UNIT-V

MICROFINANCE
OVERVIEW OF MICROFINANCE

Reference: http://www.himpub.com/documents/Chapter1055.pdf (Page No: 4-4)

The money lenders, who used to provide small amount of loans to the poor and needy
people of India and around the world, are the oldest informal and unorganized form of
microcredit. The interest rate charged by them is so high that the poor people remain in their
clutches and face vicious cycle of poverty. Further they provide loan at their own stipulated terms.
Gradually, Rotating Saving and Credit Associations (ROSCAs) based on informal understanding
among friends and relatives emerged, where in interest and costs are comparatively low but the
social costs and other obligations are considerable. These associations pool the savings of friends,
relatives, near relatives and neighbors in a systematic way and extend credit to the poor and needy
families. In India ROSCAs exist in the form of commercial chit funds.

The cooperatives emerged as group type institutions with formal constitution and legal
status to some extent, which pooled the rural poor savings and provided low amount of credit to
the needy people.

In 1971, Bangladesh won its war for independence but there were huge floods in the
country resulting into famine, killing large number of people. Muhammad Yunus (1976) started
lending small amount to the poor people in the nearby village Jobra in Bangladesh by opening
bank branch there to cater needs of the poor. In the year 1978, a small group of young people
joined to fight against rural poverty by creating a new and dynamic organisation, which served
nearly six million villagers by the year 2008 in Bangladesh. This group is now known as
Association for Social Advancement (ASA), targets poorest villagers particularly women to start
self employment vocations in Bangladesh. ASA is expanding financial markets by creating self
employment opportunities and bringing social change. ASA is providing small loans, pooling
small savings providing micro insurances and other financial services to the poor and low income
communities. It has emerged as global microfinance institution creating larger impact.

Muhammad Yunus (2006), Nobel Prize winner, introduced the concept of microfinance in
Bangladesh in the form of Grameen Bank. In India, NABARD initiated the concept of
microfinance as per this idea and established link between Self Help Group (SHGs), Non
Government Organizations (NGOs) and Banks. The SHGs are formed and nurtured by NGOs. On
attaining maturity the SHGs get credit from banks and extend to members. By2006 in India more
than22 lakh SHGs were financed by Commercial Banks, RRBs and Cooperative Banks. The
microfinance movement has multiplied and large number of SHGs, NGOs, Microfinance
Institutions (MFIs), and Non Banking Financial Companies (NBFCs) has emerged to provide
microfinance to the poor and needy rural people. Thus the microfinance has emerged as
movement and established an industry.

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 Today, the global microfinance industry is worth over INR 8.90 trillion with the loan
disbursed amount growing at an average annual rate of 11.5% over the last 5 years. The industry
has impacted the lives of 139.9 million borrowers worldwide, 80% of whom are women and 65%,
from a rural background

Meaning of Microfinance

 Microfinance is a financial service of small quantity provided by financial Institutions to

the poor.
 Provision of thrift, credit and other financial services and products of very small amounts
to the poor in rural, semi-urban and urban areas for enabling them to raise their income
levels and improve living standards.--- Task Force on Supportive Policy and Regulatory
Framework for Micro-Finance set up by NABARD in November 1998.
 Micro Finance refers to the provision of affordable financial services such as small loans, small
savings, micro insurance and funds transfer facilities extended to socially and economically poor
and disadvantaged segments of the society to enable them to increase their income levels and
improve standard of living.
 Microfinance' was introduced in India in the 1980s as a solution to poverty and to
empower women. Microfinance is a type of banking service provided to those who have
difficulty in accessing formal financial services. It is targeted at the low-income and
unemployed fraction of the population.
 Microfinance, also called microcredit, is a type of banking service provided to
unemployed or low-income individuals or groups who otherwise would have no other
access to financial services.

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Role of micro finance Reference: http://www.himpub.com/documents/Chapter1055.pdf
(PageNo: 6-6)
 Microfinance provides finance to the poor people for carrying out their economic activities
and helps them to meet the basic needs of life.
 Microfinance helps the poor people to increase their income, savings and standard of
living.
 Microfinance provides employment to the poor people by providing self employment
opportunities in various sectors and activities.
 Microfinance protects the poor people against the risks by providing life insurance and
assets insurance.
 Microfinance helps in alleviating poverty by providing affordable financial services.
 Microfinance helps in increasing economic growth and development in the country.
 Microfinance promotes gender equity by supporting women empowerment and their
economic participation and hence improving well being of the poor households.
 Microfinance provides improvements in household economic welfare and enterprise
stability and growth.
 Micro finance helps in increasing savings, investments and developments.
 Micro finance provides employment opportunities to unemployed people and full
employment to the under employed people.

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INDIAN RURAL FINANCIAL SYSTEM

Reference:http://www.ruralfinanceandinvestment.org/sites/default/files/
1175154312842_rural_financial_institutions.pdf

Late 19th century concerns with rural unrest and indebtedness in India led to a policy approach
involving moneylender regulation, and replacement of moneylender finance through institutional
credit provision in various forms. The emergence, growth, interaction and comparative
performance of these different institutional forms - co-operatives, public-sector banks, regional
rural banks, microfinance institutions and private sector commercial banks, are reviewed in
relation to the financial service needs of the rural poor. Even with this long history of institutional
credit provision and the dramatic expansion of the Self Help Group-Bank linkage programme
since the early 1990s, very substantial proportions of the rural population are still without access
to formal finance. Moreover, nationally, the share of informal finance in rural household debt has
actually increased at the start of the 21st century.

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MICROFINANCE PRODUCTS AND SERVICES

Reference: https://microfinanceinfo.com/microfinance-products/
Reference: https://finca.org/our-work/microfinance/financial-services/

In the microfinance sector there´s other services expanding as well. The poor need, like all of us, a
secure place to save their money and access to insurance for their homes, businesses and health.
Microfinance institutions are now innovating new products to help meet these needs, empowering
the world’s poor to improve their own lives. Products common used in the microfinance sector
today is:

 Micro savings: A possibility to save money without any minimum balance. Allows people
to retain money for future use or for unexpected costs. In SHGs the members save small
amounts of money, as little as a few rupees a month in a group fund. Members may
borrow from the group fund for a variety of purposes ranging from household emergencies
to school fees. As SHGs prove capable of managing their funds well, they may borrow
from a local bank to invest in small business or farm activities. Banks typically lend up to
four rupees for every rupee in the group fund.

S.No Type of Loan Products Offered Purpose

1 Micro-enterprise /small business loan capital/business start-up
2 Agricultural Loan Crop/Farm-related
3 Livestock Loan Dairy/Poultry
4 General Consumption
5 Education Loan Academic/vocational
6 Housing Loan Home improvement/new home

 Micro insurance: Gives the entrepreneurs the chance to focus more on their core business
which drastically reduces the risk affecting their property, health or working possibilities.
The is different types of insurance services like life insurance, property insurance, health
insurance and disability insurance. The spectrum of services in this sphere is constantly
expanded, as schemes and terms of providing insurance services are determined by each
company individually.

 Micro leasing: For entrepreneurs or small businesses who can´t afford buy at full cost
they can instead lease equipment, agricultural machinery or vehicles. Often no limitations
of minimum cost of the leased object.
 Micro Remittance/ Money transfer (With in India & Abroad): A service for
transferring money, mainly overseas to family or friends. Money transfers without opening
current accounts are performed by a number of commercial banks through international
money transfer systems such as Western Union , Money Gram, and Anelik. On the surface
they may seem like small money transfers, but when one considers that such transactions

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 take place millions of times around the world each week, the numbers start to become
impressive. According to the World Bank, the annual global market for remittances –
money transferred home from migrant workers – is around 167 billion US dollars. The
estimated total is closer to 230 billion dollars if one counts unregulated transactions.
Remittances are also an important source of income for many developing countries
including India, China and Mexico, all of which receive over 20 billion dollars each year
in remittances from abroad.

MICRO FINANCE MODELS (Microfinance Credit Delivery Model)

Reference (Article):
https://www.researchgate.net/publication/317062937_Microfinance_Credit_Delivery_Models_An
alysing_Exploring_the_Best_Practices

1. Self Help Group Model: reference:

Reference: https://shodhganga.inflibnet.ac.in/bitstream/10603/249567/9/09_chapter3.pdf.
(Page No: 54-56)
The first official interest in group lending in India took shape during 1986-87, when National
Bank for Agriculture and Rural Development (NABARD) supported and financed research
project on saving and credit management of self help group of Mysore Resettlement and
Development Agency (MYRADA). In 19991-92, NABARD launched the SHG-Bank
Linkage Programme on a pilot basis to finance SHGs across the country through the formal
banking system. High repayment rates by the SHGs encouraged the banks to finance SHGs.
In 1996, Reserve Bank of India included financing of SHGs as a main stream activity of
banks under the priority sector lending programmes.

The Self-Help-Groups (SHGs) have emerged as a tier below Primary Agricultural Credit
Society (PACS). SHGs comprise a group of 10-20 members. The groups begin by savings
that are placed in a common fund. In a way, SHGs are co-operative (credit) societies linked to
a commercial bank rather than an apex cooperative bank. Once linked to the bank, the SHGs
may access a given multiple of the pooled savings for disbursement to its members. Group
selects its leader and the selection of the leader is based on rotation. The SHGs have,
moreover, emerged as a form of “social collateral” substituting other forms of ‘collateral
security’ insisted upon by banks. High repayment rate has encouraged banks to
institutionalize SHGs under the bank-SHG linkage model. According to RBI Guidelines,
banks may give loans to SHGs up to Rs. 5 lakh without insisting on ‘collateral safety’

Formulation of SHGs is, however, dependent on the intervening agency, who has so far been
NGOs/MFIs, RRBs, Banks and District Rural Development Agency (DRDAs). SHGs are
being promoted primarily under the two separate schemes of NABARD/Ministry of Finance
and the Ministry of Rural Development. During some years, the SHGs formed by the
Ministry of Rural Development under Swarnajayanti Gram Swarojgar Yojana (SGSY)

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 scheme have been twice the number of those formed by NABARD under their bank-SHG
programme.

2. The Grameen Model:

Reference: https://shodhganga.inflibnet.ac.in/bitstream/10603/249567/9/09_chapter3.pdf.

This model is based on group peer pressure whereby loan is made to individuals in groups of
four to seven. Group members collectively guarantee loan repayment, and access to
subsequent loans is dependent on successful repayment by all group members. Payments are
usually made weekly. Solidarity groups have proved effective in deterring defaults as
evidenced by loan repayment rates attained by organizations such as the Grameen Bank, who
use this type of microfinance model. This model has contributed to broader social benefits
because of the mutual trust arrangement at the heart of the group guarantee system. The group
itself often becomes the building to a broader social network
3. Cooperative Model: Reference: file:///C:/Users/User/Downloads/SSRN-id1931806.pdf
History of Microfinance shows that cooperatives and Credit Unions have been around for many
decades catering to the financial needs of the lower income brackets. Small sized local cooperative
banks were among the first institutions to accept small deposits and provide micro loans to its
members. The credit cooperatives started as early as 1850 A.D in Germany by the efforts of F.W.
Raiffeisen who started a Savings and Credit Cooperatives for the economic upliftment of the poor and
lower income people.
4. Grameen Bangladesh Model: Reference: https://www.britannica.com/topic/Grameen-Bank
Grameen Bank, Bangladeshi bank founded by economist Muhammad Yunus as a means of
providing small loans to poor individuals (see microcredit). In 2006 Grameen and Yunus
were awarded the Nobel Prize for Peace. The Grameen (Bengali: “Rural”) model, devised by
Yunus in 1976, is based on groups of five prospective borrowers who meet regularly with
Grameen Bank field managers. Typically, two of the five prospective borrowers are granted
loans. If, after a probationary time period, the first two borrowers meet the terms of
repayment, then loans are granted to the remaining group members. Peer pressure acts as a
replacement for traditional loan collateral. Grameen became an independent bank in 1983;
headquartered in Dhaka, Bangladesh, it has more than 2,200 branches in the country. The
Grameen model has come to symbolize an efficient means of helping the poor by providing
them with opportunities to help themselves. More than 97 percent of Grameen’s loan
recipients have been women.
5. SGSY Model:
Reference:https://www.moneycontrol.com/mccode/news/lp_news_detail.php?
autono=2649&classic=true

The SGSY Scheme is operative from 1st April, 1999 in rural areas of the country. The
Ministry of Rural Development, Government of India have launched a new programme
known as `Swarnajayanti Gram Swarozgar Yojana' (SGSY) by restructuring the
following existing schemes: 1. Integrated Rural Development Programme (IRDP) 2. Training
of Rural Youth for Self Employment (TRYSEM) 3. Development of Women and Children in

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Rural Areas (DWCRA) 4. Supply of Improved Toolkits to Rural Artisans (SITRA) 5. Ganga
Kalyan Yojana (GKY) 6. Million Wells Scheme (MWS) Detailed `Guidelines' have been
circulated to all DRDAs/Banks by the Ministry of Rural Development.

SGSY is a holistic Scheme covering all aspects of self employment such as

organization of the poor into Self Help Groups, training, credit, technology,
infrastructure and marketing. The scheme will be funded by the Centre and the States
in the ratio of 75:25 and will be implemented by Commercial Banks, Regional Rural
Banks and Co-operative Banks. Other financial institutions, Panchayat Raj Institutions,
District Rural Development Agencies (DRDAs), Non-Government Organizations
(NGOs), Technical institutions in the district, will be involved in the process of planning,
implementation and monitoring of the scheme. NGO's help may be sought in the
formation and nurturing of the Self Help Groups (SHGs) as well as in the monitoring of
the progress of the Swarozgaris. Where feasible their services may be utilized in the
provision of technology support, quality control of the products and as recovery
monitors cum facilitators.

The Scheme aims at establishing a large number of micro enterprises in the rural areas.
The list of Below Poverty Line (BPL) households identified through BPL census duly
approved by Gram Sabha will form the basis for identification of families for assistance
under SGSY. The objective of SGSY is to bring the assisted poor families (Swarozgaris)
above the poverty line by ensuring appreciable sustained income over period of time.
This objective is to be achieved by interalia organizing the rural poor into Self Help Groups
(SHGs) through the process of social mobilization, their training and capacity
building and provision of income generating assets. The rural poor such as those with
land, landless labor, educated unemployed, rural artisans and disabled are covered
under the scheme.

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CREDIT UNIONS (Reference: http://www.ruralfinanceandinvestment.org/library/financial-services/
credit-unions)
Credit unions or savings and credit cooperatives (SACCOs) are legally constituted not-for-profit
co-operative financial institutions chartered and supervised, for the most part, under national co-
operative law and created to meet the basic financial service needs of primarily low and middle
income citizens who generally cannot obtain these services through the existing banking system.
They provide a means to learn the value of regular savings and wise use of credit. They are a form
of economic empowerment, based upon an individual's ability to control and manage the financial
institution which provides savings, credit and financial management. Membership eligibility is
usually defined in terms of some common affiliation, such as employment or residence. All
members are owners of the enterprise and have equal privileges, opportunities and
responsibilities. Typically a SACCO or credit union only accepts deposits from and grants loans
to members. All members are equal owners of the enterprise and each has one vote in the election
for committee members and the board of directors. Members of these elected bodies serve in an
unpaid voluntary capacity.

POVERTY AND NEED OF MICROFINANCE

Reference: https://www.longdom.org/articles/effect-of-microfinance-on-poverty-reduction-a-
critical-scrutiny-of-theoretical-literature.pdf

Poverty

At a UN Summit on social development, 'the Copenhagen Declaration' 1995, poverty was

described as a condition characterized by severe deprivation of basic human needs including food,
safe drinking water, sanitation facilities, health, shelter, education and information. To the (World
Bank, 2002), a person is said to be poor when his or her consumption level falls below the poverty
line of $1 per day.

Causes of poverty

 Lack of employment: Not having any productive activity which may ensure a steady flow
of income.
 Vulnerability to Income Fluctuations: There is income fluctuations in many families and
may have to go to bed without food for family members, this can basically be influenced
by many factors including the chance of one getting the job each day, price fluctuation of
the products, such as being paid on commissions etc..
 Lack of Access: It is not having access to resources to create products or earnings e.g. not
having bamboo for a person who weaves.
 Powerlessness: Inability to change things or do anything to change the current situation.

The following are the major importance of microfinance in poverty reduction.

 Job creation:
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  Win-win Propositions:
 Increase in per capital income:
 Increase in consumption:
 Increase in skills:
 Increase in productivity:
 Increase in household net-worth:

GENDER ISSUES IN MICROFINANCE

1. Do men and women differ in their patterns of credit use (e.g., type of loans, number of
loans, interest rates, arrears, defaults, amounts borrowed, and effective use)?
2. Are there significant numbers of women farmers, enterprise owners, producers, workers,
or household heads in the client population?
3. Do women and men have separate credit unions or savings and loan groups?
4. Does the beneficiary population have access to finance from both formal and informal
sources? Are there differences in access for women and men?
5. If women's access to credit is more restricted than that of men, how does this relate to
women's property rights and ability to provide collateral? What are other constraints on
women's access to credit?
6. Will the project change existing patterns of relative access to credit for women and men?
components

Key Strategies

1. If the project aims to encourage new forms of savings and credit groups, ensure that these
will be accessible to women.
2. Establish women's savings and loan groups.
3. Consider policy or legal changes to facilitate women's participation in new forms of
savings and credit groups.
4. Include special provisions to increase women's access to credit and encourage saving.
(Consider information, communication and training strategies, and terms that give poor
women or women household heads improved access.)
5. Consider providing women's skills development training in setting up a business, product
development, managing business, marketing, etc. they involved in project planning and
design?
6. Ensure that field workers and NGOs use female mobilizers, trainers, and loan officers to
work with women.
7. Consider contracting NGOs to mobilize women and to form groups.
8. Since women are generally marginalized from decision making, consider leadership
training for women.

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 CASE STUDY

The problem before the insurance regulatory authority (IRA), in some ways is unique. Unlike the
SEBI and even the telecom regulatory authority, which inherited up and running businesses, the
IRA is presiding over an unborn industry. IRA has not only to regulate the insurance industry but
also, at least in the initial phases act as midwife. It is therefore welcome that IRA regulatory will
work towards creating an environment that generates confidence among potential policyholder.
And for this , what IRA is ensuring that the insurance companies have enough money to pay for
any redemption or withdrawal. They should be perceived as safe as bank. Already, several Indian
companies have planes to enter into the insurance sector and a dozen companies have tied -up
with foreign partners. Further, as foreign players enter the market, one of the officials points out
that equally tie -up would be better than technical collaborations. Further the entry of these
foreign players will also lead to greater qualities in the products offered. This will also call for
some -re -orientation of strategies for the existing player -the LIC and GIC.

Questions:

a. The insurance regulation will work towards creating an environment that generator
confidence among potential policyholders. Why are these needs for creating such an
environment? What measures has the IRDA takes in this regard.
b. What strategies do you recommend to a new private sector insures?

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