CHAPTER- 4 MICRO FINANCE IN INDIA Q. 1: Explain the concept of Microfinance and discuss the dominantMicrofinance Models in India.

. OR Write note on Microfinance Models in India.

Ans. A) CONCEPT OF MICRO - FINANCE
In early 1980s, the existing banking policies, procedures and systems were not suited to meet the requirements of poor. For borrowings poor people usually resort to unorganised sector. NABARD recommended that alternative policies, systems and procedures should be put in use to save the poor from the clutches of moneylenders. Thus microfinance was introduced in banking sector. Microfinance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance to the poor and low income households and their micro-enterprises. Microfinance is defined as Financial Services (savings, insurance, fund, credit etc.) provided to poor and low income clients so as to help them raise their income, thereby improving their standard of living. Micro-financing is regarded as a tool for socio-economic up-liftment in a developing country like India. It is expected to play a significant role in poverty alleviation and development. Mohammed Yunus was awarded the Noble Prize for application of the concept of microfinance, with setting up of the Grameen Bank in Bangladesh. Micro credit and microfinanceare different. Micro credit is a small amount of money, given as a loan bya bank or any legally registered institution,

whereas, Microfinanceincludes multiple services such as loans, savings, insurance, transferservices, micro credit loans etc. B. FEATURES OF MICROFINANCE 1) It is an essential part of rural finance. 2) It deals in small loans. 3) It basically caters to the poor households. 4) It is one of the most effective and warranted PovertyAlleviation Strategies. 5) It supports women participation in electronic activity. 6) It provides an incentive to grab the self employment opportunities. 7) It is more service-oriented and less profit oriented. 8) It is meant to assist small entrepreneur and producers. 9) Poor borrowers are rarely defaulters in repayment of loans as they are simple and Godfearing.

10) India needto establish several Microfinance Institutions. C. MICROFINANCE MODELS IN INDIA :In India, the beginning of microfinance movement could be traced to Self Help Group (SHG) Bank Linkage Programme (SBLP) started as a pilot project in 1992 by NABARD. This programme proved to be very successful and has also developed as the most popular model of r microfinance in India. In India, the institutions which provides microfinance services includes:-NABARD Small Industries Development Bank of India <SIDBI), RashtriyaMahilaKosh, Commercial Banks, Regional Rural Banks, Co.operative Banks and Non Banking Financial Companies (NBFCs). Microfinance services are provided mainly by two models :- Self Help Group - Bank Linkage Programme (SBLP) Model and Micro-Finance Institutions Model (MFI). These both together have about 7 crore clients.

1. SHG - Bank Linkage Programme (SBLP)

a)

A Self Help Group (SHG) is a small group of 10 to 20 persons of rural poor who come together to mutually contributeto common fund for meeting their emergency needs. SHG - Bank Linkage Programme was introduced by NABARD in 1992. Under this programme three different models have emerged :Model I: - SHGs promoted, guided and financed by banks.

b) Model II :- SHGs promoted by NGOs / government agencies andfinanced by c)

banks. Model III :- SHGs promoted by NGOs and financed by banks under NGOs / formal agencies as financial intermediaries. MFls include NGOs, trusts, social and economic entrepreneurs, these lend small, sized loans to individuals or SHGs. They also provide other services like capacity building, training, marketing of products etc. MFIs operate under following models :-

2. Micro Finance Institutions (MFls)

a) Bank Partnership Model i. MFI As Agent :In this model, the MFIacts as an agent and it takes Care of all relationships with borrower from first contact to final repayment.

ii.

MFI As Holder Of Loans :-

Here MFI holds the individual loans on its books for a while, before securitising them and selling them to bank. -

b) Banking Facilitators :Banking facilitators / correspondents are intermediaries who carry out banking functions in villages or areas where it is not possible to open a branch. In January, 2006, RBI permitted banks to use services of NGOs, MFIs and other civil society organisations to act as intermediaries in providing financial and banking services to poor. Q.2 : Explain the role and performance of Microfinance in India.

Ans. A)ROLE AND IMPORTANCE OF MICROFINANCE :Microfinance institutions are those which provide credit and other financial services and products of very small amounts to poor in rural, semi-urban and urban areas for enabling them to raise their income and improve their standard of living. 1. Credit To Rural Poor :Usually rural sector depends on non-institutional agencies for their financial requirements. Micro financing has been successful in taking institutionalized credit to the doorstep of poor and have made them economically and socially sound. 2. Poverty Alleviation:Due to micro finance poor people get employment. It also helps them to improve their entrepreneurial skills and encourage them to exploit business opportunities. Employment increases income level which in turn reduces poverty.

3. Women Empowerment :Normally more than 50% of SHGs are formed by women. Now they have greater access to financial and economical resources. It is a step towards greater security for women. Thus microfinance empowers poor women economically and socially.

4. Economic Growth :-

Finance plays a key role in stimulating sustainable economic growth. Due to microfinance, production of goods and services increases which increases GDP and contributes to economic growth of the country.

5. Mobilisation Of Savings :Microfinance develops saving habits among people. Now poor people with meagre income can also save and are bankable. The financial resources generated through savings and micro credit obtained from banks are utilised to provide loans and advances to its members. Thus microfinance helps in mobilisation of savings.

6. Development Of Skills
Micro financing has been a boon to potential rural entrepreneurs. SHGs encourage its members to set up business units jointly or individually. They receive training from supporting institutions and learn leadership qualities. Thus micro finance is indirectly responsible for development of skills.

7. Mutual Help And Co.operation

Microfinance promotes mutual help and co.operation among members. The collective efforts of group promotes economic interest and helps in achieving socio-economic transition.

8. Social Welfare
With employment generation the level of income of people increases. They may go for better education, health, family welfare etc. Thus micro finance leads to social welfare or betterment of society.

B) PERFORMANCE OF MICROFINANCE IN INDIA

The microfinance scheme has grown popular in India.

Performance of microfinance as on March 31, 2006. Sr. No. 1. 2. 3. No. of SHGs linked to banks Percent of women groups No. of participating banks a) Commercial Banks b) Regional Rural Banks c) Co-operative banks 4. 5. 6. 7. 8. No. of states / UTs No. of district covered Bank Loans (Rs. In billion) No. of poor Households assisted (in million) Average Loan / SHG Rs 90 545 47 158 340 31 583 113.98 32.98 50,917 Particulars Cumulative as on March 31,2006 22,38,565

Source: - NABARD In India there are around 22.5 lakh SHGs linked to 545 banks in all

states and all union territories. By 2006, 47 Commercial Banks, 158 Regional Rural Banks and 340 Co-operative Banks have participated in SHG - Bank's linkage program.
Q. 3:What is Self Help Group? Explain its importance and progress. (Mar.11) Write note on Self Help Groups. What are the problems related to SHGs? Ans. A)CONCEPT OF SELF HELP GROUPS (SHGs):A Self Help Group (SHG) is a small economically homogeneous group of 10 to 20 persons of rural poor who come together to mutually contribute to common funds for meeting their emergency needs. The fund created by collective contribution is used to provide collateral free loans to members on terms decided by group. All decisions are made collectively. Conflicts and disputes are resolved through collective leadership and discussion. SHGs have been traditionally supported by NGOs or by governmentagencies. They are considered as agents of change, which are expected to change the lives of poor. The main objective of SHGs is to provide small loans to poor in order to help them invest in their livelihood. In 1992 with the support of RBK SHG - Bank linkage programme was launched by NABARD. OR OR

B) 1) 2)

FUNCTIONS OF SHGs Group Formation :Savings :-

Members voluntarily form groups for generating employment and reducing poverty. SHG encourages its members to save a part of their income on regular basis. Savings are transferred to groups.

3)

Lending:-

After saving for a minimum period, the funds are used for lending to its own members; 4) Meetings:-

Group meetings are conducted regularly to solve the problems and difficulties of its members. 5) Record :SHG keeps record of accounts.

C) 1)

IMPORTANCE OF SHGs :Reduction Of Poverty :-

SHGs help to overcome the problem of poverty, especially in rural areas. It is assumed that investments made would generate income and contribute significantly to family earnings.

2)

Employment Generation :-

SHG generates employment, including self-employment. The members are encouraged to start Microenterprises. Small ruralenterprises help in reducing theincidence disguised and seasonal

unemployment. 3) Empowerment Of Women SHGs have been successful in making no. of ruralwomen economically, socially and politically more empowered. Manywomens have participated in panchayat elections and won. 4) Promotes Savings And Banking Habit SHGs play a very important role in linking them to banking system by promoting savings habit in
rural areas. People are motivated to save because of benefits of SHGs.

5)

Reduction Of Unorganised Sector

Traditionally rural people were dependent oh moneylenders, indigenous bankers etc. for their financial requirements. Now SHGs have made a difference in reducing the influence of this sector by providing bank support to poor.

6)

Social And Economic Justice

SHGs help to reduce poverty and promote economic justice. They empower women, people belonging to scheduled castes, tribes and minorities. Thus they promote social justice.

7)

Community Actions

Studies have shown that women in SHGs have been motivated to improve community services, including education, health, water supply, village roads, infrastructure, protecting natural resources, stopping sale and consumption of alcohol etc. SHGs also makes rural poor aware about their rights and help them to fight exploitation. -

8)

Improves Credit System

SHG has been promoted to improve credit delivery system. It provides credit on large scale to very large no. of people. This reduces transaction cost and promotes efficiency of credit system.

9)

Mobilisation Of Resources

A large number of rural poor do not have access to banks. SHGs play an important role in mobilising savings of poor. They help them in linking them to banking system by promoting savings. Under the SHG - Bank Linkage Programme as on March, 2009.SHG held total savings of Rs.5,545crore with banks.

10) Beneficial To Financial Sector

The linking of SHGs with financial sector benefitted the banking sector. Banks are able to tap into a large market.

D) 1)

PROGRESS OF SHGs IN INDIA Linkage Model

SHG - Bank Linkage Programme was launched in 1992by NABARD. This was first time SHGs were directly financed by banks. According to NABARD about 5.8 crore poor households have been linked with banking system through this model. The Indian Model is a Linkage Model", as it is based on strengths of various partners: - The NGOs, the rural poor and banks.

2)

Financial Support:-

RBI advises commercial banks to consider lending to SHGs as part of their rural credit operations. Many apex bodies or wholesalers provide loans to financial intermediaries for on-lending to SHGs. Some of these institutions are: - SIDBI, RashtriyaMahilaKosh, Housing Development Finance Corportion, Regional Rural Banks and Co-operative Banks etc.

3)

SwarnaiavantiGramswaroigarYoiana(SGSY) :-

In 1999, the Government of India introduced SGSY by restructuring various self-employment programmes. SGSY promotes the creation of SHGs by Swarozgaries and finance them by banks at different stages. As on 31st March, 2009, the share of SGSY in SHG savings accounts formed 25% of SHGs having savings accounts in banks.

4)

SHG Federations :-

Federations of SHGs have been developed by some promoters. Federations improve the bargaining power of SHGs and are financially supported by NABARD. About 15 to 50 SHGs make up a cluster or village organisation with either one or two representatives from each SHG. Several clusters come together to form a apex body or an SHG federation.

5)

Regional Growth :-

In 2006-07, Andhra Pradesh, Tamil Nadu, Kerala and Karnataka accounted for 52% of SHG credit linked. In order to reduce Imbalance in the spread of SHG - Bank Linkage Programme, NABARD identified 13 states with large population for focussing attention.

6)

Physical And Financial Growth :-

About 41 million poor households have gained access to microfinance. During 2007-08, 87,852 SHGs have been credit linked taking the cumulative figure to 3.01 million. Currently commercial banks have the largest share of 55% in credit linked SHGs followed by RRBs by 31%.

7)

Support To Banks :-

NABARD continued to provide 100% refinance assistance to banks for financing SHGs. During 200809, Rs. 1,22,535.1 million was disbursed as loan to SHGs by various banking institutions.

8)

Individual Rural Volunteers As SHGs :-

Where NGOs are not sufficient, a special initiative has been launched by NABARD that the socially committed individual volunteers like retired and active teachers, village elders etc. should form SHG and link them with Banks. This scheme has being implemented in 20 states. Volunteers are provided help of Rs.1,200/- per SHG for formation and linking. As on March, 2009, about 47 lakh Self - Help Groups, Comprising of Women, have been able to access the formal banking sector in a sustainable and cost-effective manner.

9)

Composition Of SHGs

Generally a SHG consist of 10-20 persons. However, in areas like deserts, hills and areas with scattered and sparse population and in case of minor irrigation and disabled persons, this no. may be from 5 to 20. According to recent study, the composition of SHGs, can be summarised as follows:-

a) 51 % of SHG members are below poverty line, another 32% are borderline. b) Scheduled Castes and Scheduled Tribes form 55% of members. c) Windows were 10% of SHG members. d)38% of SHG members work as casual labourers, 29% work on their own agricultural land and 17% are engaged in a non - farm enterprise. 10) Current Status :Between 2009 and 2010, SHGs have registered a growth of 14.8% in their numbers. As on 31st March 2010, 69.53 lakh SHGs held Savings bank accounts with total savings of Rs. 6,199 crore.

E) 1)

PROBLEMS FACED BY SHGs:Regional Imbalance :-

The success of SHG programme is limited. The Southern States account for 70% of funds. There is a need for better linkage efforts in northern, central, eastern and north eastern states. These states have high concentration of rural poor.

2)

Poor Management :-

Many SHGs suffer due to poor management. In many cases internal controls are lacking. There has been poor management of cash flows. Roles and responsibilities of members and office bearers are not defined properly.

3)

Problem Of Micro Enterprises :-

Many micro enterprises developed by SHGs lack skills and strategy to survive. Even the NGOs fail to provide them with necessary linkage and market survey report.

4)

Dropouts :-

There are many incidences of dropouts from groups. The main causes are migration for employment and inability to make regular savings. The dropout rate is 11% for very poor and 7% for non-poor.

5)

Lack Of Business Attitude :-

Many banks supporting SHGs treat the projects as a social or developmental programme and not as a business proposition. This has restricted the spirit of entrepreneurship among members.

6)

Regulations :-

SHGs are governed by multiplicity of regulations. This makes their formation and functioning difficult.Micro Financial Sector Bill 2009 is expected to sort out this problem by making NABARD the single regulatory body for SHGs. .

7)

Lack of Political Support :-

Usually political parties are after Co.operative Societies as they serve vote banks. A SHG does not contain enough votes to be inspired by politicians.

8)

Sustainability :-

Sustainability of SHGs depend on the quality of SHGs and the support given by Self Help Promoting Institutions (SHPIs). Many SHPIs have been supporting SHGs, but only to achieve targets. This affects its sustainability in long run.

Q. 4: Write note on Composite Loans / Credit. Ans. A) COMPOSITE CREDIT I LOAN Credit is the main input for sustained growth of small scale sector and its availability continues to be a matter of concern. Credit provided for fixed asset is called long term credit and credit provided for running the industrys day to day requirements is called short -term or workingcapital. Provision of credit by banks and financial institutions for working capital and fixed capital of micro and small enterprises is called as composite credit.
Government encourages banks to provide composite credit to micro and small enterprises.In the year 2000, the composite loan limit was Rs.25 lakhs which has increased to Rs. 1 crore in 2004. Under Composite Loan Scheme, the SSI units can obtain working capital and term loan together from a single agency. The composite loan scheme is subject to following parameters 1. The debt equity ratio should be 3 : 1 in the total project outlay after taking into account the amount of investment / incentives available for project. 2. Margin requirement for all backward areas in state is 25%, and for other areas and municipal limits of cities of State is 30%. 3. The State Financial Corporation (SFC) will have first charge on fixed assets and hypothecation of current assets. Itmay also ask for collateral security against Working Capital Loan.

B) FEATURES OF COMPOSITE LOANS :1) Multi Purpose Loan :Composite Loan satisfies more than one purpose. It can be used for meeting various requirements of small units.

2) No Security And Guarantee :-

These loans are granted without any security and guarantee as small traders and businessmen cannot provide it.

3) Benefits Poor :Poor artisans, small weaving units, fishermen, service providers, self employed tailors from rural and urban areas are the beneficiaries of composite loans.

4) Low Rate Of Interest :Composite loans are given it low rate of interest to provide strong financial support to its beneficiaries. .

C) SCHEMES TO SUPPORT COMPOSITE LOANS :1. Credit Guarantee Fund Scheme For Micro And Small Enterprises(CGFSMSE) ,
CGFSMSE was launched by Government of India to make available collateral free composite loans to the micro and small enterprises and to SHGs that have the potential to become micro enterprises. The ministry of micro small and medium enterprises along with Small Industries Development Bank of India (SIDBI) has floated a trust called Credit Guarantee Fund Trust for Micro and Small Enterprises" (CGTMSE) which is entrusted with the responsibility of running the scheme, As on March 2009, the CGTMSE has approached proposals of 2.50 lakh micro and small enterprises to the tune of ?9,200 crore.

A. Features Of CGFSMSE :i) Theinstitutions which are eligible to lend composite loans are :-scheduled commercial banks from public and private sectors, selected Regional Rural Banks, National Small Industries Corporation Ltd. (NSIC). ii) The scheme grants loan uptoRs. 50 lakh without any collateral security or third party guarantee. iii) The Guarantee cover available under the scheme is 75% of sanctioned amount of credit. It may extend
upto 80% in following cases :- Micro enterprises seeking loan uptoRs. 5 lakh. - Micro and Small enterprises owned by women. - All loans in North - East Region.

iv) The corpus of CGTMSE is being contributed by Government and SIDBI in the ratio of 4 : 1
respectively.

v) Under CGMSE over 2.50 lakh Micro and Small Enterprises proposals for an amount of Rs.9,200crore
have been approved for extending loans without collaterals / guarantee of third party till December 2009.

2. Swarozgar Credit Card Scheme(SCCS) :SCCS was introduced by Government in 2003 to provide adequate composite credit to small artisans, handloom weavers, fishermen, self employed persons, rickshaw owners and other micro enterprises and SHGs from banking system in cost effective manner. Units from urban areas and small business units from priority sector are entertained under this scheme.Fisheries and Dairy activities from agricultural sector are also covered here.A total of 9.84 lakh cards have been issued by banks involving a credit amount of Rs. 4,007.33 crore as on March 2009.