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Shanky Gupta
MBA Cla !" #010
$n%&' th& up&'())!n !"
P'!"* Akh)l S+a,)
D&pa't,&nt !" F)nan-&
In pa't)al "ul")ll,&nt !" A+a'% !" Mat&' !" Bu)n& A%,)n)t'at)!n
I, Shanky Gupta student of Masters of Business Administration from Amity Business
School, Amity University Uttar Pradesh hereby declare that I have completed
Dissertation on
MI!"#$I%A%!& I% I%DIA'
as part of the course re(uirement )
I further declare that the information presented in this pro*ect is true and ori+inal to the
best of my kno,led+e)
Dat&: -./01/-0 Na,&: Shanky Gupta
Pla-&: %oida En'!ll* N!: A0-0-2034--
P'!6'a,: MBA 5G6
I, Prof) Akhil S,ami, hereby certify that Shanky Gupta, student of Masters of
Business Administration at Amity Business School, Amity University Uttar Pradesh has
completed dissertation on MI!"#$I%A%!& I% I%DIA', under my +uidance)

I ,ould also take this opportunity to thank P'!"* Akh)l S+a,), $aculty, Amity Business
School, %oida for facilitatin+ my understandin+ of concepts of !ommercial bankin+ and
Microfinance and +ivin+ me an opportunity to +ather practical kno,led+e of bankin+
operations) I thank him for his support and +uidance)
Shanky Gupta
Microfinance currently plays a modest role in India ,ith si+nificant variations amon+
M$Is across various states) Southern states account for a lar+er percenta+e of funds from
microfinance) It is estimated that Indian M$Is as a ,hole has one million borro,ers)
Accordin+ to an I!I!I report, in 7001 it ,as estimated that the demand for credit in India
ran+es from US81 9 82 billion annually, the or+ani:ed sector is able to provide only
US8700 million to US8100 million) ;he Small Industries Development Bank of India
5SIDBI6 has been the lar+est lender to M$Is, ,hile $riends of <omen=s <orld Bankin+
India and the %ational <omen=s fund have also played a si+nificant role) It is ,orth
notin+ that only one M$I, Bharatiya Samruddhi $inance >td), has been successful in
raisin+ capital from mainstream markets)
;his has been the story of microfinance in the Indian economy so far, ,herein ?7)77@ of
the total population is rural and dependent on a+riculture and its allied activities for their
livelihood, and ,herein the rural economy still accounts for A0@ of India=s GDP) ;he
rural market share of consumer durables and non9durable products eBceeds A0 C .0@ for
most items and is +ro,in+ every year)
Indian banks have become a,are of the potential of microfinance and have started to
compete ,ith M$Is, particularly in the case of lendin+ to SDGs, ,hich have eBperienced
si+nificant +ro,th since -222)
"ecently, ne, private sector banks such as I!I!I Bank, U;I Bank and DD$! Bank have
be+un to actively seek eBposure in the microfinance sector) Eey innovations include a
pilot scheme by I!I!I Bank that uses M$Is or %G#s, traders or local brokers as
intermediaries for loans to +roups of small farmers) Another approach is the Inte+rated
A+ricultural Service Provider) I!I!I Bank=s pilot, the I!I!I Bank $armer Service
!enter, has had success reachin+ small farmers)
<DA; IS MI!"#$I%A%!&
S&"FI!&S I%!>UD&D U%D&" MI!"# $I%A%!&
D#&S MI!"# $I%A%!& MAE& BUSI%&SS S&%S&
S&>$ D&>P G"#UP
MI!"# $I%A%!& I%S;I;U;I#%
I; I%%#FA;I#% $#" MI!"#$I%A%!&
I%!>USIF& G"#<;D M&A%I%G G !DA>>&%G&S
$I%A%!IA> I%!>USI#%
#BH&!;IF& #$ $I%A%!IA> I%!>USI#%
%&&D $#" MI!"# $I%A%!& I% I%DIA
BA!EG"#U%D $#" MI!"#$I%A%!& I% I%DIA
C/APTER 6 44
MI!"# $I%A%!& I%S;I;U;I#% I% I%DIA
C/APTER ; 52
#;D&" MI!"#$I%A%!& I%S;I;U;I#%
C/APTER 8 58
SU!!&SS $A!;#"S #$ MI!"# $IA%A%!& I% I%DIA
C/APTER 9 62
ISSU&S I% MI!"#$I%A!&
C/APTER 10 70
A%A>ISIS G I%;&"P"&;A;I#%
C/APTER 11 77
C/APTER 1# 78
"&!#MM&%DA;I#%S A%D SUGG&S;I#%S
C/APTER 15 80
C/APTER 1: 81
;he broadest definition of Microfinance is th& p'!())!n !" ")nan-)al &'()-& t! p!!' !'
l!+4)n-!,& -l)&nt* ;he term has most often been confused ,ith *ust lendin+ to the poor)
Do,ever, callin+ it that ,ould undermine the po,er that microfinance holds for the
economic development of an economy) Micro finance involves all those services that can
be provided so as to include people ,ith lo,er incomes into the bankin+ net) Services
include credit, insurance, facility for savin+s, fund transfers, transactions etc) Apart from
these, micro finance also involves providin+ sound financial advice to lo, income
individuals) ;his ensures not only the provision of financial resources but also the correct
use of those resources to promote lon+ term development)
Microfinance services are provided by three types of sourcesJ
$ormal institutions, such as rural banks and cooperativesK
Semiformal institutions, such as non 9 +overnment or+ani:ationsK and
Informal sources such as money lenders and shopkeepers
i) Poverty AlleviationJ Microfinance can be a critical element of an effective poverty
reduction strate+y) Improved access and efficient provision of savin+s, credit, and
insurance facilities in particular can enable the poor to smoothen their
consumption, mana+e their risks better, build their assets +radually, develop their
micro enterprises, enhance their income earnin+ capacity, contribute to the
improvement of resource allocation, promotion of markets, and adoption of better
ii) Microfinance can provide an effective ,ay to assist and empo,er poor ,omen,
,ho make up a si+nificant proportion of the poor and suffer disproportionately
from poverty)
iii) ;rade $acilitation
iv) &ducation
v) &nables takin+ advanta+e of profitable investment opportunities
vi) "eduction of Social eBclusion based on income
Apart from basic bankin+ services such as '&,)ttan-& pay,&nt3 "un% t'an"&'3
t'ana-t)!n &'()-&, micro finance includes three broad services)
Microcredit is the eBtension of small loans to entrepreneurs too poor to (ualify for
traditional bank loans) General characteristics of micro C credit areJ
S)>& 9 loans are micro, or very small in si:e
Ta'6&t u&' C Micro entrepreneurs and lo,9income households
$t)l)>at)!n 9 the use of funds 9 for income +eneration, and enterprise
development, but also for community use 5health/education6 etc)
T&', an% -!n%)t)!n 9 most terms and conditions for microcredit loans are
fleBible and easy to understand, and suited to the local conditions of the
C!llat&'al C >oans are usually not based on any collateral but on Ltrust=
Micro savin+s services are deposit services that allo, one to save small amount of money
for future use) Savin+s are vital for the economic condition to improve) Micro savin+s
accounts, often ,ith no minimum balance re(uirement, allo, households to save in order
to meet uneBpected eBpenses and plan for future investments) A study carried out by
Shahidur ") Ehandker in -223 revealed that micro credit not only increases involuntary
savin+s, but also induces voluntary savin+s)
Micro9insurance is a term increasin+ly used to refer to insurance characteri:ed by lo,
premium and lo, caps or lo, covera+e limits, sold as part of a typical risk9poolin+ and
marketin+ arran+ements, and desi+ned to service lo,9income people and businesses not
served by typical social or commercial insurance schemes)
;he rationale is based on the available evidence and eBperience about the role of
microfinance in poverty alleviation and the continued lar+e scale failure of both state and
market to meet the savin+s, credit and insurance needs of the poor)
At the core of microfinance is the idea of addressin+ the problem of poverty and
deprivation by enablin+ the poor to access financial capital hitherto denied to them) <ith
the help of loan, savin+s and insurance obtained from microfinance institutions 5M$Is6,
the poor are eBpected to take up on their o,n economic activities ,hich ,ould +enerate
incremental income and employment to cross the poverty line) Access to microfinance is
also eBpected to provide stability to the poor in times of shocks and fluctuations) ;hus,
microfinance is eBpected to play both the promotional and protective role in poverty
;here is fairly +ood evidence ,hich su++ests that microfinance interventions have not
only contributed si+nificantly to,ards direct poverty alleviation of the participatin+
members but have even contributed indirectly in reducin+ overall poverty of villa+es or
areas in ,hich they have been implemented 5Dossain -233, and Ehandker -2236) It is
evident that contribution of microfinance to poverty alleviation takes place mainly
throu+h improvements in the asset base, employment and income levels, reduced
dependence on moneylenders and even diversification of occupation) As a result of these
chan+es, the participants have eBperienced improvements in their livin+ standards, ,hich
is reflected in increased consumption levels, better housin+, clothin+ and education, and
many other (ualitative chan+es 5ibid6)
;here is also the empo,erment role of microfinance) Besides leadin+ to reduction of
poverty in ,ays mentioned above, the increased access and control over financial
resources by ,omen can itself become an empo,erin+ instrument) ;he available
evidence indicates that ,omen are able to eBperience many positive chan+es as a result of
their participation in microfinance pro+rammes) A ma*or study about the impact of
microcredit pro+rammes in Ban+ladesh concluded that, <omen have clearly benefited
from microcredit pro+rammes) Pro+ramme participation has enhanced ,omen=s
productive means by increasin+ their access to cash income +eneration from market9
oriented activities and by increasin+ their o,nership of non9land assets) ;hese
improvements should enhance ,omen=s empo,erment ,ithin the households,
influencin+ their o,n and their children=s consumption and other measures of ,elfare'
5Ehandker -223J -.06) It is based on such evidence that an increased emphasis is bein+
+iven to eBpand the role of microfinance in order to achieve the t,in +oals of poverty
alleviation and empo,erment)
At the level of developmental paradi+m, microfinance has emer+ed as a response to the
failure of market and state to ensure for the poor a sustained access to capital) Market
failure occurs ,hen formal a+encies and pro+rammes operatin+ in the market fail to meet
the capital needs of the poor to take up productive investments) As a result of such
failure, not only the poor are unable to make investments for income and employment
+eneration but are also forced to depend upon informal sources of finance, ,hich are
either eBploitative or not fully reliable) ;he formal institutions like commercial banks and
cooperatives have failed to serve the poor for reasons like their focus on collateral based
lendin+, information asymmetry, small si:ed loans or savin+s leadin+ to hi+h cost of
transactions and attitudinal bias a+ainst the poor and ,omen) ;here is another dimension
to this issue of market failure) As the formal financial institutions become inaccessible the
poor either try to avoid them or look to,ards alternative sources of credit, savin+s and
insurance) ;hese alternatives are mostly informal a+encies like private moneylenders,
traders, and commission a+ents ,ho, usin+ their monopolistic position, tend to eBploit the
poor by char+in+ eBorbitant rates of interest or force the clients to take part in inter9linked
transactions for credit, labour and commodities in the preteBt of +ivin+ collateral9less
loans) ;his is the case of typical market failure for the poor)
;here is also the an+le of failure of state in the rationale for microfinance) A
developmental state has a clear onus for poverty alleviation) ;he state under such a
situation has to ensure that capital needs of the poor are also ade(uately met) ;he failure
of state can occur ,hen the state is either not able to make formal a+encies respond to the
needs of the poor or unable to create any alternate mechanisms for the poor to access
savin+s, credit and insurance on a sustainable basis) ;he state in India has come out ,ith
many policies includin+ imposin+ certain obli+ations on formal a+encies to devote part of
their resources to meet the credit needs of the ,eaker sections like small and mar+inal
farmers, a+ricultural labourers and rural artisans) Some of the initiatives of the state for
the poor include credit based self9employment pro+rammes like Inte+rated "ural
Development Pro+ramme 5I"DP6 and S,arna Hayanthi S,aro:+ar Io*ana 5SGSI6,
Differential Interest "ate 5D"I6 scheme, and creation of separate institutions like
"e+ional "ural Banks 5""Bs6)
;he assessments of the initiatives taken by the state have revealed that despite these
pro+rammes, the poor have not been able to avail re+ular services from the formal
a+encies) Despite the +ood intention of the state in initiatin+ these schemes, the outcomes
have not been favourable to the poor) Some of the ma*or problems identified ,ith these
pro+rammes areJ
M ;ar+et based approach focusin+ on achievin+ (uantitative results in reachin+ the poorK
M linka+e to subsidies resultin+ in lar+e9scale leaka+e of the benefits to non9poorK
M hi+h rate of failure of self9employment schemes due to poor pro*ect formulation and
M hi+h loan repayment problems both due to failure of pro*ects and creation of ,ide
spread impression amon+ the scheme participants about loan as non9returnable +rant)
As a result the schemes have come to be perceived by the banks in +eneral as risky,
makin+ them reluctant to increase their lendin+ to the poor) #verall, the state led
initiatives have not succeeded fully in creatin+ sustainable financial services for the poor)
;hese failures +et corroborated by some of the studies conducted to estimate debt and
investment position of rural households) As per the All9India Debt and Investment Survey
of -22-, only -.)4@ of the rural households had borro,ed from various formal sources
5%ABA"D, 70006) $or the poor, this proportion ,as even lo,er) $urther, thou+h the
institutional a+encies accounted for about 4A@ of the debt of all the households in -22-,
for the households in the three lo,er asset value +roups 5less than "s) .,000, "s) .,000 to
"s) -0,000 and "s) -0,000 to "s) 70,0006 it ,as the non9institutional a+encies ,hich
accounted for bulk 5.3@, .1@ and .4@ respectively6 of their debt)
&ven the recent situation also remains lar+ely the same) ;his is corroborated by the recent
"ural $inance Access Survey 5"$AS6 of %!A&" and <orld Bank in t,o ma*or states of
India, Andhra Pradesh and Uttar Pradesh 5Basu and Ferma, 70016) ;he survey revealed
that ,hile only about 7-@ of the rural households accessed formal loan, the proportion
,as only -1@ for the poor households ,ho are landless or o,nin+ less than one acre of
land) In other ,ords about 3?@ of poor ,ere ,ithout any formal loan) Do,ever, about
A3)7@ of the poor households borro,ed from informal sources as a+ainst about AA@ for
all the households) ;his indicates the continued dependence of the poor on informal
sources for meetin+ their credit needs) &ven ,ith re+ard to savin+s and insurance, the
"$AS survey revealed that the access by the poor is still very limited) As per the survey
,hile about .3)3@ of all the rural households had no deposit accounts, in the poor
cate+ory ?0)A@ of the households did not have any deposit account) #verall, only about
-.@ of the rural households had subscribed to insurance schemes)
;he formal a+encies thus, despite their +ro,th, have not been able to meet the needs of
the poor ade(uately) It is because of this failure of the formal a+encies, that the role of
microfinance interventions has assumed si+nificance) ;he response of various
microfinance initiatives, especially in the Indian conteBt, has been broadly on the
follo,in+ t,o lines)
MC'&at)!n !" alt&'nat)(& %&l)(&'y ,&-han), "!' th& p!!': In many ,ays microfinance
can be considered as an attempt to create ne,er institutions or mechanisms for the poor
as an alternative to both the formal and informal a+encies ,hich have failed them) ;he
main aim of microfinance interventions in this re+ard is to help the poor to reduce the
difficulties they face ,ith the banks or moneylenders by creatin+ separate institutions
,hich can fully understand and appreciate their needs) ;he idea is to create pro9poor
a+encies or institutions ,hich can deliver financial services to the poor) Much of the
microfinance activities so far have been on these lines)
M R&"!',)n6 th& "!',al a6&n-)&: >ookin+ at the success of %G#9led initiatives in
deliverin+ savin+s and credit to the poor, the state and formal a+encies are tryin+ to make
amendments in their systems so that they are also able to reach out to the poor) ;he
reforms include adaptin+ methods and innovations tried out by %G#s and other
microfinance a+encies) ;he fast +ro,in+ SDG9Bank >inka+e Pro+ramme in India is one
such eBample of the response from the formal a+encies in reformin+ their earlier systems)
It is ,idely believed that micro finance is more of a !S" initiative rather than a viable
business alternative) Perhaps this is the reason for the lo, adoption rate by ma*or
commercial banks across the +lobe, and especially in India) Do,ever, micro finance
serves as a profitable opportunity for banks and financial institutions) $rom a lon+ term
point of vie,, customers of micro finance no,, translate to re+ular customers in the
future) ;his +ives ample opportunities to banks to provide a ran+e of financial services as
the customers move up the income ladder) ;he chart belo, sho,s that +lobally
Microfinance follo,s the profitability model rather than only !S" and India ranks amon+
the Global Profitability rankin+s)
;he interest char+ed by the non9institutional channels 5money lenders etc)6, on informal
loans, ran+es from #: p&' -&nt t! 60 per cent) In some re+ions, it is reported to be as
hi+h as -70 per cent per annum) In comparison, the interest char+ed by the institutional
channels 5banks and M$Is6 varies bet,een 12 t! #8 per cent) ;here is, as such, hardly any
competition bet,een the t,o, and this clubbed ,ith the hi+h underserved customers
possesses a hu+e business opportunity for the commercial banks and microfinance
institutions) Despite this, the non9institutional channels continue to have a s,ay over
micro9credit in India) In a ,ay, this is primarily due to the limited outreach of the
institutional sector in rural and remote areas)
;hou+h the profitability of SDG lendin+ is not yet fully established, indications are that
banks are able to do this business ,ithout losses even ,hen interest rates are capped at
-7). per cent) Indeed recently, the State Bank of India has announced its intention to lend
at lo,er rates) ;his is spurred by the fact that due to cut in deposit rates, the cost of funds
for banks is +oin+ do,n and at least so far the level defaults in SDG portfolio is small)
About transaction costs, banks have the vie, that they any ,ay have a rural branch
net,ork ,ith all the fiBed costs and there are little incremental costs for SDG lendin+)
A fe, studies have eBamined lendin+ to self9help +roups by some commercial banks and
re+ional rural banks and found it to be profitable) $or instance, Bank of Baroda, one of
the lar+est public banks most involved in lendin+ to self9help +roups, had a re+ular
repayment rate of nearly -00 per cent and reasonable transaction costs, so the total cost of
this lendin+ ,as not hi+her than for lar+e loans) #riental Bank of !ommerce, a small
public bank, has also developed profitable lendin+ to self9help +roups)
Bank of Madura, an old private commercial bank, has found the self9help pro+ram so
satisfactory that it has made it part of its strate+y for achievin+ viability in its -0A rural
branches) Bank of Madura, no, part of the lar+e private I!I!I Bank, hi+hli+hts the
importance of findin+ innovative solutions to cut the costs associated ,ith the pro+ram
and confirms the privile+ed role played by the private sector in innovatin+) Bank of
Madura eBpects its self9help +roup lendin+ to become profitable even ,ithout usin+
%ABA"D refinancin+)
;hese success stories could be circulated to encoura+e commercial banks to include self9
help +roup lendin+ in their business strate+ies, and innovative strate+ies to cut the cost of
the pro+ram could be shared ,ith other practitioners)
Moreover in India the re+ulations re(uire a (uota fulfilment of Priority sector lendin+)
>oans to Indian M$Is not only fulfil the priority sector lendin+ re(uirementsK but they
also fulfil the need for returns)
;he M$Is in India have only +ro,n bi++er and bi++er) >eadin+ M$Is offer slim, but
positive mar+ins, ,hereas accordin+ to a latest study, Indian local M$Is also lead the
+lobal rankin+s on efficiency and profitability, ,ith most of them bein+ 11@ less costlier
than the +lobal avera+e) ;his provides Indian M$Is the room to s(uee:e out some eBtra
;he inherent nature of this field is that it can be fleBible in its conception and
implementation) ;here are a number of distinctive models of microfinance, reflectin+ the
fact that microfinance has evolved differently in different environments) Most formats are
tailor made accordin+ to the culture and social infrastructure of the country) Some
countries tend to rely on one particular model or method, ,hile others eBhibit
considerable diversity in the ran+e of models used)
>eadin+ models of microfinance J
G'a,&&n ?ank)n6, perhaps the most ,idespread, ,ith characteristic forms of
small +roup or+ani:ation and strict procedures
S&l"4h&lp 6'!up 5SDGs6, ,ith lar+er and more autonomous +roups and a miBture
of social and financial intermediation
R&6ulat&% ")nan-)al )nt)tut)!n, usually small and operatin+ in favourable
re+ulatory environments
C'&%)t -!!p&'at)(&, some of ,hich, as in Sri >anka, have made an effort to
include the poor)
;his model, developed in Ban+ladesh, has thrived in a variety of physical, cultural, and
institutional settin+s and has a number of distinctive features) ;hese include careful
tar+etin+ of the poor throu+h a means testK the use of self9selected +roups of borro,ers,
+enerally consistin+ of five members, ,ho +uarantee each other=s loansK compulsory
savin+s mobili:ation, ,ith +enerally little or no emphasis on voluntary savin+sK intensive
motivation and supervision of borro,ers 5includin+ the use of ,eekly meetin+s6K and
decentrali:ed #perations)
;hese are lar+er 5around 70 members6 and much more autonomous than borro,er +roups
in the Grameen model) SDGs are based primarily on the principle of lendin+ their
members= savin+s but they also seek eBternal fundin+ to au+ment these resources) A
number of non +overnment or+ani:ations 5%G#s6 speciali:e in promotin+ and motivatin+
SDGs, ,ith an important distinction bet,een %G#s ,hich operate as financial
intermediaries and those ,hich confine themselves to social intermediation) Fariants of
these approaches also eBist in a number of other countries, includin+ Indonesia, %epal,
Pakistan, and Sri >anka)
Some of the principles underlyin+ the model and the +uidelines that ,ere issued to the
implementin+ +roups are listed belo,J
;he SDGs are to use part of their funds 5almost 40@6 for lendin+ to their
members and the rest for depositin+ in a bank to serve as the basis for refinancin+
from the bank)
Savin+s are to come firstJ no credit ,ill be +ranted by the SDG ,ithout savin+s
by the individual members of the SDG) ;hese savin+s are to serve as partial
collateral for their loans)
;he *oint and several liabilities of the members are to serve as a substitute for
physical collateral for that part of loans to members in eBcess of their savin+s
!redit decisions on lendin+ to members are to be taken by the +roup collectively)
All the intermediaries 5the !entral Bank, banks, %G#s and SDGs6 ,ill char+e an
interest mar+in to cover their costs)
Interest rates on savin+s and credit for members are to be market rates to be
determined locally by the participatin+ institutions)
Instead of penalties for arrears, the banks may impose an eBtra incentive char+e to
be refunded in the case of timely repayments)
;he ratio of credit to savin+s ,ill be contin+ent upon the credit,orthiness of the
+roup and the viability of the pro*ects to be implemented, and is to increase over
time ,ith repayment performance)
SDGs may levy an eBtra char+e on the interest rate for internal fund +eneration
5,hich ,ould be self9imposed forced savin+s6)
;he chart on the follo,in+ pa+e sho,s the +eneral model of micro lendin+)
Fig 2.1 Source: Building Sustainable Micro Finance System: A Growth Catalyst for the oor
!"G"#$% $esearch Study
Fig 2.2
Indian M$Is ran+e from Grameen9replicator %G#s to for9profit entrepreneurial ventures
to developmental %G#s ,hich moved from SDG promotion to direct financial
intermediation) Based on asset si:es, M$Is can be divided into three cate+oriesJ
Cat&6!'y 1J .94 institutions ,hich have attracted commercial capital and scaled up
dramatically over last five years) ;hese M$IsK ,hich include SES, SDA"& and
SpandanaK ,ere initiated in the -220s as %G#s promotin+ SDGs or Grameen9style
pro+rams but after 7000, converted into for9profit, re+ulated entities, mostly %on9
Bankin+ $inance !ompanies 5%B$!s6)
Cat&6!'y #J Around -09-. institutions ,ith hi+h +ro,th rates, includin+ both %G#s and
recently formed for9profit M$Is 5mostly %B$!s6) Many %G#s have transformed into
re+ulated, for9profit structures recently or are in process no,, and seek commercial e(uity
investments) &Bamples include Grameen Eoota, Bandhan and &SA$)
Cat&6!'y 5J ;he bulk of IndiaNs -000 M$Is are %G#s stru++lin+ to achieve si+nificant
+ro,th) Most continue to offer multiple developmental activities in addition to
microfinance and have difficulty accessin+ +ro,th funds)
<hile SDGs tend to have a multi9sectoral development approach and are challen+ed by
sustainability, Most M$Is focus on scalin+ up microcredit operations ,hile creatin+ a
sustainable le+al structure and business model) ;he M$I approach is +enerally more
attractive to commercial capital and mainstream market players)
Access to finance has played a critical role in helpin+ Indian M$Is achieve such +ro,th)
Donors includin+ !ordaid and $ord $oundation have eBtended +rants and (uasi9e(uity to
support institutional capacity buildin+ and cover early9sta+e losses) #r+ani:ations such as
Grameen $oundation have eBtended +uarantees to levera+e additional loan funds) ApeB
institutions like Small Industries Development Bank of India 5SIDBI6, $riends of
<omen=s <orld Bankin+ 5$<<B6 and "ashtriya Mahila Eosh 5"ME6 provided early
sta+e on lendin+ capital)
>evera+in+ these resources, many M$Is accessed market9rate lendin+ capital from
commercial banks such as I!I!I Bank, AB% Amro Bank and DD$! Bank) Since 7004
commercial e(uity investments have entered the market, mostly into !ate+ory - M$I
capital structures) Bet,een 700A and 700?, the microfinance sector received an e(uity
infusion of almost USDA1 million, USD13 million of ,hich flo,ed in durin+ the first
four months of 700? 5See BoB 16)
;his hi+h +ro,th period ,as also marked by ne, and innovative delivery channels) ;he
I!I!I Bank Partnership Model allo,s M$Is to +ro, their client base and en*oy lar+e
financial levera+in+) SDA"& and BASIO are sellin+ their portfolios to mainstream banks
to fuel +ro,th)
;hou+h many M$Is formally mobili:ed client savin+s as %G#s, deposit mobili:ation is
prohibited once M$Is transform into for9profit le+al entities) Proposed policy reforms on
the hori:on, are eBpected to allo, non9profit M$Is to function as business correspondents
for commercial banks and offer savin+s services to clients, but this is not an avenue open
to most of the scaled9up, for9profit M$Is)
%G#9M$Is are also partnerin+ ,ith mainstream insurance providers to offer insurance
services) "emittances are another emer+in+ area of interest for Indian M$Is as ,ell) $or
eBample, Spandana has partnered ,ith <estern Union to provide remittance services to
its clients)
Many Indian M$Is are increasin+ly becomin+ national players) As of 7003, at least -7
M$Is operate in more than one state) ;here is an increased focus on urban market and a
ne, +eneration of M$Is, such as U**ivan and S,adhaar, operate solely in urban areas)
Before enterin+ a villa+e, SES staff members conduct a comprehensive survey to
evaluate the local conditions and potential for operations) Some of the key factors
include total population, poverty level, road accessibility, political stability and
safety) After a villa+e has been selected, SES conducts a Pro*ection Meetin+ ,ith
the entire villa+e to introduce SES, its mission, methodolo+y and services) After
the pro*ection meetin+, SES holds a Mini9Pro*ection Meetin+ to further eBplain
SES to interested parties and appeal directly to those ,ho may not have attended
the meetin+ because of reli+ious, class, caste or +ender barriers)
After SES has selected a villa+e and conducted informational sessions ,ith its
residents, interested ,omen form self9selected five member +roups to serve as
+uarantors for each other) ;his process is called Group $ormation) &Bperience has
sho,n that a five9member +roup is small enou+h to effectively enforce +roup peer
pressure and, if necessary, lar+e enou+h to cover repayments in case a member
needs assistance) Group members must be bet,een the a+es of -3 and .2, cannot
be related and must live close to one another)
#nce a +roup is formed and meets the minimum re(uirements, it be+ins
!ompulsory Group ;rainin+ 5!G;6) !G; is a five day pro+ram consistin+ of
hour9lon+ sessions desi+ned to educate clients on the processes and procedures of
SES and build a culture of credit discipline) Usin+ innovative, visual and
participatory teachin+ methods, SES staff introduces clients to SES= financial
products and delivery methods) In addition, !G; teaches clients the importance of
collective responsibility, ho, to elect +roup leaders, the SES pled+e and ho, to
si+n their name) Durin+ the trainin+ period, SES staff also collects (uantitative
data on each client to make sure they (ualify for the pro+ram and record base9line
information for future analysis) #n the fifth day, clients take the Group
"eco+nition ;est and are officially accepted as a SES= client after successfully
completin+ the test)
As additional +roups are formed ,ithin a sin+le villa+e, a San+am 5!enter6
emer+es) Durin+ San+am $ormation, +roups are combined to form a center of A to
-7 +roups or 70 to 40 clients) ;he San+am is responsible for the repayment of all
+roups, creatin+ a dual *oint liability system) If one +roup defaults the rest of the
San+am must repay)
After the formation of a San+am, a leader and deputy leader are appointed to help
facilitate meetin+s and ensure compliance ,ith SES procedures) San+am
meetin+s are held on a ,eekly basis by SES= $ield Assistants and all financial
transactions 5also see Products G Services6 are conducted durin+ the meetin+)
Meetin+s be+in early in the mornin+ so not to interfere ,ith the daily activities of
the clients) In addition to financial transactions, clients use the ,eekly meetin+s to
discuss ne, loan applications, loan utili:ation and community issues) San+am
meetin+s are conducted ,ith ri+id discipline in order to sustain an environment of
credit discipline created durin+ !G;)
Microfinance= primary ob*ective is to increase the outreach to bottom of pyramid and
facilitate a creation of responsive t,o ,ay channel)
;herefore Information technolo+y is the basic tool to enable banks and Microfinance
institutions= to reach end customer) ;raditional microfinance models had an inherited la+
due to unavailability of technolo+y and infrastructure in rural areas) ;he M$Is used to
+et the payments pooled from the !ustomers 5self help +roups6 and transfer it to the
banks typically by month=s end, but bankin+ re+ulations in most of the countries asks the
banks and M$Is 5 in many countries6 to record the transaction as and ,hen it is enabled,
therefore need of technolo+y to record the transactions)
$urther technolo+y like Smart cards and A;Ms are needed to authenticate the customers
and provide them additional facilities) ;he key challen+es faced in such implementation
are the scale and a,areness)
Microfinance has started reachin+ millions of customers around the +lobe therefore I;
systems are needed to be put in place to reach such lar+e number of customers, and
further the customers and the staff have to be imparted ,ith the kno,led+e of use of such
technolo+y and e(uipments)
$ollo,in+ are some innovations done in Microfinance to streamline the flo, of
information to rural sector
P- k)!k )n ()lla6& AIn%)aB
#perator is a secondary school +raduate ,ho pays PUS8 -,100 to start up
!onnectivity provided throu+h ,ireless in local loop 5<>>6 technolo+y
ServicesJ e9+overnance, a+riculture info, video messa+e and health dia+nosis
Bankin+ and insurance services can be delivered throu+h the operator
P&n)!n CT'u-kD AS* A"')-aB
100 vehicles ,ith biometrics, smart cards, cash dispensers 5-)?m clients6
Deliver US8 -.0 million in pension and +rant payments each month
Bankin+ and insurance services can be delivered throu+h the vehicles
M!?)l& Ph!n& AN)6&')a3 7&nya3 S* A"')-a3 @a,?)a3 &t-*B
Anytime, any,here usin+ SMS C 13m mobile users in Africa by end97001
Mid9to9lar+e banks across Africa installin+ mobile bankin+ applications
Balance in(uiries, transactions, alerts, account service, promotions
;here is a vast unmet +ap in the provision of financial services to the poor) A very little
se+ment of the poor people is bein+ served by the formal financial system for micro9
credit) Ma*ority of the Indian population depends upon the informal financial system for
their credit needs) And it is this informal financial system, comprisin+ of the money
lenders, bi+ farmers, commission a+ents and friends/relatives ,ho eBploit the rural poor
and eBtract hu+e sums of money from them by char+in+ eBorbitantly hi+h interest rates)
Dence, it is here that the or+ani:ed financial sector sees immense potential for +ro,th by
the provision of their financial services to the unbanked at easily affordable rates) ;hese
services allo, participants to smooth consumption across time and help them tide over
the impact of adverse shocks durin+ their life cycle) ;hus, microfinance has brou+ht a
paradi+m shift in the Indian economy and has +ro,n to become not *ust philanthropy, but
also a lon+9term +ro,th strate+y for various financial institutions)
Detailed study of the evolution of microfinance concept in India)
;o analy:e the current market scenario of microfinance in India and a brief
introduction to it from the ,orld perspective
;o study the fe, players servin+ in this sector in India)
;he future challen+es prospects of microfinance in India
!onduct a research in order to kno, the a,areness about the concept of
microfinance amon+ the masses.
M&th!% !" th& %ata -!ll&-t)!n
;,o methods of data collection have been used i)e) Primary data and Secondary data)
P'),a'y %ata
;he study is conducted throu+h (uestionnaires and intervie,s) ;he (uestionnaires and
intervie,s are the main data collection tools due to their nature of +ivin+ accurate results
to a problem from the selected sample frame) ;he (uestionnaire is easily customi:able
and the manner of its construction is easy to follo, ,hich is only very practical in the
nature of the research) ;he (uestionnaires record the de+ree to ,hich the employees are
S&-!n%a'y %ata
;his ,as primarily done throu+h secondary data collected from the internet, *ournals and
ma+a:ines) Denceforth, the focus shifted to the efforts ,hich various banks have put in,
and the models and technolo+ical innovations ,hich they have developed for the
provision of this service)
;his section eBamines the role of micro finance in the empo,erment of people and the
realisation of financial inclusion in India) <ith increasin+ demand for rural finance, and
the inade(uacies of formal sources, the M$ has immense opportunities in the ne, avatar
of micro credit in India) Do,ever, in the li+ht of recent eBperiences, and the need for
(ualitative +ro,th, it is of utmost importance that M$ be mana+ed ,ith better scrutiny in
terms of finance and technolo+y as ,ell as social responsibility) Also, %G#s have played
a commendable role in promotin+ Self Delp Groups by linkin+ them ,ith banks)
!redit is one of the critical inputs for economic development) Its timely availability in the
ri+ht (uantity and at an affordable cost +oes a lon+ ,ay in contributin+ to the ,ell9bein+
of the people especially in the lo,er run+s of society) It is one of the three main
challen+es to input mana+ement in a+riculture, the other t,o bein+ physical and human
5Dans, 70046)
;hus access to finance, especially by the poor and vulnerable +roups is a prere(uisite for
employment, economic +ro,th, poverty reduction and social cohesion) $urther, access to
finance ,ill empo,er the vulnerable +roups by +ivin+ them an opportunity to have a
bank account, to save and invest, to insure their homes or to partake of credit, thereby
facilitatin+ them to break the chain of poverty) But India is la++in+ behind in this respect
so it has become the matter of concern)
In India, moneylenders and other informal lenders meet more than 40 per cent of rural
credit needs) ;he share of banks in particular in rural areas hovers around about 10@) It
has been assessed that only 7? per cent of the total farm households are indebted to
formal sourcesK in other ,ords ?0 per cent of the farmhouses do not have access to formal
credit sources 5"an+ara*an, 700?6)
Bankin+ data reveals that credit eBclusion is severe in -12 districts of the country) In
these districts, only -0 per cent or less out of -00 persons have access to credit from the
fact that the eBclusion is lar+e, there is also a ,ide variation across re+ions, social +roups
and asset holdin+s) ;he poorer the +roup, the +reater is the eBclusion 5"an+ara*an, 700?6)
#ver the years there has been an increase in the percent of credit facilities eBtended by
the banks to rural areas but this increase is only mar+inal and not a si+nificant one)
In spite of the lar+e net,ork of institutional credit system, it has not been able to
ade(uately penetrate the informal rural financial markets and the non9institutional sources
continue to play a dominant role in purveyin+ the credit needs of the people residin+ in
rural areas)
;hus, an important challen+e facin+ the bankin+ sector is to eBtend financial services to
all sections of society) >ike others, the poor need a ran+e of financial services that are
convenient, fleBible, and affordable and not *ust loans) Micro9finance can ,ork as a
po,erful tool to fi+ht poverty in an effective manner and thus forms an indispensable part
of financial inclusion) <ith the ne, philosophy and policies pertainin+ to micro credit,
micro finance institutions 5M$Is6 such as Self Delp Groups 5SDGs6 have emer+ed and
they no, have a stron+ footin+ in India)
;he bankin+ industry has sho,n tremendous +ro,th in volume and compleBity durin+
the last fe, decades) Despite makin+ si+nificant improvements in all the areas relatin+ to
financial viability, profitability and competitiveness, there are concerns that banks have
not been able to include vast se+ment of the population, especially the underprivile+ed
sections of the society, into the fold of basic bankin+ services 5;horat, 700?a6) ;his lead
to the emer+ence of $inancial Inclusion as a strate+y to brin+ so called eBcluded people
into the mainstream)
It is the delivery of bankin+ services at an affordable cost to the vast sections of
disadvanta+ed and lo,9income +roups) As bankin+ services are in the nature of public
+ood, it is essential that availability of bankin+ and payment services to the entire
population ,ithout discrimination is the prime ob*ective of the public policy) Althou+h
credit is the most important component, financial inclusion covers various financial
services such as savin+s insurance, payments and remittance facilities by the formal
financial system to those ,ho tend to be eBcluded 5Mahendra S, 70046)
App'!a-h& !" F)nan-)al In-lu)!n: Based on the studies published by various eBperts
in this field ,e can safely say that there are siB approaches in the system of $inancial
Inclusion ,hich are relevant in the Indian conteBt) ;hey are as follo,sJ
-) !redit to the farmer householdsJ &nsurin+ availability of credit to the mar+inal
and sub mar+inal farmers as ,ell as other small borro,ers is the need of the hour)
7) Advisory "oleJ "ural branches must +o beyond providin+ credit and eBtend a
helpin+ hand in terms of advice on a ,ide variety of matters relatin+ to
1) Greater AccessibilityJ In district ,here population per branch is much hi+her than
the national avera+e commercial banks should encoura+ed to open branches)
A) &asy >oansJ ;here is need for the simplification of the procedures in relation to
+rantin+ of loans to small borro,ers)
.) Stren+thenin+ SDG=sJ ;he further stren+thenin+ the SDG9Bank >inka+e
Pro+ramme 5B>P6 is re(uired as it has proved to be an effective ,ay of providin+
credit to very small borro,ers)
4) &ffective ImplementationJ ;he business facilitator and correspondent model needs
to be effectively implemented)
In India, the drive for financial inclusion, initiated by the "eserve Bank of India, has thus
far involved ensurin+ access to at least one :ero minimum9balance Lno frills= savin+s
bank account to every household) In this conteBt, at least one district in each state has
been brou+ht under the purvie, of this drive ,ith public sector banks in the re+ion takin+
the lead to open at least one bank account per family in the district)
;he broad ob*ective of $inancial Inclusion 5$I6 is to ,iden the span of activities of the
or+ani:ed financial system to include ,ithin its ambit people ,ith lo, incomes) ;hrou+h
+raduated credit, the attempt is to lift the poor from one level to another so that they come
out of poverty) Inclusive +ro,th encompasses ideas related to basic needs and e(uity) It
focuses on broad C based +ro,th so that all strata of society benefits out of it) It seeks to
brid+e the divide that fra+ments the society into the classes of rich and poor) "eduction in
poverty and e(uality of income such that everyone en*oys a basic minimum standard of
livin+ are the ob*ective of inclusive +ro,th) ;hus, access to finance by the poor and
vulnerable +roups has been reco+ni:ed as a pre re(uisite for poverty reduction and social
cohesion) In fact, providin+ access to finance is a form of empo,erment of the ,eaker
>imited access to affordable financial services such as savin+s, loan, remittance and
insurance services by the vast ma*ority of the population in the rural areas and
unor+ani:ed sector is believed to be actin+ as a constraint to the +ro,th impetus in these
Access to affordable financial services 9 especially credit and insurance 9 enlar+es
livelihood opportunities and empo,ers the poor to take char+e of their lives) Such
empo,erment aids social and political stability) Apart from these benefits, $I imparts
formal identity, provides access to the payments system and to savin+s safety net like
deposit insurance) Dence $I is considered to be critical for achievin+ inclusive +ro,thK
,hich itself is re(uired for ensurin+ overall sustainable overall +ro,th in the country) ;he
financially eBcluded sections lar+ely comprise mar+inal farmers, landless labourers, oral
lessees, self employed and unor+ani:ed sector enterprises, urban slum d,ellers, mi+rants,
ethnic minorities and socially eBcluded +roups, senior citi:ens and ,omen 5;horat,
Micro9$inance allo,s broader access to financial services and can lead to faster and more
e(uitable +ro,th) It is the delivery of bankin+ services at an affordable cost to the vast
sections of disadvanta+ed and lo,9income +roups) Such a system of money for the poor
allo,s poor households to save and mana+e their money securely, decreases their
vulnerability to economic shocks and allo,s them to contribute more actively to their
development) Increasin+ly, ,ith the proliferation of micro finance initiatives, there is
evidence that such initiatives can empo,er poor households socially as ,ell)
In the conteBt of India becomin+ one of the lar+est micro finance markets in the ,orld
especially in the +ro,th of ,omen=s savin+s and credit +roups such as Self Delp Groups
5SDGs6 and the sustainin+ success of such institutions ,hich has been demonstrated by
the success of S&<A bank in Gu*arat, lo, cost bankin+ is not necessarily an unviable
Do,ever the situation still remains +rim for most of the households in the rural sector)
$or instance, out of 701 million households in the country, -A? million are in rural areas,
32 million are farmer households) .-)A per cent of farm households have no access to
formal or informal sources of credit ,hile ?1 per cent have no access to formal sources of
credit 5Hayasheela, 70036
;he financial sector developed in India by the late -230s and ,as critici:ed as bein+
tar+et and supply driven) Di+h default rates, corruption and hi+h de+ree of suspicion
amon+ bankers about the credit ,orthiness of poor people ,ere the ma*or pitfalls)
;he situation ,as bleak ,ith the formal financial sector remainin+ unsuccessful to
reco+ni:e the diver+ence bet,een the hierarchies of credit needs and credit availability)
;his led to an adverse use of credit available) ;ill date ma*ority of the rural houses fund
their needs for credit throu+h informal sources at hi+h cost) Another ma*or fla, ,as that
usually credit ,as available for settin+ up ne, enterprises and not for meetin+ personal
re(uirements like marria+e eBpenses, medical treatment of family etc)
Under the Bank9SDG linka+e the banks make funds available to SDGs at around their
prime lendin+ rate 5P>"6 that may ran+e bet,een --9-7 per cent) ;he SDGs on9lend the
funds to their members at rates ran+in+ from -7@ to 40@) Do,ever, +enerally, the rate
char+ed by SDGs to members is around 7A@)
A fe, studies have eBamined lendin+ to self9help +roups by some commercial banks and
re+ional rural banks and found it to be profitable) $or instance, Bank of Baroda, one of
the lar+est public banks most involved in lendin+ to self9help +roups, had a re+ular
repayment rate of nearly -00 per cent and reasonable transaction costs, so the total cost of
this lendin+ ,as not hi+her than for lar+e loans) #riental Bank of !ommerce, a small
public bank, has also developed profitable lendin+ to self9help +roups
Bank of Madura, an old private commercial bank, has found the self9help pro+ram so
satisfactory that it has made it part of its strate+y for achievin+ viability in its -0A rural
branches) Bank of Madura, no, part of the lar+e private I!I!I Bank, hi+hli+hts the
importance of findin+ innovative solutions to cut the costs associated ,ith the pro+ram
and confirms the privile+ed role played by the private sector in innovatin+) Bank of
Madura eBpects its self9help +roup lendin+ to become profitable even ,ithout usin+
%ABA"D refinancin+)
;hese success stories could be circulated to encoura+e commercial banks to include self9
help +roup lendin+ in their business strate+ies, and innovative strate+ies to cut the cost of
the pro+ram could be shared ,ith other practitioners
;he operatin+ cost of servicin+ micro9finance/micro9credit is hi+her than normal 5bank6
finance, ho,ever) ;his holds +ood for commercial banks 5includin+ ""Bs6, M$Is and
credit co9operatives) Salaries to staff, travellin+ eBpenses, commissions not classified
under financial costs, eBpenses on promotion of +roups, staff ,elfare eBpensesK
amorti:ation and depreciation, rent on hired buildin+s and other overheads9all constitute
the operatin+ cost) ;hese costs are critical to the operations of the formal bankin+ sector)
;akin+ co+ni:ance of these costs, results in a far hi+her calculation than takin+ the
5above6 vie, that the overhead costs need not be allocated to the SDG9bank linka+e
pro+ramme since it is bein+ incurred by the bank any,ay)
;he data sho,s that the entire bank branches, irrespective of SDG promotion
mechanisms, are makin+ substantial losses in lendin+ to SDGs due to pricin+ of SDG
loans belo, cost) ;hese loans carry the lo,est interest rates of all products in all the
sample banks 5-7).9-1 per cent per annum6, and this does not allo, the banks to earn a
spread even ,ith the most efficient operatin+ system) ;he five ""Bs studied in the
sample sho,ed that the cost of SDG lendin+ varied from 77910 per cent 5even if one
eBcluded an ""B ,here it cost over A3 per cent, as an outlier6) ;hus, unless banks
increase their interest rates on SDG lendin+ to the ran+e of 7A per cent, it is unlikely that
they ,ill make any profits) Do,ever, efficiency improvement in operations of ""Bs as
also economies of scale ,ith more SDG lendin+ may also reduce the breakeven pricin+ to
perhaps 7- per cent=
;he net effect of i+norin+ overhead costs is to lo,er the apparent cost of banks lendin+ to
SDGs but it means that such lendin+ can then take place at each branch individually only
to the point ,here the eBistin+ slack' in the overhead is fully taken up) >endin+ to
SDGs beyond this point ,ill re(uire the bank to incur further overhead costs and, at this
point, the full cost of lendin+ to SDGs ,ould have to be taken into account) In this
conteBt, it is ,orth notin+ that the above study found that even in the case of individual
""Bs in south India 5,here the SDG9bank linka+e is very much in vo+ue6 the SDG
portfolio did not eBceed --@ of advances in the best of branches) #verall, the
outstandin+ of the entire bankin+ sector to SDGs does not eBceed 0).@ of their total
;he costs incurred by any financial institution in makin+ loans is made up of three main
components 5i6 $inancial !osts 5or costs of raisin+ money for makin+ loans6, 5ii6
#peratin+ &Bpenses 5or staff, travel and other administrative costs of servicin+ the loans6
and "isk !osts 5or costs of coverin+ for the risk of losin+ capital on account of the
inability of the institution to recover loans ,hether or not default is ,ilful6)
F)nan-)al C!t
;he other credit lendin+ institutions like the credit co9operatives and the M$Is may not
have sufficient deposits, as the commercial banks 5G >ABs6 to undertake credit activity
on their o,n) ;hey are, therefore, dependent either on refinancin+ facility from
a+encies, such as, the %ABA"D, the SIDBI, the "ashtriya Mahila Eosh or borro,in+s
from the commercial banks 5includin+ the ""Bs6) ;he respective financial cost involved
under each cate+ory may be seen from ;able 7 belo,J
#able &.2: Financial Cost to MF%
'"n a one year loan(
Institution "ate of Interest
5on declinin+ balance6
I %ABA"D 392
"ME 3
II !ommercial Banks
a) Public Sector -7
b) Private Sector -A
$undin+ may be made available to M$Is by the development a+encies
5SIDBI/%ABA"D6 also by ,ay of subordinated debts, as promoter=s/member=s capital
5or e(uity/(uasi e(uity6 as ,ell as +rants from donors) In vie, of the hi+h set up cost, the
development institutions may char+e a lo,er rate of interest to the M$Is in the initial
years, ,hich may be raised subse(uently once the M$I has matured) &(uity other than
L+rants= is, obviously, the cheapest of all funds as there is no interest liability and
payment of dividend is to be made only ,hen profits have been earned) ;he financial
cost to the M$I ,ill, thus, be the ,ei+hted avera+e of all the different kinds of funds)
Op&'at)n6 C!t
Salaries, moreover, account for the ma*or cost of these institutions) ;he sustainability of
micro9finance at lo, interest char+es thus depends +reatly on staff efficiency) In simple
terms, efficiency depends on ho, many clients a staff member is able to deal ,ith) By
and lar+e, M$Is in India are able to service some -.097.0 clients per staff member) ;he
lar+er institutions are able to service more borro,ers per staff member as some
economies of scale take effect) ;he leadin+ ten M$Is in India service some 712 clients
per staff member* ;his amounts to the operatin+ eBpense ratio 5#&"6 of these
institutions declinin+ as the si:e of portfolio increases)
;he table/fi+ure belo, +ives some idea of start up costs C the first three years and a
portfolio si:e of "s- crore are crucial) Beyond this level operatin+ eBpenses decline to
70@ and after about "s)7). crore to -A9-.@ of outstandin+ portfolio) ;he really lar+e
M$Is are able to achieve -09-7@ #&"s)

#able &.& ")erating e*)enses and )ortfolio yield by age of MF%
A6& Ay&a'B OER .)&l%
Q1 A4)0@ -2)0@
19. -2)0@ -?)0@
.9? -A)0@ 70@
R? -.)0@ -2)0@
M4CRI0 In%)a18*2F 19*1F
;op -0 -7)1@ 7A)3@
MBB #0*#F 58*1F
M$Is have been playin+ an important role in substitutin+ moneylenders and reducin+ the
burden on the formal financial institutions) It is a proven method of financial inclusion,
providin+ un9banked rural clientele ,ith access to formal financial services from the
eBistin+ bankin+ infrastructure) ;o study the impact of these initiatives ,e be+in by
analysin+ the number of SDG=s that have been linked ,ith the banks)
In-'&a)n6 Nu,?&' !" S/GG: Durin+ the year 4, 34,A03 ne, SDGs ,ere credit linked
,ith banks as a+ainst 4, 70,-02 durin+ 700.904, takin+ the cumulative number of credit
linked SDGs to 72, 7A,2?1) !onsiderin+ that many +roups no, operate to promote the
idea of M$ it is important to have a peek into the number of households that have
benefited from such +roups)
/!u&h!l% S&'(&%: ;he phenomenal outreach of the pro+ramme has enabled an
estimated A02). lakh poor households to +ain access to M$ from the formal bankin+
system as on 1- March 700?, re+isterin+ a +ro,th of 7A)7 per cent over the previous year
5%ABA"D, 700?6) ;hese initiatives, ,hich ,ere started as an outreach pro+ramme, not
<3 3-5 5-7 >7
Years of Experience
OER Yield
only aimed to promote thrift and credit but made immense contribution to,ards
empo,erment of rural ,omen)
/u6& P!t&nt)al F!' G'!+th: Micro finance still plays a modest role in India) At the All
India >evel less than . per cent of poor rural households have access to micro finance 5as
compared to 4. per cent in Ban+ladesh6 ,ith si+nificant variation eBists across the states
5Basu and Srivastava, 700.6)
Balan-&% R&6)!nal D&(&l!p,&nt: ;here is ske,ed +ro,th of SDGs across the re+ions)
;he year 700490? ,itnessed the spread of the M$ pro+ramme in resource9poor re+ions of
the country indicatin+ a marked shift from its initial concentration in the southern re+ion)
;he cumulative share of non southern re+ions rose from 72 per cent as on March 700- to
A3 per cent as on March 700?) ;his is mainly because of presence of lar+e number of
%G#s operatin+ in South "e+ion
P'!,!t)n6 O(&'all D&(&l!p,&nt: <hile estimatin+ the impact of micro finance on
savin+s and borro,in+s it has been found that micro credit not only increases involuntary
savin+s, but also induces voluntary savin+s 5Ehandker, -2236) Apart from financial
services Micro finance Institutions 5M$Is6 provide trainin+ and impart kno,led+e to the
tar+et +roups) ;hus micro finance today is bein+ treated as a developmental tool and not
*ust a financial service 5>ed+er,ood Honna, 7000B*
E,p!+&')n6 8!,&n: ;he formation of SDGs in rural areas throu+h %G#s has kindled
ne, hope of chan+e and development in the status and role of ,omen folk ,ho ,ere
other,ise considered as po,erless and mar+inali:ed members of the society)
Increasin+ly, they have been able to +ro, economically and socially because no,
members have also accepted the chan+ed role of their ,omen folk and most of the time
they are supportive to the efforts they make 5Patil, 70046)
An attempt is made in this section to hi+hli+ht the current status of the microfinance
sector in India in terms of potential demand for microfinance services, current level
outreach and supply in relation to the potential, and eBtent of involvement of various
types of institutions)
;here are no clear and systematic estimates available re+ardin+ the actual as ,ell as
potential demand and supply of microfinance in the country) "e+ardin+ the estimation of
tar+et +roups for M$ services, one can base it on the official estimation of the number of
poor in the country as indicative of the total potential, +iven the fact that microfinance is
meant for the poor) ;he estimated si:e of the belo, poverty line 5BP>6 population +ives
some idea about the potential client base of the sector)
;akin+ the official estimation of BP> population of 740 million durin+ -22097000
5Government of India, 70076 and the avera+e household si:e, ,e find that there are about
.7)0A million households ,ho are in the BP> cate+ory) ;he number of BP> households
in rural areas comes to 13)4 millionK the same in urban areas comes to about -1)A million)
;here are, ho,ever, ar+uments ,hether the entire BP> households should be considered
for the purpose of providin+ microfinance) But +iven the fact that even very poor
households need service like savin+s and insurance, if not credit al,ays, one can safely
consider almost all the households belo, BP> as potential client base of microfinance)
Ad*ustin+ for chan+es like population +ro,th and households crossin+ poverty line
durin+ the interval, one can say about .0 million households in the country presently
constitute the basic tar+et +roup of the M$ sector)
As re+ards the demand, based on the available estimates in the ;ask $orce of %ABA"D
on microfinance it ,as indicated that the potential annual credit re(uirement could be in
the ran+e of "s) -.0 billion to "s) .00 billion per year 5%ABA"D, 70006) A recent
unofficial estimate puts the total credit demand by the poor households in the order of
"s)-.0 billion to "s) A.0 billion 5Maha*an and "amola, 70016) ;hese estimates are based
on the actual credit usa+e as reported by various studies and not the potential demand)
Due to variations in the avera+e household credit use as estimated by different studies,
there is a ,ide +ap in the total estimated ran+e of credit demand)
A+ain, there are no clear estimates about savin+s and insurance demand by the poor) ;he
same unofficial study 5ibid6, based on the assumption that the poor can save up to five to
-0@ of their annual income and can pay insurance premium e(uivalent to three to five
percent of their income, puts the annual demand for savin+s products in the ran+e of "s)
.0 billion to "s) -00 billion, and demand for insurance premium in the ran+e of "s) 10
billion to "s) .0 billion) ;akin+ to+ether the estimated demand for credit, savin+s and
insurance, the annual total demand for microfinance by the poor households has been put
in the ran+e of "s) 710 billion to "s) 400 billion in the country)
Given such a demand potential, the actual covera+e of the tar+et +roup and the eBtent of
supply of microcredit by various a+encies indicate that there is a bi+ +ap in the demand
and supply of microfinance in the country) Since there are no clear fi+ures available on
the actual supply of microfinance, here ,e look at the level of lendin+ and outreach of the
tar+et +roup attained by the ma*or apeB level microfinance institutions in the country) ;he
follo,in+ table +ives some macro level details about the lendin+ and outreach
performance of the ma*or apeB level microfinance institutions or schemes in the country
based on 7001 and 700A data) It is possible that there may be some overlaps in the
covera+e of these a+encies as some of the M$Is and %G#s may be simultaneously
+ettin+ assistance from more than one a+ency) ;here may be also some M$Is,
%G#s or +overnment9sponsored microfinance pro+rammes like SGSI ,hich may not be
fully covered under these apeB level pro+rammes) Dence, one needs to take the fi+ures in
Ta?l& 1 only as indicative of the total actual outreach and supply)
In terms of the actual number of a+encies or institutions involved at the +rass root or
retail level, from Ta?l& 1 one can make out that about -,?.7 institutions of different types
,ere involved in deliverin+ microfinance durin+ 70019700A) Under the SDG9Bank
>inka+e Pro+ramme of %ABA"D, about .40 financial institutions, cooperatives, ""Bs
and !ommercial Banks have participated across the country) Under the SDG9Bank
>inka+e Pro+ramme, the financial institutions have financed about -,030,000 SDGs
,hich are promoted either directly by them or by the %G#s) %ABA"D provides
refinance to these financial institutions for on9lendin+ to SDGs) Besides these financial
institutions, a lar+e number of %G#s and microfinance institutions are also involved in
deliverin+ microfinance)
About -,-27 %G#/M$Is had received loan assistance from various apeB institutions like
S$M!, "ME, $<<B and %ABA"D for their on9lendin+ pro+ramme) ;hese -,-27
%G#s/M$Is have approached the apeB a+encies for +ettin+ various types of loan
assistance for on9lendin+ to their +roups or members) !umulatively, these %G#s/M$Is
have reached out to over -).4 million households and have received about "s) 7,2A7
million loan assistance from apeB a+encies for on9lendin+) In addition to these -,-27
%G#/M$Is, it is estimated that another about .00 %G#s ,ith an outreach of 0)17 million
households are also involved in deliverin+ microfinance in the country) ;hese are mostly
smaller %G#s ,hich are mana+in+ their microfinance pro+rammes either usin+ donor
funds or ,ith savin+s mobilised by their SDGs) ;akin+ even these %G#s into account,
one can say that as of 70019700A, about -,?00 %G#s/ M$Is are involved in deliverin+
microfinance in the country, apart from the .40 mainstream financial institutions
involved under the SDG9Bank >inka+e Pro+ramme)
;aken to+ether, the microfinance a+encies in the country have reached about -?)3?
million households, ,hich accounts for little over one9third of the estimated number of
poor households in the country) ;he M$ a+encies hence still have a lon+ ,ay to +o in
reachin+ the ultimate potential) If ,e look at the credit needs bein+ met, the +ap in the
demand and supply is even more +larin+) !umulatively, from -232 till 700A the ma*or
microfinance a+encies have disbursed about "s) A-)23 billion loans) &ven this cumulative
loan fi+ure of -. years accounts for only about 73@ of an estimated annual credit
demand on the lo,er side 5"s) -.0 billion6 or only about 2)1@ of the estimated credit
demand on the hi+her side 5"s) A.0 billion6)
Instead of cumulative loan disbursement, if one ,ere to take the actual annual loan
disbursement of these a+encies, then the +ap ,ould be even bi++er) ;he +ap probably
could be even bi++er if ,e ,ere to take the total potential demand and not one based on
the actual credit use) As re+ards savin+s and insurance, a+ain there are no clear macro
level statistics available) But +oin+ by the fact that the microfinance a+encies in the
country so far have focused their attention mainly on credit, and also that many local
microfinance institutions are not able to mobilise savin+s in a full fled+ed ,ay due to
le+al restrictions, the eBtent of +ap in the demand and supply for these services ,ould be
definitely much hi+her than the credit) ;hus, +iven the need and their current level of
achievements, the M$Is and other a+encies have still a lon+ ,ay to +o in meetin+ the
needs of the poor)
Chapt&' 46
M)-'!")nan-& )nt)tut)!n )n In%)a
SIDBI $oundation for Micro !redit 5S$M!6 ,as launched by the Bank in Hanuary -222
for channelisin+ funds to the poor in line ,ith the success of pilot phase of Micro !redit
Scheme) S$M!=s mission is to create a national net,ork of stron+, viable and sustainable
Micro $inance Institutions 5M$Is6 from the informal and formal financial sector to
provide micro finance services to the poor, especially ,omen)
S$M! is the apeB ,holesaler for micro finance in India providin+ a complete ran+e of
financial and non9financial services such as loan funds, +rant support, e(uity and
institution buildin+ support to the retailin+ Micro $inance Institutions 5M$Is6 so as to
facilitate their development into financially sustainable entities, besides developin+ a
net,ork of service providers for the sector) S$M! is also playin+ si+nificant role in
advocatin+ appropriate policies and re+ulations and to act as a platform for eBchan+e of
information across the sector) ;he launch of S$M! by SIDBI has been ,ith a clear focus
and strate+y to make it as the main purveyor of micro finance in the country) #perations
of S$M! in the neBt fe, years, is not only eBpected to contribute si+nificantly to,ards
development of a more formal, eBtensive and effective micro finance sector servin+ the
poor in India but also ensure sustainability at all levels vi:) at the apeB level 5S$M!6, at
the M$I level and at the client level to ensure continuance of such arran+ement) Most
importantly, S$M! has strived to create a mechanism in ,hich there should be no
barriers to +ro,th) Under the dispensation, there is a focus on innovation and action
On l&n%)n6
In keepin+ ,ith its mission, SIDBI $oundation identifies, nurtures and develops select
potential M$Is as lon+ term partners and provides credit support for their micro credit
initiatives) ;he eli+ible partner institutions of SIDBI $oundation, therefore, comprise
lar+e and medium scale M$Is havin+ minimum fund re(uirement of "s) -0 lakh per
annum) In all, around -009-7. M$Is are planned to be developed as lon+ term partners
over the neBt A years) >ar+e and medium scale M$Is havin+ considerable eBperience in
mana+in+ micro credit pro+rammes, hi+h +ro,th potential, +ood track record,
professional eBpertise and committed to viability are provided financial assistance for on9
lendin+) Under the present dispensation, annual need based assistance is provided to
enable M$Is to eBpand their scale of operations and achieve self sufficiency at the
earliest) >endin+ is based strictly on an intensive in9house appraisal supplemented ,ith
the capacity assessment ratin+ by an independent professional a+ency) "elaBed security
norms have also been adopted to reduce procedural bottlenecks as ,ell as to facilitate
easy disbursements)
SBI has taken up SDG movement as a mission) A noble mission to reach those families
,ho ,ere hitherto havin+ no access to the credit by any formal financial institution and,
therefore, ,ere dependin+ on informal sources and moneylenders)
Micro finance is not ne, to State Bank of India) Bank=s association ,ith non9+overnment
or+ani:ations 5%G#s6 or voluntary a+encies in eBtendin+ financial help can be traced as
far back as -2?4 ,ell before %ABA"D introduced SDG9Bank !redit >inka+e
Pro+ramme as a pilot pro*ect in -227)
SBI has actively participated in SDG9Bank !redit >inka+e pro+ramme since its inception
in -227 as a pilot pro*ect of %ABA"D) Since then the Bank has made a steady pro+ress
in financin+ SDGs) As on March 7004, SBI=s branches spread throu+hout the len+th and
breadth of the country have opened 4,10,04? Savin+s Bank account of SDGs out of
,hich more than .)A- lacs SDGs have been provided ,ith credit facilities thus benefitin+
more than ?. lacs poor people) Ma*ority of these SDGs are ,omen SDGs* ;he year9,ise
cumulative position of SDGs9Bank >inka+e pro+ramme for the last A years is as underJ
.&a' Ma'-h H05 Ma'-h H0: Ma'-h H02 Ma'-h H06
SDGs linked 5financed6 -,0?,..1 -,?A,444 1,A1,42- .,A0,A3-
%o) of beneficiaries -7,11,440 7-,.0,?.7 A3,--,4?A ?.,43,3A7
Amount disbursed 17A)3A cr) 4-A)3? cr) -1--)A. cr) 7747)2. cr)
Amount outstandin+ 742)A1 cr) A47)?? cr) 3?7)03 cr) -A.2)32 cr)
%o) of SDGs maintainin+
Savin+s a/c in the Bank
7,?2,A44 1,42,.43 .,03,124 4,14,04?
Amount in Savin+s a/c
5Amt) in "s)6
74-)14 cr) 1A3)1- cr) A--)37 cr) A1A)0? cr)
SBI is maintainin+ its position as a leader amon+ !ommercial Banks in credit linkin+ of
SDGs and is a prime driver for the movement) As at the end of March 7004, SBI ,ith a
share of approBimately A?@ of total SDGs financed by !ommercial Banks is far ahead of
Bank has successfully initiated various measures to,ard ,idenin+ its SDG net,ork) ;o
list a fe, eBamplesJ
o S&n)t)>at)!n !" ta""J Bank=s aim is to sensiti:e the entire staff from
Mana+er to Messen+er ,orkin+ in rural and semi9urban branches to,ards
the pro+ramme)
o Sp&-)al t'a)n)n6 p'!6'a,,& )n S/G are bein+ conducted at .A
trainin+ centres of the Bank in the country apart from State Bank Institute
of "ural Development, Dyderabad)
o Cl!& l)a)!n +)th NGOJ #peratin+ functionaries at branch level and
re+ion level are in close contact ,ith %G#s in their area to take the
movement ahead) $or the purpose, re+ular meetin+s are arran+ed ,ith the
%G#s and their support is solicited)
o S/G -&llJ Special SDG cells have been opened at ma*or branches)
o 0&n%)n6 t! NGO I F&%&'at)!n !" S/GJ >endin+ to credible %G#s/
$ederations of SDGs on selective basis for on lendin+ to SDGs is bein+
o Sahay!6 N)+aJ SBI has launched its Dousin+ >oan product LSADAI#G
%I<AS= meant for SDG members) Under the scheme formulated keepin+
the socio economic conditions of villa+es insi+ht, housin+ loans are +iven
to the SDG members ,ithout any mort+a+e of house / land) "esponse to
this product is very encoura+in+)
o SBI 0)"&4 Shakt)J SBI >ife, our insurance subsidiary, is the first to
introduce a life insurance scheme, especially desi+ned for SDG members)
Special feature of the scheme is that entire premium amount paid by the
member is refunded after maturity, i)e), -0 years)
o Ru'al t'a)n)n6 )nt)tut&J ;o help the rural youth to stand on their feet,
t,o "UDS&;I type trainin+ institutes have been established at Gulbar+a
and Gada+ in Earnataka State, to impart trainin+ in self employment to
youth free of cost)
o SBI ta"" a S/PIJ ;he main role of formation and nurturin+ of SDGs
have been played by %G#s ,ho, apart from their fundamental role of
social service, also aim to make the poor economically self sufficient) But
in SBI, our committed ,ork force is not la++in+ behind and a number of
committed staff members have ,orked hard to form and nurture SDGs on
their o,n)
o App'&-)at)!n ?y G!(&'n,&ntJ A number of our branches / !ircles have
also received commendation and appreciation from various State
Governments for doin+ eBcellent *ob in SDG9Bank !redit >inka+e
I!I!I Bank, IndiaNs second lar+est bank, is findin+ innovative and profitable ,ays to
eBtend financial services to the rural poor) Prompted in part by re+ulation that re(uires all
banks to serve the rural market, I!I!I Bank is developin+ multiple channels to deliver
microfinance) It proposes to finance a net,ork of villa+e internet kiosks, partner ,ith
microfinance institutions 5M$Is6 ,ho ,ill act as loan service a+ents, and collaborate ,ith
social entrepreneurs to establish Greenfield M$Is) If it succeeds, I!I!I Bank ,ill have
built a US8 -0 billion plus microfinance loan portfolio by 70-0 and created a net,ork
that could eventually distribute a ran+e of financial services throu+hout rural India) Its
insurance subsidiaries have already be+un sellin+ life, personal accident and ,eather
insurance 5indeB9based rainfall insurance6 policies throu+h M$Is in rural areas)
I!I!I Bank is IndiaNs second9lar+est bank ,ith total assets of over "s)-00, 000 crore
5about US8 70 billion6 and a net,ork of A.0 branches and offices and over -,?00 A;Ms)
;he bank has an approBimate 10 percent market share in the retail se+ment, and ,as one
of the first commercial banks in India to reali:e the potential of the microfinance sector)
;he "eserve Bank of India 5"BI6 re(uires all private sector banks in India to allocate at
least -3 percent of their net bank credit to the a+ricultural sector, althou+h a+ri9lendin+
can also fulfil banks= this re(uirement, the officials contacted at I!I!I bank revealed that
bank takes rural finance as a "ull "l&%6&% p'!")ta?l& ?u)n& ,!%&l) I!I!I Bank is
a++ressively focusin+ on microfinance to eBpand its portfolio si:e) In a+riculture, durin+
the last three years I!I!I Bank has built a portfolio of over R* #3000 -'!'& 5about US8
A00 million6 ,ith a presence in the follo,in+ statesJ Pun*ab, Maharashtra, ;amil %adu,
Andhra Pradesh and Uttar Pradesh) ;he Bank hopes to si+nificantly increase its
involvement in the a+ricultural sector ,ith the asset base +ro,in+ over time to over "s)
-0,000 crore 5about US8 7 billion6) I!I!I BankNs challen+e is to reach this tar+et ,ithout
the benefit of a ,ide branch net,ork or brand presence in rural India) 5By comparison,
the public sector State Bank of India has over 4,400 rural and semi9urban branches6) Its
strate+y is multi9pron+edJ
-) &nter into strate+ic partnerships ,ith %G#s/M$Is that serve the rural poor)
7) Build rural outreach throu+h lo,9cost technolo+y net,orks
1) !reate a franchise for social entrepreneurs to start up M$Is)
ICICI Bank an% M)-'!")nan-&
I!I!I Bank entered the micro9finance market in 7007) Amon+ the reasons for enterin+
the market is its +oal to lead in every field of Indian bankin+) #ther includesJ
S;he reverse mer+er meant that I!I!I >imited=s portfolio ,as a++re+ated ,ith that
of I!I!I Bank for the purposes of calculatin+ the Bank=s priority sector lendin+
(uota) ;his created ur+ent need for additional (ualifyin+ assets, since the returns
on compensatin+ Lpenalty loans= to institutions such as %ABA"D and SIDBI
,ere likely to be lo,er than I!I!I Bank=s avera+e cost of funds)
I!I!I Bank had purchased the privately o,ned Bank of Madura, in Southern
India, in the year 700-) ;he Bank of Madura had a substantial portfolio of loans to
400 SDGs, and I!I!I Bank had someho, to inte+rate these accounts into its
business model)
S;he Bank of Madura=s eBperience sho,ed that micro9finance loans ,ere of hi+h
(uality, and that the market ,ould pay relatively hi+h interest rates for +ood
(uality service) I!I!I Bank=s mana+ement believe that their model of offerin+
services throu+h speciali:ed intermediaries, such as car loans throu+h vehicle
dealers, housin+ finance throu+h builders, or micro9credit throu+h micro9finance
institutions, can offer better (uality service than banks can throu+h their multi9
purpose branch net,orks)
I!I!I Bank=s mana+ement believe that their micro finance clients ,ill mi+rate
into mainstream bankin+, and micro finance is a form of customer development)
;he Bank is hi+hly visible, and has a obvious branch presence in the richer parts
of Mumbai, Delhi and micro9finance offers a ,ay to demonstrate the Bank=s
commitment to social as ,ell as economic and financial +oals) I!I!I Bank started
its micro9finance activities under its Social Initiatives Group 5SIG6) ;his Group is
half9,ay bet,een the corporate responsibility area and the for9profit business)
;he SIG is responsible for strate+ic sector9,ide developments, and it success has
already led to competition from other banks, learnin+ from the pioneerin+ ,ork of
SIG) ;he bulk of the micro9finance activity has no, been transferred to
mainstream business) ;he five9member micro9finance team is located in the rural
and micro9bankin+ and a+ri9business +roup, ,ithin the ,holesale bankin+
division) ;hey have also set up a specialised centre for practical action9directed
research in micro9finance, ,hich is located in !hennai, in an eBistin+ staff
trainin+ centre of the Bank) As a private sector bank, I!I!I Bank feels that it
should focus on improvin+ individuals= capacity to access formal financial
services, rather than ,orkin+ at the community level) ;he Bank therefore
endeavours to deal direct ,ith individuals or ,ith their SDGs ,hen they are
or+ani:ed in this ,ay) ;hey sometimes ,ork throu+h community SDG federations
or similar bodies, but the emphasis is on developin+ individual customer
relationships ,henever possible)
By early 700. I!I!I had a portfolio of about 844 million throu+h 7? partner M$Is, and
loans throu+h a further -- institutions ,ere under ne+otiation) Indian micro9finance has
+ro,n rapidly but ine(uitablyK Bihar and Uttar Pradesh, ,hich are home to 1? percent of
India=s poorest people, only have 2 percent of the over one million SDGs) I!I!I Bank is
attemptin+ to reverse this trend, and a number of its partner M$Is, includin+ !ashpor, one
of the lar+est, are located in the poorer %orthern States)
;he Bank aims to increase its micro9finance portfolio to 8A billion dollars, ,orkin+
throu+h 700 M$Is) ;here are some -400 M$Is in India, but only about a do:en of these
are presently of sufficient si:e or stren+th to be suitable partners for I!I!I Bank) ;he
Bank is tryin+ to develop their capacity, throu+h practical trainin+, and also throu+h a
pro+ramme of mentorin+ ,hereby senior staff of the Bank, not from the micro9finance
team, make re+ular visits to assist M$Is to improve their systems and to adopt some
elements of a bankin+ culture) ;his pro+ramme is thou+ht to be of +reat benefit not only
to the M$Is but also to the mentors, ,ho may previously have had little or no eBposure to
the realities of poverty in their o,n country) ;he Bank is also collaboratin+ ,ith the
!A"& !ASD& pro*ect to develop second9tier M$Is 5see section 46) I!I!I Bank is
packa+in+ and sellin+ on its micro9finance loans, to for instance U;I Bank, one of the
lar+er private banks) In this ,ay I!I!I can enhance the (uality and price of these assets)
It may eventually be possible to create an international secondary market in microfinance
debt, such as already eBists for many other securitised assets, but the priority sector
eli+ibility of the Bank=s loans to M$Is means that they are presently more attractive to
Indian banks)
ARank&% #
?y F!'?& Ma6a>)n& )n D&-&,?&' #00;B
Bandhan is ,orkin+ to,ards the t,in ob*ective of poverty alleviation and ,omen
empo,erment) It started as a !apacity Buildin+ Institution 5!BI6 in %ovember 7000
under the leadership of Mr) !handra Shekhar Ghosh) Durin+ such time, it ,as +ivin+
capacity buildin+ support to local microfinance institutions ,orkin+ in <est Ben+al)
Bandhan opened its first microfinance branch at Ba+nan in Do,rah district of <est
Ben+al in Huly 7007) Bandhan started ,ith 7 branches in the year 7007901 only in the
state of <est Ben+al and today it has +ro,n as stron+ as A-7 branches across 4 states of
the countryT ;he or+ani:ation had recorded a +ro,th rate of .00@ in the year 700190A
and 4--@ in the year 700A90.) ;ill date, it has disbursed a total of "s) .3? crores amon+
almost ? lakh poor ,omen) >oan outstandin+ stands at "s) 77- crores) ;he repayment
rate is recorded at 22)22@) Bandhan has staff stren+th of more than 7-10 employees)
A !n 9uly #008
%o) of states J 3
%o) of branches
%o) of members
%o) of staff
!umulative loan disbursed
>oan outstandin+
J .73
J -,-37,?A-
J 1,-2-
J "s)-,7A2 crores
J "s) A-? crores
Op&'at)!nal M&th!%!l!6y
Bandhan follo,s a +roup formation, individual lendin+ approach) A +roup of -097.
members are formed) ;he clients have to attend the +roup meetin+s for 7 successive
,eeks) 7 ,eeks hence, they are entitled to receive loans) ;he loans are disbursed
individually and directly to the members)
E-!n!,)- an% S!-)al Ba-k6'!un% !" Cl)&nt
>andless and asset less ,omen
$amily of . members ,ith monthly income less than "s) 7,.00 in rural
and "s) 1,.00 in urban
;hose ,ho do not o,n more than .0 decimal 5-/7acre6 of land or capital
of its e(uivalent value
0!an S)>&
;he first loan is bet,een "s) -,000 C "s) ?,000 for the rural areas and bet,een "s) -,000
C "s) -0,000 for the urban areas) After the repayment, they are entitled to receive a
subse(uent loan ,hich is "s -,000 9 .,000 more than the previous loan)
S&'()-& Cha'6&
Bandhan char+es a service char+e of -7).0@ flat on loan amount) Bandhan initially
char+ed -?).0@) Do,ever from -st Huly 700., it has slashed do,n its lendin+ rate to
-.)00@) ;hen it ,as further reduced to -7).0@ in May 7004) ;he reason is obvious) As
overall productivity increased, operational costs decreased) Bandhan, bein+ a non profit
or+ani:ation ,anted the benefit of lo, costs to ultimately trickle do,n to the poor)
M!n)t!')n6 Syt&,
;he various features of the monitorin+ system areJ
A 1 tier monitorin+ system C "e+ion, Division and Dead #ffice
&asy reportin+ system ,ith a prescribed checklist format
Accountability at all levels post monitorin+ phase
!ross9 checkin+ at all the levels
;he mana+ement team of Bandhan spends 20)00@ of time at the field
0)a?)l)ty t'u-tu'& "!' 0!an
<hen a member ,ants to *oin Bandhan, she at first has to +et inducted into a +roup) After
she +ets inducted into the +roup, the entire +roup proposes her name for a loan in the
"esolution Book) ;,o members of the +roup alon+ ,ith the member=s husband have to
si+n as +uarantors in her loan application form) If she fails to pay her ,eekly installment,
the +roup inserts peer pressure on her) ;he sole purpose of the above structure is simply
to create peer pressure)
;he Grameen Model ,hich ,as pioneered by Prof Muhammed Iunus of Grameen Bank
is perhaps the most ,ell kno,n, admired and practised model in the ,orld) ;he model
involves the follo,in+ elements)
T Domo+eneous affinity +roup of five
T &i+ht +roups form a !entre
T !entre meets every ,eek
T "e+ular savin+s by all members
T >oan proposals approved at !entre meetin+
T >oan disbursed directly to individuals
T All loans repaid in .0 instalments
;he Grameen model follo,s a fairly re+imented routine) It is very cost intensive as it
involves buildin+ capacity of the +roups and the customers passin+ a test before the
lendin+ could start) ;he +roup members tend to be selected or at least stron+ly vetted by
the bank) #ne of the reasons for the hi+h cost is that staff members can conduct only t,o
meetin+s a day and thus are occupied for only a fe, hours, usually early mornin+ or late
in the evenin+) ;hey ,ere used additionally for accountin+ ,ork, but that can no, be
done more cost effectively usin+ computers) ;he model is also rather meetin+ intensive
,hich is fine as lon+ as the members have no alternative use for their time but can be a
problem as members +o up the income ladder)
;he +reatness of the Grameen model is in the simplicity of desi+n of products and
delivery) ;he process of delivery is scalable and the model could be replicated ,idely)
;he focus on the poorest, ,hich is a value attribute of Grameen, has also made the model
a favourite amon+ the donor community)
Do,ever, the Grameen model ,orks only under certain assumptions) As all the loans are
only for enterprise promotion, it assumes that all the poor ,ant to be self9employed) ;he
repayment of loans starts the ,eek after the loan is disbursed C the inherent assumption
bein+ that the borro,ers can service their loan from the eB9ante income)
Many companies say they protect the interests of their customers) Fery fe, actually sit in
dirt ,ith them, usin+ stones, flo,ers, sticks, and chalk po,der to fi+ure out if they ,ill be
able to repay a 870 loan at 8- a month) <ith this approach, this company has created its
o,n loyal +an+ of over 7 million customers)
Its borro,ers include a+ricultural labourers, mom9and9pop entrepreneurs, street vendors,
home based artisans, and small scale producers, each livin+ on less than 87 a day) It
,orks on a model that ,ould allo, micro9finance institutions to scale up (uickly so that
they ,ould never have to turn poor person a,ay)
Its model is based on 1 principles9
-) A%!pt a p'!")t4!')&nt&% app'!a-h )n !'%&' t! a--& -!,,&'-)al -ap)tal4
Startin+ ,ith the pitch that there is a hi+h entrepreneurial spirit amon+st the poor
to raise the funds, SES converted itself to for9profit status as soon as it +ot break
even and +ot philanthropist "avi "eddy to be a foundin+ investor) ;hen it secured
money from parties such as Unitus, a Seattle based %G# that helps promote
micro9financeK SIDBIK and technolo+y entrepreneur Finod Ehosla) >ater, it ,as
able to attract multimillion dollar lines of credit from !itibank, AB% Amro, and
7) Stan%a'%)>& p'!%u-t3 t'a)n)n63 an% !th&' p'!-&& )n !'%&' t! ?!!t
-apa-)ty4 ;hey collect standard repayments in round numbers of 7. or 10 rupees)
Internally, they have factory style trainin+ models) ;hey enroll about .00 loan
officers every month) ;hey participate in theory classes on Saturdays and practice
,hat they have learned in the field durin+ the ,eek) ;hey have shortened the
trainin+ time for a loan officer to 7 months thou+h the avera+e time taken by other
industry players is A94 months)
1) $& T&-hn!l!6y t! '&%u-& -!t an% l),)t &''!'4 It could not find the soft,are
that suited its re(uirements, so it they built their o,n simple and user friendly
applications that a computer9illiterate loan officer ,ith a -7
+rade education can
easily understand) ;he system is also internet enabled) Given that electricity is
unreliable in many areas they have installed car batteries or +as po,ered
+enerators as back9ups in many areas)
S-al)n6 up Cut!,&' 0!yalty
Instead of askin+ illiterate villa+ers to describe their seasonal pattern of cash flo,s,
they encoura+e them to use colored chalk po,der and flo,ers to map out the villa+e
on the +round and tell ,here the poorest people lived, ,hat kind of financial products
they needed, ,hich areas ,ere lorded over by ,hich loan sharks, etc) ;hey set
people=s tiny ,eekly repayments as lo, as 8- per ,eek and health and ,hole life
insurance premiums to be 8-0 a year and 7. cents per ,eek respectively) ;hey also
offer interest free emer+ency loans) ;he salaries of loan officers are not tied to
repayment rates and they *ourney on mopeds to borro,ers= villa+es and schedule loan
meetin+s as early as ?)00 A)M) Deep customer loyalty ultimately results in a
repayment rate of 22).@)
0&(&'a6)n6 th& S7S ?'an%
Its payoff comes from hi+h volumes) ;hey are +ro,in+ at 700@ annually, addin+ .0
branches and -,40,000 ne, customers a month) ;hey are also usin+ their deep
distribution channels for sellin+ soap, clothes, consumer electronics and other
packa+ed +oods)
#ver the last ten years, successful eBperiences in providin+ finance to small entrepreneur
and producers demonstrate that poor people, ,hen +iven access to responsive and timely
financial services at market rates, repay their loans and use the proceeds to increase their
income and assets) ;his is not surprisin+ since the only realistic alternative for them is to
borro, from informal market at an interest much hi+her than market rates) !ommunity
banks, %G#s and +rass root savin+s and credit +roups around the ,orld have sho,n that
these micro enterprise loans can be profitable for borro,ers and for the lenders, makin+
microfinance one of the most effective poverty reducin+ strate+ies)
-) ;he field of development itself eBpands and shifts emphasis ,ith the pull of ideas,
and %G#s perhaps more readily adopt ne, ideas, especially if the resources
re(uired are small, entry and eBit are easy, tasks are 5perceived to be6 simple and
people=s acceptance is hi+h C all characteristics 5real or presumed6 of
7) !anvassin+ by various actors, includin+ the %ational Bank for A+riculture and
"ural Development 5%ABA"D6, Small Industries Development Bank of India
5SIDBI6, $riends of <omen=s <orld Bankin+ 5$<<B6, "ashtriya Mahila Eosh
5"ME6, !ouncil for Advancement of People=s Action and "ural ;echnolo+ies
5!APA";6, "ashtriya Gramin Fikas %idhi 5"GF%6, various donor funded
pro+rammes especially by the International $und for A+ricultural Development
5I$AD6, United %ations Development Pro+ramme 5U%DP6, <orld Bank and
Department for International Development, UE 5D$ID6U, and lately commercial
banks, has +reatly added to the idea pull) Induced by the ,orld,ide focus on
microfinance, donor %G#s too have been fundin+ microfinance pro*ects) #ne
mi+ht call it the supply push)
3. All kinds of thin+s from khadi spinnin+ to %adep compost to bal,adis do not
produce such concrete results and sustained interest amon+ beneficiaries as
microfinance) Most %G#9led microfinance is ,ith poor ,omen, for ,hom access
to small loans to meet dire emer+encies is a valued outcome) ;hus, (uick and hi+h
Lcustomer satisfaction= is the USP that has attracted %G#s to this trade)
A) ;he idea appears simple to implement) ;he most common route follo,ed by
%G#s is promotion of SDGs) It is implicitly assumed that no Ltechnical skill= is
involved) Besides, eBternal resources are not needed as SDGs be+in ,ith their
o,n savin+s) ;hose %G#s that have access to revolvin+ funds from donors do not
have to ,orry about financial performance any ,ay) ;he chickens ,ill eventually
come home to roost but in the first flush, it seems all so easy)
.) $or many %G#s the idea of Lor+anisin+= C formin+ a samuha C has inherent
appeal) Groups connote empo,erment and or+anisin+ ,omen is a double bonus)
4) $inally, to many %G#s, microfinance is a ,ay to financial sustainability)
&specially for the medium9to9lar+e %G#s that are able to access bulk funds for
on9lendin+, for eBample from SIDBI, the interest rate spread could be an
attractive source of revenue than an uncertain, hi+hly competitive and
increasin+ly difficult9to9raise donor fundin+)
Microfinance has been attractive to the lendin+ a+encies because of demonstrated
sustainability and of lo, costs of operation) Institutions like SIDBI and %ABA"D are
hard nosed bankers and ,ould not ,ork ,ith the idea if they did not see a lon+ term
en+a+ement C ,hich only comes out of sustainability 5that is economic attractiveness6)
#n the supply side, it is also true that it has all the trappin+s of a business enterprise, its
output is tan+ible and it is easily understood by the mainstream) ;his also seems to sound
nice to the +overnment, ,hich in the post liberalisation era is tryin+ to eBplain the lo+ic
of every rupee spent) ;hat is the reason ,hy microfinance has attracted mainstream
institutions like no other developmental pro*ect)
Perhaps the most important factor that +ot banks involved is ,hat one mi+ht call the
policy push)
Given that most of our banks are in the public sector, public policy does have some
influence on ,hat they ,ill or ,ill not do) In this case, policy ,as follo,ed by dili+ent, if
meanderin+, promotional ,ork by %ABA"D) ;he policy chan+e about a decade a+o by
"BI to allo, banks to lend to SDGs ,as initially follo,ed by a seven9pa+e memo by
%ABA"D to all bank chairmen, and later by sensitisation and trainin+ pro+rammes for
bank staff across the country) Several hundred such pro+rammes ,ere conducted by
%G#s alone, each involvin+ -. to 70 bank staff, all paid for by %ABA"D) ;he policy
push ,as s,eetened by the %ABA"D refinance scheme that offers much more
favourable terms 5-00@ refinance, ,ider spread6 than for other rural lendin+ by banks)
%ABA"D also did some system settin+ ,ork and banks lately have been +iven tar+ets)
;he canvassin+, trainin+, refinance and close follo, up by %ABA"D has resulted in
,idespread bank involvement)
Moreover, for banks the operatin+ cost of microfinance is perhaps much less than for
pure M$Is) ;he banks already have a vast net,ork of branches) ;o the eBtent that an
%G# has already promoted SDGs and the SDG portfolio is performin+ better than the
rest of the rural 5if not the entire6 portfolio, microfinance via SDGs in the ,orst case
,ould represent mar+inal addition to cost and ,ould often reduce mar+inal cost throu+h
better capacity utilisation) In the process the bank also earns bro,nie points ,ith policy
makers and meets its priority sector tar+ets)
It does not take much analysis to fi+ure out that the market for financial services for the
.0940 million poor households of India, coupled ,ith about the same number ,ho are
technically above the poverty line but are severely under9served by the financial sector, is
a very lar+e one) Moreover, as in any emer+in+ market, thou+h the perceived risks are
hi+her, the spreads are much +reater) ;he traditional commercial markets of corporate,
business, trade, and no, even housin+ and consumer finance are bein+ sou+ht by all the
banks, leadin+ to price competition and ,afer thin spreads)
$urther, bank9+roups are motivated by a number of cross9sellin+ opportunities in the
market, for deposits, insurance, remittances and eventually mutual funds) Since the lar+er
banks are offerin+ all these services no, throu+h their +roup companies, it becomes
imperative for them to eBpand their distribution channels as far and deep as possible, in
the hope of capturin+ the entire financial services business of a household)
$inally, both a+ri9input and processin+ companies such as &ID Parry, fast9movin+
consumer +oods 5$M!G6 companies such as Dindustan >evers, and consumer durable
companies such as Philips have realised the potential of this bi+ market and are actively
usin+ SDGs as entry points) Some amount of free9ridin+ is takin+ place here by
companies, for they are usin+ channels ,hich ,ere built at a si+nificant cost to %G#s,
fundin+ a+encies and/or the +overnment)
#n the ,hole, the economic attractiveness of microfinance as a business is +ettin+
established and this is a sure step to,ards mainstreamin+) <e kno, that mainstreamin+ is
a miBed blessin+, and one tends to eBchan+e scale at the cost of ob*ectives) So it needs to
be ,atched carefully)
Microfinance has dra,n attention to an entire sector of borro,ers ,ho had been
previously poorly served by the formal financial sector) M$ has successfully
demonstrated ho, to make lendin+ to this sector a viable proposition) But there still
remain areas of concerns that have been raised by the critics time and a+ain) ;here is no,
a need to address these issues appropriately so that M$ continues bein+ seen as the
solution to unendin+ problems of the poorest sections of our society) ;he areas of concern
identified are as follo,sJ
/)6h&' Rat& !" Int&'&t: ;he rates of interest char+ed are (uite hi+h, typically -7 to 10
per cent, mainly on account of the hi+h transaction cost for the avera+e loan si:e that can
be (uite small) !ompared to the informal sector, perhaps the rates are lo,er, but issues
are raised ,hether these rates are affordable 9 in the sense ,hether they ,ould leave any
surplus in the hands of the borro,ers and lead to hi+her levels of livin+) $or commercial
banks, the lo,er cost of fundin+, advanta+es of si:e and scale +ives scope for cross
subsidi:ation and their interest rates are more competitive compared to the M$Is, but they
have not been as successful in dealin+ ,ith the last mile issue)
Th& EJt&nt !" R&a-h !" S/GG: ;he financial inclusion attained throu+h SDGs is
sustainable and scalable on account of its various positive features) #ne of the distinctive
features of the SDGB>P has been the hi+h recovery rate) Do,ever the spread of SDGs is
very uneven and is more concentrated in southern states) ;his re+ional imbalance needs
to be corrected and special efforts in this re+ard may have to be made by %ABA"D)
#AB!+ 2: $+G%",-.%S+ S$+A/ "S S0G1s
S"2$C+: ,ABA$/ Annual $e)ort3 2445
0),)t&% R!l& !" S/G: Another point of contention is that SDG=s have to +raduate from
mere providers of credit for non9productive purposes to promotin+ micro enterprises)
;here have been several institutional innovations in financial services by includin+ civil
society) $ollo,ed by the success of SDG9 B>P and Ban+ladeshi Grameen model, many
of the %G#=s have taken to financial intermediation by adoptin+ innovative delivery

$n"a)' P'a-t)-&: Althou+h the impact of M$ has been positive on our society as a
,hole ,hat ,e should not for+et is that these SDG=s and other bodies must be revie,ed
periodically to ensure fairness) #ne has to be very cautious about the attempts bein+
made by the vested interest +roups to substitute the need for eBpansion of formal bankin+
structure to the hitherto un9banked areas ,ith SDGs and %G#s) ;he complaints of hi+h
interest rates char+ed from ultimate borro,ers and eBamples of coercion are not too
insi+nificant 5Mitra, 700?6) In absence of strict control there is a possibility that such
instances can increase thereby defeatin+ the ,hole purpose of the M$ system)
/u6& D&,an%4Supply Gap: ;he "eserve Bank of India has identified lar+e +ap in the
demand and supply of credit to the poor and su++ests the ur+ent need to ,iden the scope,
outreach and scale of financial services to cover the un9reached populace) &stimates
reveal that the credit support for poor households in India is of the order of "s)A.0, 000
crore) Some micro level studies sho, that the poor still continue to depend on informal
sources of credit to up to 40 per cent of the household demand)
;he first challen+e relates to sustainability) M$I model is comparatively costlier in
terms of delivery of financial services) An analysis of 14 leadin+ M$Is by Hindal G
Sharma sho,s that 32@ M$Is sample ,ere subsidy dependent and only 2 ,ere able
to cover more than 30@ of their costs) ;his is partly eBplained by the fact that ,hile
the cost of supervision of credit is hi+h, the loan volumes and loan si:e is lo,) It has
also been commented that M$Is pass on the hi+her cost of credit to their clients ,ho
are Linterest insensitive= for small loans but may not be so as loan si:es increase) It is,
therefore, necessary for M$Is to develop strate+ies for increasin+ the ran+e and
volume of their financial services)
7) >A!E #$ !API;A>
;he second area of concern for M$Is, ,hich are on the +ro,th path, is that they face
a paucity of o,ned funds) ;his is a critical constraint in their bein+ able to scale up)
Many of the M$Is are socially oriented institutions and do not have ade(uate access
to financial capital) As a result they have hi+h debt e(uity ratios) Presently, there is no
reliable mechanism in the country for meetin+ the e(uity re(uirements of M$Is)
;he IP# issue by MeBico based L!ompartamos= ,as not accepted by purists as they
thou+ht it defied the mission of an M$I) ;he IP# also brou+ht forth the issue of
valuation of an M$I)
;he book value multiple is currently the dominant valuation methodolo+y in
microfinance investments) In the case of start up M$Is, usin+ a book value multiple
does not do *ustice to the underlyin+ value of the business) ;ypically, start ups are loss
makin+ and hence the book value continually reduces over time until they hit break
even point) A book value multiplier to value start ups ,ould decrease the value as the
or+ani:ation uses up capital to build its business, thus accentuatin+ the ne+ative rather
than the positive)
1) $I%A%!IA> S&"FI!& D&>IF&"I
Another challen+e faced by M$Is is the inability to access supply chain) ;his
challen+e can be overcome by eBplorin+ syner+ies bet,een microfinance institutions
,ith eBpertise in credit delivery and community mobili:ation and businesses
operatin+ ,ith production supply chains such as a+riculture) ;he latter players ,ho
brin+ ,ith them an understandin+ of similar client se+ments, ability to create micro
enterprise opportunities and ,illin+ness to nurture them, ,ould be keen on directin+
microfinance to such opportunities) ;his enables M$Is to increase their client base at
no additional costs)
;hose businesses that procure from rural India such as a+riculture and dairy often
identify finance as a constraint to value creation) Such businesses may find
complementarities bet,een an M$I=s skills in mana+ement of credit processes and
their o,n stren+ths in supply chain mana+ement)
I;! >imited, ,ith its stron+ supply chain lo+istics, rural presence and an innovative
transaction platform, the &9choupal', has started eBplorin+ syner+ies ,ith financial
service providers includin+ M$Is throu+h pilots ,ith ve+etable vendors and farmers)
Similarly, lar+e $Is such as Spandana foresee a lar+er role for themselves in the rural
economy ably supported by value creatin+ partnerships ,ith players such as
Mahindra and <estern Union Money ;ransfer)
I;! has initiated a pilot pro*ect called Lpushcarts scheme= alon+ ,ith BASIO 5a
microfinance or+ani:ation in Dyderabad6) Under this pilot, it ,orks ,ith t,enty
,omen head load vendors sellin+ ve+etables of around -09 -. k+s per day) BASIO
eBtends ,orkin+ capital loans of "s)-0,000/9 , capacity buildin+ and business
development support to the ,omen) I;! provides support throu+h supply chain
innovations byJ
-) Makin+ the !houpal $resh stores available to the vendors, this avoids the hassle
of bar+ainin+ and unreliability at the traditional mandis 5local ve+etable markets6)
;he ,omen are able to replenish the stock from the stores as many times in the
day as re(uired) ;his has positive implications for (uality of the produce sold to
the end consumer)
7) !ontinuously eBperimentin+ to increase efficiency, au+mentin+ incomes and
reducin+ ener+y usa+e across the value chain) $or instance, it has for+ed a
partnership ,ith %ational Institute of Desi+n 5%ID6, a pioneer in the field of
desi+n education and research, to desi+n user9friendly pushcarts that can reduce
the physical burden)
1) ;akin+ lessons from the pharmaceutical and telecom sector to identify
technolo+ies that can save ener+y and ensure temperature control in push carts in
order to maintain (uality of the ve+etables throu+hout the day) ;he model
au+ments the incomes of the vendors from around "s)109A0 per day to an avera+e
of "s)-.0 per day) $rom an environmental point of vie,, push carts are much
more ener+y efficient as opposed to fiBed format retail outlets)
A) >A!E #$ !#%DU!IF& "&GU>A;#"I $"AM&<#"E
Despite havin+ proved its mettle as a sound financial intervention for the poor,
microfinance today stands in a state ,here the future path of its +ro,th in the
country, especially in terms of the institutional form it ,ill take, still remains
uncertain) M$ has enabled the policy makers and planners to discover a potential
tool for poverty alleviation but the enablin+ environment for its o,n +ro,th looks
elusive 5Shylendra, 70016) It is reco+nised that successful scalin+ up of M$
intervention for a lar+er impact re(uires promotin+ stron+ net,ork of institutions
deliverin+ microfinance ,ith sound practices) Do,ever, the M$ sector is faced
,ith many problems in this re+ard)
&Bcludin+ the formal financial institutions, the sector consists of a lar+e number
of unre+ulated %G#s dealin+ ,ith the poor and other small clients 5Satish, 700.6)
Much of the M$ intervention by the %G# sector is in the form of a pro*ect,
lackin+ the much needed or+anisational form and capacity) As estimated above,
there are over -,?00 %G#9M$Is involved in microfinance) A lar+e number of
these %G#s are either tryin+ to promote or even transform themselves into full9
fled+ed microfinance institutions 5Shylendra and Saini, 70016) ;he %G#s, havin+
crossed the sta+e of infancy in microfinance activity more under an informal
frame,ork, are no, lookin+ for,ard to a conducive and an appropriate re+ulatory
environment to +ro, further) >ack of suitable le+al and re+ulatory frame,ork
,hich clearly reco+nises the role of %G#s in microfinance and enables them to
scale up their operations or transform themselves as financial intermediaries is
identified as one of the ma*or hurdles bein+ faced by the %G#s) Such a scenario
is also leadin+ to many distortions in the sector) In the absence of a suitable
re+ulatory frame,ork, many %G#s are either sta+natin+ in the delivery of
microfinance or able to deliver only a fra+mented service 5Shylendra, 70016)
<ithout a clear formal reco+nition, the status of microfinance activity of the
%G#s, especially savin+s mobilisation, has remained va+ue and even ille+al)
Since the entry point and other prudential norms are so ri+id or hi+h under
eBistin+ frame,ork, many %G#s, despite +ood past record, have decided to
remain small and local in deliverin+ microfinance) <hile some have decided to
set up non9bankin+ financial companies 5%B$!6 providin+ only partial service,
others are forced to run t,o institutions ,ith additional cost) &ven formation of a
re+ulated M$I is takin+ a very lon+ time, +iven many le+al hurdles faced
5$ernande:, 700A6) ;hose ,hich are re+istered as societies or cooperatives have to
put up ,ith the problem of interference of politicians or bureaucracy to the
detriment of their much needed autonomy) #nly a very fe, states have enacted
acts for autonomous or self9reliant cooperatives under ,hich full fled+ed M$Is
could be formed)
.) D" ISSU&S
"ecruitment and retention is the ma*or challen+e faced by M$Is as they strive to
reach more clients and eBpand their +eo+raphical scope) Attractin+ the ri+ht talent
proves difficult because candidates must have, as a prere(uisite, a mindset that fits
,ith the or+ani:ation=s mission)
Many mainstream commercial banks are no, enterin+ microfinance, ,ho are
poachin+ staff from M$Is and M$Is are unable to retain them for other *ob
3.@ of the poorest clients served by microfinance are ,omen) Do,ever, ,omen
make up less than half of all microfinance staff members, and fill even fe,er of the
senior mana+ement roles) ;he challen+e in most countries stems from cultural notions
of ,omen=s roles, for eBample, ,hile ,omen are sin+le there mi+ht be a +reater
,illin+ness on the part of ,omen=s families to let them ,ork as front line staff, but as
soon as they marry and certainly once they start havin+ children, it becomes
unacceptable) >on+ distances and lon+ hours a,ay from the family are difficult for
,omen to accommodate and for their families to understand)
4) MI!"#I%SU"A%!&
$irst bi+ issue in the micro insurance sector is developin+ products that really respond
to the needs of clients and in a ,ay that is commercially viable)
Secondly, there is stron+ need to enhance delivery channels) ;hese delivery channels
have been relatively ,eak so far) Micro insurance companies offer minimal products
and do not ,ant to +o for,ard and offer compleB products that may respond better)
Micro insurance needs a delivery channel that has easy access to the lo,9income
market, and preferably one that has been en+a+ed in financial transactions so that they
have controls for mana+in+ cash and the ability to track different individuals)
;hirdly, there is a need for market education) People either have no information about
micro insurance or they have a ne+ative attitude to,ards it) <e have to counter that)
<e have to someho, +et people 9 ,ithout havin+ to sit do,n at a table 9 to
understand ,hat insurance is, and ,hy it benefits them) ;hat ,ill help to demystify
micro insurance so that ,hen a+ents come, people are ,illin+ to en+a+e ,ith them)
?) ADF&"S& S&>&!;I#% A%D M#"A> DAVA"D
;he *oint liability mechanism has been relied upon to overcome the t,in issues of
adverse selection and moral ha:ard) ;he +roup lendin+ models are contin+ent on the
availability of skilled resources for +roup promotion and entail a +estation period of
siB months to one year) Do,ever, there is not sufficient understandin+ of the drivers
of default and credit risk at the level of the individual) ;his has constrained the
development of individual models of micro finance) ;he +roup model ,as an
innovation to overcome the specific issue of the (uality of the portfolio, +iven the
inability of the poor to offer collateral) Do,ever, from the perspective of scalin+ up
micro financial services, it is important to proactively discover models that ,ill
enable direct finance to individuals)
Q.1.) To which sae !o "o# $e%on&'
The &raph $e%ow shows he sae(wise !isri$#ion of he sa)p%e si*e
in!icain& ha he )axi)#) no. of respon!ens is fro) +,ar"ana-.
W)7)6 <hat is your a+eX
;he +raph belo, sho,s the a+e ,ise distribution of the sample, sho,in+ maBimum no) of
respondents bein+ from the a+e +roup of 1.9A.' years)
W)1)6 <hat is your occupationX
;he fi+ure belo, sho,s the occupation ,ise distribution of the sample si:e taken) It
sho,s that the maBimum no) of respondents belon+ to Service' cate+ory)
W)A)6 Dave you ever taken a loan from any of the follo,in+ institutionsX
;he fi+ure above sho,s the no) of respondents takin+ finance from the different
microfinance institutions ,ith Moneylender=s' leadin+ the pack amon+ the financial
W .6
;he above fi+ure sho,s that maBimum no of respondents are a,are about others banks)
;he fi+ure above indicates the fre(uency ,ith ,hich the people avail to the financin+
needs ,ithin a span of 791 years ,ith maBimum people availin+ the facility of
microfinance -91 times ,ithin a span of 791 years )
;he bar +raph sho,n above sho,s the duration for ,hich the people avail the amount
of loan taken from different financial institutions ,ith the maBimum percenta+e bein+
of the people takin+ loan for duration of more than 7 years')
;he fi+ure above sho,s that the fre(uency of the amount of loan taken up and the rate
of interest paid by the sample population) ;he most amount of loan taken up is
"s).0, 000 or over' and the interest rate paid up by these people is -0970@')
;he fi+ure above indicates the fre(uency ,ith ,hich the people avail to the financin+
needs ,ithin a span of 791 years ,ith maBimum people availin+ the facility of
microfinance -91 times ,ithin a span of 791 years)
;he follo,in+ +raph sho,s the distribution of people belon+in+ to different occupations
and the interest rate paid by them for availin+ the microfinance facility ,ith the farmer=s
and the servicemen payin+ a interest of -0970@ and the people belon+in+ to others
payin+ a interest of around 109A0@)
-) <ith a population of ?0 million people, ,hich is almost ?0@ of the Indian
villa+es, ma*ority of them, do not even o,n a bank account) ;his itself represents
the scope of micro9finance in the Indian economy, and the +ro,th possibilities of
the same)
7) ;he analysis of the above data +athered throu+h the research conducted indicates
that amon+ the people availin+ to the finance at this level have the kno,led+e
about the commercial banks providin+ this facility at much cheaper rate of
interests as compared to the Self9help +roups, S&<A bank, Micro9finance
institutions, Money lender=s, etc)
1) ;he apeB financial institutions in the country have also reco+ni:ed the importance
of micro9finance and have been takin+ measures to encoura+e this) Do,ever, their
efforts are still incomplete and more defined and strin+ent re+ulatory measures are
called for)
A) ;he technolo+ical innovations in microfinance have been indeed remarkable)
Do,ever, there eBists a further need for innovatin+ lo,9cost lendin+ technolo+ies
so that the provision of such services can be achieved economically and
.) $orei+n banks have also be+un to identify the potential in this untapped sector and
have to be encoura+ed to venture into this C that too ,ith commercial
4) ;he commercial banks ,ithin the country also should be encoura+ed to eBtend the
reach of their services to the rural poor and provide them ,ith services ,hich
nurture a Lvoluntary savin+s= culture at affordable rates)
-) Most of the efforts of the apeB financial institutions have been directed at the
promotion of micro9credit, and not micro9finance) ;his bias has not only i+nored
the need of other financial services for the rural poor, but has also been counter9
7) Increase the supply of financial services to the unbanked by developin+ more such
institutions, lo,erin+ the transaction costs, increasin+ the marketin+ of such
services etc)
1) Desi+n and develop ne, innovative models for the provision of such services and
lo,9cost technolo+ical offerin+s so as to increase their access to formal loans and
other financial services)
A) ;here is also an ur+ent need for the eBistin+ banks to revamp their practices and
redesi+n their bankin+ operations, so as to incorporate microfinance as a lon+9
term +ro,th strate+y)
.) ;he formal documentation procedure for procurin+ loans can also be made more
user9friendly to the illiterate and uneducated poor, ,ho ,ill be accessin+ these
4) ;he apeB or+ani:ation can play not *ust the role of an intermediary, but also a
Lmarket development= role, ,herein it can transform funds from +overnment and
donors into M$I structures, transfer of technolo+y, trainin+ of staff members etc)
?) &ducate and emphasi:e on a repayment', no9default' and voluntary savin+s'
culture amon+st the rural poor)
3) &Bpand the institutional structure in terms of commercial bank branch eBpansion,
settin+ up of more ""B=s and M$I=s, special credit pro+rams for channeli:in+
subsidi:ed credit to the rural sector, allocate compulsory sectors under "BI
+uidelines, namely the priority sector lendin+', encoura+e forei+n banks to
venture into microfinance by sho,in+ them the commercial point of vie,)
!ommercial banks can also be encoura+ed to become involved in microfinance to
ensure an appropriate re+ulatory and prudential frame,ork) ;he elements of an
optimal policy conteBt areJ
sound macroeconomic policies and basic infrastructure to ensure a +ro,in+
economy 5especially increasin+ compleBity in the financial sector6
minimal restrictions to profitable lendin+, particularly no interest rate caps
enhanced ability to establish a small commercial bank ,hich can focus on this
sector 5such as a lo, minimum capital re(uirement6
appropriate prudential re+ulations for this market includin+ capital ade(uacy
ratios, asset (uality indicators and unsecured loan limits)
-) ;he study is limited to a very fe, people only, since in9depth intervie,s ,ere
conducted, and hence the development and efforts put in by various commercial
banks to,ards microfinance in India cannot be effectively measured)
7) Since no structured (uestionnaires ,ere used, the study can be sub*ect to
perceptual biases of the intervie,ee and there can be chan+es in the ans,ers or
opinions, of both, the intervie,er and intervie,ee)
It is becomin+ increasin+ly apparent that addressin+ financial eBclusion ,ill re(uire a
holistic approach in creatin+ a,areness about financial products, education, advice on
money mana+ement, debt counsellin+, savin+s and affordable credit)
Th& R!l& !" Bank: ;he banks must evolve specific strate+ies to eBpand the outreach of
their services in order to promote financial inclusion) #ne of the ,ays in ,hich this can
be achieved in a cost9effective manner is throu+h for+in+ linka+es ,ith microfinance
institutions and local communities) Banks should +ive ,ide publicity to the facility of no
frills account)
8)%&p'&a% $& !" T&-hn!l!6y: ;echnolo+y plays a ma*or role in providin+ access to
bankin+ products in remote areas) Accordin+ to Prof) M)S) S,aminanthan, the noted
a+ricultural scientist, SDGs, ,ill ho,ever, become sustainable only if they have
back,ard linka+es ,ith technolo+y and credit and for,ard linka+es ,ith processin+ and
marketin+ or+anisations)' A;Ms cash dispensin+ machines can be modified suitably to
make them user friendly for people ,ho are illiterate, less educated or do not kno,
Th& R!l& !" NGOG E S/GG: Banks need to redesi+n their business strate+ies to
incorporate specific plans to promote financial inclusion of lo, income +roup treatin+ it
both a business opportunity as ,ell as a corporate social responsibility) $or an initiative
of such hi+h ma+nitude it is essential that they make use of all available resources
includin+ technolo+y and eBpertise available ,ith them as ,ell as the M$Is and %G#s)
%G#s have played a commendable role in promotin+ SDGs and linkin+ them ,ith banks)
%G#s, bein+ local initiators ,ith their lo, resources, are findin+ it difficult to eBpand in
other areas and re+ions) ;here is, therefore, a need to evolve an incentive packa+e ,hich
should motivate these %G#s to diversify into other back,ard areas)
E"")-)&nt D&l)(&'y !" S&'()-&: In dealin+ ,ith the needs of rural enterprises and of small
and medium enterprises in urban areas, ne, delivery mechanisms need to be developed)
;he ob*ective is to economi:e on transaction costs and provide better access to the
currently under9served) ;o serve ne, rural credit needs, innovative channels for credit
delivery ,ill have to be found)
D&(&l!p)n6 a R&6ulat!'y F'a,&+!'k: In vie, of the risin+ micro9finance activities in
the country, a need has been felt to re+ulate the unre+ulated business in this sector and
also provide le+al frame,ork to facilitate the credit flo, in rural areas 5;i,ari, 70046)
;he Micro $inancial Sector 5Development and "e+ulation6 Bill 700? has been tabled in
the Parliament 5;he Dindu Business >ine, March 700?6) M$Is fear that re+ulation mi+ht
stifle +ro,th, but analysts say that it is important to put them under scannin+)
E-alat)n6 M)-'!4Inu'an-&: Micro9insurance is a key element in the financial services
packa+e for people at the bottom of the pyramid) ;he poor face more risks than the ,ell
off) It is becomin+ increasin+ly clear that micro9insurance needs a further push and
+uidance from the "e+ulator as ,ell as the Government)
1* "an+ara*an !) 5700?6, $inancial InclusionJ Some Eey Issues, >ecture delivered at
Man+alore University,Man+alore, and Au+ust -0, 700?K
#* ;horat, Usha 5700?a6, ;akin+ Bankin+ Services to the !ommon Man C $inancial
Inclusion, Deputy Governor, "eserve Bank of India at the DM;9D$ID $inancial
Inclusion !onference 700?, <hitehall Place, >ondon, UE, Hune -2K
5* Mahendra Dev S, $inancial InclusionJ Issues and !hallen+es, &conomic and
Political <eekly, Fol) A-K%o) A- #ctober -A9#ctober 70, 7004
:* Dans, F) Basil, ;o,ards a Fibrant Indian A+riculture, Eisan <orld, Fol) 11, %o)7,
$ebruary, pp) -3970, 7003
2* Hayasheela, Dinesha P); and F) Basil DansJ $inancial Inclusion and Microfinance
in IndiaJ An #vervie,, 7003K papers.ssrn.com/sol3/papers.cfm?
6* Satish P) 5700.6, Mainstreamin+ Indian Micro $inance, &conomic and Political
<eekly, Fol) A0 %o) -?, April 71 to April 72, 700., pa+es -?1-9-?12, 700.)
;* SaCDhan Micro finance "esource !entre 5700A6, Indian &Bperience of Micro
$inanceJ A Sustainable Bankin+ Solution to the PoorK httpJ//,,,)sa9
8* Earmakar, E)G) 570076 Micro finance revisited, $inancin+ A+riculture, Fol)1A,
%o)7, April9Hune 7007)
9* Beyond MicrocreditJ Puttin+ Development Back into MicrofinanceK Book by
;homas $isher, M)S) Sriram, 570076
10* Mahendra Dev S, $inancial InclusionJ Issues and !hallen+es, &conomic and
Political <eekly, Fol) A-K%o) A- #ctober -A9#ctober 70, 7004
11* %adara*an S) and ") Ponmuru+an 570046, Self Delp GroupsJ Bank >inka+e
Pro+ramme, Eisan <orld, Fol) 11)
1#* %ABA"D Annual "eport 700?
15* Priya Basu, Pradeep SrivastavaK &Bplorin+ Possibilities Microfinance and "ural
!redit Access for the Poor in India, &conomic and Political <eekly, Fol) A0 %o)
-? April 71 9 April 72, 700.)
1:* Shahidur ") Ehandker, 5-2236, $i+htin+ poverty ,ith micro creditJ &Bperience in
Ban+ladesh, #Bford University Press, %e, IorkK httpJ//,,,9
12* >ed+er ,ood Hoanna, 570006 MicrofinanceJ Sustainable Bankin+ ,ith the Poor,
;he <orld Bank <ashin+ton D ! 7000)
16* Patil, Shobhadevi ") 570046, "ole of self help +roups in sustainable developmentJ
an %G# eBperience, Participative Development, Fol) ., %o -, Han9Mar, 7004, pp
1;* ;i,ari, "avish 570046, Micro9finance Bill referred to GoM after ob*ections, ;he
Indian &Bpress, Dec -4) Available at
18* ;he Dindu Business >ine 5700?6, Micro9finance Bill tabled, March 70) Available
5accessed Hanuary 10, 70036)
19* G#I570036, "eport on the !ommittee on the $inancial Inclusion, Hanuary 7003
#0* !ommercial Banks and MicrofinanceJ &volvin+ Models of SuccessK By Jennifer
Isern !ead "icrofinance #pecialist $%&' and (a)id 'orteo*s $ons*ltantK
U%I;&D %A;I#%S !API;A> D&F&>#PM&%; $U%D %e,sletterK Issue -? /
#1* Development of Micro financeK Asian Development Bank Book
##* $inance for the PoorJ Microfinance Development Strate+yK Asian Development
BankK 7000
#5* $inancial Inclusion and Microfinance in IndiaJ An #vervie,K Hayasheela, Dinesha
P); and F) Basil DansK
#:* !#%!&P; PAP&"J Microfinance Institutions in IndiaK Piyush ;i,ari and S)M)
#2* !hatter*ee) ArupK $rom eBclusion to InclusionK $inance for the Poor, Hune 7003,
Fol) 2 K %o)7
#6* I!I!I bank Annual "eport 700?
#;* Impact assessment of microfinanceK &DA "ural systems pvt, ltd) Huly 7001
#8* "obert <) DerdtK >earnin+ from &BperienceJ A+riculture !redit and MicrocreditK
December, 7004
#9* " Srinivasan and M S SriramK MicrofinanceJ An IntroductionK IIMB Mana+ement
revie,K Fol) -.K %o) 7
50* Microfinance development strate+yK Asian development bankK 7000
51* ;odd *) Markson, Michael hokensonK <hat ,orks I!I!I bank Innovations in
"ural $inanceK Michi+an business schoolK Au+ 7001
5#* "aven SmithK ;he !han+in+ face of rural finance in IndiaJ ;he costs and benefits
of transformin+K ;he $letcher SchoolK 7004
55* &rica $ield and "ohini Pande+ "epayment $re(uency and Default in Micro9
$inanceJ &vidence from IndiaK
5:* Dousin+ Development $inance !orporationK
52* ;ransparency and performance in Indian microfinance
56* httpJ//,,,)microfinance+ate,ay)or+/content/article/detail/-1AA4
5;* http:II+++*-6ap*!'6IpI)t&I-I
58* httpJ//,,,)m9cril)com/
%AM&J S;A;&J
W)-)6 In ,hich of the follo,in+ options does your a+e fallsX
a)6-397. b)67.91. c)61.9A. d)6 A. or above
W)7)6 <hat is your occupationX
a)6#,n a small business b)6$armer c)6Service d)6Douse,ife

W)1)6Are you a,are about all microfinance options available in IndiaX
a)6Ies b)6 %o
W)A)6 Dave you ever taken a loan from any of the follo,in+ institutionsX
a)6 Self9help +roups b)6 Micro finance Institutions c)6Money lender

d)6 !ommercial banks e)6 %ot applicable
W).)6 #f ho, much amount have you taken up the loanX
a)6.,000970,000 b)670,000910,000 c)610,0009.0,000 d)6.0,000 or above
e)6 %ot applicable
W)4)6 Do, much interest are you payin+/had paid on a loanX
a)6-0970@ b)670910@ c)6109A0@ d)6 Above A0
e)6 %ot applicable
W)?)6 About ,hich of the follo,in+ banks have you heard of providin+ this facilityX
a)6 State bank of India b)6!entral bank c)6Standard !hartered bank
d)6 #thers e)6 %one
W)3)6 <hen somebody tells you about it, then ,ould you +o for takin+ up a loan from a
commercial bankX
a)6Ies b)6%o
W)2)6 Do, fre(uently you +o for financin+ your personal needs in about 791 yearsX
a)6 -91 times b)6 A9. times c)6 493 times d)6 3 or more times
e)6 %one
W)-0)6 <hen not able to pay loan on time, do you face any problems in +ettin+ a loan for
the neBt timeX
a)6Ies b)6%o c)6%ot applicable
W)--)6 $or ho, much duration do you +enerally take up a loanX
a)6 49-7 months b)6-79-3 months c)6-397A months d)6Greater than 7 years
e)6 %ot applicable