Project: Issue and Success Factors in Micro Financing

Bag round: EXECUTIVE SUMMARY

Poverty in India is widespread, with the nation estimated to have a third of the world's poor.
In 2010, the world bank reported that 32.7% of the total Indian people fall below the
international poverty line of US$ 1.25 per day (PPP) while 68.7% live on less than US$ 2 per
day.]

The recent poverty index shows a rapid reduction in poverty in India to 21.9% in 2011-2012
from 37.2% in 2004-2005 as per the Planning commission of India.

According to 2010 data from the United Nations Development Programme, an estimated
29.8% of Indians live below the country's national poverty line.[ A 2010 report by the Oxford
Poverty and Human Development Initiative (OPHI) states that 8 Indian states have more
poor people than 26 poorest African nations combined which totals to more than 410
million poor in the poorest African countries. A 2013 UN report stated that a third of the
worlds poorest people live in India.

AmartyaSen (2000) convincingly argued that poverty is not merely insufficient income, but
rather the absence of wide range of capabilities, including security and ability to participate
in economic and political systems. Today the termbottom of the pyramid refers to the
global poor most of whom live in the developing countries. These large numbers of poor are
required to be provided with much needed financial assistance in order to sail them out of
their conditions of poverty.Accordingly, there is felt a need for policy support in channeling
the financial resources towards the economic upliftment of resource poor in any developing
economy.

The operational definitions of financial inclusion, have also evolved from the underlying
public policy concerns that many people, particularly those living on low income, cannot
access mainstream financial products such as bank accounts and low cost loans, which, in
turn, imposes real costs on them -often the most vulnerable people (H.M. Treasury,
2007). In the Indian context, Rangarajan Committee (Report of the Committee on
Financial Inclusion in India (2008)) defines it as: "Financial inclusion may be defined
as the process of ensuring access to financial services and timely and adequate
credit where needed by vulnerable groups such as weaker sections and low income
groups at an affordable cost." The financial services include the entire gamut -
savings, loans, insurance, credit, payments etc. By providing these services, the
aim is to help them come out of poverty.

While in developed countries, the formal financial sector comprising mainly

the banking system serves most of the population, in developing countries, a large
segment of the society, mainly the low-income group, has little access to financial
services, either formal or semi formal. As a result, many people have to necessarily
depend either on their own sources or informal sources of finance, which are
generally at high cost.
 Microfinance means providing very poor families with very small loans (micro credit) to help
them engage in productive activities /small businesses.
oral lessees.
In early 1980s, the existing banking policies, procedures and systems were not suited
to meet the requirements of poor. For borrowings poor people usually resort to
unorganized sector. NABARD recommended that alternative policies, systems and
procedures should be put in use to save the poor from the clutches of moneylenders. Thus
microfinance was introduced in banking sector.
Microfinance is the provision of a broad range of financial services such as deposits,
loans, payment services, money transfers and insurance to the poor and low income
households and their micro-enterprises. Microfinance is defined as Financial Services
(savings, insurance, fund, credit etc.) provided to poor and low income clients so as to help
them raise their income, thereby improving their standard of living.
Micro-financing is regarded as a tool for socio-economic up-liftment in a developing
country like India. It is expected to play a significant role in poverty alleviation and
development.
Mohammed Yunus was awarded the Noble Prize for application of the concept of
microfinance, with setting up of the Grameen Bank in Bangladesh. Micro credit and
microfinance are different. Micro credit is a small amount of money, given as a loan by
a bank or any legally registered institution, whereas, Microfinance includes multiple services
such as loans, savings, insurance, transfer services, micro credit loans etc.
B. FEATURES OF MICROFINANCE
1) It is an essential part of rural finance.
2) It deals in small loans.
3) It basically caters to the poor households.
4) It is one of the most effective and warranted Poverty Alleviation Strategies.
5) It supports women participation in electronic activity.
6) It provides an incentive to grab the self employment opportunities.
7) It is more service-oriented and less profit oriented.
8) It is meant to assist small entrepreneur and producers.
9) Poor borrowers are rarely defaulters in repayment of loans as they are simple and
God-
fearing.
10) India need to establish several Microfinance Institutions.

C. MICROFINANCE MODELS IN INDIA :-

In India, the beginning of microfinance movement could be traced to Self Help Group
(SHG) Bank Linkage Programme (SBLP) started as a pilot project in 1992 by NABARD. This
programme proved to be very successful and has also developed as the most popular model
of microfinance in India. r

In India, the institutions which provides microfinance services includes:-NABARD Small

Industries Development Bank of India <SIDBI), Rashtriya Mahila Kosh, Commercial Banks,
Regional Rural Banks, Co -operative Banks and Non Banking Financial Companies (NBFCs).
 Microfinance services are provided mainly by two models :- Self Help Group - Bank
Linkage Programme (SBLP) Model and Micro-Finance Institutions Model (MFI). These both
together have about 7 crore clients.
1. SHG - Bank Linkage Programme (SBLP)
A Self Help Group (SHG) is a small group of 10 to 20 persons of rural poor who come
together to mutually contribute to common fund for meeting their emergency needs. SHG -
Bank Linkage Programme was introduced by NABARD in 1992. Under this programme three
different models have emerged :-
a) Model I: - SHGs promoted, guided and financed by banks.

b) Model II :- SHGs promoted by NGOs / government agencies and financed by

banks.
c) Model III :- SHGs promoted by NGOs and financed by banks under
NGOs / formal agencies as financial intermediaries.
2. Micro Finance Institutions (MFls)
MFls include NGOs, trusts, social and economic entrepreneurs, these lend small, sized
loans to individuals or SHGs. They also provide other services like capacity building, training,
marketing of products etc.
MFIs operate under following models :-
a) Bank Partnership Model
i. MFI As Agent :-
In this model, the MFI acts as an agent and it takes Care of all relationships with borrower
from first contact to final repayment.
ii. MFI As Holder Of Loans :-
Here MFI holds the individual loans on its books for a while, before securitizing them and
selling them to bank. -
b) Banking Facilitators :-
Banking facilitators / correspondents are intermediaries who carry out banking functions in
villages or areas where it is not possible to open a branch. In January, 2006, RBI permitted
banks to use services of NGOs, MFIs and other civil society organizations to act as
intermediaries in providing financial and banking services to poor.