Microfinance

Building Bridges Between

Economy and Society

Edited By
Surender Mor

Bhagat Phool Singh Mahila Vishwavidyalaya

Khanpur Kalan, Sonepat, Haryana

Vista International Publishing House

DELHI-110053 (INDIA)
 © Publisher
First Edition : November 2013
ISBN : 978-93-81604-84-7

Vista International Publishing House

V-196, Near Shiv Sadhna Mandir,
C-11, Yamuna Vihar, Delhi-110053
Phone : (011) 22921212, 22917141
E-mail : viph_vista@hotmail.com

Disclaimer
The articles published in this book are purely personal views and judgments of the
authors and do not reflect the views of the Editor/Publisher/Printer.
The Editor/Publisher/Printer has delivered their best in presenting the original views
of the authors in this book. However, they will not be responsible for any errors caused
by oversight or otherwise. The authors themselves are responsible for grammatical
mistakes, if any.
The Editor of this book will not take any responsibility for any issue arising out of
the contents, such as copyrights, plagiarism, self-plagiarism, etc. The authors themselves
are full responsible for contents as endorsed by them in the transfer of copyright to the
Editor.

—Surender Mor, Editor

PRINTED IN INDIA
Published by Vista International Publishing House and printed at Himanshu Printers, Maujpur, Delhi-110 053.
 Foreword

This book is the culmination of a lot of hard toil by Dr. Surender Mor, requiring intense co-
ordination skills. Dr. Mor is working in the middle of the rural India, in a university which is seeking
to educate women from the lower income and lower-middle income categories. Often, their courses
are in English! The university was started as a private foundation. This is social entrepreneurship at
the grassroots.
At a time when eminent Indians living abroad are debating the economic growth and social
upheaval in the country, often shaping the political agenda within the country, grass root developments
such as these are forgotten. Perhaps, sitting abroad, they are not even aware of them. These are
developments which will not provide results today. Social development may lag economic growth by
a generation, if not more. And such development that does take place may not be visible in measurable
metrics.
Just as such initiatives for education are not isolated examples (you will find some all over the
country), there is a grassroots movement which is transforming the country. This is microfinance.
Microfinance sits at the crossroads of two fundamental dimensions of social development in poor
economies: entrepreneurial management and social responsibility. Often criticized, sometimes justly,
for forgetting its social mission in the name of sustainability, it is nevertheless spreading because of
the hope it entails for the poor through entrepreneurial development. This hope is evidenced not just
by the hundreds of large visible microfinance institutions, but by the thousands of invisible ones who
are gradually replacing moneylenders or causing them to reduce their interest rates. Their passion is
sustained because their credit officers are seeing the social changes that will transform into beautiful
metrics in a few decades.
The researchers who have contributed to this book have freely given their contribution, finished
or work-in-progress, hoping that it would contribute to the overall understanding of the phenomena.
Dr. Mor has selected the most interesting papers that showed the discipline and rigor required for
high quality research as well as the unique conceptual ideas that they presented. He has appropriately
titled the book as Microfinance: Building Bridges between Economy and Society.

Arvind Ashta
Banque Populaire Chair of the Burgundy
School of Business (ESC Dijon), France.

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 Acknowledgments

Although, the task to edit a second book is very challenging but the inspiration given by
Prof. Arvind Astha, Banque Populaire Chair of the Burgundy School of Business, France made
it easier and exciting. I wish to express my deep gratitude to my esteemed teacher Prof. T. R
Kundu for inculcating the skills and patience necessary for success in life and academic career.
The noble and sensible guidance of Dr. (Mrs.) Pankaj Mittal, Vice-Chancellor, BPSMV, Khanpur
Kalan deserves special mention.
Without the continuous support of reviewers Prof. Ved Pal (GJU&ST Hisar), Dr. Sanjeev
Gupta (CUHP, Dharamsala) and Dr Supran Sahrma (SMVDU. Katra), it would not have been
possible for me to maintain the academic quality of this book. I owe my special thanks to Prof.
Geoff Archer (Royal Roads University, Canada), David P. Moxley (Oklahoma University, USA),
Prof. R.R.Singh (Visiting Professor) for their valuable suggestions. The discussions with Mr.
UdayRaj Khatiwada (SLB Bank Nepal), Mrs. Gyanao Pouydal (NAMUNA Integrated Council,
Nepal), Mr. C. Prabhat (PRIME, Sri Lanka) and Mr Rajive Vishwakarma (Centre for Innovation,
Bhopal) are noteworthy enough to be placed on record.
I also express my deep sense of gratitude to all colleagues (especially Dept. of English)
and staff for helping me at each step for timely completion of this book. Finally my thanks to my
family members Mrs. Sushila (wife), Sukriti (daughter) and Yashwant (son) for their moral
support and patience which proved to be very handy in completion of this book.

—Surender Mor

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 List of Contributors

 Abdul Wahab: Professor, Department of Economics, Aligarh Muslim University, Aligarh,

Uttar Pradesh

 Amandeep Kaur: Faculty, Department of Economics, BPSMV, Khanpur Kalan, Sonepat,

Haryana

 Anil Kumar: Scientist, National Centre for Agricultural Economics and Policy Research
(NCAP), New Delhi

 Ashish Hooda: Assistant Professor, BPSMV, Khanpur Kalan, Sonepat, Haryana

 Ashok Kumar: Scientist, National Centre for Agricultural Economics and Policy Research
(NCAP), New Delhi

 D.R. Singh: Scientist, Indian Agricultural Statistical Research Institute, Pusa, New Delhi

 Geetanjali Singh: Project Fellow, Department of Economics, K.U. Kurukshetra, Haryana

 Harvinder Singh: Faculty, Department of Economics, Panjab University, Chandigarh

 Jasmine Kaur Ludhar: Research Assistant, Institute for Studies in Industrial Development,
Vasant Kunj, Delhi

 Kanwaljeet Kaur: Associate Professor, Department of Economics, SGGS College, Chandigarh

 Karam Singh: Research Scholar, Singhania University, Rajasthan

 Manleen Kaur: Research Assistant, Centre for Research in Rural and Industrial Development,
Chandigarh

 Mandeep Kaur: Associate Professor, Department of Economics, SGGS College, Chandigarh

 Narender: Research Scholar, Faculty of Management Studies, Delhi University, New Delhi

 Nitish Khurana: Research Scholar, Department of Economics, Panjab University, Chandigarh

 P.A. Lakshmi Prasanna: Scientist, National Centre for Agricultural Economics and policy
Research (NCAP), New Delhi

 Parul Deshwal: Assistant Professor, Department of Business Administration, Maharaja

Surajmal Institute, Janakpuri, New Delhi

 Pooja Rani: Faculty, Department of Economics, BPSMV, Khanpur Kalan, Sonepat, India

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 Pradip Kumar Parida: Assistant Professor of Rural Development, Indian Institute of Public
Administration, Indraprastha Estate, New Delhi

 Pranaya Kumar Parida: Assistant Professor, GADVASU, Ludhiana, Punjab

 Prawin Arya: Scientist, Indian Agricultural Statistical Research Institute, Pusa, New Delhi

 Rajeshwari Malik: Associate Professor & Head, Department of Business Administration,

Maharaja Surajmal Institute, Janakpuri, New Delhi

 Rashpal Kaur: Assistant Professor, School of International Trade and Business Studies,
Shridhar University Pilani, Rajasthan

 Sanjay Nandal: Assistant Professor, Department of IMSAR, M.D.U. Rohtak, Haryana

 Seepana Prakasam: Assistant Professor, Department of Economics, P.G.G.C.G, Chandigarh

 Shaveta Kohli: Research Fellow, Department of Economics, Panjab University, Chandigarh

 Sheena Jangir: Assistant Professor, School of Business Studies and International Trade,
Shridhar University, Pilani, Rajasthan

 Shilpi Devi: Research Scholar, Department of Economics, M.D.U. Rohtak, Haryana

 Shirin Rais: Post-Doctoral Fellow (ICSSR), Department of Economics, Aligarh Muslim

University, Aligarh, Uttar Pradesh

 Shiv Kumar: Senior Scientist, National Centre for Agricultural Economics and Policy Research
(NCAP), New Delhi

 Silender Singh: Assistant Professor, Department of Commerce, Chaudhary Devi Lal

University, Sirsa, Haryana

 Smita Raut: Research Fellow, M S Swaminathan Research Foundation, Chennai

 Sunil Kumari: Research Scholar, IMSAR, M.D.U. Rohtak, Haryana

 From the Editor’s Desk

Microfinance is one of those small ideas that turns out to have enormous implications. The
Microfinance movement which was initiated by the Muhamad Yunus of Bangladesh has grown
through cross-pollination. The book, “Microfinance : Building Bridges Between Economy and
Society” is about the ideas and movements in the field of microfinance which attempts to bridge the
gap between economy and Society. The success stories of Microfinance have forced the academicians
and policy makers to rethink and reshape their policies about poor households and towards the
societal as well as economic development. The book is divided into two sections and each section
highlights a particular aspect related to the microfinance. Section I deals with articles devoted to
Microfinance for Promoting Sustained Growth in Indian sub-continent. Mandeep Kaur in her
paper highlights the challenges faced by the Microfinance institutions and suggested some solutions
to counter the challenges whereas Seepana Prakasam investigates the problem of urban poverty
and attributed Microfinance for removal of urban poverty. Geetanjali Singh in her manuscript shares
the role of MFIs in Indian growth in recent time, while Amandeep Kaur analyses the impact of
microfinance on economic growth of India. Kuldeep Goyal highlights the role of NABARD in
promoting the microfinance India, whereas Pardeep Kumar elaborates the role of social
entrepreneurship in rural development of India. Pranaya Kumar in his study of Odisha pin points the
role of Self-help groups in National Rural Livelihood Mission, while Smita Raut examines role of
Self-Help Groups in various rural development programmes. Ashish Hooda et al. investigate the role
of microinsurance in economic development, whereas Manleen Kaur deliberates upon Indian
experience of financial inclusion. Rashpal Kaur and Sheena Jangir in their study examine the growth
of SHG Bank Linkage programme in India.
Section II consists of manuscripts related to Microfinance for Creating Empowerment in
India. Pooja Rani in her study examines the impact of SHGs in promoting women empowerment in
India, whereas Supriya Chaudhary and Rajeshwari Malik in their study analyse the social
entrepreneurship in light of triple bottom line. Parul Deshwal in her manuscript lays stress on the
economic empowerment of women through entrepreneurship, while Narender and Shilpi Devi examine
the growth of SHGs and microfinance channels in India. Kanwaljit Kaur in her study highlights the
challenges and prospects of Mobile Banking in India, whereas Sanjay Nandal and Sunil Kumari
explore the challenges of social entrepreneurship. Abdul Wahab and Shirin Rais analyse the impact
of FDI on generating employment opportunities in India, while Shiv Kumar et al. examined various
dimensions for measuring the performance of Microfinance. Nitish Khurana and Sheveta Kohli in
their case study highlight the impact of microfinance on impoverished farmers in situation of debt in
Punjab. Silender Singh in his manuscript explores the reasons for Lapsation of Life Insurance Policies
among Household in Haryana, whereas Jasmine Kaur in her comparative analysis highlights the
trends and pattern of structural changes in Punjab and India economy.

Surender Mor

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 Contents
Foreword
From the Editor’s Desk
List of Contributors

Section A
MICROFINANCE: PROMOTING SUSTAINED GROWTH

1. Microfinance for Economic Growth: Challenges and Solutions in India 1

—Mandeep Kaur
2. Microfinance and Urban Poverty: An Investigation 14
—Seepana Prakasam
3. Microfinance for Economic Growth: Experience of India 22
—Geetanjali Singh
4. Microfinance and Economic Growth : An Analysis of India 32
—Amandeep Kaur
5. Microfinance in India: The Role of NABARD 49
—-Kuldeep Goyal
6. Social Entrepreneurship and Rural Development in Contemporary India: An Investigation 55
—Pradip Kumar
7. Public Delivery System through Self Help Groups in National Rural Livelihood Mission
(NRLM) Approach: A Case Study of Odisha 64
—Pranaya Kumar
8. Self Help Groups in Rural Development Programmes: Some Policy Implications 72
—Smita Raut
9. Microinsurance and Economic Development: An Empirical Investigation 80
—Ashish Hooda, Harvinder Singh and Karam Singh*
10. Microfinance and Financial Inclusion: An Indian Experience 87
— Manleen Kaur
11. Self Help Groups under SHG Bank Linkage Program: Growth Analysis 103
— Rashpal Kaur and Sheena Jangir*

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Section B
MICROFINANCE: CREATING EMPOWERMENT

12. Do Self Help Groups promote Women Empowerment? Case of India 111
— Pooja Rani

13. Social Entrepreneurship and Triple Bottom Line: An Analysis 121

— Supriya Chaudhary and Rajeshwari Malik*

14. Economic Empowerment of Women in India Through Entrepreneurship 130

— Parul Deshwal

15. An Empirical Analysis of Growth of SHG and Microfinance Channels in India 140
— Narender and Shilpi Devi*

16. Mobile Banking in India: Challenges and Prospects 146

—Kanwaljeet Kaur

17. Challenges of Social Entrepreneurship: An Exploratory Analysis 155

— Sanjay Nandal and Sunil Kumari*

18. Employment Generation and FDI in India: An Analysis 161

— Abdul Wahab and Shirin Rais*

19. Dimensions of performance of Micro Finance: A Conceptual Exploration 172

—P.A. Lakshmi Prasanna, Ashok Kumar, Prawin Arya, Shiv Kumar*,
Anil Kumar, and D.R. Singh

20. Impact of Microfinance on the livelihood of impoverished farmers’ in 199

the situation of debt: A Case study of Punjab
— Nitish Khurana and Shaveta Kohli*

21. Assessment of Key Reasons of Life Insurance Policies Lapsation among 206
Households : An Exploratory Study in Haryana
— Silender Singh

22. Trends and Pattern of structural changes in Punjab and the Indian Economy: 213
A Comparative Analysis
—Jasmine Kaur

*Corresponding Author
 Microfinance
Building Bridges Between
Economy and Society
 Microfinance for Economic Growth: Challenges
and Solutions in India
By

Mandeep Kaur

1. Introduction
It’s estimated that approximately 2.5 billion people around the world live in poverty, struggling
to survive on less than US$2 a day. That’s less money than we would spend on a cup of coffee without
a second thought. Yet for many people, it’s all they have to provide for the needs of their whole family.
Families living in this kind of poverty struggle to afford even the most basic of items. They are
unable to afford adequate meals, clean water or an education. They go without proper shelter,
transport and even medicine when they’re sick. Poor access to credit markets is the key reason why
most of the economies cannot expand. However, microfinance can provide economic interventions,
which help to improve an access to financial technologies. A durable microfinance system with
well-equipped resources can help to stimulate the economic growth from very basic level.
Microfinance sector has grown rapidly over the past few decades. Nobel Laureate Muhammad
Yunus is credited with laying the foundation of the modern MFIs with establishment of Grameen
Bank, Bangladesh in 1976. Today it has evolved into a vibrant industry exhibiting a variety of
business models. Microfinance Institutions (MFIs) in India exist as NGOs (registered as societies
or trusts), Section 25 companies and Non-Banking Financial Companies (NBFCs). Commercial
Banks, Regional Rural Banks (RRBs), cooperative societies and other large lenders have played
an important role in providing refinance facility to MFIs. Banks have also leveraged the Self-
Help Group (SHGs) channel to provide direct credit to group borrowers. With financial inclusion
emerging as a major policy objective in the country, Microfinance has occupied centre stage as a
promising conduit for extending financial services to unbanked sections of population. At the same
time, practices followed by certain lenders have subjected the sector to greater scrutiny and need
for stricter regulation.
Although the microfinance sector is having a healthy growth rate, there have been a
number of concerns related to the sector, like grey areas in regulation, transparent pricing, low
financial literacy etc. In addition to these concerns there are a few emerging concerns like cluster
formation, insufficient funds, multiple lending and over-indebtedness which are arising because
of the increasing competition among the MFIs. On a national level there has been a spate of

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actions taken to strengthen the regulation of MF sector including, enactment of microfinance
regulation bill by the Government of Andhra Pradesh, implementation of sector-specific
regulation by Reserve Bank of India and most recently, release of Draft Microfinance Institutions
(development and regulation) Bill, 2011 for comments. Based on the research work, a few major
recommendations made in the report include field supervision of MFIs to check ground realities
and the operational efficiency of such institutions. Offer incentives to MFIs for opening branches
in unbanked villages, so as to increase rural penetration. Also MFIs be encouraged to offer
complete range of products to their clients. Transparent pricing and technology implementation
to maintain uniformity and efficiency are among the others which these institutions should adopt.
Inability of MFIs in getting sufficient funds is a major hindrance in the microfinance growth and
so these institutions should look for alternative sources of funds. Some of the alternative fund
sources include outside equity investment, portfolio buyouts and securitization of loans which
only a few large MFIs are currently availing.
Microfinance lenders offer small loans to aspiring as well as current business owners. These
loans assist people in getting access to traditional financing and offer jobs to local communities. The
size of microfinance loan may is very small to Make it feasible for the needy people. Microfinance
includes basic financial services - including small loans, savings accounts, fund transfers and
insurance. Alongside non-financial services such as business training, microfinance assists people
living in poverty who wouldn’t usually qualify for regular banking services because they have no
form of collateral or formal identification. Loans as small as Rs.5, 000 can help people in poverty
either to start or grow their own small business. This enables them to earn an income so they can
afford food, clean water, proper shelter and an education for their children.
According to the latest research done by the World Bank, India is home to almost one third of
the world’s poor (surviving on an equivalent of one dollar a day). Though many central government
and state government poverty alleviation programs are currently active in India, microfinance plays
a major contributor to financial inclusion. In the past few decades it has helped out remarkably
in eradicating poverty. Reports show that people who have taken microfinance have been able to
increase their income and hence the standard of living.Moreover, about half of the Indian population
still doesn’t have a savings bank account and they are deprived of all banking services. Poor also
need financial services to fulfill their needs like consumption, building of assets and protection
against risk. Microfinance institutions serve as a supplement to banks and in some sense a better one
too. These institutions not only offer micro credit but they also provide other financial services like
savings, insurance, remittance and non-financial services like individual counseling, training and
support to start own business and the most importantly in a convenient way. The borrower receives
all these services at her/his door step and in most cases with a repayment schedule of borrower’s
convenience. But all this comes at a cost and the interest rates charged by these institutions are
higher than commercial banks and vary widely from 10 to 30 percent. Some claim that the interest
rates charged by some of these institutions are very high while others feel that considering the cost
of capital and the cost incurred in giving the service, the high interest rates are justified

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2. Micro Finance Vs Macro Finance
Business can be of any size from the small cloth designing shop to the giant manufacturing
company, where thousands of people work in assembly line. Taking into consideration the size of
a business, there are unlimited financing options available for business of any type. The criteria
and size of the loan or funding strongly varies according to the credit history, recognition and
repayment capability of an organization.
• Micro Finance: Some businesses that target middle income people of the society don’t
need very high finances to expand and get going. An individual who enter into the business
of car painting may need lesser amount to produce the end product and sell it. In developing
nations like India, most of the microfinance institutions come forward and provide helping
hand to poor entrepreneurs, so that they are not completely dependent on others. Over the
years, microfinance has played vital role in offering opportunities to entrepreneurs to run
secondary businesses. The contribution of microfinance in providing job opportunities to
locals as well as immigrants is commendable.
• Macro Finance: When a builder wants to construct 100-floor corporate office tower, his
company may seek huge funding out of the several options available in the market. The
builder may want investors to share his costs and profit through venture investors. In most
of the cases, builder may approach a finance company or bank for getting large scale loan.
In both cases, macro finance is involved, as the money resources are either multimillions
or high risk takers. Generally, macro finance projects involve very high risk. If something
turns wrong, money lenders can face incredible losses. That’s the reason why seeking
macro finance is not an easy task. Businesses who seek for macro finance must possess a
sound credit record or enough accomplishments to get eligible for such a large scale loan.
Macro finance is the study of big group; on the other hand, microfinance is constrained to need of
an individual. In order to make microfinance project successful, an organization should justify his
leverage and achieve returns to make the micro-lending process worthwhile.
2.1 Channels of Micro Finance
In India microfinance operates through two channels: 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. In India, the institutions which
provides microfinance services includes:-NABARD Small Industries Development Bank of India
(SIDBI), Rashtriya MahilaKosh, Commercial Banks, Regional Rural Banks, Cooperative 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.

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2.1.1  SHG – Bank Linkage Programme (SBLP):This is the bank-led microfinance channel
which was initiated by NABARD in 1992. Under the SHG model the members, usually women
in villages are encouraged to form groups of around 10-15. The members contribute their savings
in the group periodically and from these savings small loans are provided to the members. In the
later period these SHGs are provided with bank loans generally for income generation purpose. The
group’s members meet periodically when the new savings come in, recovery of past loans are made
from the members and also new loans are disbursed. This model has been very much successful
in the past and with time it is becoming more popular. The SHGs are self-sustaining and once the
group becomes stable it starts working on its own with some support from NGOs
2.1.2  Micro Finance Institutions (MFIs): Those institutions which have microfinance as their
main operation are known as micro finance institutions. A number of organizations with varied
size and legal forms offer microfinance service. These institutions lend through the concept of
Joint Liability Group (JLG). A JLG is an informal group comprising of 5 to 10 individual members
who come together for the purpose of availing bank loans either individually or through the group
mechanism against a mutual guarantee. The reason for existence of separate institutions i.e. MFIs
for offering microfinance are as follows:
• High transaction cost – generally micro credits fall below the break-even point of providing
loans by banks
• Absence of collaterals – the poor usually are not in a state to offer collaterals to secure the
credit
• Loans are generally taken for very short duration periods
• Higher frequency of repayment of installments and higher rate of Default
Non-Banking Financial Companies (NBFCs), Co-operative societies, Section-25 companies,
Societies and Trusts, all such institutions operating in microfinance sector constitute MFIs and
together they account for about 42 percent of the microfinance sector in terms of loan portfolio. The
MFI channel is dominated by NBFCs which cover more than 80 percent of the total loan portfolio
through the MFI channel.
2.2 Micro Finance and Economic Development
As credit plays vital role in beginning and expanding the business, microfinance has been
treated as an important tool for economic development. In a world where almost half the population
lives in poverty, microfinance is one of the better tools for poverty alleviation, economic growth
and development in emerging economies. These loans offer the same benefits to major world
economies that face growth problems. It is very well realized that these loans can help lower-
income groups setup and grow the small businesses, which generate income and employment
that helps their communities and their economies. Achieving balanced and inclusive economic
growth is a key challenge faced by policymakers in countries around the world. The gains of

4
economic growth are accessible to a greater extent by the relatively advantaged, who find it easier
to participate in the growth process. Poorer people, who are separated by distance from the urban
areas where economic activity is concentrated, have to wait much longer to reap the benefits of
economic growth. Engaging these sections of society in the economic mainstream is essential to
achieve balanced growth, which is critical for the long-term sustainability of social development
and economic prosperity. Access to financial services is a key element of the process of socio-
economic empowerment. Only by delivering financial services to people in rural areas and lower
income strata can they be brought within the ambit of economic activity. Only then can the full
potential of the country’s physical and human resources be realised. The rural economy represents
a large latent demand for credit, savings and risk mitigation products like insurance. Governments
and regulators the world over have articulated the expansion of financial service delivery to this
segment of the population as a priority
Finance plays a key role in stimulating sustainable economic growth. Due to microfinance,
production of goods and services increases which increases GDP and contributes to economic
growth of the country.
2.3 Microfinance plays vital role in economic development through following ways-
• Job Creation: A business that starts and operates because of microfinance aid can create jobs
in equal number as those created by multi-national corporations. Most of the microfinance
lenders provide loans to borrowers who reside in some of the remote and most deprived
areas of the world. The employment opportunities created by these small businesses are
substantial, especially for communities where jobs are rare. As people of these communities
earn an extra income, they can spend that earning within their community, which assists in
stimulating the economic growth.
• Women Empowerment:-Normally more than 50% of SHGs are formed by women. Now
they have greater access to financial and economical resources. It is a step towards greater
security for women. Thus microfinance empowers poor women economically and socially
• Mobilisation of Savings: - Microfinance develops saving habits among people. Now
poor people with meager income can also save and are bankable. The financial resources
generated through savings and micro credit obtained from banks are utilised to provide
loans and advances to its members. Thus microfinance helps in mobilisation of savings.
• Financial Stability: One of the greatest rolesmicro-finance has played by providing
financial stability to people which contributed to local economies in substantial extent.
Small loans have offered an opportunity to create extra income, so that people can pay for
their extreme necessities. After availing financial aid through microfinance, people don’t
rely on any public assistance programs, which indeed beneficial for the national economy.
• Global Poverty: The supporters of microfinance believe that offering financial stability
to poor and low income families through small loans may break the poverty cycle for

5
 future generations. As many of these communities started growing, the local economies
are started flourishing. The gross domestic production of country started increasing and the
gap between the poorest and wealthiest people has also decreased.
• Development of Skills: Micro financing has been a boon to potential rural entrepreneurs.
SHGs encourage its members to set up business units jointly or individually. They receive
training from supporting institutions and learn leadership qualities. Thus micro finance is
indirectly responsible for development of skills.
• Mutual Help and Cooperation: Microfinance promotes mutual help and cooperation
among members. The collective efforts of group promote economic interest and helps in
achieving socio-economic transition.
• Social Welfare: With employment generation the level of income of people increases.
They may go for better education, health, family welfare etc. Thus micro finance leads to
social welfare or betterment of society.
2.4 Micro Finance for Poverty Alleviation
Microfinance is the provision of financial services to people who wouldn’t usually qualify
for traditional banking services because they have no form of collateral or formal identification. A
loan as small as $100 can help someone living in poverty start or grow their own small business.
This enables them to earn an income so they no longer have to struggle to afford food, clean water,
healthcare and an education for their children. By helping a mother buy a sewing machine to start
a tailoring business or a father buy seeds to plant a vegetable garden, small loans enable people
in poverty to earn an income and provide for their families. As each business grows, loans are
paid back and lent out again. With 97% of loans repaid, the cycle continues, year after year. Each
successful business can feed a family, employ more people and eventually help empower a whole
community. This is explained with the help of the diagram given below:

2.5 Microfinance also includes:

• Savings accounts to help provide a safety net in times of need and help with planning for
the future

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 • Micro insurance to protect against emergencies and disasters
• Micro pensions to help provide an income in old age
• Fund transfers and remittance products to help families living far apart access their
incomes
• Non-financial services such as business development to strengthen enterprises, and
financial literacy training to empower families to look after their own finances.
Beyond this, access to these kinds of services helps empower families to become active
participants in society, building self-confidence and dignity.

3. Current Status of Microfinance in India

Microfinance originated in India when the late former Prime Minister Smt. Indira Gandhi
nationalized the banks in the year 1969, to see that 1% of the profit of these banks goes to the
poor towards their micro enterprises. This she planned that bank should facilitate her 20 point
programme to fight poverty among the poor and she called it “Garibi Hatao”. She envisaged that
credit to the poor should be an instrument of social change towards social justice and empowerment
both among the urban and rural poorer households.
3.1 Introduction
The initiative of 1992 to make the traditional and formal banks to extend financial services to
deprived sections through informal Self Help Groups (SHGs), has now blossomed into a
“monolith” micro Finance initiative. It has been recognized as a decentralised, cost effective and
fastest growing micro Finance initiative in the world, enabling over 103 million poor households’
access to a variety of sustainable financial services from the banking system by becoming members
of nearly 8 million SHGs. The linkage with banks has provided the members of the Groups the
facility of not only pooling their thrift /savings and access to credit from the banking system, but
also created a platform through which they could launch a number of livelihood initiatives and also
facilitate the empowerment process.
While the first decade of the programme was meant to demonstrate the potential of SHGs to
organise themselves and be instrumental in managing their own savings and extending emergent
micro credit needs, the second decade laid emphasis on establishing the replicability of the model
across the regions, with focus on resource poor regions of the country. This decade also witnessed
greater confidence among the financing banks to “own” up the programme as a potential business
model thereby extending its outreach to the current level. The development planners including
the Government of India and the State Governments also recognised the real potential of the
SHG movement in development of the poor and it was made an essential ingredient of all poverty
alleviation programmes of the Government.
Even the private sector started realising the untapped potential of SHGs for deep penetration to
the emerging rural markets. The turbulence witnessed in the microfinance sector in the recent past

7
due to the mushrooming growth of microfinance Institutions (MFIs) and their questionable ways in
which they went ahead in extending their outreach and credit intensification, could not make any
significant dent in the popularity of the SHG-Bank Linkage Programme. The small beginning of
linking only 500 SHGs to banks in 1992, had grown to over 0.5 million SHGs by March 2002 and
further to 8 million SHGs by March 2012. From almost 100% of the SHGs linked to Banks at the
pilot stage from southern states, the share of southern States in the total number of SHGs linked
shrank to 46% by March 2012, while the share of eastern States (especially, West Bengal, Odissa,
Bihar) shot up to over 20%.
The third decade of the programme promises to be one of maturing the linkage programme
with livelihoods support, lot more innovations in the product range offered through SHGs and path
breaking reforms in leveraging technology to improve efficiency, while extending its outreach to
more geographical regions, especially the most resource poor regions of the country. It is widely
believed that the SHGs of the poor will be the vehicles leading the march of India’s emergence as a
super economic power in the next decade. A number of countries, especially the developing countries
and international agencies are turning to India to learn from its experiments with microfinance and
to explore possibilities of replication of the model in other parts of the globe. But still there are
many difficulties faced by this sector which is discussed below:
3.2 Problems Faced By Micro Finance Institutions
There are large numbers of problems faced by different micro finance institution in India.
These are explained below:
• Regional Imbalance: -The success of SHG programme is limited. The Southern States
account for 70% of funds. There is a need for better linkage efforts in northern, central,
eastern and north eastern states. These states have high concentration of rural poor.
• Poor Management: - Many SHGs suffer due to poor management. In many cases
internal controls are lacking. There has been poor management of cash flows. Roles and
responsibilities of members and office bearers are not defined properly.
• Problem of Micro Enterprises: - Many micro enterprises developed by SHGs lack skills
and strategy to survive. Even the NGOs fail to provide them with necessary linkage and
market survey report.
• Dropouts: -There are many incidences of dropouts from groups. The main causes are
migration for employment and inability to make regular savings. The dropout rate is 11%
for very poor and 7% for non-poor.
• Lack of Business Attitude:- Many banks supporting SHGs treat the projects as a social or
developmental programme and not as a business proposition. This has restricted the spirit
of entrepreneurship among members.
• Regulations: - SHGs are governed by multiplicity of regulations. This makes their

8
 formation and functioning difficult. Micro Financial Sector Bill 2009 is expected to sort
out this problem by making NABARD the single regulatory body for SHGs. .
• Lack of Political Support: - Usually political parties are after Cooperative Societies as
they serve vote banks. A SHG does not contain enough votes to be inspired by politicians.
• Sustainability: - Sustainability of SHGs depends on the quality of SHGs and the support
given by Self Help Promoting Institutions (SHPIs). Many SHPIs have been supporting
SHGs, but only to achieve targets. This affects its sustainability in long run.
3.3 Solutions to Make Micro Finance More Effective
There are certain solutions that can be provided that can help us in improving the working of
the micro finance institutions and also will help us in providing the microfinance effectively to the
needy. In this paper I am recommending few solutions to increase the efficiency of micro finance.

4. Recommendations
• Proper Regulation: The regulation was not a major concern when the microfinance was
in its nascent stage and individual institutions were free to bring in innovative operational
models. However, as the sector completes almost two decades of age with a high growth
trajectory, an enabling regulatory environment that protects interest of stakeholders as well
as promotes growth, is needed.
• Field Supervision: In addition to proper regulation of the microfinance sector, field
visits can be adopted as a medium for monitoring the conditions on ground and initiating
corrective action if needed. This will keep a check on the performance of ground staff
of various MFIs and their recovery practices. This will also encourage MFIs to abide by
proper code of conduct and work more efficiently. However, the problem of feasibility and
cost involved in physical monitoring of this vast sector remains an issue in this regard.
• Encourage rural penetration: It has been seen that in lieu of reducing the initial cost,
MFIs are opening their branches in places which already have a few MFIs operating.
Encouraging MFIs for opening new branches in areas of low microfinance penetration by
providing financial assistance will increase the outreach of the microfinance in the state
and check multiple lending. This will also increase rural penetration of microfinance in the
state.
• Complete range of Products: MFIs should provide complete range of products including
credit, savings, remittance, financial advice and also non-financial services like training
and support. As MFIs are acting as a substitute to banks in areas where people don’t have
access to banks, providing a complete range of products will enable the poor to avail all
services.
• Transparency of Interest rates: As it has been observed that, MFIs are employing different
patterns of charging interest rates and a few are also charging additional charges and interest

9
 free deposits (a part of the loan amount is kept as deposit on which no interest is paid). All
this make the pricing very confusing and hence the borrower feels incompetent in terms
of bargaining power. So a common practice for charging interest should be followed by all
MFIs so that it makes the sector more competitive and the beneficiary gets the freedom to
compare different financial products before buying.
• Technology to reduce Operating Cost: MFIs should use new technologies and IT tools
& applications to reduce their operating costs. Though most NBFCs are adopting such
cost cutting measures, which is clearly evident from the low cost per unit money lent
(9%-10%) of such institutions. NGOs and Section 25 companies are having a very high
value of cost per unit money lent i.e. 15-35 percent and hence such institutions should be
encouraged to adopt cost-cutting measures to reduce their operating costs. Also initiatives
like development of common MIS and other software for all MFIs can be taken to make
the operation more transparent and efficient.
• Alternative sources of Fund: In absence of adequate funds the growth and the reach of
MFIs become restricted and to overcome this problem MFIs should look for other sources
for funding their loan portfolio. Some of the ways through which MFIs can raise their fund
are:
 By getting converted to for-profit company i.e. NBFC: Without investment by
outside investors, MFIs are limited to what they can borrow to a multiple of total
profits and equity investment. To increase their borrowings further, MFIs need to raise
their Equity through outside investors. The first and the most crucial step to receive
equity investment are getting converted to for-profit NBFC. Along with the change in
status the MFI should also develop strong board, a quality management information
system (MIS) and obtain a credit rating to attract potential investors.
 Portfolio Buyout: It is when banks or other institutions purchase the rights to future
payment stream from a set of outstanding loans granted by MFIs. In such transactions
MFIs are responsible for making up any loss in repayment up to a certain percentage
of the portfolio and this clause is known as “first loss default guarantee”. The above
clause ensures that the MFI retains the correct incentive to collect these loans. To
ensure security to the buying institution, MFIs are allowed to sell off as much of the
outstanding portfolio as is financed by accumulated earnings or equity.
 Securitization of Loans: This refers to a transaction in which the repayments from
a set of microloans from one or more MFIs are packaged into a special purpose
vehicle, from which tradable securities are issued. As the loans from multiple MFIs
can be pooled together the risk gets diversified. Though securitization of loans and
portfolio buyout are similar in many ways like first loss default guarantee clause, limit
to the amount of loans that can be sold off etc. The major difference between the

10
 two is that securitizations require a rating from a credit rating agency and that it can
be re-sold, which makes securitized loans attract more potential buyers. Also unlike
portfolio buyout, there can be multiple buyers and sellers for each transaction in case
of securitization of loans as compared to single buyer and single seller in portfolio
buyout. Through securitization, MFIs can tap new sources of investments because fund
of certain types like mutual funds, which are barred from directly investing in MFIs,
can invest through securitized loans.

5. Development and policy initiatives:

• SHG 2 Guidelines: - Revisiting the SHG-Bank linkage guidelines issued two decades
back, NABARD, issued revised guidelines after holding numerous rounds of discussions
with various stakeholders. The key changes in the guidelines include allowing voluntary
savings for SHG members either by opening individual bank accounts/reviving existing
“no frill accounts” or by depositing the voluntary savings within the SHG corpus without
any additional entitlements. The approach is intended to facilitate SHG members to steadily
graduate from community banking to individual banking. The second key feature of SHG 2
is about extending initial loans to SHG as flexible cash credit facility instead of term loans.
• The limits are granted based on the estimated savings potential of the SHG for the ensuing
3-5 years while actual operation of the limit is to be based on actual savings harnessed.
The guidelines also suggest creation of enterprise/livelihood based groups (JLGs) within
the SHGs as a separate entity without disturbing the functioning of SHGs; while higher
loan requirements for a few enterprising members could be accessed through JLGs. The
guidelines also suggest risk mitigation mechanisms like audits, ratings and also about
leveraging active members of SHGs to serve as Business Facilitators for helping the bank
monitor the functioning of SHGs.
• Intensifying SHG promotion in backward & Left Wing Extremism affected districts:
-Programme envisages positioning an anchor NGO in each of the 150 backward districts
of the country for promotion and financing of Women SHGs. The project envisages a tie up
with at least 2 bank branches in each block of the district for financing the SHGs promoted.
The role of the partner NGO is expected to be for longer term and not merely for promoting
and enabling credit linkage of these groups, but also for serving as a business facilitator,
tracking, supporting livelihoods and also being responsible for loan repayments. Besides,
providing the partner NGO support for promotion of SHGs, a Service Charge of 5% p.a. of
average loan outstanding is to be levied from clients for continued handholding the SHGs
by the anchor NGO. Promotional support to anchor NGOs will be funded by NABARD out
of WSHG Development Fund of `100 crore created for the purpose.
• SHG Federations as Self Help Promoting Institutions: - Realizing the inherent strengths
of SHG federations being associated entities and having a clearer understanding of SHG

11
 members needs, aspirations as also nuances of SHG functioning; a scheme to facilitate
Federations to serve as SHPI for formation and credit linking of SHGs with the banks with
grant assistance from NABARD was introduced during the year.
• PACS as Self Help Promoting Institutions: - A scheme to encourage Primary Agriculture
Cooperative Society (PACS) to function as SHPI for promotion and nurturing of SHGs was
introduced during the year. Besides, forming SHGs and facilitating its savings and credit
linkage directly or through branches of the affiliated DCCB, the PACS are expected to
improve their business and their client outreach. The approach is also expected to improve
the participation of cooperative banks share in the SHG-Bank linkage programme and also
lead to its improved business and profitability of PACS.
• Posting Microfinance anchor persons for SHG intensification: - A pilot programme,
with the objective of strengthening the Self Help Group movement, is being implemented
across 25 resource poor districts from 10 priority states of the country. The programme
aims at leveraging the services of retired bankers by placing them as District Micro Finance
Anchor Persons (DMAP). The role of the DMAP in the district will be to prepare a road map
for promotion of SHG-BLP, to establish a SPIN (Self Help Institutions Network),facilitate
conduct of training programmes for SHGs, facilitate better MIS & document success and
failure stories, serve as anchor resource person for SHG-BLP and facilitate promotion of
livelihoods, etc.
• Action Research in facilitating voluntary savings in SHGs: - The sources of income for
SHG members are predominantly seasonal in nature. At the same time major part of their
expenditure habits are routine in nature coupled with occasional contingencies. With the
objective of gathering some leads on the propensity of the SHG members’ habit to save for
meeting their future financial needs and the extent to which the available banking services
and their products can meet such aspirations, an action research pilot on voluntary savings
is being implemented across ten districts in five states of the country viz. Chhatisgarh, West
Bengal, Maharashtra, Tamilnadu and Kerala. The pilot will cover about 500 members from
50 matured SHGs from these states.
The pilot entails carrying out the need mapping of the SHG members, enabling a suitable
framework for them to save beyond their compulsory group savings amount, suggesting suitable
financial products for meeting their future needs, imparting financial education to the members and
studying the impact of the process over a period of one year.

References
• Base K. And Jindal (2000) Micro Finance Emerging Challenges. The Tata McGraw Hill Publishing
Company. New Delhi.
• Chen, S and Martin Ravallion (2001) “How Did the World’s Poorest Fare in the 1990s?” Review of
Income and Wealth, Series 47, No. 3, September 283-300.

12
• Das Gupta .R. (2001) Working and Impact of Rural Self Help Groups and Other Forms of Micro
Financing. Andhra Pradesh Informal Journey through Self Help Groups. Indian Journal of Agricultural
Economics. Vol. 56. No 3, July- Sept.
• Dev Mahindra (2004) How To Make Rural India Shine. Economic and Political Weekly. Oct 2. PP 4415-
22.
• Government Of India, National Sample Survey Organization (2006) Status Of Education And Vocational
Training In India: 2004-2005, Report No. 517(61/10/3).
• Government Of India, National Sample Survey Organization (2006a) Level And Pattern Of Consumer
Expenditure, 2004-05, Report No. 508(61/1.0/1).
• Government of India, National Sample Survey Organization (2007) Household Consumer Expenditure
among Socio-Economic Groups: 2004-2005, Report No. 514(61/1.0/7).
• Gaiha Raghav (2001), Micro Credit and the Rural Poor. A Review of the Maharashtra Rural Credit
Project. Journal of Micro Finance. 3(2) PP 125-153.
• Jain, Blair (1992) “Methods of Drawing Absolute Poverty Lines,” Indian Economic Journal.
• Khandelwal.A.K (2007) Micro Finance Development Strategy in India. Economic and Political Weekly.
Vol. Xlii.No. 3. March 31-April 6.PP 1127-35.
• Pandey.K.N. (1983) Supply of Farm Credit and Mobilization of Rural Savings. Financing Agriculture.
Vol. XV. No 4, Oct-Dec .PP 3-7.
• Prasad Babu .Gland Squash’s. (2009) Rural Credit –An Over View. Kurukshetra. November.Vol.58, No.
1.
• Gurgles, Patricia and Robertson Williams (1989) “Longitudinal Measures of Poverty,” Review Of
Income and Wealth, Vol. 35, No. 3, 225-243.
• Reddy Y.V 2006 Micro Finance. RBI’s Approach. August 2006.
• Swami Nathan. M (2007) the Micro Credit Alternative. Vol.XLII.No.13, March 31-April 6 .PP. 1171-75.

13
 Microfinance and Urban Poverty:
An Investigation
By

Seepana Prakasam

1. Introduction
The problem of poverty is severe in third world nations (especially in Asia and Africa), it can
be seen substantially in many rich countries of Europe and America also. Poverty is a tragedy not
only for the individual concerned but also for the world at large,being intimately linked with some
of the most pressing social and political problems of our time (Abhijit Vinayk Benarje et al, 2006).
Even in 21st century, poverty midst among the plenty is still a universal and terrible phenomenon.
While most countries and regimes of the world are expanding an improvement in prosperity in
varying degrees, but poverty also co-exists. The maximum proportion of urban poverty in India
is transmitted from rural areas by the means of migration of poor people from rural areas. The
contribution of migrants to the total urban poverty cannot be lopsided. The interstate and even
within the state migration from rural to urban areas though happens due to plethora of reasons;
however the economic motives scores the highest. Since the rural people could not able to sustain
their life in the rural areas partly because of the failure of the rural poverty alleviation programmes,
the urban poverty has increased.The inability of cities to productively absorb the migrants and
generate enough jobs of decent quality has led to increasing levels of urban informality, poverty
and insecurity, International Labor Organization (ILO 2004). In urban areas only those workers
who are engaged in the formal sector as formal workers are currently covered through statutory
social security measures. Informal sector makes a significant contribution to the national wealth,
yet workers in this sector do not have access to social security. They are exposed to different types
and degrees of household and work related risks.
Indian economy has witnessed growth rate of 8% and more in recent years, but the number
of people living below poverty line in urban areas has increased, even though the percentage of
population living below poverty line has declined (India Urban Poverty Report, 2009). Roughly
one fourth of urban population in India (25.7 percent) lives below poverty line (Kartar Singh,
2009). Though it was expected that higher economic growth, formal sector will also expand and
generate employment opportunities for growing labor force, it did not happen, but informal sector
has shown consistent growth of employment, but at low levels of earnings and productivity. The
cities in India are projecting development with sky scrapers, fancy flyovers, shopping malls and
multiplexes. But urban poverty is co-existing with these developments. Massive unemployment,
inadequate housing, and basic necessities such as electricity, water, drainage and sanitation are

14
features in urban areas. The poor do find some work, but it is mostly in unorganized sector with no
guarantee of minimum wages and number of working hour. The working conditions of urban poor
are precarious and the problems of urban poverty are rooted in resource constraints, inadequate
government policies and unplanned unban growth.
The incidence of poverty in urban areas is more among the people working in unorganized
sector than in the organized sector and it is more among the informal workers than among the
formal workers .Urban poverty poses the problems of housing and shelter, water, sanitation, health,
education, social security and livelihoods along with special needs of vulnerable groups like women,
children and aged people. Poor people live-in slums facing problems like over crowdedness, often
polluted and lack basic civic amenities like clean drinking water, sanitation, health facilities,
and housing, illiteracy, assetlessness, indebtedness, indecent living, deviant behavior, domestic
violence,premature death, vicious circle of poverty, incapacity to acquire skill, infant mortality,
anemia, underweight, and often exposed to natural calamities . Most of them are involved in
informal sector activities where there is constant threat of eviction, removal, confiscation of goods
and almost non-existent social security cover.

2. Methodology
This paper is based on secondary sources such as planning commission reports, India’s urban
poverty report, world development report and web sites.

3. Results and Discussion

Urban poverty in 2004-05 at the all India level was 25.7 percent, which is rather high level.
The rate at which poverty declined at the all India level was 0.82 percentage points per annum
during the decade 1973-74 to 1983-84 and 0.84 percentage points per annum during the decade
1983-84 to 1993-94, but declined to 0.61 percentage points per annum during the period 1993-94
to 2004-05 and it if further declined during 2005-2012 (Table 1.1)

Table 1.1: Number of People Living Below Poverty Line inUrban India(1973-74 to 2011-12)

Year Number of people ( in Lakhs) Head Count Ratio Percentage)

1973-74 600.47 49.01

1977-78 646.48 45.22

1983-84 709.39 40.79

1987-88 751.67 38.20

1993-94 763.36 32.36

2004-05 807.97 25.70

2011-12 528 13.7

Source: Planning Commission, Estimates of Poverty (1997&2012)

15
3.1 The inadequacy of Financial Infrastructure
Investments on Rural infrastructure directly and/ or indirectly affect productivity of farm
& non-farm sector and there off people living in rural areas. Infrastructure can be classified as
two types (1) Economic infrastructure (2) Social infrastructure. The main categories of economic
infrastructural activities are investments in rural electrification, rural credit, financial institutions,
agricultural research and extension, flood control and drainage, irrigation works, rural roads, rural
transport, markets, warehousing facilities, common property resources, and watershed development,
dairy development, agro-processing, village industries and crafts. Social infrastructure includes
activities like access to educational institutions, primary health centres, and safe drinking water,
sanitation, and construction community centres.
Credit market failure (financial exclusion) is considered as one among the major factor for
the persistence of the incidence of poverty,hence provision of credit by the intervention of the
government at remunerative terms is a main strategy to alleviate poverty. Generally, rich borrowers
appropriate major pie of credit subsidies, which are meant for the poor, because they have
resourcesand connections to manipulate. Hence, an innovative approach is brought into existence
by number of countries, to reduce poverty, income and wealth inequalities through financial
inclusion, because financial inclusion will not happen on its own.a few developing economies like
Bangladesh, South Africa, Bolivia etc have achieved financial inclusion through rigours exercises.
Financial inclusion usually refers to the delivery of banking services at an affordable cost
to the vast sections of the disadvantaged and low income groups Leeladhar (2006). A slightly
broader definition refers to it as provision of affordable financial services viz, access to payments
and remittance facilities, savings and insurance services by the formal financial system to those
who tend to be excluded (Thorat 2006, 239) Rangarajan’s committee on financial inclusion 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.”(Rangarajan 2008, 26) The financial services include
- savings, loans, insurance, credit, payments etc. The financialsystem has to provide its function
of transferring resources from surplus to deficit areas and surplus units to deficit units where the
marginal utility and productivity is more, aiming to help people comeout of poverty.
3.2 Financial Inclusion For Inclusive Growth
Financial inclusion is necessary to achieve inclusive growth. The ‘inclusive growth’ as a
strategy of economic development received attention owing to a rising concern that the benefits of
economic growth have not been equitably shared. Growth is inclusive when it creates economic
opportunities along with ensuring equal access to them. Apart from addressing the issue of
inequality, the inclusive growth may also make the poverty reduction efforts more effective by
explicitly creating productive economic opportunities for the poor and vulnerable sections of the
society. The inclusive growth meant for trickle down benefits to the hitherto excluded population.

16
The concept “Inclusion” should be seen as a process of including the excluded as agents whose
participation is essential in the very design of the development process, and not simply as welfare
targets of development programmes (Planning Commission, 2007)The Eleventh Five Year Plan
(2007-12)mentioned inclusive growth as a key objective. Inclusive growth is possible along
with other factors, by achieving financial inclusion through micro finance. Beginning with the
nationalisation of banks in 1969: efforts have been made to take the banking system closer to the
people. Expansion of banking network, introduction of lead bank scheme and setting up of regional
rural banks.
In urban areas, people require credit for two purposes i.e. productive, and un productive
(consumption) under productive needs we can say all credit requirements which directly affect
productivity on the other hand money borrow to meet unproductive purposes like performance
of marriages, births and deaths ceremonies, religious functions, festivals, for court litigation etc .
Ancestral debt also adds fuel to fire. Devolving credit into urban areas to the poor people, country
faces many constraints. Among the supply side constraints, concern for profitability of the branches,
weakness of the co-operative credit system, legal impediments, fear of sustainability of the business,
lack of infrastructure, low levels of loan recovery, high transaction costs for banks . Demand
side constraints are concerned, lack of financial information, lack of awareness, long procedure
and paper work and time consumption, timely non availability of loan, low literacy levels,lack
of entrepreneurship, dearth of suitable financial products, lack of adequate infrastructure, money
involved in the long procedure i.e. corruption among the revenue staff for issuing documents,
corruption among the banking staff for the approval of sanctioning loan, lack of extension and
supporting services have come in the way of effective credit delivery.
3.3 The Failure of Formal Banking System
The present formal banking system having the following drawbacks viz...
• Inappropriate system/ undue procedure followed with regard to identification and
selection of borrowers.
• In effective supervision and monitoring over the end use of credit.
• In adequate rural orientation of staff and lack of positive relationship between bankers
and borrowers.
• Compulsory requirement of collateral securities and more documents.
The inability of credit institutions to deal with the credit requirements of the poor effectively,
forced the invention of an alternative credit delivery system to the credit hungry poor masses.
Credit institutions provide finance for productive purposes but sometimes-poor people need money
for consumption or for emergency purposes, which many a time cannot be catered by the formal
credit system or government sponsored poverty alleviation schemes. In India it can be seen that
the poorer sections of the society and destitute can not avail the credit from the banks and other
formal financial institutions due to their inability to deposit collateral security. At this point of view,

17
micro finance or group lending is being looked upon as the instrument that can be considered as the
golden stick for poverty alleviation vis-à-vis rural development.
Devolving credit through various means in ever-increasing doses alone can lead to poverty
alleviation for the poor, in a sustainable manner . One time availability the huge amount of credit
tends to mismanagement and misutilization. Poverty alleviation is possible only if serious issues
like rural livelihoods, entitlements, agro processing, land /water rights, underemployment issues,
supplementary income sources, etc are given priority . Only then, can a serious assault on poverty
be possible. These issues need to be tackled with a constructive approach. Till fourth five year plan
Indian planners believed in the trickle down approach to solve the problem of poverty which was
not realized.
Poor have their own basket of livelihood strategies and financial needs such as education,
purchase of livestock, land development, working capital needs in agriculture and other family
ventures, business, medical expenses, house repairs, house construction, LPG connection, etc
.Poverty could also be the result of high cost of living and production. Prof. C. K. Prahalad pointed
out in his celebrated book ‘Fortune at the Bottom of the Pyramid’, that the poor live in costly
environment and often pay relatively higher price for comparable services. Most prohibitive price
they often pay is to the financial services.
3.4 Micro Finance and supportive environment
Even though micro credit is very useful tool, it is not the only prescription to all the ills
because
• Credit alone is useless unless the complementary services like training, awareness
creating programmes, marketing of the produce, transport facilities, availability of
inputs technology, information etc.
• Credit at the first hand imposes the burden debt on the poor who have no repaying
capacity at present unless and until they generate income by investing the money in
productive channels, they cannot repay with interest
• Most of the borrowers are habituated in spending money unproductively to meet social
and religious functions like marriages, festivals, ceremonies etc so the generation of new
income may not be possible.
• Poor people have no prior experience in investing in creating of productive assets,
operating business operations, facing markets fluctuations and managing money .So this
tendency may leads to winding op their business..

4. Conclusions and Suggestions

There is a need of Designing financially sustainable models and increase access to poor in
India. Poor people are still unaware about banking policies and credit opportunities available to
them. Therefore, NGOs and government should communicate to them through print media and

18
electronic media. Banks should convert and build up professional system into social banking system
for poor. Government of India and state governments should also provide support for capacity
building initiatives, ensure transparency, and enhance creditability through disclosures. Delivering
credit and the mix of other services at lower costs is possible by increasing competition among the
Micro Financial Institutions. Emergence of new business models that offer similar micro financing
services at far lower costs through process innovation is needed to achieve inclusive growth.
• The borrowers from micro finance institutions would benefit more if they borrowed at
liberal terms at lower and affordable rate of interest, and their savings would be safe and
would be serviced better.
• Develop financial technology that to break barriers and to establish linkages between
formal financial institutions and informal service providers.
• Improve awareness of staff involved in microfinance-related work at a general level,
including managers of operational departments and offices in microfinance development
issues and promote networking with international, regional, and national microfinance
development institutions, and coordination among funding agencies
• Credit can be provided to any borrowers for any creditworthy financially viable economic
activity (farm and non-farm sector) or household investment purposes. Credit should
not be limited to one sector, one commodity or one group, a mixed package of which
minimizes risk of lending.
• Banks should keep proper database and analytics, whether to grant loans or not to grant
loans to certain types of borrowers.
• More credit may be provided to the already established small enterprises and to the
experienced entrepreneurs whose performance record is positive and their level of
achievement is high. It will create impact on the fellow borrowers to use credit in way
that is more productive and to follow rules and regulations of the financial institutions.
Govt. could play an important role in establishing and enabling policy, legal and
regulatory framework for MFIs.
• Diversified loan port polios are to be maintained with regard to types of enterprises and
geographical areas. Introduce an innovative approach to tap small savings of the poor
households
• Attract new leaders who can combine excellent management skills with the vision for
massive social impact to build effective institutions to serve the millions of poor micro-
entrepreneurs.
• Design optimal Managing information system including user-friendly software for
tracking accounts and operations. Better policy co-ordination among the various govt
ministries / departments/ agencies that cover MFI issues would help greatly without
over lapping and duplication of programmes.

19
 • Govt. to establish partnership with private and public financial institutions. Financial
inclusion is the necessary but not sufficient condition for poverty alleviation. Without
corresponding promotion of appropriate livelihood opportunities the poor people credit
absorption capacity would be limited and there would be possibility of misuse of funds,
which may lead to indebtedness.
• There should be cap on the rate of interest charged by micro finance institutions to safe
guard the interests of the poor borrower’s.
• No coercive methods used by the agents of MFIs and the group members to get timely
repayments, because rural poor have no definite employment and regular incomes.
• All the Micro Financial Institutional institutions should register before the state
regulatory authorities to avoid any malpractices.
• Banks lend money to MFIs at lesser than market rate of interest, so that loans may be
made available at optimal rate of interest.
• MFIs can reduce their operating costs and the risk so no recovery of loans by increasing
the operational and administrative efficiency.

References

• Asian Development Bank (2007) “Effect of Microfinance Operations on Rural Households and the
Status of Women,” Reference Number: SST: REG 2007-19.
• Base K. And Jindal (2000) Micro Finance Emerging Challenges. The Tata McGraw Hill Publishing
Company. New Delhi.
• Chen, S and Martin Ravallion (2001) “How Did the World’s Poorest Fare in the 1990s?” Review of
Income and Wealth, Series 47, No. 3, September 283-300.
• Das Gupta .R. (2001) Working and Impact of Rural Self Help Groups and Other Forms of Micro
Financing. Andhra Pradesh Informal Journey through Self Help Groups. Indian Journal of Agricultural
Economics. Vol. 56. No 3, July- Sept.
• Dev Mahindra (2004) How To Make Rural India Shine. Economic and Political Weekly. Oct 2. PP 4415-
22.
• Government Of India, National Sample Survey Organization (2006) Status Of Education And Vocational
Training In India: 2004-2005, Report No. 517(61/10/3).
• Government Of India, National Sample Survey Organization (2006a) Level And Pattern Of Consumer
Expenditure, 2004-05, Report No. 508(61/1.0/1).
• Government of India, National Sample Survey Organization (2007) Household Consumer Expenditure
among Socio-Economic Groups: 2004-2005, Report No. 514(61/1.0/7).
• Gaiha Raghav (2001), Micro Credit and the Rural Poor. A Review of the Maharashtra Rural Credit
Project. Journal of Micro Finance. 3(2) PP 125-153.
• Jain, Blair (1992) “Methods of Drawing Absolute Poverty Lines,” Indian Economic Journal.

20
• Khandelwal.A.K (2007) Micro Finance Development Strategy in India. Economic and Political Weekly.
Vol. Xlii.No. 3. March 31-April 6.PP 1127-35.
• Pandey, K.N. (1983) Supply of Farm Credit and Mobilization of Rural Savings. Financing Agriculture.
Vol. XV. No 4, Oct-Dec .PP 3-7.
• Prasad Babu .Gland Squash’s. (2009) Rural Credit –An Over View. Kurukshetra. November.Vol.58,
No. 1.
• Gurgles, Patricia and Robertson Williams (1989) “Longitudinal Measures of Poverty,” Review Of
Income and Wealth, Vol. 35, No. 3, 225-243.
• Reddy Y.V 2006 Micro Finance. RBI’s Approach. August 2006.
• Swami Nathan. M (2007) the Micro Credit Alternative. Vol.XLII.No.13, March 31-April 6 .PP. 1171-75.
• Thorat, U. (2008) Inclusive Growth – The Role Of Banks In Emerging Economies, Lecture Delivered
At ‘Independence Commemoration Lecture, 2008’ At The Central Bank Of Sri Lanka, Colombo, 28
February.
• Thorat, U. (2008) Financial Inclusion And Information Technology, Delivered At WIPRO-NDTV
Convergence Conference On ‘Vision 2020 - Indian Financial Services Sector’. Policies and Pitfalls in
Expanding Access, Washington: The World Bank.
• Yunus Md. (2003) Attacking Poverty With Micro Credit Paper Presented At The International Seminar
Organized By KPSE, Dhaka, Jan 8th&9th. P 18-19.

21
 Microfinance for Economic Growth:
Experience of India
By

Geetanjali Singh

1. Introduction
Microfinance sector has grown rapidly over the past few decades. India has a huge space
for microfinance –within a fast growing economy it has more than 400 million poor seeking an
opportunity to create assets and ensure income security. Today it has evolved into a vibrant industry
exhibiting a variety of business models. Microfinance Institutions (MFIs) in India exist as NGOs
(registered as societies or trusts) and Non-Banking Financial Companies (NBFCs). Commercial
Banks, Regional Rural Banks (RRBs), cooperative societies and other large lenders have played
an important role in providing refinance facility to MFIs. Banks have also leveraged the Self-Help
Group (SHGs) channel to provide direct credit to group borrowers.Providing loans to poor has
many limitations so Microfinance was developed as an alternative to provide loans to poor with
the goal of creating financial inclusion and equality. Nobel Laureate Muhammad Yunus is credited
with laying the foundation of the modern MFIs with establishment of Grameen Bank, Bangladesh
in 1976. With financial inclusion emerging as a major policy objective in the country, Microfinance
has occupied centre stage as a promising conduit for extending financial services to unbanked
sections of population. At the same time, practices followed by certain lenders have subjected
the sector to greater scrutiny and need for stricter regulation.Although the microfinance sector is
having a healthy growth rate, there have been a number of concerns related to the sector, like grey
areas in regulation, transparent pricing, low financial literacy etc. In addition to these concerns
there are a few emerging concerns like cluster formation, insufficient funds, multiple lending and
over-indebtedness which are arising because of the increasing competition among the MFIs.
“Microfinance is the provision of financial services to low-income clients or solidarity lending
groups including consumers and the self-employed, who traditionally lack access to banking and
related services.” Microfinance is not just about giving micro credit to the poor rather it is an
economic development tool whose objective is to assist poor to work their way out of poverty. It
covers a wide range of services like credit, savings, insurance, remittance and also non-financial
services like training, counseling etc.

22
2. Microfinance In India: An Overview
The micro finance initiative in private sector in India can be traced to the initiative undertaken
by Shri Mahila SEWA (Self Employed Women’s Association) Sahakari Bank set up in 1974 by
registering as an Urban Cooperative Bank at Ahmedabad City of Gujarat State. The main aim of
SEWA bank was to provide banking services to the poor women employed in the unorganised
sector. Encouraged by the results of field level experiments in group based approach for lending
to the poor, NABARD launched a Pilot Project in 1991-92 in partnership with Non Governmental
Organizations (NGOs) for promoting and grooming self help groups (SHGs) of homogeneous
members and making savings from existing banks and within the existing legal framework. Steady
progress of the pilot project led to the mainstreaming of the SHG-Bank Linkage Programme (SBLP)
in 1996 as a normal banking activity of the banks with widespread acceptance. The Reserve Bank
of India (RBI) set the right policy environment by allowing savings bank accounts of informal
groups to be opened by the formal banking system. Launched at a time when regulated interest rates
were in vogue, the banks were expected to lend to SHGs at the prescribed rates, but the RBI advised
the banks not to interfere with the management of affairs of SHGs, particularly on the terms and
conditions on which the SHGs disbursed loans to their members. This has laid the foundation stone
of self-governance of the SHGs. The SHGs grown to federation and culminated to NGO-MFIs but
the issues of governance remained unresolved.
2.1 Gaps in the Financial System and Need of Microfinance
According to the latest research done by the World Bank, India is home to almost one third of
the world’s poor (surviving on an equivalent of one dollar a day). Though many central government
and state government poverty alleviation programs are currently active in India, microfinance plays
a major contributor to financial inclusion. In the past few decades it has helped out remarkably in
eradicating poverty.
About half of the Indian population still doesn’t have a savings bank account and they
are deprived of all banking services. Poor also need financial services to fulfill their needs like
consumption, building of assets and protection against risk. Microfinance institutions serve as a
supplement to banks and in some sense a better one too. These institutions not only offer micro
credit but they also provide other financial services like savings, insurance, remittance and non-
financial services like individual counselling, training and support to start own business and the
most importantly in a convenient way.. But all this comes at a cost and the interest rates charged by
these institutions are higher than commercial banks and vary widely from 10 to 30 percent.
2.2 Structure of Microfinance In India
In India microfinance operates through two channels:
1. SHG – Bank Linkage Programme (SBLP)
2. Micro Finance Institutions (MFIs)

23
2.2.1 SHG – Bank Linkage Programme
This is the bank-led microfinance channel which was initiated by NABARD in 1992. Under
the SHG model the members, usually women in villages are encouraged to form groups of around
10-15. The members contribute their savings in the group periodically and from these savings
small loans are provided to the members. In the later period these SHGs are provided with bank
loans generally for income generation purpose. The group’s members meet periodically when the
new savings come in, recovery of past loans are made from the members and also new loans are
disbursed. This model has been very much successful in the past and with time it is becoming more
popular. The SHGs are self-sustaining and once the group becomes stable it starts working on its
own with some support from NGOs
2.2.2 Micro Finance Institutions
Those institutions which have microfinance as their main operation are known as micro
finance institutions. A number of organizations with varied size and legal forms offer microfinance
service. These institutions lend through the concept of Joint Liability Group (JLG). A JLG is an
informal group comprising of 5 to 10 individual members who come together for the purpose of
availing bank loans either individually or through the group mechanism against a mutual guarantee.
The reason for existence of separate institutions i.e. MFIs for offering microfinance are as follows:
• High transaction cost – generally micro credits fall below the break-even point of providing
loans by banks
• Absence of collaterals – the poor usually are not in a state to offer collaterals to secure the
credit
• Loans are generally taken for very short duration periods
• Higher frequency of repayment of installments and higher rate of Default
Sl. Type of MFI Number Legal Registration
No.
Not-for Profit MFIs
1 NGOs 400-500 Society Registration Act, 1860
Indian Trust Act, 1882
2 Non-Profit companies 20 Section-25 of Indian Companies Act, 1956
Mutual Benefit MFIs
3 Mutual benefit MFIs – Mutual- 200-250 Mutually Aided Co-operative societies, Act
ly Aided Cooperative Societies enacted by State Governments
(MACS)
For Profit MFIs
4 Non-Banking Financial Companies 45 Indian companies Act, 1956
(NBFCs) Reserve Bank of India Act, 1934

24
3. Progress under Microfinance
The progress under the Microfinance programme has been discussed separately under the SHG-
Bank linkage programme where the financing banks extend services like savings and credit to the
groups directly while other stakeholders like NABARD, Banks, NGOs, Government Departments,
Insurance providers, etc. extend support services including organisation and nurturing of groups,
capacity enhancement of their members, etc. and lending to SHG members through microfinance
Institutions (MFIs).

3.1 SHG-Bank Linkage Programme

The SHG-Banks linkage programme which commenced as a pilot programme during 1992
to link 500 SHGs with banks, has grown exponentially during the last two decades and over 97
million rural households have now access to regular savings through 74.62 lakh SHGs linked to
different banks. Of these, over 47.8 lakh SHGs also have access to direct credit facilities from the
banks. Nearly 12 lakh SHGs were extended fresh loans to the extent of 14,548 crore during 2010-
11 by all FIs. The total loan outstanding of SHGs already credit linked as on 31.3.2011 was 31,221
crore. As much as 81.7 per cent of SHGs already linked to banks are exclusive women groups - one
of the most distinguishing features of microFinance sector in the country, About 27 per cent of
SHGs have been linked through the Swaranjayanti Gram Swarojgar Yojana (SGSY) programme -
the rural poverty alleviation programme of the Government of India.

25
Fig. 2 and Fig. 3 illustrate comparative picture of last three years of SHG-Bank linkage programme in terms of growth
of savings and credit through SHGs across the states.

The number of SHGs availing fresh loans from Banks has shown a decline of about 25 per
cent during the year while the quantum of loan availed has remained almost at the same level. The
loan extended per SHG on an average, however, showed an impressive growth of nearly 34 per cent
from 91,000 during 2009-10 to over 1,21,600 during 2010-11, indicating more selective lending by
banks during the year possibly on account of the turmoil in the MF industry in some states. The rate
of growth in the number of SHGs having loans outstanding with banks has also declined during the
year though the growth itself is positive.
3.2 Growth of Microfinance during the Economic Recession
Despite the global recession,total assets of the 10largest microfinance investment vehicles grew
in 2011,reaching us $4 billion .During the year,MIVs continued to face many challenges,including
credit risk in several markets and lower returns,but the overall investment market was more active
than in 2010,with renewed capital appetite from most microfinance services providers and more
focus on underserved markets. Total assets of the 10 largest MIVs grew by 7.2percent in 2011,
above the 4.15%growth rate in 2010, but still below precise level. This increase in growth rates is
mainly driven by the increased microfinance institution demand for capital particularly for local
currency notes.
3.3 Growth of Microfinance World-Wide
Although there has been remarkable progress worldwide,in terms of growth in the number
of MFIs and their outreach,there is still a lot to do .As MFI outreach to the poorest families is only
38% in Asia,8.5% in Africa and the Middle East,11.6% in Latin America and the Caribbean and
1.7% in Europe .

26
3.4 Impact of Microfinance on Indian Economy:
• High growth rates and business efficiency.
• Amenable financing environment.
• Create coordination for retail microfinance.
• Increase of personal income.
• Supporting infrastructures needed.
• The enterprising spirits of the poor is valuable for the economy.
3.5 Major Challenges
• Financial Illiteracy: One of the major hindrances in the growth of the microfinance sector
is the financial illiteracy of the people. This makes it difficult in creating awareness of
microfinance and even more difficult to serve them as microfinance clients. The worst part
is that many MFIs think that this is what financial literacy means.
• Inability to generate sufficient funds: Inability of MFIs to raise sufficient fund remains
one of the important concern in the microfinance sector. Though NBFCs are able to raise
funds through private equity investments because of the for-profit motive, such MFIs are
restricted from taking public deposits. Not-for-profit companies which constitute a major
chunk of the MFI sector have to primarily rely on donations and grants from Government
and apex institutions like NABARD and SIDBI. In absence of adequate funding from the
equity market, the major sources of funds for MFIs are the bank loans.
• Dropouts and Migration of group members: Majority of the microfinance loans are
disbursed on group lending concept and a past record of the group plays an important role
in getting new loans either through SHG-Bank linkage or through MFIs. The two major
problems with the group concept are dropouts (when one or more members leave the group)
and migration (when one or more members move to another group). Most MFIs lend on the
basis of the past record of the group i.e. SHG or JLG and also on the individuals repayment
performance. In absence of a decent past record, members are deprived of getting bigger
loan amounts and additional services.
• Transparent Pricing: Though the concern about the transparent pricing in the
microfinance sector has been an older one, it is gaining significance with the growing size
and the increasing competition in the sector. Non-transparent pricing by MFIs confines the
bargaining power of the borrowers and their ability to compare different loan products,
because they don’t know the actual price. In absence of the proper understanding of the
pricing, clients end up borrowing more than their ability to payback which results in over-
indebtedness of the borrower. MFIs, in order to make their products look less expensive
and more attractive, are disguising their actual/effective interest rates by including other

27
 charges like service charge, processing fee etc. Some MFIs even take interest free deposits
for lending microloans. There have been cases where the interest rates are linked with
the loan amount, which means a higher interest rate for smaller loans (because of higher
transaction cost). This is resulting in highest interest rate being charged to the poorest
clients, which contradicts with the social aspect of microfinance.
• Cluster formation – fight to grab established market: MFIs’ drive to grab an established
market and reduce their costs is resulting in formation of clusters in some areas leaving the
others out of the microfinance outreach. By getting an established microfinance market,
MFIs reduce their initial cost in group formation of clients, educating them and creating
awareness about microfinance. This cluster formation is restricting MFIs from reaching to
rural areas where there is the actual need for microfinance. People in urban and semi-urban
areas are already having access to microfinance through SHG-bank linkage or individual
lending, but in rural areas people don’t have access to banks and so SBLP is not much
active in such areas. Because of the initial cost involved in serving a new location, MFIs
are not willing to go to such remote locations.
• Multiple Lending and Over-Indebtedness: Both of these are outcome of the competition
among the MFIs. Microfinance is one such sector where the Neo-liberal theory of free
market operation fails, at least to some extent. Though competition is good for many
sectors but in this case it is going against both the parties. In order to eat away each others’
market share, MFIs are ending up giving multiple loans to same borrowers which in some
cases is leading to over-indebtedness (a situation where the borrower has taken loans
more than her/his repaying capacity) of the borrower. MFIs are getting affected because
borrowers are failing to make payments and hence their recovery rates are falling, while
over-indebtedness is making the borrower go to depression and in some cases forcing them
to commit suicide.

4. Recommendations
• Proper Regulation: The regulation was not a major concern when the microfinance was
in its nascent stage and individual institutions were free to bring in innovative operational
models. However, as the sector completes almost two decades of age with a high growth
trajectory, an enabling regulatory environment that protects interest of stakeholders as well
as promotes growth, is needed.
• Field Supervision: In addition to proper regulation of the microfinance sector, field
visits can be adopted as a medium for monitoring the conditions on ground and initiating
corrective action if needed. This will keep a check on the performance of ground staff
of various MFIs and their recovery practices. This will also encourage MFIs to abide by
proper code of conduct and work more efficiently. However, the problem of feasibility and
cost involved in physical monitoring of this vast sector remains an issue in this regard.

28
• Encourage rural penetration: It has been seen that in lieu of reducing the initial cost,
MFIs are opening their branches in places which already have a few MFIs operating.
Encouraging MFIs for opening new branches in areas of low microfinance penetration by
providing financial assistance will increase the outreach of the microfinance in the state
and check multiple lending. This will also increase rural penetration of microfinance in the
state.
• Complete range of Products: MFIs should provide complete range of products including
credit, savings, remittance, financial advice and also non-financial services like training
and support. As MFIs are acting as a substitute to banks in areas where people don’t have
access to banks, providing a complete range of products will enable the poor to avail all
services.
• Transparency of Interest rates: As it has been observed that, MFIs are employing
different patterns of charging interest rates and a few are also charging additional charges
and interest free deposits (a part of the loan amount is kept as deposit on which no interest
is paid). So a common practice for charging interest should be followed by all MFIs so
that it makes the sector more competitive and the beneficiary gets the freedom to compare
different financial products before buying.
• Technology to reduce Operating Cost: MFIs should use new technologies and IT tools
& applications to reduce their operating costs. Though most NBFCs are adopting such
cost cutting measures, which is clearly evident from the low cost per unit money lent
(9%-10%) of such institutions. NGOs and Section 25 companies are having a very high
value of cost per unit money lent i.e. 15-35 percent and hence such institutions should be
encouraged to adopt cost-cutting measures to reduce their operating costs. Also initiatives
like development of common MIS and other software for all MFIs can be taken to make
the operation more transparent and efficient.
• Alternative sources═ of Fund: In absence of adequate funds the growth and the reach of
MFIs become restricted and to overcome this problem MFIs should look for other sources
for funding their loan portfolio. Some of the ways through which MFIs can raise their fund
are:
 By getting converted to for-profit company i.e. NBFC: Without investment by outside
investors, MFIs are limited to what they can borrow to a multiple of total profits and
equity investment. To increase their borrowings further, MFIs need to raise their Equity
through outside investors
 Portfolio Buyout: It is when banks or other institutions purchase the rights to future
payment stream from a set of outstanding loans granted by MFIs. In such transactions
MFIs are responsible for making up any loss in repayment up to a certain percentage
of the portfolio and this clause is known as “first loss default guarantee.

29
  Securitization of Loans: This refers to a transaction in which the repayments from a
set of microloans from one or more MFIs are packaged into a special purpose vehicle,
from which tradable securities are issued. As the loans from multiple MFIs can be
pooled together the risk gets diversified.

5. Conclusions and Suggestions

Effective governance is one of the critical factors for success of any microfinance institution
in India. It is therefore, imperative for all stakeholders give this important issue the highest attention
and few relevant issues are highlighted here under:
• Separation of Responsibilities: In most of the MFIs in India, it was observed that
the promoter/chairperson/CEO is the same person that in real terms hampers the basic
chemistry of the Governance architecture and transparency of operation. The chairperson
cannot play this role effectively if the same person i splitting responsibilities between the
CEO and the chairperson/promoter would bring more transparency of the system. This
view has been proved correct in some of the big MFIs in India, which registered their
success after splitting the position of Chairperson and CEO.
• Committees:Creating and utilizing well-defined board committees/b subcommittees to
address key issues of different aspect of operation can be useful. Board meetings should
not be taken up by work that can best be done in a board committee/sub-committees. The
effectiveness of the committee structure, like that of the full board, depends on the clarity
of the committees’ responsibilities, the dedication of its members, which can include non-
board members, and leadership.
• Procedures: Well-defined and clearly drafted procedures areessential for effective
governance. Even the most committed and highly qualified individuals cannot discharge their
roles effectively without following well-documented procedures. Proper documentation
set out in accurate board minutes, up-to-date articles of incorporation and by-laws, and a
board policy manual on lending, recovery, risk management etc. are essential.
• Policy on MFIs and enabling environment: Now in India, there is an urgent need of a
well-accepted Microfinance policy supported by regulatory and supervisory framework,
which is still missing at the cost of the stakeholders. The Microfinance Bill, 2006 is a
milestone event for expanding the provision of financial services to the poor, which is yet to
get its legal shape. The Reserve Bank of India (RBI) has increased the capital requirements
of NBFCs from the existing 10 per cent to 12 per cent by March 2009 and 15 per cent by
March 2010.
The long-term future of the microfinance sector in India depends on MFIs able to achieve
operational, financial and institutional sustainability and good governance. The need for MFIs
to rope in domain experts, professionals and independent directors on their boards in the larger

30
interest of all stakeholders has now been surfaced. The importance placed on microfinance as a
development instrument, combined with the increasing inflow of capital/funds to the industry,
indicate a need to better understand governance systems for MFIs

References

• CGAP. (2006). Transforming NGO MFIs: Critical Ownership Issues to Consider. (http://www.cgap.org/
gm/document-1.9.4213/Occasional Paper _ 13.pdf).
• Gibbons, David. The Grameen Reader, Grameen Bank,Dhaka,1992.
• GOI. 2012. The Union Budget. Ministry of Finance, Government of India, New Delhi.
• GOI. 2012. The Economic Survey 2012. Ministry of Finance, Government of India, New Delhi.
• Government of India. 2011. Faster, Sustainable and more Inclusive Growth- Approach Paper to the 12th
Five.
• Gyanendra, Mani and T. Sudheer. 2012. ‘Two Decades of SHG Bank Linkage Programme: Different
Facets.
• Harper, Malcolm, 2012. ‘Self Help Group 2 Vs MFIs—Competing to Serve the Poor’, The Micro
Finance.
• Microfinance World (2009): Change can happen; Financial Express, India-Jan–March issue: pp 24-27.
• NABARD. 2012. Annual Report 2011–12. National Bank for Agriculture and Rural Development,
Mumbai.
• Review, Centre for Microfinance Research, 4(1), Lucknow: Bankers Institute for Rural development.
• RBI, 2012. Annual Report 2011–12. Reserve Bank of India, Mumba.
• Roodman, David, Due Diligence: An Impertinent Inquiry Into Microfinance,Centre for Global
Development,2012.
• Standard & Poors Ratings direct. Nov, 2008 pp1-7. (http://www.standardand poors.com/ratingdirect).
• The Microfinance Review, IV(1), January—June, Bankers Institute of Rural Development, Lucknow.
• Venkatraman, S and Raj Sekhar T. (2008). For India’s Microfinance Institutions, Governance in the Key
to Sustained and Scalable Growth.
• www.nabard.org
• www.financialservices.gov.in

31
 Microfinance and Economic Growth: An Analysis
of India
By

Amandeep Kaur

1. Introduction
Micro-financing is regarded as a tool for socio-economic benefit in a developing country
like India. It is expected to play a significant role in poverty alleviation and development.
Microfinance as a means of poverty alleviation because they suggest that institutions can make
loans to poor individuals without sacrificing financial viability. India is the world’s tenth largest
economy with a gross domestic product in 2012 of $1.824 trillion as reported by the World Bank.
The country’s growth is also strong, with real GDP growing in by 3.986 % in 2012. Microfinance
is one development approach that can contribute to achieve the national and international goal of
improving the livelihoods of poor people. It has been approximately 25 years since the birth of
Microfinance with the Founding of the Grameen Bank in Bangladesh by Professor Mohammad
Yunus. The Grameen Bank launched in 1976. Mohammed Yunus was awarded the Noble Prize
for application of the concept of microfinance; 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”. Since the 1970s microfinance
has been growing rapidly with the aim to lift people out of poverty and promote economic growth.
The impact of microfinance on economic growth is perceived through direct and indirect channels.
The direct channel of microfinance is based on poverty reduction, welfare increase and production
value added from entrepreneurship activities of the poor, economic growth as an aggregate measure
captures the direct contribution of microfinance. Under indirect channel to growth microfinance
contributes to an increase in liquid liabilities through financial deepening and the development
of retail banking system. In the last 20 years, the “microfinance industry” has emerged. During
the 1980’s and 1990’s, particularly in Asia, Africa, and Latin America, thousands of microfinance
NGOs (Non-Government Organizations) were established to provide micro loans, using individual
and group lending methodologies.
The UN Year of Microcredit in 2005 indicated a turning point for Microfinance as the private
sector began to take a more serious interest in microfinance. In India, the first initiative to introduce

32
microfinance was the establishment of Self- Employment Women Association (SEWA) in Gujarat. In
India, micro-Finance scene is dominated by Self Help Groups (SHGs) - Banks linkage Programme,
Established in 1976, the Grameen Bank (GB) has over 1000 branches (a branch covers 25-30
villages, around 240 groups and 1200 borrowers) in every province of Bangladesh, borrowing
groups in 28,000 villages, 12 lakh borrowers with over 90% being women. It has an annual growth
rate of 20% in terms of its borrowers. The most important feature is the recovery rate of loans,
which is as high as 98%. A still more interesting feature is the ingenious manner of advancing credit
without any “collateral security”. Microfinance Institutions (MFIs) in India exist as NGOs, Section
25 companies and Non-Banking Financial Companies (NBFCs). Commercial Banks, Regional
Rural Banks (RRBs), cooperative societies and other large lenders have played an important role
in providing refinance facility to MFIs. all microfinance institutions aim at increasing incomes
and employment, in developing countries the empowerment of women, improved nutrition and
improved education of the borrower’s children are frequently aims of microfinance institutions.
Better microfinance mechanisms will contribute to the reduction of global poverty and assist
developing nations in sustaining their economies without foreign aid. Today the Grameen Bank
consists of more than 2.4 million clients. The Scheme has also made a significant contribution
to economy as 48 percent of the poor families obtained credits have managed to overcome the
poverty line. The rest of the research paper is organized as follows. In section-II We have discussed
the theoretical framework of microfinance, review of literature and objectives of the study. The
Section III presents formulation of hypothesis, Data and the methodology, which is based on unit
root test and the Granger-causality test. In section IV we have presented the regression results. The
conclusions emerging out of the study have been presented in section -V
1.1 The Theoretical Framework of Microfinance
India is agriculture based rural economy and about 60 percent of total population still resides
in villages. So development of India depends upon the development of rural sector. Micro Finance
is defined as, financial services such as Saving A/c, Insurance Fund & credit provided to poor &
low income clients so as to help them to rise their income & there by improve their standard of
living.
From this definition it is clear that main features of Micro Financing:
• Borrowers are from the low income group
• Loans are of small amount – micro loans
• Short duration loans
• High frequency of repayment
• Loans are generally taken for income generation purpose
• Loan are given without security

33
 • Loans to those people who live BPL (Below Poverty Line)
• Even members of SHG enjoy Micro Finance
• Maximum limit of loan under micro finance ₨25,000/-
• The terms and conditions given to poor people are decided by NGOs
• Micro Finance is different from Micro Credit- under Micro Credit, small amount of loans
given to the borrower but under Micro Finance besides loans many other financial services
are provided such as Savings A/c, Insurance etc.
In India microfinance operates through two channels:
1. SHG – Bank Linkage Programme (SBLP)
2. Micro Finance Institutions (MFIs)
1. SHG-Bank Linkage Programme:This is the bank-led microfinance channel which was
initiated by NABARD in 1992. Under the SHG model the members, usually women in villages
are encouraged to form groups of around 10-15. The members contribute their savings in the
group periodically and from these savings small loans are provided to the members. In the later
period these SHGs are provided with bank loans generally for income generation purpose. The
group’s members meet periodically when the new savings come in, recovery of past loans are
made from the members and also new loans are disbursed.
2. Micro finance institutions:Those institutions which have microfinance as their main operation
are known as micro finance institutions. Non-Banking Financial Companies (NBFCs), Co-
operative societies, Section-25 companies, Societies and Trusts, all such institutions operating
in microfinance sector constitute MFIs and together they account for about 42 percent of the
microfinance sector in terms of loan portfolio. The MFI channel is dominated by NBFCs which
cover more than 80 percent of the total loan portfolio through the MFI channel.
Poverty : India has over a quarter of its population below the poverty line. The World Bank reports
that India is still home to some 260 to 290 million poor, numbers that rise to 390 million if poverty
is measured by the international standard of those living on less than US$1 dollar a day. Almost half
of India’s poor, approximately 133 million, are concentrated in three states: Uttar Pradesh,Bihar,
and Madhya Pradesh. Rural areas in India are home to three quarters of India’s poor which is
strengthened by the increasing urban/rural disparities. The Indian government’s poverty reduction
strategy focuses on infrastructure, social development (especially education and health), and rural
livelihoods. The improvement of rural livelihoods is the aspect of poverty reduction that MFIs
focus on. This study then looks at how the organizational structure of MFIs contributes to their
ability to improve rural livelihoods.
A lot of studies have been carried out both Indian and foreign on the relationship between
microfinance and economic growth. Greenwood and Jovanovic (1990) suggested that the

34
relationship between financial development and economic growth is mutual, while Khan,(1999)
who is of a similar opinion explains further that economic growth create financial development
which in turns helps in sustaining the growth.Levine (2004) outlines five functions that the financial
system serves in facilitating growth: savings mobilization, provision of investment information,
monitoring/governance, risk management, facilitation in goods and service exchange. Through these
functions the financial sector not only promotes private sector development but also supports the
public sector, infrastructure and the household’s ability to invest in human capital and consumption
smoothing.Misra (2006) discussed the factors associated with poverty eradication in India. The
study shows that microfinance is an instrument for achieving Millennium Development Goals .this
paper derives from the current overriding emphasis on microfinance in rural finance discourse and
its celebration as the new ‘magic wand’ in the fight against poverty.
Thankom Arun(2006)analyses the effect of Micro Finance Institutions (MFIs) on poverty
of households in India. It has show Significantly positive effects on the multidimensional
poverty indicator suggest the role of MFIs in poverty reduction. Nazrul Islam(2008)analysis the
performance of microfinance institutions varies with domestic GDP growth. Using panel data from
the Microfinance Information Exchange (MIX), and OLS regressions controlling for year and
country fixed effects, the analysis finds no significant correlation between domestic GDP growth
and microfinance performance. This result suggests that microfinance may be an effective means of
addressing poverty even in environments of low GDP growth.A.Vanroose and B. D’Espallier(2009)
This paper analyzes the relationship between performance of microfinance institutions (MFIs) and
the development of the formal financial sector of the country in which the MFI is active. the results
show that the macro-economic environment is crucial to fully understand MFI-performance and
that outreach and accordingly impact of MFIs are contingent on financial sector development.
Shastri (2009) discussed the dynamic growth of microfinance industry in India. The study shows
that microfinance worked in India as a more effective tool for poverty eradicating and solving the
problems of unemployment. Amelie Brune(2009) This paper examines the impact of microfinance
institutions on development in an empirical setting. There is empirical evidence for significant
positive impact of microfinance institutions on development.
Nargiza Maksudova(2010) discussed the empirical analysis is based on data from 1433
microfinance institutions pooled into 102 countries perform a Granger-causality test The results
indicate different transfer channels of microfinance to growth for middle and low-income countries,
implying that the strength of the impact depends on the underlying level of development.Durrani
(2011) also explained the role of micro finance in reducing poverty. The study reveals that access
and efficient provision of microcredit can enable the poor to smooth their consumption, better
manage their risks, gradually built their assets and enhance their income earning capacity which
improve their lives. In conclusion, study argues that with little efforts the performance of MFIs can
play better role in poverty reduction of India. Satyajit roy(2011),This paper appraises options for
research relating to microfinance in India, doing so in the broad context of rival macro pressures to
accelerate economic growth, maintain political order, reduce poverty and adapt to climate change.

35
Buera,Kaboski†,Shin(2011)This paper provides a quantitative evaluation of the aggregate and
distributional impacts of economy-wide microfinance or credit programs targeted toward small-
scale businesses.Bansal A.K.& Bansal Anu (2012) discussed micro finance has proven to be an
effective tool for poverty reduction. The dynamic growth of the microfinance industry has been
promoted not only by market forces but also by conscious actions of national governments, Non-
Governmental Organizations (NGOs) and the donors who view microfinance as an effective tool
for eradicating poverty

2. Research Methodology
The main objective of the study is to find out the relationship between micro finance and
Growth rate in India and how Microfinance helps in reduction of poverty. The present analyses of
the study impact of microfinance on economic growth. Microfinance has both direct and indirect
effect on economic growth. the following hypotheses for further estimation Null & Alternative
hypothesis being:
2.1 Hypothesis
The null hypothesis is:(H0: Microfinance do not exerts an impact on economic growth)
: αt = δt = 0 for all i [X does not Granger cause Y]
The alternative hypothesis is:(H1: Microfinance exerts an impact on economic growth )
H1 : αt ≠ 0 and δt ≠ 0 for at least some i [X Granger cause Y]
The hypothesis extends the analysis to the micro–macro linkages between microfinance
and economic growth. First hypothesis in fact represents the direct channel of microfinance to
economic growth. From the discussion above the direction of causality could go in both ways.
However, We have focused on the presence and the extent of causality running from microfinance
to economic growth. As such, microfinance is captured by two indicators: (a) the growth rate of the
gross loan portfolio (MFp) defined as the intensive growth of microfinance institutions and (b) the
growth in the number of MFI borrowers (MFb) defined as an extensive margin. Economic growth
is measured by the annual growth rate of real GDP.
2.2 Data: The present study depends upon secondary data. Data has been collected from the source
such as various referred journals, books, websites, Annual Reports of NABARD,the Microfinance
Information eXchange (MIX), and GDP data from Reserve bank of India ( RBI) and world bank.
The study covers the time series data running from 1995-2012.
Firstly the study find out the growth rates of GDP and MFp. It have been calculated by using
the following formulas:

GROWTH RATE= (PRESENT VALUE-PAST VALUE)

-------------------------------------------------------------- X 100
PAST VALUE

36
 Theoretical framework in order to understand how microfinance can be connected to economic
growth In this study, two methods have been applied. The statistical methods used are; the Ordinary
Least Squares Method (OLS) and the Granger causality test. Before using the Granger causality
test we performed some of the other test like unit root test and co-integration test. For this study,
Statistical Package for Social Sciences (SPSS) has been used.Similarly; Granger Causality Test
was run using SPSS package. But before using the Granger Causality Test, nature of the data has
been studied using unit root test and ADF test using same Microsoft package (SPSS).
2.3 Statistical Tools
2.3.1 Unit root test: The objective of the unit root test is to empirically examine whether a series
contains a unit root or not. If the series contains a unit root, this means that the series is non-
stationary. Otherwise, the series will be categorized as stationary.The Test of stationary that has
recently become popular is known as the unit root test. This test is to consider the following
model:Y t = Y t-1 + u t;
Where ut is the stochastic error term that follows the classical assumptions, namely, it has zero
mean, constant variance and is non-auto-correlated.
Now if the coefficient of yt-1 is in fact equal to 1 we face what is known as the unit root
problem.
2.3.2 Dickey-Fuller Unit Root Test: This test is used for Check the Stationary.
DF Unit Root Test are based on the following three regression forms
1) Without constant and trend
Dyt = dyt-1 + mt
2) With Constant
Dyt = a + dyt-1 + mt
3) With constant and trend
Dyt = a + bT + dyt-1 + mt
The hypothesis is :
Null Hypothesis ⇒H o :δ = 0 (Unit Root Problem)
Alternative Hypothesis ⇒ H 1 : δ ≠ 0 (No Unit Root Problem)
Unit Root Problem means non stationary series and No Unit Root Problem means stationary
series:
(Augmented Dickey Fuller Test):If the error term ut is auto correlated then we use this equation.
This is called ADF test.
Dy t = a + bT + dy t-1 + n i ΣDy t-I + ct

37
 If Durbin-Watson Statistics is not significantly to reject the autocorrelation so we still cannot
rely on the simple Dickey fuller (DF) Test. For the remove the autocorrelation problem we adopted
the Augmented Dickey Fuller (ADF) Test.
Trend Stationary Process or Difference – Stationary Process
(TSP) (DSP)
If Time series data is Non-Stationary then to data convert to stationary we use the TSP or
DSP. In this situation use the DSP to get stationary time series.
With Constant
∆(Dy t ) = Q + δDy t-1 + ct
With constant and trend
∆(Dy t ) = α + β + δDy t-1 + ct

2.4 Econometric Regression Model

2.4.1 Linear regression Equation:
Ordinary least square method: Here we will assume the hypothesis that there is no relationship
between Microfinance and Economic Growth in terms of GDP (GDPGR). Ordinary Least Square
test was run using SPSS Microsoft regression package with Microfinance as a dependent variable
while GDP as an independent. Then calculated F value is then compared to the critical value or
level of significance. If the calculated F value is greater than the critical F value at a chosen level
of significance, the null hypothesis is rejected otherwise accepted.
MODEL -I
MFpGR = β0 + β1 GDPGR + ui …………………….(1)
GDPGR = β0 + β1 MFpGR + ui ……………………..(2)
where, GDPGR shows the Gross Domestic Product annual growth rate and MFpGR shows the
growth rate of the gross loan portfolio of MFI’s particular time respectively while εi represents the
“noise” or error term; αi and βi represent the slope and coefficient of regression. The coefficient
of regression, βi indicates how a unit change in the independent variable (GDPGR) affects the
dependent variable (growth rate of the gross loan portfolio (MFp)). The error, εi, is incorporated
in the equation to cater for other factors that may influence MFp. The validity or strength of the
Ordinary Least Squares method depends on the accuracy of assumptions. the dependent and
independent variables (GDP and MFp) are linearly co-related
2.4.2 The Granger causality test, is used to further test for the direction of causality.
If you have two variables, Y and X, and you want to see if X Granger causes Y, you would
do a regression of Yt on lagged values of Y and lagged values of X and then test whether the

38
coefficients on the lagged X values are jointly equal to zero. If you reject this null hypothesis, then
the conclusion is that X Granger causes Y.
YT=β0 +β1YT-1+β2XT-1 + ε
YT=β0 +β1YT-2+β2XT-2 + ε
YT=β0 +β1YT-3+β2XT-3 + ε
If the coefficient on Bt-1 is significantly different from zero, the implication is that X Granger
causes Y. The model might also include additional lagged terms. You can also reverse this to test
whether Y Granger causes X. In case you’re wondering, it can be the case that Y Granger causes X
and that X also Granger causes Y.
MODEL-II

p p
Yt = a + ∑ An X ( t − p ) + ∑ BnY( t − p ) + Et
n =1 n =1 …………………………………….(3)

p p
X t = b + ∑ An' Y('t − p ) + ∑ Bn' X (' t − p ) + Et'
n =1 n =1 ………………………………………….(4)
Granger causality test: Yt is MFpGR and Xt is GDPGR, in fact, both are interlinked and co-related
through various channel. There is no theoretical or empirical evidence that could conclusively
indicate sequencing from either direction.

3. Results and Discussions

The objective of this Section is to present an overview of some of the most relevant models
for relationship between Gross Domestic Product annual growth rate and growth rate of the gross
loan portfolio of MFI’s. These Include the unit Root test apply (Random walk Model), on Gross
Domestic Product annual growth rate and growth rate of the gross loan portfolio of MFI’s.In this
section, the estimation of Gross Domestic Product annual growth rate and growth rate of the gross
loan portfolio of MFI’s for the period 1995-2012 has been undertaken. We have analyzed the impact
of Gross Domestic Product annual growth rate on growth rate of the gross loan portfolio of MFI’s
and vice-a-versa. The analysis has been made by Applying the linear regression equation an unit
root test.
In this section; first of all we see the trend and growth rate of Gross Domestic Product and the
gross loan portfolio of MFI’s . Then, we apply the method of growth rate and after that use the unit
Root test for stationary.

39
Table 1.1: Trend of Growth Rate Gross Loan Portfolio of MFI’s And Growth Rate Gross
Domestic Product in India ( 1994-2012)

% GROWTH GDP (US$) % GROWTH RATE NO. OF

Year MFp (US$) RATE MFp GDP MFI
1994-95 114,253 366599645609.097 2
1995-96 339,209 196.8929 399786888515.031 7.288167 3
1996-97 1,151,388 239.4332 423160419439.977 7.974668 3
1997-98 2,962,151 157.2678 428741030147.281 4.301614 8
1998-99 5,952,949 100.9671 464344395616.421 6.683389 9
1999-2000 9,360,721 57.24511 474691627708.133 7.589182 11
2000-01 15,220,744 62.60226 492378579615.659 4.29591 11
2001-02 29,809,584 95.8484 522798457731.02 5.518159 13
2002-03 71,317,336 139.243 617572578402.853 3.990126 39
2003-04 248,951,154 249.0752 721585293250.318 8.057098 86
2004-05 462,954,080 85.96181 834216897836.722 6.971348 92
2005-06 772,440,887 66.85043 949116769619.216 9.477113 105
2006-07 1,391,509,707 80.14449 1238700195643.9 9.569137 79
2007-08 2,245,483,001 61.37027 1224096625885.47 9.322056 100
2008-09 4,627,199,011 106.067 1365372912989.09 6.724775 123
2009-10 5,376,356,196 16.1903 1710917218018.04 8.391156 120
2010-11 4,317,896,330 -19.6873 1872845406804.92 8.392801 112
2011-12 765,973,715 -82.2605 1841717371769.71 6.47898 10
SOURCE- Microfinance Information eXchange (MIX), and GDP data from Reserve bank of India ( RBI).

Figure-A Trend of GDPGR and MFpGR

40
 Table1.1 represents the number of MFI’S in india, It is also show the Gross Domestic Product
and the gross loan portfolio of MFI’s with their annual growth rate from 1995-96 to 2011-12.It
may be seen from the table that total number of MFI’S have increased from 2 to 123 in 1995-96 to
2008-2009 but after that total number of MFI’S decline. Although gross loan portfolio of MFI’s is
showing increasing trend from 1995-96 to 2008-2009 but their annual growth is highest (249.07%)
in 2003-04. GDP also showing increasing trend up to 2011-12.
Table 1.2: Results of Linear Regression Equation MFpGR = β0 + β1 GDPGR + ui s h o wi n g
t he I m pact of Growth R a te Gross Do m es t i c P ro d u ct o n R at e o f Gro s s L o an
Por tf olio of MF I’s : 1995-2012.
Time Period Bo B1 R R2 F Value
1995-96 to 2011-2012 133.132(1.476) -5.371(-.436) .112 .013 .190
1995-96 to 2003-2004 19.562(.214) 20.153(1.408) .47 .221 1.981
2004-2005 to 2011-2012 -69.866(-.433) 13.372(.684) .26 .072 .468
Note: 1. t *- Statistically significant at 5% Level of significance.
2. F* - Statistically significant at 5% Level of significance.
3. Ho: There is no relationship between the variables;
4. H1: There is relationship between the variables

41
Table 1.3: Results of Linear Regression Equation GDPGR = β0 + β1 MFpGR + ui; showing
the Impact of Growth Rate of Gross Loan Portfolio on Growth Rate of Gross Domestic Product
1995-2012.
Time Period Bo b1 R R2 F Value
1995-96 to 2011-2012 7.340(10.905) -2.33e-03 .112 .013 .190
(-.436)
1995-96 to 2003-2004 4.609(3.717) 1.095e-02 .470 .221 1.981
(1.408)
2004-2005 to 2011- 7.953(14.089) 5.415e- .26 .072 .468
2012 03(.684)
Note:
1. t *- Statistically significant at 5% Level of significance
2. F* - Statistically significant at 5% Level of significance.
3. Ho: There is no relationship between the variables;
4. H1: There is relationship between the variables

We have also analyzed the relationship between of growth rate of the gross loan portfolio and
Gross Domestic Product annual growth rate. The analysis has been made by applying the linear
regression equation. The results are presented in table 1.2 to 1.3 in this section.

The table 1.2 We have analyzed the impact of Gross Domestic Product annual growth rate
(GDPGR) on growth rate of the gross loan portfolio (MFpGR). Empirical result have been obtained
by using regression equation “MFpGR = β0 + β1 GDPGR + ui’’ In Ordinary least Square Method,
we reject the null hypothesis that there is no relationship between the variable

The results of the Ordinary Least Squares Regression are summarized in the Table 1.2.The
above regression analysis clearly Indicates that MFpGR is dependent variable and GDPGR are
independent variable. The result show that GDPGR are negatively related to MFpGR; and has a not
significant Impact of growth rate on the gross loan portfolio (MFpGR) in whole Period under study
1995-96 to 2011-2012 and also during the Sub- Periods 1995-96 to 2003-2004 and 2004-2005 to
2011-2012 GDPGR positively related to MFpGR but not statistically significant. The value of R2
is very low.

The table 1.3 We have analyzed the impact growth rate of the gross loan portfolio (MFpGR)
on Gross Domestic Product annual growth rate (GDPGR). Empirical result have been obtained by
using regression equation “ GDPGR= β0 + β1 MFpGR + ui “The above regression analysis clearly
Indicates that MFpGR are also negatively related to GDPGR; and has not significant Impact on
growth rate of the GDP in whole Period under study 1995-96 to 2011-2012 and also during the Sub-
Periods 1995-96 to 2003-2004 and 2004-2005 to 2011-2012 MFpGR positively related to GDPGR

42
but not significant. The value of R2 is very low. But in the whole period 1995 to 2012 correlation
coefficient is very low and also the value of t is not statistically significant. In Ordinary least Square
Method, we reject the hypothesis that there is no relationship between the variable.

Table-1.4(A) Spearman’s correlation Coefficients

Correlations

Table-1.4(B) Pearson correlation

Correlations

Table 1.4(A), 1.4(B) We have analyzed in the whole period 1995 to 2012 the correlation
between growth rate of GDP and growth rate of MFp are negative. correlation coefficient is very
low. Similarly the results of Unit Root test, and Granger Causality test are summarized in the Table
1.5(A), 1.5(B), Table 1.6(A) and Table1.6(B) respectively.

Table 1.5 (A) shows that unit Root Test is used for check the stationary. In unit Root test,
two tests are very useful Dickey fuller and augmented Dickey Fuller Test.Dickey fuller Test
Show that all variable are Non- Stationary in level I(0) Series. But in the Integrated level one
with I (1) First Difference of time series data of all variable is Stationary But this result show that
all variables take Autocorrelation Problem; for the solution of this problem; we take Augmented
Dickey fuller test.

43
Table 1.5(A) : Results of Unit Root Test for Growth Rate Gross Domestic Product and Growth
Rate of Gross Loan Portfolio of MFI’s with Dicky Fuller Test : 1995-2012.
Variables Unit Root Test Bo B1 B 2T Durbin Conclusion
D.F. Test Watson
Test
1) MFpGR I(0) Without trend 10.817 -.267 ______ 1.866 Non Stationary
(.370) (-1.168)
with Trend 117.565 -.583 -7.713 1.700 Non Stationary
(1.787) (-2.106) (-1.783)
I(1) Without trend -23.594 -1.149 _____ 1.843 Stationary
(-4.245)*
(-1.299)
with Trend -16.456 -1.152 -.718 1.843 Stationary
(-.354) (-4.085)* (-.168)
2) GDP-GR I(o) Without trend 5.087 -.718 _______ 2.086** Non Stationary
(2.679) (-2.787)
with Trend 4.957 -.894 .147 1.983** Non Stationary
(2.683) (-3.171) (1.356)
I(1) Without trend -6.25E-02 -1.506 _______ 1.812 Stationary
(-6.108)*
(-.118)
with Trend -.328 -1.510 2.661E-02 1.811 Stationary
(-5.878)*
(-.237) (.209)
*-Indicate the stationery series
** - Indicate the No Autocorrelation Problem
Critical Value of Tau Test is 10% (-2.5844),5% (-2.8951), 1% (-3.5073)

Figure-(B)

44
Table 1.5(B): Results of Augmented Dickey Fuller Test Growth Rate Gross Domestic Product and
Growth Rate of Gross Loan Portfolio of MFI’S: 1980-2009
Variable Bo Yt-1 T δyt-1 D.W Conclusion
GDP-GR 4.498 -.944 .216 -5.68E-02 1.622 Auto Correlation
(-2.412) Problem
(1.941) (1.622) (-.198)

MFpGR 138.683 -.784 -7.807 .258 1.970** No Auto Correlation

Problem
(1.729) (-2.236) (-1.601) (.846)
**- Indicate the No Auto Correlation Problem.
Critical value of ADF Test 10% (-3.13), 5% (-3.41), 1% (-3.96)

Table 1.5(B) Shows the Durbin Watson d has increased. But notice that T tau value show that
GDPGR and MFpGR time Series is Non stationary. This table results of regression show that there
is no Autocorrelation Problem in MFpGR. The problem has been solved by Durbin Watson Test.
The results of the ADF test show that there is unit root.

3.1 Granger Causality Test

PART-1
p p
Yt = B 0 + ∑ B1n X ( t − p ) + ∑ B 2 n Y( t − p ) + Et
n =1 n =1

H0 :B0=B1=B2=0 (Growth rate of GDP do not Granger cause of Growth rate of gross loan portfolio)
Granger causality test: Yt is MFpGR and Xt is GDPGR, in fact, both are interlinked and co-related
through various channel.

Table 1.6(A): Granger Causality Test on MFpGR

Null hypothesis Time Bo B1 B2 R R2 F Value D.W Decision
Lags
X (t-p) Y(t-p)
No.
GDPGR does not P=1 112.289 .671 -13.249 .71 .50 6.614* 1.812 Reject**
granger cause MFpGR (t-1) (1.490) (2.994)* (-1.452)
GDPGR does not P=2 135.349 .255 -12.159 .399 .159 1.133 1.206 Accept
granger cause MFpGR (t-2) (1.500) (.864) (-1.114)
GDPGR does not P=3 187.615 -.127 -14.238 .36 .135 .857 1.087 Accept
granger cause MFpGR (t-3) (2.042) (-.391) (-1.269)
** Reject at 5% level of significance

45
PART-2
p p
X t = b0 + ∑ b1'n Y('t − p ) + ∑ b 2 'n X (' t − p ) + Et'
n =1 n =1
H0 : B0=B1=B2=0 (Growth rate of gross loan portfolio do not Granger cause of Growth rate of
GDP) causality test: Yt is MFpGR and Xt is GDPGR, in fact, both are interlinked and co-
related through various channel.

Table-1.6(B) Granger Causality Test on GDP-GR

Null hypothesis T i m e Bo B1 B2 R R2 F Value D.W Decision
Lags
y(t-p) x(t-p)
No.
MFpGR does not P=1 5.451 .265 -2.24e-03 .29 .087 .620 2.014* Accept
granger cause GDPGR (t-1) (2.434) (.977) (-.337)
MFpGR does not P=2 4.592 .296 3.201e-03 .30 .090 .596 1.255 Accept
granger cause GDPGR (t-2) (1.976) (1.052) (.421)
MFpGR does not P=3 5.766 .121 5.244e-03 .22 .051 .294 1.333 Accept
granger cause GDPGR (t-3) (2.534) (.435) (.653)
** Reject at 5% level of significance

Granger Causality Test indicates that GDPGR Granger Cause MFpGR in lag value one but
MFpGR Granger does not Cause GDPGR. That means the Granger Causality Test shows that
casual effect ceases to exit.
H0 :B0=B1=B2=0 (Growth rate of GDP do not Granger cause of Growth rate of gross loan portfolio)
In table-1.6(a) under the null hypothesis show that economic growth does not Granger-cause
microfinance but after apply the test there are reject the null hypothesis to claim that economic
growth is significant causes of microfinance with time lag (1).

4. Conclusions and Suggestions

The results show that Micro-Finance can be a powerful instrument initiating a cyclical process
of growth and development. Micro-Finance activity improved access of rural poor to financial
services, both savings and credit. This section discusses the results of the analyses mentioned above.
I find that there is no significant correlation with changes in any of the microfinance performance
indicators and domestic GDP growth. The impact of microfinance on economic growth is perceived
through direct and indirect channels. The Economic growth are indirectly effected by microfinance.
Microfinance doing work for poverty reduction, welfare increase, employment generate and
production value added from entrepreneurship activities of the poor, through these variable
economic growth are affected by microfinance.The empirical analysis on basis of ordinary Least
Square Method suggests that there is weak relationship between the variables .The Ordinary least

46
Square Method indicates that there is nagetive relationship between MFpGR and GDP in whole
time period. But in sub time period there are positive relationship between MFpGR and GDP.
Unit Root Test indicates that data are non-stationary in level but stationary in first difference so
these data are integrated in order(1). Granger Causality Test indicates that GDPGR Granger Cause
MFpGR in lag value one but MFpGR Granger does not Cause GDPGR. That means the Granger
Causality Test shows that casual effect ceases to exit.

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Factors’ International Journal of Business and Social Science, Vol.2, No.21, p.p 138-144.
• Judson, R., & Owen, A. (1997). Estimating dynamic panel data models: A practical guide for
macroeconomists. Board of Governors of the Federal Reserve System Finance and Economics Discussion
Series, 97(3), 234-279.20.
• Kanunga, M.(2012), “Rural Development through Micro Finance, MGNREGA And Women
Empowerment”, Odisha Review, p.p 75-78.
• King, R., & Levine, R. (1993). Finance and growth: Schumpeter might be right. Quarterly Journal of
Economics, 108 (3), 717-737.
• Levine, R. (2004). Finance and growth: Theory and evidence. NBER Working Paper, (10766), 1-98.
• Levine, R., Loyaza, N., & Beck, T. (2000). Financial intermediation and growth: Causality and causes.
Journal of Monetary Economics, 46 (8), 31–77.

47
• MIX, 2009. The Microbanking Bulletin. Issue No.19. Microfinance Information Exchange: Washington
DC, December.
• MIX database for India, 2010 on www.mixmarket.org
• NABARD (2012), “Status of Micro Finance in 2011-12”, http:// www. NABARD. Org
• Maksudova(2010), “Macroeconomics of microfinance:how do the channels work?” working paper
series (issn 1211-3298).
• RBI, 2009. Statistical tables on banks in India, 2008-09. Mumbai: Reserve Bank of India.
• Ravallion, M. (2001). Growth, inequality, and poverty: Looking beyond averages. World Development,
29 (11), 23–49.
• Shastri, R.K (2009), “ Micro Finance and Poverty Reduction in India ( A Comparative Study With Asian
Countries),” African Journal of Business Management, Vol.3, No.4, P.P 136-140.
• Uppal, R.K (2011), “ Microfinance in India- Growth, Trends and Emerging new Issues in India”, Arabian
Journal of Business and Management Review, Vol.11, No.5, p.p 32-47.
• Vanroose, A. (2008). What macro factors make microfinance institutions reach out? Solvay Business
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• Vanroose, A., & D’Espallier, B. (2009). Microfinance and financial sector development. Solvay Business
School Working Paper No. 09/040, 1-38.

48
 Microfinance in India: The Role of NABARD
By

Kuldeep Goyal

1. Introduction

The origins of microcredit in its current practical incarnation can be linked to several
organizations founded in Bangladesh, especially the Grameen Bank. The Grameen Bank,
which is generally considered the first modern microcredit institution, was founded in 1983 by
Muhammad Yunus. Yunus began the project in a small town called Jobra, using his own money
to deliver small loans at low-interest rates to the rural poor. Grameen Bank was followed by
organizations such as BRAC in 1972 and ASA in 1978. Microcredit reached Latin America
with the establishment of PRODEM in Bolivia in 1986; a bank that later transformed into the
for-profit BancoSol. Microcredit quickly became a popular tool for economic development,
with hundreds of institutions emerging throughout the third world. Though the Grameen Bank
was formed initially as a non-profit organization dependent upon government subsidies, it later
became a corporate entity and was renamed Grameen II in 2002.Muhammad Yunus was awarded
the Nobel Peace Prize in 2006 for his work providing microcredit services to the poor

INDIA’S microfinance sector was once touted as a saviour of the poor and a good bet for
investors. The high point for the industry came when SKS—then India’s biggest microfinance
company with a $1.2 billion loan book, a third of it in the southern state of Andhra Pradesh—
went public in July 2010. The $350m offering was more than 13 times oversubscribed.Things
went downhill fast. Many in the industry admit that runaway growth spurred reckless lending to
poor Indians. Just months after the SKS listing, Andhra Pradesh’s state government accused the
industry of strong-arm collection tactics that drove some farmers to suicide. It issued suffocating
rules; almost all loans in the state were written off; business ground to a halt. But the industry is
starting to revive, with regulators in a far more central role.Microlenders are attracting capital
again. Grameen Capital India, a social-investment bank, says $144m of equity has been injected
into microfinance groups in the past 12 months, more than double the amount in the preceding
year. The International Finance Corporation, a multilateral lender, invested $18m in Equitas,
a mid-sized group in the southern state of Tamil Nadu. SKS, whose loan book is now worth
just $325m, raised $47.5m by issuing shares last year. Outside Andhra Pradesh microlenders’

49
loan books rose in value by 33% year on year in the third quarter of 2012, according to the
Microfinance Institutions Network (MFIN), an industry body. Southern states and the eastern
state of West Bengal are new hotspots. Bandhan, a no-frills company based in West Bengal, now
has over 4m borrowers and the largest microfinance loan book in the country. Analysts say the
sector’s outstanding loans are now worth $2 billion-3 billion, compared with a peak of around
$5 billion during the boom.

2. Microfinance in India

India’s central bank is behind the renewed confidence. It released national guidelines for
microlenders at the end of 2011 and has set up a licensing system. Although a bill officially
appointing the central bank as the industry’s regulator is languishing in parliament, these moves
have helped stem what M.R. Rao, the boss of SKS, calls a “fear of contagion”, the worry that
other states will copy Andhra Pradesh and suddenly draw up new rules. The guidelines try to
draw a line between profits and profiteering. Microlenders’ annual interest rates are now capped
at 10-12 percentage points above their own borrowing costs, leaving most charging 23-27%.
Some charged 40% during the boom; dodgy local loan-sharks, the only alternative source of
credit in many rural areas, have even higher rates. Microlenders are also barred from lending
to anyone with more than one outstanding loan. But capping profits may end up harming the
neediest borrowers, say lenders. Undertaking small transactions in remote areas is not cheap.
Chandra Shekhar Ghosh, Bandhan’s managing director, says he keeps costs down with one-
room branches containing little more than plastic chairs. Alok Prasad, the head of MFIN, warns
that others may ditch the hardest-to-reach villages.Some microfinance firms are looking beyond
small, unsecured loans, which the central bank caps at 50,000 rupees ($910) a pop. Equitas last
year set up a subsidiary that sells mortgages to poorer customers. Bandhan has similar plans. P.N.
Vasudevan, the managing director of Equitas, says his housing loans, starting at 100,000 rupees,
involve lower operating costs, in part because mortgage payments often get transferred via banks
and do not require collection. If firms start to gravitate towards these lines of business, that could
yet again leave the neediest behind.

2.1 Role of Self Help Groups (SHGs) in Microfinance

The initiative of 1992 to make the traditional and formal banks to extend financial services
to deprived sections through informal Self Help Groups (SHGs), has now blossomed into a
“monolith” micro Finance initiative. It has been recognised as a decentralised, cost effective
and fastest growing Micro Finance initiative in the world, enabling over 103 million poor
households’ access to a variety of sustainable financial services from the banking system by
becoming members of nearly 8 million SHGs. The linkage with banks has provided the members
of the Groups the facility of not only pooling their thrift /savings and access to credit from
the banking system, but also created a platform through which they could launch a number of
livelihood initiatives and also facilitate the empowerment process.

50
 While the first decade of the programme was meant to demonstrate the potential of SHGs to
organise themselves and be instrumental in managing their own savings and extending emergent
micro credit needs, the second decade laid emphasis on establishing the replicability of the model
across the regions, with focus on resource poor regions of the country. This decade also witnessed
greater confidence among the financing banks to “own” up the programme as a potential business
model thereby extending its outreach to the current level. The development planners including
the Government of India and the State Governments also recognised the real potential of the
SHG movement in development of the poor and it was made an essential ingredient of all poverty
alleviation programmes of the Government. Even the private sector started realising the untapped
potential of SHGs for deep penetration to the emerging rural markets. The turbulence witnessed
in the microFinance sector in the recent past due to the mushrooming growth of microfinance
Institutions (MFIs) and their questionable ways in which they went ahead in extending their
outreach and credit intensification, could not make any significant dent in the popularity of the
SHG-Bank Linkage Programme.The small beginning of linking only 500 SHGs to banks in 1992,
had grown to over 0.5 million.

3. Results and Discussion

SHGs by March 2002 and further to 8 million SHGs by March 2012. From almost 100%
of the SHGs linked to Banks at the pilot stage from southern states, the share of southern States
in the total number of SHGs linked shrank to 46% by March 2012, while the share of eastern
States (especially, West Bengal, Odissa, Bihar) shot up to over 20%. The third decade of the
programme promises to be one of maturing the linkage programme with livelihoods support,
lot more innovations in the product range offered through SHGs and path breaking reforms in
leveraging technology to improve efficiency, while extending its outreach to more geographical
regions, especially the most resource poor regions of the country. It is widely believed that
the SHGs of the poor will be the vehicles leading the march of India’s emergence as a super
economic power in the next decade. A number of countries, especially the developing countries
and international agencies are turning to India to learn from its experiments with microFinance
and to explore possibilities of replication of the model in other parts of the globe.

Together the 8 million SHGs of the poor maintain a balance of over `6550 crore in the
Savings Bank accounts with the Banks, while they are estimated to have harnessed savings of
over `22000 crore of which nearly 70% (over `15000 crore) goes for internal lendings. Over
4.4 million SHGs are regularly availing credit facilities from the Banks. During 2011-12 alone,

51
over 1.15 million Groups availed loans amounting to `16535 crore from Banks and together
4.4 million Groups have loans to the extent of `36340 crore outstanding against them with the
financing banks as on 31.3.2012. As the credit availed by the Groups along with their internal
savings are revolved many times within the group for shorter durations, the multiplier effect
makes the process much larger than the basic figures indicate.

NABARD had been publishing data on microFinance in India every year along with
an analysis of the data compiled through various stakeholders like partner NGOs, financial
institutions, Government Departments, etc. and this publication and data contained therein are
based on returns submitted by participant banks covering Commercial Banks, Regional Rural
Banks (RRBs) and Cooperative Banks. In addition to the analysis of data on the extent of savings
harnessed by the SHGs, credit availed by SHGs across agencies and across the geographical
spread, the publication also highlights the facilitating role played by NABARD in further refining
the SHG-Bank linkage programme by bringing in more stakeholders into this sector, helping it
to extend its outreach to more unbanked areas and by extending the scope of financial services
rendered through such groups. The publication also highlights a brief of the discussions at a
National Colloquium organised during the year with participation from different stakeholders
soliciting issues connected with the design of the SHGs, a few pilot innovations made by
NABARD, product innovations to support livelihood groups (JLGs) etc.

The number of saving linked SHGs now standsat 7.96 million with amembership of over
103 million poor households. While bulk of the sesavings isused for internall ending within
the Group (over 70%), the balance is maintained in the savings accounts with the financing
banks. Over 79% of SHGs linked to banksare exclusive women groups, which is one of the most
distinguishing features of micro Finance sector in the country.

The balance in the savings accounts of the banks as attheend of March 2012 stoodat Rs.
6551.41 crore. Among them a jor States, Karnataka SHG smainta in the highest S.B. balance of
over ` 16000 per SHG followed by Punjab of nearly `12500 per SHG. Among the regions,
southern region is highest at `10080 per SHG and north eastern region recorded the lowest
balance of `4159 per SHG.On an average, the SHG smainta inabalance of `8230. Commercial
Banks account for 58% of the savings account maintained by SHGs and RRBs 27% and
CooperativeBanks the remaining 15%.

52
Table-1:Overall Progress under SHG-Bank Linkage for last 3 years
(Amountin crore/ Numbers in lakh)

2009-10 2010-11 2011-12

Particulars
Amount No.of SHGs Amount No.of Amount
No.of SHGs
SHGs

69.53 6198.71 74.62 (7.3%) 7016.30 79.60 (6.7%) 6551.41

SHG Total SHGs (13.6%) (11.8%) (13.2%) (-6.7%)
Savings
Of which SGSY 16.94 1292.62 20.23 1817.12 21.23 (5.0%) 1395.25
with Banks
Groups (12.5%) (-17.3%) (19.4%) (40.6%) (-23.2%)
as on
31stMarch % of SGSY Groups
to Total 24.4 20.9 27.1 25.9 26.7 21.3

53.10 4498.66 60.98 5298.65 62.99 (3.3%) 5104.33

All women SHGs (9.18%) (1.46%) (14.8%) (17.8%) (-3.7%)

% of Women
Groups 76.4 72.6 81.7 75.5 79.1 77.9

15.87 14453.3 11.96 14547.73 11.48 (-4%) 16534.77

Loans Total SHGs (-1.4%) (17.9%) (-24.6%) (0.01) (13.7%)
Disbursed
Of which SGSY 2.67 (1.0%) 2198 (9.1%) 2.41 2480.37 2.10 2643.56
to SHGs
Groups (-9.9%) (12.8%) (-12.9%) (6.6%)
during the
year % of SGSY Groups
to Total 16.9 15.2 20.1 17.0 18.3 16.0

12.94 (5.8%) 12429.37 10.17 12622.33 9.23 14132.02

All women SHGs (18.1%) (-21.4%) (1.6%) (-9.2%) (12.0%)

% of Women
Groups 81.6 86 85 86.8 80.4 85.5

48.51 28038.28 47.87 31221.17 43.54 36340.00

Loans Total SHGs (14.8%) (23.6%) (-1.3%) (11.4%) (-9.0%) (16.4%)
Outstanding
Of which SGSY 12.45 6251.08 12.86 (3.4%) 7829.39 12.16 8054.83
against
Groups (27.5%) (6.6%) (25.2%) (-5.4%) (2.9%)
SHGs as
on % of SGSY Groups
31stMarch to Total 25.7 22.3 26.9 25.1 27.9 22.2

No. of all Women 38.98 23030.36 39.84 (2.2%) 26123.75 36.49 30465.28
SHGs linked (18.9%) (23.9%) (13.4%) (-8.4%) (16.6%)

% of Women SHGs 80.3 82.1 83.2 83.7 83.8 83.8

Source: NABARD 2010

53
4. Conclusions and Suggestions
Besides, conceiving the SHG-Bank Linkage Programme two decades back, NABARD had
assigned to itself the role of a facilitator and a mentor of the initiative. The focus was on bringing in
various stakeholders on a common platform, building capacity among the stakeholders to take the
movement forward while extending 100% refinance to all banks participating in the programme. A
large number of seminars, workshops and training programmes were organised to create awareness
about the microFinance programme among all the stakeholders – the bankers, the Government
agencies, the NGO partners and more importantly the SHG members. The NGO sector who
played the key role of organising and nurturing the SHGs as the Self Help Promoting Institutions
– later joined by many others including the rural financial institutions, Farmers Clubs, etc. – were
encouraged by way of promotional grant assistance by NABARD for taking up such work. The
phenomenal growth of SHG-Bank linkage programme during the last 20 years owe a great deal to
these promotional efforts actively supported by NABARD and participated by the stakeholders.
The rapid growth of the SHG linkage programme and its success in taking financial services to
the poor, led to its recognition as the most important tool for financial inclusion – the main focus
of the XI Five Year Plan. Simultaneously, efforts were also on to experiment innovative initiatives
in improving the efficacy and reach of the programme with the involvement of all microfinance
practitioners facilitated by NABARD.

References

• www.wikipedia.org
• The Economist, Delhi 12 Jan 2013.
• Status of Microfinance 2011-12, NABARD.
• Rutherford, Stuart. The Poor and Their Money. Oxford University Press, Delhi, 2000.
• Microfinance Information Exchange, Inc. (2009-12-01). “MicroBanking Bulletin Issue #19, December,
2009, pp. 49”. Microfinance Information Exchange, Inc.

54
 Social Entrepreneurship and Rural Development
in Contemporary India: An Investigation
By

Pradip Kumar

1. Introduction
In the contemporary development discourse, ‘Social Entrepreneurship’ is becoming gradually
the buzz word, particularly in the context of trickling down the benefit of any development project
which has a bearing to the market economy, with specific reference to vulnerable sections of the
society, under privileged category, women, children, people from minority community or the
poor- in each and every sense. Hence naturally the question comes to our mind, “What is social
entrepreneurship”? In other words, it is the process of pursuing innovative solutions to social
problems. More specifically, social entrepreneurs adopt a mission to create and sustain social value.
They relentlessly pursue opportunities to serve this mission, while continuously adapting and
learning. Social entrepreneurs act boldly, not constrained by resources currently in hand. They hold
themselves accountable for achieving the social mission and use resources wisely. They draw upon
the best thinking in both the business and nonprofit worlds and operate in all kinds of organizations:
large and small; new and old; religious and secular; nonprofit, for-profit, and hybrid.
The degree to which social entrepreneurs pursue social impact as opposed to profitability
vary, but in all cases financial sustainability is fundamental. One approach is to create business
models revolving around low-cost products and services to resolve social problems. The objective
is to create a social benefit that is not limited by personal gain. Social Entrepreneurship is the
process of bringing about social change on a major and more effective scale than a traditional
Non-Governmental Organization (NGO). They differ from NGOs in that they aim to make broad-
based, long-term changes, instead of small-scale and time-limited changes. Above all, Social
Entrepreneurs consider the affected people as part of the solution and not as passive beneficiaries.
Although the terms are relatively new, social entrepreneurs and social entrepreneurship can be
found throughout history. We can consider Florence Nightingale- the founder of the first nursing
school and developer of modern nursing practices, Robert Owen- founder of the cooperative
movement and Vinoba Bhave, founder of Bhoodan Movement and many more in this category.
The terms social entrepreneur and social entrepreneurship were used first in the literature on social
change in the 1960s and 1970s. The terms came into widespread use in the 1980s and 1990s,
promoted by Bill Drayton the founder of Ashoka: Innovators for the Public. From the 1950s to the

55
1990s Michael Young was a leading promoter of social enterprise and in the 1980s was described by
Professor Daniel Bell at Harvard as ‘the world’s most successful entrepreneur of social enterprises’
because of his role in creating more than sixty new organizations worldwide, including the School
for Social Entrepreneurs (SSE) which exists in the UK, Australia and Canada and which supports
individuals to realize their potential and to establish, scale and sustain, social enterprises and social
businesses. Another notable British social entrepreneur is Andrew Mawson OBE, who was given
a peerage in 2007 because of his regeneration work including the Bromley by Bow Centre in East
London.

2. Methodology
The following concepts and issues were examined and discussed in detail to get a broad
picture on the theme of social entrepreneurship. However a broad surevey of literature particularly
from secondary sources were scanned before specific case studies were taken into consideration
for minute examination. It has helped the authors to bring a comparison between the macro-level
picture long with micro level issues and triangulate them with the necessary information.
• Social business
• Social enterprise
• Social innovation
• Social Venture Capital
• Triple Bottom Line business theory
• Microfinance
• Micro franchising
2.1 Social Entrepreneurship in Contemporary Time
Social Entrepreneurship is an act of creating social value and impact through your service.
This simple concept has been used to create great things and driven change and development in
places where the benefits of government schemes have never seemed to penetrate. At micro level it
has some impact to solve problems related to education, agriculture, healthcare, skill development,
employment, awareness and so many innumerable local problems. In a country like India, here the
division and stratification of society is on various grounds of social reality, social entrepreneurship
ventures organized and executed in a well manner have the capability to transform the rural
society. As a matter of fact everyone does not have enough money to keep running it as a non-profit
organization. So the good thing is that there are many models that have run on two way benefit. We
all know about the success story of Verghese Kurien by AMUL model through NDDB. Ultimately
he proved that the poor farmers, who are the primary producers, are the best managers as well as
primary beneficiary along with the consumers.
Starting from businessmen, Social activists, NGOs, and socially-oriented practitioners are
referred to as social entrepreneurs. It is important to identify the boundaries within which social

56
entrepreneurs operate.Some have advocated restricting the term to founders of organizations that
primarily rely on earned income – meaning income earned directly from paying consumers. Others
have extended this to include contracted work for public authorities, while still others include
grants and donations. This argument is unlikely to be resolved soon. Well-known contemporary
social entrepreneur is Muhammad Yunus, founder and manager of Grameen Bank and its growing
family of social venture businesses, Nobel Peace Prize awardee in 2006. The work of Yunus and
Grameen echoes a theme among modern day social entrepreneurs that emphasizes the enormous
synergies and benefits when business principles are unified with social ventures. In some countries
- including Bangladesh - social entrepreneurs have filled the spaces left by a relatively small state.
In other countries - particularly in Europe and South America - they have tended to work more
closely with public organizations at both the national and local level. Today, nonprofits and non-
governmental organizations, foundations and individuals also play the role to promote, fund, and
advise social entrepreneurs around the planet. A growing number of colleges and universities are
establishing programs focused on educating and training social entrepreneurs
2.2 Social Entrepreneurship in India
Some well-known Indians became aware of the potential of Social Entrepreneurship
quite early. Two of them were the Social Entrepreneurs Dr. Govindappa Venkataswamy and
Thulasiraj D Ravilla who established the Aravind Eye Hospital in 1976. Since then, they have
treated more than 2.4 million patients, often free of charge. Many others have also contributed
to the comparatively high levels of Social Entrepreneurship which have been reached in India.
As the Swiss Klaus Schwab, founder of the World Economic Forum and of the Schwab Foundation,
pointed out in an interview with the Hindustan Times: “India has some of the most advanced and
innovative social entrepreneurs. We believe and already see that many of the models developed in
India, for instance rainwater harvesting for schools pioneered by Barefoot College, are exported
around the world.” Thus, India is a key country in developing social entrepreneurs. Several
institutions help people to become involved with Social Entrepreneurship, such as UnLtd India and
the National Social Entrepreneurship Forum (NSEF).
Another important organization that is linked to India is Ashoka, which is the global
association of the world’s leading social entrepreneurs. Since 1981, they have elected over 2.000
leading social entrepreneurs as Ashoka Fellows, providing them with living stipends, professional
support and access to a global network of peers in more than 60 countries. India is home to Ashoka’s
first Fellow and for the past 25 years, India has served as a testing ground for most of Ashoka’s
international Fellowship building programs and other key initiatives. Since 2003, Ashoka and the
American India Foundation (AIF) have partnered to co-invest in social entrepreneurs in India.
This partnership has enabled Ashoka to increase the number of Fellows elected in India to 250.
AIF is a leading international development organization charged with the mission of accelerating
social and economic change in India. Since 2001, it has raised over 30 million US-Dollars and
awarded grants to education, livelihood, and public health projects in India with an emphasis on

57
elementary education, women’s empowerment and HIV/AIDS. Some have also created for-profit
and for-a-difference organizations. More recent example is Vikram Akula, the McKinsey alumnus
who started a micro lending venture, SKS Microfinance, in villages of Indian state of Andhra
Pradesh. Although this venture is for profit, it has initiated a sharp social change amongst poor
women from villages. Other examples of social entrepreneurs in Healthcare in India is Ramanujan
Bose Awardee, Dr Akash S Rajpal, Founder of Ekohealth has been working in India in the field of
healthcare against Fee splitting and creating a unique ethical facilitation and aggregation services
for healthcare providers.
2.3 Poverty, Development Programmes and Social Entrepreneurship:
Traditionally, both government and the private sector have struggled to reach remote and
poverty stricken parts of India, especially eastern states such as Bihar. Even social entrepreneurs
and civil society organizations struggle to apply their innovations because of poor reach and lack
of absorption. However, Jeevika, a program jointly supported by Government of Bihar and the
World Bank, has built a community-based institutional platform that can reach millions of poor
households in Bihar. It is now offering a unique opportunity to social innovators to capitalize on the
platform as well as access to financial capital providing enterprises with a chance for a leap. Bihar
has more than 100 million inhabitants and is India’s second poorest state. Ninety percent of the
population lives in rural areas and the state has lagged behind in reducing poverty. Poor households
have struggled for reasons such as lack of economic opportunity, inability to transact with financial
institutions. Jeevika, a rural livelihoods program has been working with community institutions
since 2007 and has built an institutional platform by mobilizing 1 million women into self-help
groups (SHGs) and higher-level federations. Eventually, the project plans to mobilize 15 million
households and reach most poor households in the state over the next 5 years. Social mobilization
has also been accompanied with focused efforts to improve both the demand and supply side of
credit enabling a pro-poor investment climate in the state.
In 2007, Jeevika launched a unique market-place called Bihar Innovation Forum (BIF) with
the objective of identifying private sector and non-profit organizations with new ideas and high
social impact but which are unable to scale-up due to lack of resources or poor access to public
institutions. BIF’s intention was to find solutions to improve rural livelihoods beyond established
channels through an open, transparent, and competitive process. Social entrepreneurs were asked
to send proposals with their ideas and its applications on ground. The long-listed proposals were
each vetted through a rigorous process and on-site visits. Eventually, 25 innovations were featured
in the forum and given public recognition. Some of these awardees were also given an opportunity
to scale-up their innovations through the community institutions. One of the most successful scale-
up of innovations has been by PRADAN under the able guidance and leadership of Padmshri Deep
Joshi. It had piloted the System of Rice Intensification (SRI) method in Purulia District of West
Bengal with just 17 farmers in 2002 and was present in Bihar with 417 farmers. The institutional
platform provided by Jeevika assisted PRADAN engineer a rapid scale-up of its innovation.

58
The merger of technical support provided by PRADAN, community institutions, and pro-poor
investment climate facilitated the creation of a single-window system for smallholders (small and
marginal farmers can access all agri-services within 2 kilometers of their workplace). This single-
window system enabled more than 200,000 farmers to adopt SRI techniques last year. The farmers
through experimentation and customization were also able to transfer the principles of SRI to other
crops such as oilseeds, pulses and vegetable. Initial results have shown that the participant farmers
have witnessed a productivity increase of 86% in rice and 72% in wheat. The profitability of rice
cultivation has increased to 2.5 times.
Encouraged by the success of first innovation forum, Jeevika recently launched the second
edition of the forum in collaboration with Bihar State Innovation Council and is now looking to
tap social entrepreneurs beyond the state. The government has rolled out a major outreach plan
with road shows across the country to call for proposals from public, social entrepreneurs and
civil society organizations in 8 livelihood themes: Agriculture, Livestock, Financial Services, Rural
Energy,  ICT Based Solutions,  Skill Development & Non-Farm Sector,  Improved Access to
Entitlements and, Services. Winners of the forum will be provided direct financial support,
mentorship and a chance to scale-up their innovations using the institutional platform. In addition,
these entrepreneurs will get access to a network of other partners like impact investors, foundations,
incubation agencies and donor agencies. It has also forged partnerships with the major players in
the social entrepreneurship sectors. “If you believe that you can transform the lives of the rural
poor in Bihar and your innovations can lead to sustainable and scalable rural livelihood solutions,
then the Innovation Forum are the right platform for you. If your ambitions to scale are being held
back by lack of access to rural poor or local governments’ support, you must come forward”. Social
entrepreneurship in India has progressed significantly over the last decade. More and more people
are using entrepreneurial skills in building sustainable enterprises for profit and non-profit to effect
change in India.
2.4 The Changing Paradigm
Over the last ten years is that the Indian government and NGOs (non-governmental
organizations) have realized that they not only have to co-exist but to work with each other to effect
change. India still has a long way to go compared to the West where governments are funding non-
profit organizations by outsourcing social sector services. At the same time the few organizations
who have decided to play this role have realized that even with one hand tied behind their back
they can effect great change because they have access to hundreds of millions of people that they
will never be able to access on their own. Although social entrepreneurship has been practiced
in India for some time now, social business is a comparatively new phenomenon in the country.
Social entrepreneurs in the country, however, have had substantive success in addressing social
problems. The reason for their success, and that of social businesses, is the fact that the solutions
are realistic. They address existing gaps in society which are in need of practical solutions, and
more importantly, the solution initiatives are driven by visionary, tenacious and ambitious persons

59
who are ready to strive to ensure their dreams do come true.” Social enterprises are definitely
making an impact on Indian society. With a population of 1.1 billion, it is very difficult to see that
impact on a macro level. “However, in organizations we have worked directly with, we have seen
growth 15 to 100 times in their beneficiary base in a five- to seven-year period. Clearly growth
is possible. They are at numbers of tens of thousands and realize they need to get to hundreds of
thousands, if not hundreds of millions. But that is taking time. It is the mindset more now than ever
of the need to scale and the ability of the organization to do so.”

3. Comparative Analysis: The factors responsible for social entrepreneurship in India

First there needs to be an awareness of and concern about the social problems and issues to be
addressed, and committed entrepreneurs interested in addressing them, says Hans Wahl, executive
director of INSEAD’s Social Entrepreneurship Initiative. A policy and regulatory framework within
which social entrepreneurs can obtain status without compromising their objectives is also very
important. “It would be good to have a collaborative network to be used among social entrepreneurs
that enables them to share ideas and spread innovations, ideally linked to an academic institution
interested in, and committed to, promoting awareness and creating knowledge and insight into the
best functioning of social enterprises”. Financial assistance, social legitimacy and acknowledgement
are the most important factors necessary to enhance the growth of social entrepreneurship in India.
The process has begun, but a lot more needs to be developed, especially by social, educational and
government institutions.
It is presumed all over the world that with the changing economic situation of the world, it
is very likely that social need will increase and, consequently, the number of people committed
to addressing them will increase. Naturally the work in the field of human rights will continue
since violations are unlikely to go away. Natural resource management and alternate energy
initiatives will gain prominence, as will livelihood and migration. Social entrepreneurship and
social businesses will be mainstreamed substantially. India has the world’s second largest labour
force of 516.3 million people and although hourly wage rates in India have more than doubled
over the past decade, the latest World Bank report states that approximately 350 million people in
India currently live below the poverty line. With an estimated population of 1.2 billion people, this
means that every third Indian is bereft of even basic necessities like nutrition, education and health
care and many are still suffering from unemployment and illiteracy. Social entrepreneurs can help
alleviate these issues by putting those less fortunate on a path towards a worthwhile life. Rather
than leaving societal needs to the government or business sectors, they can solve the problem by
changing the system.
The existing socio-economic situation of the country reflects that the field of microfinance is
a growing one. The Bhartiya Samruddhi Investments and Consulting Services (BASIX) founded
by Vijay Mahajan was the first microfinance project to lend to the poor. Vikram Akula is another
founder of a successful Indian microfinance project. His organization “SKS Microfinance” offers

60
microloans and insurance to poor women in impoverished areas of India. SKS is currently one of
the largest and fastest growing microfinance organizations in the world. Banking and finance are
the biggest beneficiaries of technology-enabled social start-ups. There are three reasons why micro
financing is so important for the poor: Firstly, they don’t possess money to open a bank account.
Secondly, they don’t have collateral or a credit record to secure a loan and thirdly, they are often
unable to complete the necessary paperwork because of their poor standard of literacy. This is
why they rarely have access to the formal financial sector and micro financing is an important
service in assisting to cope with these issues. In India, self-help groups form the basic constituent
unit of microfinance. These groups usually consist of 5 to 20 poor women who pool their savings,
sometimes as low as 10 or 20 cents per month, per member, into a fund from which they can
borrow when necessary. The group is linked to a bank, where they maintain a group account. After
at least 6 months of ´inter-loan` repayments the group is eligible for the loan. The bank lends to
the group as a unit, without collateral, relying on self-monitoring and peer pressure within the
group for repayment of these loans. Starting with lower multiples (1:1 to 2:1) the maximum loan
amount often is a 4:1 multiple of the total funds in the group account. Many other innovative social
entrepreneurs could be named.

4. Conclusions and Suggestions

In India, especially in low-income markets, there is also a significant distinction between
urban and rural ground realities. Move 30 miles away from a metro and the reality of this other
India hits home. Here every day urban accommodations – such as 24-hour access to electricity, safe
drinking water or affordable healthcare – is a luxury. Thus when evaluating how an enterprise can
prosper in low-income markets, entrepreneurs and investors must consider how local realities can
impact consumption, production, distribution and operations. Moreover, how those realities may
change swiftly between rural communities should also be considered. There is a great potential for
social enterprises in India. But social entrepreneurs and start-ups need support at multiple levels,
both from the government and from organizations to turn innovative ideas into products or services.
Affordable products, such as solar-powered lamps and mobile phone chargers, are often called
innovations for low-income markets. But service models – such as outsourcing companies in rural
areas generating local employment – can also be high-impact innovations. The common factor
whether it is a product, service, process or technology is that innovations can create value for
people on low incomes and improve their lives. Many enterprises in India show such innovations.
Among them are lifestyle enterprise  Mother Earth, rural hospital provider Vaatsalya and solar
energy company Barefoot Power. But such enterprises must become more common to have a
greater impact on society.
In India, the growth of start-ups with strong social impact – especially those for low-
income markets – is often challenging. Entrepreneurs lack global business exposure, especially in
marketing and finance. This makes it difficult for an enterprise to expand and grow beyond its local
and regional influence. Mentoring such enterprises could help. A mentor could convey industry

61
knowledge, enable the enterprise leverage and deepen business impact and profits. But mentoring
culture is weak in India. This is a result of the majority of incubators either being focused on
technology based innovations or being based in key metros only. Where relevant incubation for
low-income market businesses does exist, there aren’t adequate strategic partnerships, rendering
such businesses a ‘risky investment’ for investors. Sometime incubators provide mentorship and
in some cases access to funding. However, they need to focus on building strategic partnerships
for entrepreneurs; without these partnerships the investors have to undertake higher risk which
ultimately limits the number of ideas that can be successfully taken to markets. To overcome such
challenges, the country needs more organizations like Ennovent to accelerate innovations. They
provide a structured yet flexible mentoring approach as well as connections to a global community
of investors, which helps generate investor-ready ventures.

References

• Alex, Alexandar V. 1983. Human Capital Approach to Economic Development, New Delhi, Metropolitan.
• Abu-Saifan, S. 2012.  Social Entrepreneurship: Definition and Boundaries.  Technology Innovation
Management Review. February 2012: 22-27.
• Charles Leadbeater, The Rise of the Social Entrepreneur, Demos, 1996.
• Davidson, J. Et al. 1992. No Time to Waste; Poverty and the Global Environment, Oxford University
Press, New Delhi.
• Dandekar, V.M. and Nilakanth Rath. 1971. Poverty in India, Pune, Indian School of Political Economy.
• David Bornstein, How to Change the World: Social Entrepreneurs and the Power of New Ideas, Oxford
University Press (and others) ISBN 0-19-513805-8.
• Hardin, G. 1968. The Tragedy of Commons, Science, Vol.162.
• Joanna Mair, Jeffrey Robinson, and Kai Hockerts,  Social Entrepreneurship,  Palgrave Macmillan,
2006. ISBN 1-4039-9664-4.
• John Elkington and Pamela Hartigan, The Power of Unreasonable People: How Entrepreneurs Creates
Markets to Change the World, Harvard Business Press, 2008.
• Krishnaji, N.1997. ‘Human Poverty Index: A Critique’, in the Economic and Political Weekly, 30th
August, 2202-05.
• Mohapatra, Bishnu. N. 2001. ‘Social Connectedness and Fragility of Social Capital; View from an Orissa
Village’, Economic and Political Weekly, Vol.36 No.8, Feb 24, Pp.665-672.
• Maheswari, Shriram.1987. ‘Voluntary Action in Rural Development in India’, in the Indian Journal of
Public Administration, Jul- September: 560-561.
• Muhammad Yunus, Bertrand Moingeon, Laurence Lehmann-Ortega, “Building Social Business Models:
Lessons from the Grameen Experience”, April-June, vol 43, n° 2-3, Long Range Planning, 2010, p. 308-
325”.
• Myrdal, Gunnar, 1957. Economic Theory and Under-developed Regions. Bombay, Vora and Co.
Publishers Pvt. Ltd.

62
• NIRD. 2001. Rural Development Statistics 2000-01. Hyderabad: National Institute of Rural Development
• Patel, Amrita. 1996. ‘Operation Flood: The Next Step’, in Dairy India 1997. Delhi.
• Peredo, A. M., & McLean, M. 2006. Social Entrepreneurship: A Critical Review of the Concept. Journal
of World Business, 41(1): 56-65.
• Paul Samuel. 1982. Managing Development Programmes: The Lessons of Success. Boulder, (Colorado),
Westview Press.
• Robert Gunn and Christopher Durkin, Social Entrepreneurship: A Skills Approach, Policy Press, 2010
• Singh, Kartar. 1999. Rural Development- Principles, Policies and Management, New Delhi, Sage.
• Singh, Kartar and J. Acharya. 1986. ‘The Impact of Madhya Pradesh Dairy Development Project’,
Research Paper, June, Institute of Rural Management, Anand.
• Singh, Kartar and V. Mukund Das. 1982. ‘Impact of Operation Flood at the Village Level’, IRMA
Research Report, Anand, Institute of Rural Management.
• World Bank. 2011. World Bank Development Report 2011. Delhi, Oxford University Press.

63
Public Delivery System through Self Help Groups
(SHG) in National Rural Livelihood Mission
(NRLM) Approach: A Case Study of Odisha
By

Pranaya Kumar

1. Introduction
To begin with, Ministry of Rural Development (MoRD), Government of India (GoI) set up
a committee under the Chairmanship of Prof. R. Radhakrishna (Committee on Credit Related
Issues under SGSY). The committee gave its recommendations in the year 2009. The Ministry
held widespread consultations on the recommendations and accepted the major recommendation
of the Radhakrishna Committee. The Ministry secured the approval of the Planning Commission
and the Finance Ministry for restructuring the SGSY as National Rural Livelihoods Mission
(NRLM). The objective of the programme is to see that the institutions of the poor are continuously
nurtured, strengthened and empowered and they eventually drive all the initiatives to enable their
members to come out of poverty and enjoy a decent quality of life. The external sensitive support
structure envisioned under the NRLM should gradually shed its functions and responsibilities to
the institutions of the poor and truly evolve into a sensitive facilitating structure. The success of
NRLM will be possible in achieving this objective. In spite of having problem in terms of sufficient
trained manpower in this programme and sector, this is a humble attempt to address the problem.
1.1 Guiding Principles of NRLM
• Poor have a strong desire to come out of poverty, and, have innate capabilities
• Social mobilization and building strong institutions of the poor is critical for unleashing
their capabilities
• An external dedicated and sensitive support structure is required to induce social
mobilization
• Providing employment opportunities to people
• To create livelihood opportunities through Self Help Groups
• To give opportunities to marginalized sections to have some avenues to lead life with
dignity.

64
1.2 Key Features of NRLM
• Promotion of Institutions of the Poor: Strong institutions of the poor such as SHGs and
their village level and higher levels federations are necessary to provide space, voice and
resources for the poor and for reducing their dependence on external agencies. NRLM will
therefore focus on setting up of these institutions at various levels. These institutions will
partner with Government, Public and Private sectors for last mile delivery of social and
economic services for the poor. NRLM will in addition promote specialized institutions
like Livelihoods collectives, producer’s cooperatives/ companies for deriving economies
of scale, backward and forward linkages, and access to information, credit, technology,
markets etc. The Livelihoods collectives will enable the poor to optimize their limited
resources.
• Demand Driven: NRLM adopts a demand driven strategy. States will have the flexibility
to develop their action plans for poverty reduction which will include a 7 year Perspective
Plan and a detailed Annual Action Plan. The overall plan will be within the allocation for
the state based on inter-state poverty ratios. Demand driven also implies that it will be a
process driven from below by the grassroots institutions of poor. Planning will be highly
decentralized and as the institutions of the poor mature, they will drive the agenda.
• Training and Capacity building: Training and capacity building of the poor ensures that
they are provided with the requisite skills for managing their institutions, managing
their livelihoods, for enhancing their credit absorption capacity and credit worthiness. A
multipronged approach for training and continuous capacity building of the targeted families,
S.H.Gs, their federations, government functionaries, bankers and other key stakeholders is
envisaged. Particular focus will be given to develop and engage community professionals,
community resource persons for capacity building of SHGs and their federations and other
collectives. NRLM will mark extensive use of ICT to make knowledge dissemination and
capacity building more effective.
• Revolving Fund and Capital Subsidy: Subsidy will be available in the form of revolving
fund and capital subsidy. The Revolving Fund is provided to the SHGs as an incentive to
inculcate the habit of thrift and credit and also to meet their immediate consumption needs.
Under NRLM the major paradigm shift is that subsidy will be a ‘resource in perpetuity’ and
will be used as catalytic capital for leveraging bank finance rather than onetime injection
to bridge the viability gap in the microenterprises taken up by the beneficiaries. The capital
subsidy is thus meant for building their credit worthiness and this enables a long term
relationship with banks for repeat finance.
• Universal Financial Inclusion: NRLM will work on achieving universal financial inclusion,
which will go beyond providing basic banking services to all the poor households /SHGs/
federations. NRLM will work on both demand and supply side of Financial Inclusion. On

65
 the demand side, it will promote financial literacy among the poor and provide catalytic
capital to the SHGs and their federations. On the supply side, NRLM will coordinate with
the financial sector and encourage use of Information, Communication & Technology
(ICT) based financial technologies, business correspondents and community facilitators
like ‘Bank Mitras’. The N.R.L.M will also take initiative to ensure universal coverage
of rural poor against loss of life, health and assets through convergence with existing
insurance products. Finally N.R.L.M will also work on remittances, especially in areas
where migration is endemic.
• Provision of Interest Subsidy: The rural poor need credit at low rate of interest and in
multiple doses to make their ventures economically viable. In order to ensure affordable
credit, it is proposed to provide subsidy on interest rate above 7% per annum for all SHG
loans availed from mainstream financial institutions, based on prompt loan repayment.
This subsidy is available till a member accesses institutional credit, through repeat loaning,
up to Rs 1.00 lakh per capita.
• Infrastructure creation and Marketing support: NRLM will seek to ensure that the
infrastructure needs for key livelihoods activities of the poor are met with. Particular
attention needs to be given to activities for providing marketing support to SHGs which
will include support for market research, market intelligence, technology, extension and
developing backward and forward linkages. This will include support to build livelihoods
collectives.

2. A Case of Odisha - TRIPTI in NRLM approach

TRIPTI in the similar line of NRLM, before announcement of NRLM and through the
support of World Bank, started in 2009. Targeted Rural Initiatives for Poverty Termination and
Infrastructure” (TRIPTI) is an IDA (World Bank) assisted livelihood project to be implemented in
the State of Orissa. This project has been planned to be taken up in 38 blocks of 10 coastal districts
of Orissa i.e. Puri, Khurda, Nayagarh, Cuttack, Jagatsinghpur, Kendrapara, Bhadrak, Jajpur, Angul,
and Balasore. The project recognizes the progress under the Mission Shakti movement in Orissa,
that has demonstrated considerable achievement in the field of social mobilization of the poor
women into 3, 00,000 Self Help Groups with credit mobilization from Banks. But, the economic
benefit that was envisaged has not been realized under the movement in the poverty pockets of the
identified project area. It can be attributed to the fact that the credit linkage with banks has not been
up to the mark. It aims to enhance social and economic empowerment of rural poor in 38 blocks
in 10 districts of Orissa. The programme would strengthen SHGs and promote their federation at
the Gram Panchayat level in order to develop self-sustaining community institutions. The project
would cover over 1.254 million families in 8,369 villages under 1,020 gram Panchayats in these
project blocks

66
 One of the major strategies of the project is to ensure social inclusion of poor in the project that
would enable poor and marginalized to have equal opportunities to participate in community based
institutions. The project would adopt a two-fold approach in ensuring inclusion of these groups.
Firstly, the project would identify the left out poor in the village and would organize them in existing
or new SHGs. Secondly, the project recognizes that there are extremely poor and vulnerable groups
(EPVG) in community that typically suffer from severe economic and social impediments and such
groups needs to be identified and supported through specific need based interventions to enable
them to participate in community / village level institutions. The pro-poor inclusion fund (PPIF), a
sub-component of community investment fund under the project is earmarked for investments that
would enhance the productive capacities of such EPVG households / groups, including providing
need based bridging finance for inclusion of identified EPVG households into existing SHGs. A
part of this fund would be managed by the Gram Panchayat level federation (GPLF) to undertake
various activities that would enhance productive potential of EPVG households. Financial support
to GPLF for further support to SHGs through the community institution, i.e. is GPLF
- Monitoring of Livelihood support programs by GPLF
- Monitoring of Livelihoods extension mechanism by GPLF
- Support in opening bank account/financial inclusion through Bank Mitra by GPLF
- Master book keeper to maintain the book and records of GPLF
- Community mobilizers to for induce the financial inclusion and social inclusion
- Preparation of EMF ( Environment Management frame work) and implementation of
the same through NREGS
- Support to the poor and vulnerable groups through vulnerable funds
- Helping the poor and vulnerable to access the public delivery system.
- GPLF representative to attend the panchayat meetings

3. Findings from the Field: Achievements of TRIPTI

• Identification of Poor: A participatory process was adopted to identify the poor in each
village. The households were divided into four categories, Well off, manageable, poor and
extremely poor and vulnerable (EPVG). Govt. official, PRI members, Agnawadi and local
community themselves identified the households into different category. The project aimed
at the poor and EPVG for their socio-economic development.
• Mobilization of eligible households into SHGs: The project has done a notable job
in mobilizing around 191,820 households in 16,823 SHGs thus raising the inclusion
percentage of poor and EPVG from 45.8% to 64.5%. T e project is also working with pre-
existing SHGs formed under the Mission Shakti program of Govt. of Orissa. Thus, the total

67
 coverage of the project has been extremely impressive, working with 715,011 households
mobilized into 61,134 SHGs. The inclusion of poor and EPVG household has been more
than 80% in 252 GP (25% of the GPs), 50-80% in 567 GPs (57% of the GPs) and 30-50%
in 148 (15% of the GPs).
• Formation of CLF and GPLFs: The project has been successful to form 6487 CLFs, which
includes 49,219 SHGs (80% of the total SHGs). In 868 GPs (85% of total GPs), the CLF
formation has been saturated. Similarly, the project has been able to restructure 830 GPLF
successfully, having the representation of poor and EPVG on board of GPLF. 827 of the
GPLFs have operational bank account.
• Placement of CRP-CM and MBKs: So far 2182 CRP-CMs in 2182 CLFs of 728 GPLFs
have been placed through a robust selection procedure and have started work. Another
2000 odd CRP-CM are undergoing orientation training. It is envisaged that 6800 odd CRP-
CM will be engaged for the project activity in all the CLFs.
• Speeding up disbursement of Pro-Poor Inclusion Fund (PPIF): Till date the project has
disbursed PPIF I to 9882 SHGs, amounting to INR 4.94 Crores and PPIF II to 2263 SHGs
amounting to INR 2.26 Crores. In all the SHGs visited, the mission tea members were
satisfied to observe that the poor and EPVG has actually benefitted from the PPIF and
the largest share of the amount has been distributed among them. Thus there has been
some level of prioritization happened at the SHG level. This is a positive trend as the
earlier Mission Shakti grant amount have been mostly distributed equally among the
member. According to the project, over the current base of 60,000 odd SHGs, PPIF need
to be distributed to 25,000 odd SHGs, the majority of whom around 18,000 SHGs will be
receiving INR 15,000 and the rest INR 10,000 as these SHGs have already received the
mission Shakti grant of IN 5,000.
• Micro Investment Plan: As per the project around 12,000 SHG MIP have been developed
till date and the entire disbursement of CIF has been according to the MIP. During the
field visit the mission team members observed that the MIP process has started getting
institutionalized. In no places did any of the members complained about the process, in
fact they were of the view that during MIP, the first time they were able to understand their
family cash flow so much clearly. This has been the first step towards financial literacy and
the project has been able to deliver that quite effectively. The project staff has internalized
the process of enquiry into the income, expenditure, assets, liabilities and risks position
of each poor household. This process need to deliver at a scale with some modification
without diluting the process of enquiry. It was also observed that the CRPs will be playing
major role in MIP preparation, however the capacity of the CRPs need to be strengthened.
Looking at the present work load it is suggested that the project develop a separate training
architecture for building the capacity of the CRPs on MIP preparation as well as of the
GPLF on the process of prioritization, aggregation of MIPs, managing and monitoring CIF

68
 portfolio, etc. The first tranche of CIF has been transferred to 385 GPLFs amounting to
INR 28.4 Crores. However it is observed that the utilization of CIF till date has been only
36%.
3.1 Livelihoods Promotion Fund:
The Livelihood Fund is designed to transfer financial and technical assistance to the community
based organizations (producer or commodity groups their federations, producer companies) on a
demand driven basis through a participatory livelihood mapping process for use as a catalyst to
improve their livelihoods and build their institutions. TRIPTI follows a two pronged strategy for
promotion of livelihoods of the rural poor; viz. ‘financial services approach’ by arranging financial
assistance to targeted households through MIP process, an ‘livelihood services approach’ by
strengthening delivery of support services like technology, extension, information, input-output
marketing, etc. in select sub-sectors.
The project launched two pilots in the year 2011 in agriculture sector. One was around
improved agriculture practices for enhancing productivity of paddy, pulses and vegetables through
System of Rice Intensification (SRI) and System of Crop Intensification (SCI) with the technical
support of Center for World Solidarity (CWS). The second interventions was aimed at improving
livelihood incomes of the poor farmers by engaging them in seed production and influencing Seed
Replacement Ratio (SRR) in the local blocks through targeted seed exchange practices. This was
taken up with technical assistance from Live and Let Live (LALL).
• System of Crop Intensification: A pilot was undertaken in Nayagarh district by TRIPTI
covering about 190 farmers growing SRI paddy on 31.5 hectares of land. Out of these, 146
farmers belonged to poor and EPVG category. The yield difference between SRI (5.6 tons/
ha) and conventional production practices (4.0 tons/ha) was nearly 37.5 % higher in SRI
demonstration plots. The demonstrations were undertaken in about 5 varieties of paddy
viz. Kala Tulasi, Masuri, Nali Jagganatha, Pratikhya and Pooja. About 4 farmers recorded
yield in excess of 8 tons/ha. The incremental yield in paddy recorded by the farmers over
the previous season was in the range of 1.9 tons/ha. During the rabi season, the SCI
was implemented for the Green Gram – ‘Mung’ crop with 153 farmers. The production
for SCI Mung crop was of the order of 6.3 quintals/ha as compared to 3.8 quintals/ha
through traditional practice. During thecurrent year, the project has hired two consortia of
NGOs, viz. one led by CWS and another by Livolink for scaling up SCI activity to 20,000
farmers in 22 blocks during both Kharif and Rabi seasons. However, 14,000 farmers could
participate in the program this year due delayed contracting of technical service providers.
• Seed Village: This intervention was aimed at enhancing agriculture production through
improved seed replacement outcomes by leveraging community institutions of the poor
producers creating local loops connecting quality seed producers with small farmers. The
seed village program was implemented in Jagatsinghpur district 116 farmers on 20 hectares

69
 of land in five patches (each patch was of 10 acre). About 59 farmers from poor and EPVG
category households and other small and marginal farmers participated in the pilot. About
13 Tons of certified seed of both, long duration (CR 1018) and short duration varieties
(Pooja) was produced and sold locally through community level seed exchange programs,
Kisan Melas, etc. The GPLFs coordinated the certification process and provided logistic
support in terms of seed processing, bagging, storing and marketing of the seed. Similarly,
LALL was entrusted the job of expanding seed villages to 2000 farmers in 5 blocks. The
project may advise the agency to expand the scope of seed production activities to include
scented varieties of rice, pulses, groundnut and vegetable seeds.
The livelihoods initiatives are to establish a community based extension mechanism and
monitored through the GPLF. This is not a parallel programme with Agriculture department, rather
supplement to the Agricultural programmes. Odisha is one of state where the gramsabha meetings
were video recorded this year. This year the participation of community in the Gram Sabha in trpiti
area is better in comparison to other area because of the presence of GPLFs and the members of
GPLF who attended the meeting and represented their issue.
3.2 Problems and Policy Issues
The major drawback in SGSY was lack of dedicated manpower for the process intensive
work envisaged under the programmess. All evaluation studies have pointed out this as critical
shortcoming. Hence, the major innovation under NRLM is the setting up of sensitive and dedicated
support structures at the National, State, district and sub-district levels. The district level units for
managing the activities of NRLM will have suitable linkages with District Rural Development
Agencies (DRDAs). They will have appropriate linkages with the PRIs. No additional post would
be created for the Mission; all professional support in the required fields will be on deputation or
on contract or through outsourcing of services.

4. Conclusions and Recommendations

The future of SHG in India will be determined according to the resources, infrastructure,
manpower and the people who will lead it at the grass root level. In terms of policy, infact NRLM has
tried incorporate many issues with some flexibility of adaptation to the local need of the community,
resources available, skills of the people and economic activities associated with it. The way NDDB
succeeded under the leadership of Dr. Verghese Kurien by making the Village Dairy Cooperative as
the Primary unit/ focus, in the same way, if proper leadership will arise at community level, which
is otherwise available and autonomy, flexibility, accountability, responsibility to the community. It
is expected that NRLM will develop a framework for partnership with CSOs be both at strategic
and at implementation levels. The partnership will be guided by the core beliefs and values of
NRLM, and mutual agreement on processes and outcomes. In view of the importance of PRIs,
it is necessary to consciously structure and facilitates a mutually beneficial working relationship
between Panchayats and institutions of the poor particularly at the level of Village Panchayats.

70
Care should be taken that while doing so the autonomy of the institutions of poor is not to be
compromised; at the same time lead role of the PRIs in initiating local level development is not
challenged. Formal platforms can be conceived for regular consultations between institutions of
poor and PRIs for exchange of mutual advice, support and sharing of resources available with the
Panchayats. Above all any development programme succeeds by taking into consideration people
and people’s organization.

References

• Alex, Alexandar V. 1983. Human Capital Approach to Economic Development, New Delhi, Metropolitan.
• Dasgupta, Partha and Karl-Goran Maler. 1991. ‘The Environment and Emerging Development Issues’,
Proceedings of the World Bank Annual Conference on Development Economics 1990,The World Bank,
Washington.
• Davidson, J. Et al. 1992. No Time to Waste; Poverty and the Global Environment, Oxford University
Press, New Delhi.
• Dandekar, V.M. and Nilakanth Rath. 1971. Poverty in India, Pune, Indian School of Political Economy.
• Garg, S.C. 2006. ‘Transformation of Central Grants to States: Growing Conditionality and TRIPTI
website of Panchayati Raj department, Government of Odisha, www.tripti.org
• Krishnaji, N.1997. ‘Human Poverty Index: A Critique’, in the Economic and Political Weekly, 30 th
August, 2202-05.
• Maheswari, Shriram.1987. ‘Voluntary Action in Rural Development in India’, in the Indian Journal of
Public Administration, Jul- September: 560-561.
• Myrdal, Gunnar, 1957. Economic Theory and Under-developed Regions. Bombay, Vora and Co.
Publishers Pvt. Ltd.
• Patel, Amrita. 1996. ‘Operation Flood: The Next Step’, in Dairy India 1997, Delhi.
• Paul Samuel. 1982. Managing Development Programmes: The Lessons of Success. Boulder, (Colorado),
Westview Press.
• Singh, Kartar. 1999. Rural Development- Principles, Policies and Management, New Delhi, Sage, Singh,
Kartar and J. Acharya. 1986. ‘The Impact of Madhya Pradesh Dairy Development Project’, Research
Paper, June, Institute of Rural Management, Anand.
• World Bank midterm evaluation mission document for TRIPTI, 2013.

71
 Self Help Groups in Rural Development
Programmes: Some Policy Implications
By

Smita Raut

1. Introduction
There was a significant shift in focus when in 1999 the Integrated Rural Development
Programme (IRDP) was transformed to Swarnajayanti Gram Swarojgar Yojana (SGSY). The
strategy of self employment through organizing poor into Self Help Groups (SHGs) became the
cornerstone of the new strategy. An overview of the implementation of SGSY over the last ten years
throws up a mixed picture. There is a widespread acceptance in the country of the need for poor
into S.H.Gs as a pre-requisite for poverty reduction. In the last 10 years about 250 lakh rural BPL
households have been organized and brought under the SHG network. However, it has also brought
into focus shortcomings like vast regional variations in mobilization of rural poor, insufficient
capacity building of beneficiaries, insufficient investments for building community institutions,
weak linkages with the banks leading to low credit mobilization, lack of repeat financing and lack
of dedicated manpower to implement the programme. The focus on single livelihoods activity
has not met the multiple livelihoods requirements of the poor. Furthermore, several states have
not been able to fully utilize the funds received under SGSY, indicating a lack of appropriate
delivery systems and lack of building necessary absorption capacity among the rural poor. Absence
of aggregate institutions in the form of SHG federations precluded the poor from accessing higher
order support services for productivity enhancement, marketing linkage, risk management, etc. It
is primarily trying to address the rural poverty by focusing on the targeted population with multi
prong approach and strategic action to achieve the target.
Self Help Group is a homogeneous group of micro entrepreneurs with affinity among
themselves, voluntarily formed to save whatever amount they can conveniently save out of their
earnings and mutually agree to contribute to a common fund of the group from which small loans
are given to the members for meeting their productive and emergent credit needs at such rate of
interest, period of loan and other terms as the group may decide. The objectives of SHG are:
• To meet the credit needs of the poor by combining flexibility, sensitivity and responsiveness
of the informal credit system with the strength of technical and administrative capabilities
and financial resources of the formal credit institutions.
• To build mutual trust and confidence between the bankers and the rural poor.

72
 • To encourage banking activity both on thrift as well as credit side in a segment of the
population that the formal financial institutions usually find difficult to cover.
The group should
• Be in active existence for at least a period of six months.
• Have successfully undertaken savings and credit operations from its own resources.
• Maintain proper accounts/records.
• Work democratically wherein all members feel that they have a say should be evident.
• Be formed to reflect genuine need to help each other and work together and Branch
Manager should be convinced that the group has not come into existence only for the sake
of participation in the project and availing benefits there under.
Have members preferably with homogenous group. In order to financially strengthen Women
Self Help Groups (SHGs) across India, the Union Cabinet has approved key changes to the National
Rural Livelihoods Mission (NRLM), aiming to eradicate poverty in villages by empowering
women. Rural Development Minister Jairam Ramesh announced recently that over 25 lakh Women
SHGs will now be provided bank loans at an interest rate of seven per c The development of rural
part of India is only possible with ameliorating the socio- economic conditions of millions of rural
poor by creating a platform to provide them some livelihood generation activities and addressing
the poverty syndrome by targeting it specifically. None the less various efforts by successive
governments at the centre to remove poverty has not been able to give due benefits to the deserving
sections of the society.
At the same time in recent past, particularly since last two decade, we have witnessed the
reasonable amount of growth in economic terms without having much impact of trickling down
of benefit to the poor. India is one of the fastest growing economies with annual growth rate of
Gross Domestic Product (GDP) of over 9 percent in the recent past. In spite of this rapid growth
rate, 41.8% of the rural population continues to live below the poverty line (estimates of the
Tendulkar Committee for 2004-05). The key challenge, therefore, is to ensure that the economic
growth is inclusive and it leads to significant reduction of rural poverty. Despite significant efforts
of Government rural poverty continues to be a major challenge. Programmes directly targeting
poor families and supporting their livelihoods promotion hold a major promise to trigger pro-
poor growth. However, the past record of implementation of these programmes has not been very
successful and the pro-poor growth that they were supposed to generate has actually not taken
place.

2. Methodology
The issues related SHGs and their role in rural development as well as anti-poverty
programmes were examined and discussed in detail to get a broad picture in this scenario. However

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a broad survey of literature particularly from secondary sources was scanned before specific case
studies were taken into consideration for minute examination. It has helped the author to bring a
comparison between the macro-level pictures long with micro level issues and triangulate them
with the necessary information.
2.1 Recent Developments
In accordance with the announcement made by Finance Minister P. Chidambaram in the 2012-
13 Budget, the Union Cabinet on May 1, approved the provision of interest subvention for Women
SHGs operating under the NRLM, ensuring that they shall avail loans up to Rs. three lakh at an
interest rate of seven per cent per annum. Initially, the scheme will be started as a pilot project in
150 districts, including the 82 Integrated Action Plan districts affected by naxal violence; and in the
rest of the States, 75 per cent of the cost would be borne by the Central government and 25 per cent
by the States. “In 150 districts, all Women SHGs, which are now getting bank loans at 11.5 to 14 per
cent rate of interest, will now get it at seven per cent rate of interest,” said Mr. Ramesh. Additionally,
Women SHGs that repay loans in time will enjoy an additional three per cent subvention, thereby
reducing the effective rate to four per cent. In the 150 districts, the Central government will bear the
entire cost of the interest subvention from the market rate to seven per cent.
The total cost of the project is around Rs.1,650crore for 2013-14, out of which, Rs.1,400 crore
shall be borne by the Central government and Rs. 250 crore by the States. Over the next five years,
we will move to a situation where the entire cost will be borne by the Centre. In order to improve
targeting, the Cabinet has decided to do away with the BPL (below poverty line) category in the
NRLM, and instead identify target groups through the Participatory Identification of Poor (PIP)
process, at the community-level. Currently, there are nearly 25 lakh Women SHGs in the country,
with nearly three crore members and over the next five years, the number is expected to increase
to seven crore. There is proposal for a separate Nabard-like institution in order to promote Women
SHGs. The NRLM was launched by UPA chairperson Sonia Gandhi in June 2011 — a poverty
reduction programme based on employment generation by adoption of a multi-pronged strategy.
The program aims at creating efficient and effective institutional platforms of the rural poor,
thereby enabling them to increase household income through sustainable livelihood enhancements
and improved access to financial services.
2.2 Experience of PRADAN
PRADAN is one of the pioneers in the promotion of Self-Help Groups (SHG) in India,
having formed its first SHG in Alwar, Rajasthan, in 1987. A savings and credit SHG is a simple
yet effective way of reaching out and connecting with rural poor women. A Self-Help Group
is an informal association of 10 to 20 poor women belonging to the same village and sharing a
common socio-economic background. The group enables its members to gain their identity as
individuals, while realising – and utilising – the immense power of mutual aid. It provides them
with a platform from where they can access banks and public services, and spearhead changes that

74
affect them as poor women. Nurturing Self-Help Groups of rural poor women is PRADAN’s key
tool in fulfilling its mission and goals. The Self-Help Groups work for the women in a number
of ways: they provide guidance; they give support and assistance to women; and they identify
and promote home-based enterprises among its members. These home-based enterprises, called
“honeybee activities”, involve a myriad of ventures. The SHG members take loans from the SHGs
and set out to begin an enterprise of their own. As a result of PRADAN’s intervention efforts, an
increasing number of rural families – especially women – are engaging in independent livelihood
activities. These activities serve as opportunities for diversifying and enhancing their incomes.
PRADAN gives particular attention to women because even as they comprise half of the country’s
population, they remain the most disadvantaged sector among the poor. Yet it is the women who
prove to be most effective in fostering change in their families and communities.With PRADAN’s
guidance and the members’ own experiences, SHGs can potentially play four key roles through the
different stages of evolution: mutual help, financial intermediation, livelihood planning, and social
empowerment. As on March 2013, Pradan worked with 18,736 SHG’s across 7 states, representing
a total membership of 252,070 rural poor women. These SHG’s have mobilised a total savings of
1230 Million Rupees. Also significantly, the financial accounting and Management Information
System (MIS) of PRADAN’s SHG programme has been streamlined by the innovative system of
community-based accounting through the Computer Munshi System.

3. Findings from the country and Macro Level Analysis:

As of 2010, the total number of SHGs directly linked to banks stood at 69.53 lakh, with
a savings amount of Rs 6,199 crore and loan outstanding of Rs 28,038 crore, according to the
recently released ‘Status of Microfinance in India’ report by NABARD. The recently released
‘Status of Microfinance in India’ report by NABARD examines the reach of the bank-self-help-
group (SHG) linkage model across the country. The initiative is the largest microcredit and micro
savings programme of its kind in the world, and uniquely Indian. As on March 31, 2010, the total
number of SHGs directly linked to banks (public and private sector commercial banks, regional
rural banks, and cooperative banks) stood at 69.53 lakh, with a savings amount of Rs 6,199 crore
and loan outstanding of Rs 28,038 crore. Recent years have, however, seen a fall in numbers. The
report states that while the number of SHGs grew by 22.2% in 2008-09 over 2007-08, it fell by
13.6% in 2009-10 over 2008-09. The savings amount with SHGs grew at 46.5% in 2008-09 over
2007-08, but it came down to 11.8% in 2009-10 over 2008-09 (Table 1).

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Table 1 Progress of SHG-Bank Linkage Model (Amounts in Rs crore)
2007-08 2008-09 % Growth 2009-10 % Growth
No. of Amt No. of Amt (2008- 09) No of Amt SHGs (2009-10)
SHGs (lakhs) SHGs (lakhs) No Amt of (lakhs) No Amt of
SHGs SHGs
SHG 50.1 3785.39 61.21 5545.62 22.2 46.5 69.53 6198.71 13.6 11.8
Savings
Loan 12.28 8849.26 16.1 12253.51 31.1 38.5 15.87 14453.2 1.4 17.9
Disbursed
to SHGs

SHGs' 36.26 16999.91 42.24 22679.84 16.5 33.4 48.52 28038.28 14.8 23.6
Loan O/s
Source: Status of Microfinance in India 2009-10, NABARD

Nevertheless, the overall growth in numbers and coverage over the years, from a small
initiative in the early-1990s, is remarkable and also signifies the potential for more effective outreach
with proper support. For instance, the distribution of SHGs under the linkage shows regional
imbalance. This has to be understood against the backdrop of banking density being significantly
higher in the southern, northern and western regions as compared with the north-eastern, central
and eastern regions. In March 2010, the southern region comprising the states of Kerala, Tamil
Nadu, Karnataka, Andhra Pradesh and Pondicherry accounted for 46% of SHGs under the bank-
SHG model, and 51% of savings as against 5% of SHGs and 5.5% of savings accounted for by the
northern region comprising the states of Haryana, Himachal Pradesh, Punjab, Jammu and Kashmir
and Rajasthan, and 11% of SHGs and 8.3% of savings in the central region comprising the states
of Uttar Pradesh, Madhya Pradesh, Uttarakhand and Chhattisgarh. The eastern region comprising
West Bengal, Assam, Bihar, Jharkhand, Orissa and the Andaman and Nicobar Islands came after
the southern region, accounting for just 20% of SHGs and 18% of savings.
The southern region, likewise, remained ahead in terms of loans disbursed to SHGs as of
March 2010, with a 66% share, while the north-eastern, eastern, northern, western and central
regions together accounted for just 34%. Studies have shown a positive correlation between SHG
spread (measured as the number of SHGs per lakh population) and banking network (measured as
the number of scheduled commercial bank branches per lakh population). But banking network
does not automatically translate to better SHG spread, as seen by the contrast between the southern
and northern regions of the country. Besides banking infrastructure, the presence of strong NGOs
that nurture and build the capacity of SHGs may also be seen as a factor.
Another feature that has been noted right from the start of the bank-SHG linkage concept
has been the predominance of women’s self-help groups, or the ‘feminisation of linkage banking’.
Women’s groups accounted for 75% of the total number of SHGs and 71% of the total savings of

76
SHGs as of March 2010. The dominance of women in SHG credit is, however, understandably
a miniscule part of the larger macro scenario where women’s access to formal banking services
is abysmally low. While the thrust on women’s groups and credit access to women has to be
appreciated, it should not be at the cost of neglecting the formation of men’s SHGs. At another
level, the ‘women focus’ of SHGs has led to questions being raised about increasing the burden on
women; their being targeted as vote banks by political parties, marketing agents for the products of
multinational corporations, and agents for the delivery of government programmes.
The neglect of men’s SHGs at the other end calls for critical reflection from a women’s
perspective. The relatively high rates of interest charged on internal lending by SHGs, and translation
of the benefits of SHG membership into significant increases in income levels are some of the other
issues. A matter of great concern is the higher rate of growth of credit disbursement to microfinance
institutions (MFIs) under the bank-MFI linkage model, at 89.4% in 2008-09 and 116% in 2009-10
compared to the rate of growth of loans to SHGs which fell during the same period, as can be seen
in Table 1. Notwithstanding the fact that bank credit to MFIs, at Rs 8,062.74 crore in March 2010,
was only 56% of bank credit to SHGs, it was an increase from Rs 3,732.33 crore in March 2009 that
was 30% of bank credit to SHGs the same year. There is cause for concern that banks find lending
to MFIs an easier way of fulfilling priority sector lending targets. This also has to be viewed in
the larger perspective of a fall in the number of rural bank branches and a fall in loans of smaller
amounts from the formal sector with the onset of financial liberalisation.
As already stated, with some direction to address the imbalances there is substantial potential
and scope for expansion of the bank-SHG model for greater coverage and outreach in order to
make significant impact. Recent news of suicides by MFI borrowers under pressure in some regions
makes it imperative that we re-focus with renewed thrust on the bank-SHG model as the way
forward. The existing formal credit infrastructure will have to be effectively harnessed towards
this. For instance, the Eleventh Five-Year Plan Sub-Group on Microfinance had suggested the
need to evolve a policy framework that would encourage regional rural banks (RRBs) to graduate
as MFIs. RRBs also have a greater presence in poorer regions of the country and can promote the
bank-SHG linkage in these areas. Microfinance can be an effective means of financial inclusion
only if dependence on informal credit at high rates of interest is reduced. Banks are better placed
than MFIs to do this.

4. Conclusions and Recommendations

Concerted efforts will be made to strengthen and consolidate all existing SHGs of poor
households formed by various organizations. Large scale successful poverty eradication
programmes in the country have demonstrated that the best way to reach out to the entire family
is through women. Hence, NRLM will focus on women for the primary institutions. Banks in
the country have had a positive experience in lending to women’s self help groups. Since banks
will have a key role under N.R.L.M, the strategy of women S.H.Gs is aligned with the Banks’

77
positive experience with women’s groups. Subsequently, both women and men will be organized
for addressing livelihoods issues i.e. farmers organizations, milk producers’ cooperatives, weavers
associations, etc. Participatory social assessments and well being analysis would be conducted to
identify and rank all households according to vulnerability. This will enable special focus, right from
the beginning, on poorest of poor among the BPL households. The most vulnerable households like
the Particularly Vulnerable Tribal Groups (PVTGs), single women and women headed households,
persons with disability, landless, migrant labour would receive a special focus. NRLM will ensure
adequate coverage of vulnerable sections of the society such that 50% of the beneficiaries are SC/
STs, 50% are women, 15% are minorities and 3% are persons with disability.
A shift that has happened over the last ten years is that the Indian government and NGOs
(non-governmental organizations) have realized that they not only have to co-exist but to work
with each other to effect change. India still has a long way to go compared to the West where
governments are funding non-profit organizations by outsourcing social sector services. It will
be overambitious for us to think that they will be funding all these initiatives but the fact that
they allow these organizations to operate within the government structure - albeit with conflict,
as they are operating with one hand tied behind their back - is progress. At the same time the few
organizations who have decided to play this role have realized that even with one hand tied behind
their back they can effect great change because they have access to hundreds of millions of people
that they will never be able to access on their own.

References

• Alex, Alexandar V. 1983. Human Capital Approach to Economic Development, New Delhi, Metropolitan.
• Dandekar, V.M. and Nilakanth Rath. 1971. Poverty in India, Pune, Indian School of Political Economy.
• GOI (Government of India). 2006. Planning at the Grassroots Level: An Action Programme for the
Eleventh Five Year Plan, Report of the Expert Group. New Delhi: Ministry of Panchayati Raj.
• GOI (Government of India). 2006. The State of the Panchayats: A Mid-term Review and Appraisal. New
Delhi: Ministry of Panchayati Raj.
• GOI (Government of India). 2008. ‘Centrally Sponsored Schemes: Identifying a Domain for the
Panchayati Raj Institutions’, in The State of Panchayats: 2007-08, Vol. 3: Supplementary. New Delhi:
Ministry of Panchayati Raj. pp. 337-45.
• GOI (Government of India). 2008. Report of the Empowered Sub-Committee of the National Development
Council on Financial and Administrative Empowerment of the Panchayati Raj Institutions. New Delhi:
Ministry of Panchayat Raj.
• Krishnaji, N.1997. ‘Human Poverty Index: A Critique’, in the Economic and Political Weekly, 30 th
August, 2202-05.
• Maheswari, Shriram.1987. ‘Voluntary Action in Rural Development in India’, in the Indian Journal of
Public Administration, Jul- September: 560-561.
• Myrdal, Gunnar, 1957. Economic Theory and Under-developed Regions. Bombay, Vora and Co.
Publishers Pvt. Ltd.

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• Patel, Amrita. 1996. ‘Operation Flood: The Next Step’, in Dairy India 1997, Delhi.
• Paul Samuel. 1982. Managing Development Programmes: The Lessons of Success. Boulder, (Colorado),
Westview Press.
• Singh, Kartar. 1999. Rural Development- Principles, Policies and Management, New Delhi, Sage.
• Singh, Kartar and J. Acharya. 1986. ‘The Impact of Madhya Pradesh Dairy Development Project’,
Research Paper, June, Institute of Rural Management, Anand.
• TRIPTI website of Panchayati Raj department, Government of Odisha, www.tripti.org
• World Bank midterm evaluation mission document for TRIPTI, 2013.

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 Microinsurance and Economic Development:
An Empirical Investigation
By

Ashish Hooda, Harvinder Singh and Karam Singh*

1. Introduction
Microinsurance  is the protection of low-income people against specific perils in exchange
for regular premium payment proportionate to the likelihood and cost of the risks involved. This
definition is exactly the same as one might use for regular insurance except for the clearly prescribed
target market: low-income people. The target population typically consists of persons ignored by
mainstream commercial and social insurance schemes, as well as persons who have not previously
had access to appropriate insurance products. Microinsurance is insurance with low premiums and
low caps / coverage. In this definition, “micro” refers to the small financial transaction that each
insurance policy generates. “General micro insurance product means health insurance contract, any
contract covering the belongings, such as, hut, livestock or tools or instruments or any personal
accident contract, either on individual or group basis, as per terms stated in Schedule-I appended
to these regulations”; and “life micro insurance product” means any term insurance contract with
or without return of premium, any endowment insurance contract or health insurance contract,
with or without an accident benefit rider, either on individual or group basis, as per terms stated in
Schedule-II appended to these regulations as those within defined (low) minimum and maximum
caps. Micro insurance is a financial arrangement to protect low-income people against specific
perils in exchange for regular premium payments proportionate to the likelihood and cost of the
risk involved. (i) the size of the risk (ii) the scope of the risk (the risks themselves are by no means
“micro” to the households that experience them); (iii) the delivery channel: it can be delivered
through a variety of different channels, including small community-based schemes, or other types
of micro institutions, but also by enormous multinational insurance companies, etc.

2. Research Methodology
The secondary data sources like IRDA Annual Reports, Individual Company Reports,
NABARD and various research engines as well research papers are studied to support the research
objective.
2.1 Objective of the Study
• Analysis of Working Models of Microinsurance
• Analysis of Microinsurance Mechanism and Economic Development.

80
2.2 Micro insurance Products
Micro insurance like regular insurance may be offered for a variety of risks. These include
both health risks (Illness, injury, or death) and property risks (damages or loss). A wide variety of
micro insurance products exists to address these risks.

2.3 Micro insurance Models

• Partner agent model: A partnership is formed between the micro insurance (partner as MFI)
scheme and an agent (insurance companies), and in some cases a third – party healthcare
provider. The micro- insurance scheme is responsible for the delivery and marketingof
the clients, while the agents retain all responsibilities for design and development. In this
model, micro insurance scheme benefit from limited risk, but are also disadvantaged in
their limited control
• Full service model: The micro insurance scheme is in charge of everything; both
the design and delivery of products to the clients, working with external healthcare
providers to provide the services. This model has the advantage of offering micro
insurance schemes full control, yet the disadvantage of higher risks.
• Provider-driven model: The healthcare provider is the micro insurance scheme, and
similar to the full-service model, is responsible for all operations, delivery, design,
and service. There is an advantage once more in the amount of control retained, yet
disadvantage in the limitations on products and services.
• Community-based/mutual model: The policyholders or clients are in charge, managing
and owning the operations, and working with external healthcare providers to offer services.
This model is advantageous for its ability to design and market products more easily and
effectively, yet is disadvantaged by its small size and scope of operations.

2.4 Micro Insurance Scheme

A micro insurance scheme is a scheme that uses, among others, an insurance mechanism
whose beneficiaries are people excluded from formal social protection schemes, particularly,
informal economy workers and their families. The scheme differs from others created to provide
legal social protection to formal economy workers. Membership is not compulsory (but can be
automatic), and members pay, at least in part, the necessary contributions in order to cover benefits.
The expression “micro insurance scheme” designates either the institution that provides
insurance (e.g., a health mutual benefit association) or the set of institutions (in the case of linkages)
that provide insurance or the insurance service itself provided by an institution that also handles
other activities (e.g., a micro-finance institution).

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3. Micro insurance & Development
Traditionally in India, rare Micro insurance schemes were introduced, either by non-
governmental organizations (NGOs) due to the felt need in the communities in which they were
involved or by the trust hospitals. These schemes now gathered momentum partly due to the
development of micro- insurance activity, and partly due to the regulation that makes it mandatory
for all formal insurance companies to extend their activities to rural and well – identified social
sector in the country. Now a days, Micro insurance is recognized as a useful tool in economic
development. As many low-income people do not have access to adequate risk-management tools,
they are vulnerable to fall back into poverty in times of hardship, for example when the breadwinner
of the family dies, or when high hospital bills force families to take out loans with high interest
rates. Furthermore, micro insurance makes it possible for people to take more risks. When farmers
are insured against a bad harvest (resulting from drought), they are in a better position to grow crops
which give high yields in good years, and bad yields in year of drought. Without the insurance,
however, they will be inclined to do the opposite; since they have to safeguard a minimal level of
income for themselves and their families, crops will be grown which are more drought resistant, but
which have a much lower yield in good weather conditions.

Table 1: Growth of Micro insurance in India

No. of life Insurance offices (As on 31st March, 2012)
Year/ Insurers 2010 2011 2012
Private 8768 8175 7712
LIC 3250 3371 3455
Industry 12018 11546 11176
Source: IRDA Annual Report 2011-2012
The above table shows that the private insurers results in a net reduction of 463 offices during
the financial year 2011-2012. On the other hand, the public sector insurer LIC resulting in a net
addition of 84 offices in the same financial year. But the overall result In Industry is reduction in
no. of offices from 11546 to 11167 as on 31st march, 2013.

Table 2: New Policies Issued: Life Insurers

(In lakh)
Insurers 2010-2011 2011-2012
LIC 370.38 357.51
(-4.70) (-3.47)
Private Sector 111.14 84.42
(-22.61) (-24.04)
Total 481.52 441.93
(-9.53) (8.22)
Figures in brackets indicate the growth over previous year.

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Table 3: Factors affecting Demand and Supply of Micro- insurance in India
Factors Specific Issues
1. Low and Limited Pres- • The vast majority of the poor do not have access to any form of
ent Coverage insurance services.

• Insurance Coverage is better in relatively developed states.

• Coverage is far more common in the case of the life rather than non-
life products, conforming that most non- life products needed to be
sold or made compulsory.
2. Low willingness to Buy • For many potential clients i.e. those with limited or no previous
Insurance: Perspectives insurance exposer, there appear to be several reasons for not buying
of the Target Population insurance:

 Many are unaware of Micro insurance products

 They claim that they can not afford the premium, because
income is highly variable and seasonal.
 In many places, clients are still unfamiliar with the local agent
of company selling insurance products.
 The felling that insurance is only for the old, sick and/or
DEAD person.
 Did not own enterprises, hence, did not think they had any
insurable asset.
• Those with previous insurance experience, had a set of different
responses:
 Distrustful of insurance companies because
they had seen a genuine claim not paid
 Products on offer did not cater to real needs- they were money
busters
 Tired of the expense and time required for documentation and
process involved in the claim servicing
 Paying premium year after year, with very little coming back,
and also because that serious loss was incurred was seen grossly
unfair; so the motivation to insure was low, particularly when
products were priced high and benefits remote and
distant
 Too much time taken in receiving the payout and a lot of the
money going to corrupt people
 Insurance forced by banks when animals (catel) were
purchasing using a bank loan

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3. Exclusion of Social • Staff of insurance companies confirmed that provided minimum cover
Sectors to this section of the population, primarily under the rural and social
sector obligations to meet the IRDA directives.
• Further, they preferred to fulfil the mandatory directives through rural
insurance, rather than social sector, focusing on the relatively rich.
As a consequence, the BoP households in most cases continued to
remain excluded from commercial insurance services. Thus, coverage
of low income rural household has, by and large been through special
initiatives of NGOs and microfinance institutions.
• Some commercial insurers are now watching these operations with
interest in expending their client base. They agreed that the rural
sector had unlapped potential, but insurers were daunted by the initial
costs of market development because there was no guarantee that
these investing would be the ones to reap profits.
4. Low awareness and Gaps • Among poor rural households, insurance services are so limited that
in Understanding there experiential knowledge.
• Self- help groups are ignorant about new, private insurance players.
However, they were familiar with the intermediary organization’s
name and role is much more easily reported by the respondents, rather
than ultimate insurers.
• Regarding Knowledge about the products, largely limited to life
insurance and the LIC.
• Awareness of non- risk coverage, insurance products and insurance
companies is abysmally low.
• Ironically, the field staff of implementing agencies also is ignorant
about the technicalities of insurance (like actuarial aspects, and are not
always aware of the products features and processes. Consequently,
they are often misinforming clients as well which will results in non –
renewable policies as well loss of faith in insurance services.
5. Managerial and Opera- • Provision of micro- insurance services to the rural poor requires man-
tional Capacity Gaps agement and operational capacity at the grassroot level.
• Well established MFIs/ organizations, with professionals heading
field units and operational procedures and systems in place, are most
trusted by the insurance companies because of their managerial and
operational capacity. There are used first-tier partner for field level
functions by insurance companies.

6. Challenges in Design of • Mismatch between customer needs and products available in the
insurance Products market.
• Lack of sensitivity if gender.
• Inadequate effort in developing new products.

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 7. Pricing Issues • Mismatch between willingness to pay and perceived high price of
micro- insurance products.
• Lack of data for appropriate pricing.
• Lack of actuarial expertise and with relevant expertise in Micro
finance.
3.1 The use of the mechanism of insurance implies:
1. Prepayment and resource-pooling: the regular prepayment of contributions (before the
insured risks occur) that are pooled together.
2. Risk-sharing: the pooled contributions are used to pay a financial compensation to those
who are affected by predetermined risks, and those who are not exposed to these risks do
not get their contributions back.
3. Guarantee of coverage: a financial compensation for a number of risks, in line with a pre-
defined benefits package.
Micro insurance schemes may cover various risks (health, life, etc.); the most frequent micro
insurance products are:
• Life micro insurance (and retirement savings plans)
• Health micro insurance (hospitalisation, primary health care, maternity, etc.)
• Disability micro insurance
• Property micro insurance – assets, livestock
• Crop microinsurance

4. Conclusions and Suggestions

Micro insurance has the potential to be a game changer, as it can help address many of the
across the world. Micro insurance can result in a ‘win-win’ situation, joining the double bottom line
of commercial profit with social benefits fighting through systematic risk management among the
rural poor. If we take into account the increasingly rural- urban connectivity, we find the basic nature
of rural economy and the rural market has go through essential change. To quote NCAER “ the
mobility towards higher income group has, in fact, been much higher in the rural areas than urban.”
Opportunities in the rural market are huge. The village-folk are rotating to more safe institutions
like LIC, Post Offices, and Nationalised Banks. Obviously the lead will have to be maintained
by the public sector insurers because of their geographical spread and market share, it is equally
important that the private players increase their efforts to cover this section of the vast population.
The rural areas in the 21st century are not what they used to be at the time of independence.
Continuous investments in irrigation & power and modern methods of connectivity & communication
have brought success and comfortable circumstances to a good-sized population. It makes sound

85
business sense to study these markets and fully hit the massive potential that exists today. Many
insurance schemes for the poor are being tested with across the country covering crop, property,
assets, and health hazards for the under privileged population, and the time has come to scale up
the pilot schemes to much larger populations with the active support if the governmental and non-
governmental infrastructure that is existing. Further the following suggestions may be adopted for
betterment.
• IRDA should look into the matter that all the insurers develop their own micro insurance
products and fulfil the rural obligations. This will encourage all the existing and upcoming
insurers to develop and design more customized micro insurance products for the market
which will eventually improve rural poor’s conditions and increase the overall insurance
penetration in India.
• There is an urgent need to improve the awareness among the low income people about
the micro insurance and the functioning of IRDA which will improve people about
the micro insurance and the functioning of IRDA which will improve the confidence
level of the common investors. To do so, it is highly recommended that the IRDA along
with the existing insurers should take the responsibilities to educate the people through
print advertisement, TV advertisement, hoardings, campaigning and through the oral
communication of the life insurance agents.
• It is highly recommended to induct more and more trained rural life insurance agents,
especially micro insurance agents, for the micro- insurance products only. For this reason
IRDA should monitor the quality of trainings imparted to the life agents/advisors. More
quality training institutes are required for this purpose.
• The development of distribution channel into the rural areas is very important for the
overall development of insurance in India. Therefore, a proper distribution channel is
required to develop.

References

• Annual Reports of IRDA, (2010-11 and 2011-2012)

• Alexander S. Preker, Guy Carrin, David Dror, Militia Jacob, William Hsiao, DynaArhin-Tenkorang
(2002). “Effectiveness of community health financing in meeting the cost of illness”.  Bulletin of the
World Health Organisation (Geneva:WHO) 80 (2): 143–150.
• Dror, D, Jacquie Ch (1999). “Micro-insurance: Extending Health Insurance to the Excluded”. International
Social Security Review (Geneva: ISSA) 52 (1): 71–97. 
• Deacon Stefan (2005). Risk, Insurance and Poverty: A Review.
• IRDA (Micro- insurance) Regulations (2005)
• PERFORMANCE INDICGATORS FOR MICROINSURANCE: A Handbook for Micro- finance
Practitioners
• The Journal of Indian Micro- Finance: Lessons for the Future.

86
 Microfinance and Financial Inclusion:
An Indian Experience
by

Manleen Kaur

1. Introduction
Financial Inclusion as defined by Leeladhar (2005) is “the delivery of banking services at an
affordable cost to the vast sections of disadvantaged and low income groups.” Reserve Bank of
India (RBI) defines financial inclusion as “the process of ensuring access to appropriate financial
products and services needed by vulnerable groups such as weaker sections and low income
groups at an affordable cost in a fair and transparent manner by mainstream institutional players.”
Rangarajan Committee (January 2008) defines financial inclusion as “the process of ensuring
access to financial services and timely and adequate credit where needed by vulnerable groups at
an affordable cost.” Financial services may include remittances of funds, micro-insurance, payment
of bills, savings account with overdraft facilities, etc. Therefore, Financial Inclusion is the ‘social’
responsibility of the banks to meet the ‘social’ requirement of the people by providing them with
easy access of financial services so as to accustom them with financial environment of the nation
and also to protect them from “harsh” moneylenders. The importance of Financial Inclusion can be
judged from the fact that in the past few years it has been a priority in the policy making process
in many nations. A financial system, inclusive in nature, alleviates availability of financial services
and thus reduces the cost of capital, leading the nation on the path of growth. Such a kind of
system also reduces the power of middlemen to exploit poor households and small businessmen
by charging unexpectedly high rates of interest. Easy access to finance serves as an incentive for
inception of great ideas and technology.
Financial inclusion has been a part of the policy making process since the 1950s after the
establishment of the co-operative banks under the ‘Co-operative Credit Societies’ Act of 1904
with the objective of “facilitating promotion of thrift and self-help among agriculturists, artisans
and persons with limited means.”. The commercial banks acted mainly as business entities that
channelled their sources majorly towards the ones having major stake in their respective banks.
These banks were not reachable to the masses, therefore, 17 commercial banks were nationalised
in 1969 followed by another 6 in 1980. A further step was taken with the establishment of Regional
Rural Banks in 1975 to outreach more credit to rural people. In 1982, National Bank for Agriculture
and Rural Development (NABARD) was established which enhanced credit for agriculture and

87
rural development activities. In 1992, NABARD launched an innovative programme of ‘Self Help
Group-Bank Linkage’ which emerged as one of the largest programme in the world making it easy
for the ‘marginalised asset-less, and resource deficient poor especially women, easy access to micro
credit and micro insurance.’ The scheme was successful in steering the finance towards unbanked
and under-banked rural areas with 100 million poor families linked to banks through 80 lakh SHGs
till March 2012.
Similarly, a Rural Infrastructure Development Fund (RIDF) was set up in NABARD, initiated
by the Government of India in 1995-96 with an allocation of Rs 2000 crore to facilitate the completion
of on-going projects of rural infrastructure.A Kisan Credit Card (KCC) scheme was introduced by
NABARD in 1998 to provide credit for production requirements like purchase of seeds and inputs
for agriculture through cash credit limit. Under this scheme, account holders were provided with
a card and passbook with their credentials on it which served as a valid identification document.
Also an accidental insurance against death or permanent disability was provided for three years to
the KCC holder. Synonymously, a General Credit Card (GCC) scheme was introduced for non-
agricultural clients of banks in rural and semi-urban areas. Under this, credit up to Rs 25000 was
provided as indirect finance to agriculture, giving preference to women clients. The main objective
of the scheme was to provide easy credit to the banks’ customers without insisting on the security
purpose or ultimate use of the credit. All the above broad schemes have indirectly helped in linking
more population with banks.
The direct approach of Financial Inclusion was started in 2005. RBI, in November 2005,
directed the banks to provide simple and safe deposit facilities with zero or minimal balances
by opening “No-Frills Account”. The basic objective behind such accounts was to allow the
unbanked households to maintain an account with minimal balances and permit limited number of
transactions per month. The Government used such accounts overtime to make welfare payments
like pensions and wage payments under MGNREGA. The no-frills account increased from half a
million in 2006 to 33 million as on March 31, 2009 and is over 50 million presently. However the
studies by Skoch Development Foundation stated that out of the total no frills accounts opened
between April 2007 and March 2009, only 11% were operational which an issue of concern was.
Financial Inclusion Committee, headed by Dr Rangarajan, was set up on June, 2006. On the basis
of the recommendations by the Committee, two funds, viz, Financial Inclusion Fund (FIF) was
established for the purpose of meeting the cost of development and promotion of financial inclusion
and Financial Inclusion Technology Fund (FITF) was established to support the technology efforts
in the process of financial inclusion.
Both the funds of corpus Rs 500 crore each were operated by NABARD.RBI, in January
2006, introduced Business Correspondents/Business Facilitators (BC/BF) models, for providing
financial and banking services. The activities performed by BCs include: Disbursal of small value
credit, Recovery of principle/ collection of interest, Collection of small value deposits, Sale of
micro insurance/ mutual fund products/ pension products/ other third party products, Receipt and
delivery of small value remittances/ other payment instruments.

88
 On the other hand, BFs perform activities like:
• Identification of borrowers and fitment of activities
• Collection and preliminary processing of loan applications
• Creation of awareness about savings and other products such as, education and advise
on managing money and debt counselling.
• Processing and submission of application to banks.
• Promotion and nurturing of SHGs.
• Post-sanction monitoring.
• Monitoring and handholding of SHGs/credit groups/ others.
• Follow-up for recovery.
Initially in this model, only insurance agents could act as BFs but with time, retired officials,
postmasters, bankers, school teachers could also act as BFs. In July 2009, Government of India
identified 129 unbanked blocks to provide banking facilities to them and making them financially
inclusive. Out of those 129 blocks, 91 blocks were in North-East states and 38 in other states
implying the extent of financial exclusion in the North-Eastern area of the country. With continuous
efforts, those unbanked blocks were reduced to 71 as on March 31, 2011.Similarly in December
2009, RBI, to equalise the uneven spread of branches, permitted the commercial banks to open the
branches in tier 2 to tier 6 centres with a population of less than 50000 freely but under general
permission as per the procedure. After analysing the extent of financial exclusion in the North-
Eastern states, the commercial banks to open branches in rural, semi-urban and urban areas
without taking any permission from RBI.RBI also advised the banks to come up with a road map
to provide banking facilities to each of the unbanked villages having a population of over 2000 by
March 2012. The banking facilities need not be provided through a ‘bricks and mortar’ branch, but
could be provided through various forms of ‘ICT-based models’. As a result, State-level Bankers’
Committee identified 7300 unbanked villages and allotted them to various banks.
Recently Government of India introduced a scheme to directly transfer the government
subsidies and social security benefits to the accounts of the beneficiaries; who in turn could draw
the money from BCs in their village itself. In the budget of 2012-13, Finance Minister extended
the campaign to areas with population of more than 1000 in North-Eastern and hilly states, and
others having population more than 2000, as per census 2011. Banks were asked to provide banking
facilities to areas with population of 1000-2000 in North-Eastern states and hilly states; and to
habitations of 1600-2000 in all states/UTs by March 2013.

2. Methodology
The study attempts to calculate the Index of Financial Inclusion (IFI) for the year 2010-11
using the UNDP formula as well as simple arithmetic mean so as to compare between the two for
broadening the scope of financial inclusion. Therefore, the objectives of the study are as under:

89
 • Calculation of various dimensions helpful in assessing the level of financial inclusion
in the economy.
• Assess the level of financial inclusion in India across various regions and states and
Union Territories by formulating an Index of Financial Inclusion.
• A regression analysis has been performed to determine the significance level of
independent variables like per capita income, etc. in the value of the index.
• The following assumptions are made in calculating the index of financial inclusion:
• A cap of 100 is set on ‘savings account per 100 adults’ so as to moderate the extreme
values especially in cities like Chandigarh, New Delhi, etc.
• A weight of 0.5 is given to the off-site ATMs as compared to 1 given to the bank branches.
• Optimum adult age is taken to be 14 years according to the rules prescribed by RBI for
minimum age to open a bank account.
• In view of financial inclusion plan, April 2012 by RBI, we have taken ultimate 50
branches and ATMs per 100000 of adult population.
• A cap of 100 is set on the sum of amount outstanding and deposit amount with respect
to GSDP at current prices to moderate the extreme values in cities like Chandigarh, etc.
2.1 Database
The study is based on the secondary data available up to 2010-11 which was available from
RBI Publications. Also All regions, states and Union Territories have been included. The data on
adult population was arrived at through ‘Sample Registration System 2010’. The savings account
and branches include the ones in commercial banks and Regional Rural Banks available from
‘Basic Statistical Return 2011’. The total deposit amount and the amount outstanding were taken
from ‘Basic Statistical Return 2011’. GSDP at current prices was available from Central Statistical
Organization (CSO) for the year 2011-12. State-wise literacy rates were taken from Economic
Survey 2011-12, Per-capita income from CSO and the total number of Self-Help Groups was taken
from “Status of Micro-finance in India 2011-12” by NABARD.
2.2 Index of Financial Inclusion
The study uses a multi-dimensional approach for calculating IFI. Three dimensions were
taken into account:
• Dimension 1 measures the access and availability of banking services, proxied by
the savings account per 100 adults. Savings accounts are taken into account for both
scheduled commercial banks as well as of Regional Rural Banks. A cap of 100 was
imposed on the determinant.
• Dimension 2 measures the coverage of banking services proxied by the number of bank
branches and off-site ATMs per 100000 adults. Off-site ATMs are intentionally used so
as to distinguish between the services provided by a ‘Bricks and Mortar’ branch and

90
 ATMs. On the basis of that, we have assigned a weight of 0.5 to the off-site ATMs. Also
the data for state-wise off-site ATMs was not available directly. As a result, we used an
estimated data calculated by the formula:

• After getting the estimated number of off-site ATMs of each bank in each state, we
summed it up to get total off-site ATMs for each state.
• Dimension 3 measured the usage of banking system proxied by the sum of total deposit
amount and outstanding amount with respect to GSDP at current prices. A cap of 100
was imposed so as to moderate the extreme values in certain cities.
After calculating the dimensions, Index of Financial Inclusion was calculated using the
formula:

Where:
D1= dimension 1
D2= dimension 2
D3= dimension 3
The formula also implies that equal weight is assigned to all the dimensions.
The results from this formula were further compared with the value of financial inclusion
using the simple arithmetic mean of all the dimensions, giving them equal weights.
2.3 Regression Analysis
A regression analysis was performed, keeping IFI as our dependent variable and log of
combined branches and off-site ATMs per 100000 adult population, literacy rates, per capita
income and number of Self-Help Groups as our independent variables. This exercise is to ascertain
the broad determinants of Financial Inclusion.

3. Results and Discussion

The study mainly focuses on the level of contribution by Scheduled Commercial Banks
(SCBs) and Regional Rural Banks (RRBs) in making the economy financially inclusive.
The results were divided into three parts:

91
 • Calculation of dimensions
• Computation of index of financial inclusion
• Regression analysis
Three dimensions were taken into consideration, i.e., access or availability of banking services,
banking penetration and usage of banking facilities. Each of the dimensions require due attention
and need to be discussed in detail.
• Dimension 1 measures the access or availability of banking services which wasproxied
by the ‘savings account per 100 adults’. As mentioned earlier, saving accounts were
considered for both SCBs and RRBs. Also the adult age was considered to be 15 years and
above according to the minimum age to open an account prescribed by RBI. To moderate
the variations at the national level, a cap of 100 accounts per 100 adults was imposed on the
value. All-India average for this dimension came out to be 0.86, meaning that 86 out of 100
individuals have bank account. Accordingly, the Southern region gives us the maximum
value of 1; implying that every individual had at least one bank account followed closely by
Northern region with the value 0.96. On the other hand, Eastern region shows a minimum
value of 0.65 meaning that 65 adults out of 100 had a bank account.

Adults linked by Saving Bank Account (%)

1.5
D1 Savings A/Cs per 100 adults

1.0

0.5

0.0
Southern
North east

Eastern

Central
Northern

Western

Regions

92
Table 1: Linkage or access of banking services

Access or Availability of banking Access or Availability of banking

services (Dimension 1 without a services (Dimension 1 with a cap
cap of 100 accounts) of 100

Standard Deviation 44.91 15.77

Weighted Average 86.11 86.11

Coefficient of Variation 52.15 18.31

The table 1 shows that standard deviation, after imposing a cap was reduced from 44.91 to
15.77, thus improving the results and also reducing the coefficient of variation from 52.15 to 18.31,
implying a drastic change.
Going by State/UT-wise data, Manipur shows the least value of 0.5 (Approx) to imply 50%
of the adults have a bank account.

Range Level States/UTs

0.86-1.00 High Haryana, Himachal Pradesh, Punjab, Chandigarh, Delhi, Arunachal

Pradesh, Mizoram, Tripura, Sikkim, Andaman & Nicobar Islands, Uttar
Pradesh, Uttarakhand, Goa, Dadra & Nagar Haveli, Andhra Pradesh, Kar-
nataka, Kerala, Tamil Nadu, Lakshadweep, Puducherry

0.60-0.86 Medium Jammu & Kashmir, Rajasthan, Assam, Meghalaya, Jharkhand, Odisha,
West Bengal, Chattisgarh, Madhya Pradesh, Gujarat, Maharashtra, Da-
man & Diu

Below 0.60 Low Manipur, Nagaland, Bihar

Overall, Manipur, Bihar and Nagaland require maximum attention in terms of linkage. 20 states/
UTs were included in the higher range of savings accounts. Details are provided in Annexure 1.
• Dimension 2 The banking penetration for all-India resulted to be 15.98 implying approx
16 branches per 100000 adults. In this case, Northern region showed the maximum
development with 0.42 branch and off-site ATMs per 2000 adult population while, Eastern
region gives the least value with 0.24 branches and off-site ATMs per 2000 adult population,
closely followed by North-Eastern region with 0.26 branches and off-site ATMs per 2000
adult population.

93
 Banking Penetration

D2 Branches per 2000 adult population

0.5

0.4

0.3

0.2

0.1

0.0

Southern
North east

Eastern

Central
Northern

Western
Regions

Table 2: Banking Penetration

Banking Penetration (Dimension 2 Banking Penetration (Dimension 2
without cap) with cap)
Standard Deviation 0.26 0.20
Weighted Average 0.32 0.32
Coefficient of
80.23 62.68
Variation

A cap of 1 was imposed on the values of dimension 2 which reduced the coefficient of variation
from 80.23 to 62.68 as shown in table 2. The value was still high implying a huge variation across
the states and regions.
Range Level States/UTs
0.70 – 1.00 High Chandigarh, Delhi, Goa, Dadra & Nagar Haveli, Lakshadweep
0.50 – 0.70 Medium Himachal Pradesh, Punjab, Mizoram, Sikkim, Uttarakhand, Puducherry
Below 0.50 Low Haryana, Jammu & Kashmir, Rajasthan, Arunachal Pradesh, Assam, Ma-
nipur, Meghalaya, Nagaland, Tripura, Bihar, Jharkhand, Odisha, West
Bengal, Andaman & Nicobar Islands, Chattisgarh, Madhya Pradesh, Uttar
Pradesh, Gujarat, Maharashtra, Daman & Diu, Andhra Pradesh, Karnata-
ka, Kerala, Tamil Nadu

94
 As is evident from the table above, Chandigarh and Goa show maximum banking penetration
with value 1. On the other hand, Manipur shows the least value in this case with value 0.188.
Majority of the states/UTs still lack bank branches which is one of the most important factor
for financial inclusion. As a result, Government should take aggressive measures to set up branches
in areas where the population doesn’t have access. Details are given in Annexure 2.
• Dimension 3 All India value came out to be 1. Northern, Western and Southern regions
show the maximum usage with the value of 1 whereas North-Eastern region shows the
lowest usage with 0.651 as the value.

UNDP

Arithmatic Mean
1.0

0.8

0.6
IFI

0.4

0.2

0.0
Southern
North east

Eastern

Central
Northern

Western

Region

Table 3: Usage of Banking Services

Usage of banking services Usage of Banking services
(Dimension 3 without cap) (Dimension 3 with cap of 1)
Standard deviation 0.69 0.21
Weighted Average 1.14 1.00
Coefficient of Variation 60.61 20.93

A cap on dimension 3 resulted into a sharp fall in the coefficient of variation from 60.61 to
20.93, according to the table 3. Also standard deviation reduced from 0.69 to 0.21, after imposing
the cap of 1 on the values of dimension 3.

95
 Range Level States/UTs
1.00 High Punjab, Chandigarh, Delhi, Maharashtra, Daman & Diu, Karnataka,
Tamil Nadu, Lakshadweep
0.65 – 1.00 Medium Haryana, Himachal Pradesh, Jammu & Kashmir, Arunachal
Pradesh, Assam, Meghalaya, Jharkhand, West Bengal, Madhya
Pradesh, Uttar Pradesh, Uttarakhand, Goa, Gujarat, Dadra & Nagar
Haveli, Andhra Pradesh, Kerala, Puducherry.
Below 0.65 Low Rajasthan, Manipur, Mizoram, Nagaland, Tripura, Bihar, Odisha,
Sikkim, Andaman & Nicobar Islands, Chattisgarh

Manipur ranks last with the value 0.445 whereas states/UTs like Chandigarh, Delhi,
Maharashtra, Daman & Diu, Karnataka, Tamil Nadu and Lakshadweep have the highest usage with
value 1.
Majority of the States/UTs are included in the medium range of usage of financial services.
However states like Manipur, Bihar are included in the lower category. This takes us to the
importance of awareness programmes required in such states to make people understand the
benefits of formal financial institutions and accustom people to such financial services. Details are
provided in Annexure 3.
IFI was calculated using the traditional UNDP formula giving equal weights to all the
dimensions:

Where:
D1= dimension 1
D2= dimension 2
D3= dimension 3
As a result, IFI was calculated to be 0.60. Northern region showed maximum financial
inclusion (0.66) followed by southern region (0.65). North-Eastern region with value 0.53 ranked
least amongst all the regions followed by Eastern region(0.56).
IFI was also calculated using the simple average of all three dimensions assigning equal
weights to all. According to this method, our index value for all India resulted to be 0.73 with
southern region showing the maximum value of 0.80 followed by Northern region (0.79). Eastern
region ranked least amongst all regions (0.56).

96
 UNDP

Arithmatic Mean
1.0

0.8

0.6
IFI

0.4

0.2

0.0

Southern
North east

Eastern

Central
Northern

Western
Region

According to the table 4, Chandigarh and Goa were the top ranking states with ranks one
and two respectively whereas Bihar and Manipur showed least values of IFI with ranks 34 and 35
respectively.
It is also evident from the table that Andhra Pradesh, Uttar Pradesh and Tripura have high
linkage but very low banking penetration. This implies that banks and other financial institutions
need to be set up to make people accustom to the formal sources of financial services. States like
Maharashtra and West Bengal have low linkage but high usage. This may be due to the level of
industrial set up on a large scale in these states. Also these states too require more bank branches
and ATMs to make it more financially inclusive and to improve its ranking in terms of savings
accounts. The details are provided in Annexure 4.
Overall, North-Eastern, Eastern and Central Regions require maximum attention in terms of
financial inclusion which could be improved by increasing the banking penetration in them. There
is a need to make people aware about the benefits of formal financial institutions through various
awareness programmes. Also in the regions where it is not profitable to set up a branch, banks
should use mobile vans on a large scale to help in getting deposits and lending to people who are
unable to make full use of the branches due to high transaction costs.
Overall Government still needs to use some aggressive measures to make the economy
financially inclusive.

97
Table 4: State/UT- wise ranking with respect to IFI and Dimensions
State/UTs IFI Linkage (d1) Banking Network (D2) Usage (D3)

Chandigarh 1 1 1 1
Goa 2 1 1 10
Lakshadweep 3 1 3 1
Delhi 4 1 5 1
Dadra & Nagar Haveli 5 1 4 17
Pondicherry 6 1 6 15
Uttarakhand 7 1 7 18
Sikkim 8 17 8 27
Punjab 9 1 11 1
Kerala 10 1 13 12
Himachal Pradesh 11 16 10 19
Karnataka 12 1 16 1
Haryana 13 1 15 21
Mizoram 14 18 9 34
Daman & Diu 15 22 18 1
Tamil Nadu 16 19 19 1
Andhra Pradesh 17 1 20 11
Meghalaya 18 21 14 26
Andaman & Nicobar Islands 19 1 12 31
Jammu & Kashmir 20 23 22 13
Maharashtra 21 24 24 1
Arunachal Pradesh 22 20 21 25
Tripura 23 1 17 32
Uttar Pradesh 24 15 31 16
Gujarat 25 27 23 22
Odisha 26 26 25 23
West Bengal 27 28 32 9
Jharkhand 28 30 29 14
Madhya Pradesh 29 30 27 20
Assam 30 25 33 24
Chattisgarh 31 29 28 28
Rajasthan 32 32 26 29
Nagaland 33 33 30 33
Bihar 34 34 34 30
Manipur 35 35 35 35

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3.1 Regression Analysis
A regression analysis was performed taking IFI as our dependent variable and branches &
off-site ATMs per 100000 adults, literacy rates, per capita income and SHGs as our independent
variables. The values of all the independent variables were converted into log, to obtain the
elasticity of the independent variables with respect to the dependent variable. As a result, per capita
income and SHGs showed very high elasticities ranging between 4 and 6 whereas literacy rates and
branches and off-site ATMs show moderate elasticities; i.e., around 1.
The regression analysis using the index values as calculated by the traditional UNDP formula
as well as the index values calculated by simple arithmetic mean.

Table 5: Regression Equations

Method Regression Equations
IFI= 0.971 log β1 -0.088 logβ2 + 0.125 logβ3 + 0.182 logβ4 +c
UNDP Formula (7.528) (-1.100) (1.103) (2.320)
R square = 0.876
IFI= 1.015 log β1 - 0.170 log β2 + 0.173 log β3+ 0.430 log β4 + c
Simple Arithmetic
(6.711) (-1.801) (1.302) (4.684)
Mean
R square = 0.830
(Figures in brackets are t-values)
Where:
β1= Branches & off-site ATMs per 100000 adult population
β2= literacy rates
β3= per capita income
β4= No. of SHGs
In the case of UNDP formula, R square resulted to be 0.876, i.e., 87.6% of the value of
dependent variable is explained by independent variables taken into consideration.
All the independent variables except literacy rates and per capita income are significant at
95% level of confidence. Also with 1% change in log β1, IFI value changes by 0.971%, highest
amongst the group showing the impact of β1on the dependent variable. Surprisingly, literacy
rate has not proved to be a significant variable in the index value with t value -1.100 showing a
negative relationship with it. Per capita income also doesn’t prove to be a significant variable with
t-value 1.103 but shows a positive relationship with the coefficient value, i.e., 0.125. SHGs have a
significant relationship with the index value with t value 2.320 and coefficient value as 0.182.
In case of regression analysis, using the index values calculated by simple arithmetic mean, R
square was 0.830 meaning that 83.0% of the value of dependent variable was due to the independent

99
variable into consideration. Also literacy rate was insignificant at 95% confidence level with value
-1.801 and negative relation with the index of financial inclusion with coefficient value -0.173.
With 1% change in branches and off-site ATMs per 100000 adults, IFI changes by 1.015%, again
the highest amongst the group. Per Capita Income is also insignificant with t value 1.302 and
coefficient 0.173. SHGs have shown a significant relation with t value as 4.684 and coefficient
value 0.430.
On comparing the regression analysis using the index values from both the methods, we reach
on a conclusion that index of financial inclusion from UNDP formula is more realistic as compared
to the one from simple arithmetic mean because the simple arithmetic mean gives us inflated results.
After discussing the results, our index values may not be fully correct due to the assumptions taken
into consideration. Also the study is limited to SCBs and RRBs only. Summarising, if we take the
results comparatively, North-Eastern and Eastern regions require maximum attention in the policy
making process for financial inclusion whereas Northern region being highest amongst the list has
a potential to become financially inclusive. Even on analysing the regression analysis, it has been
proved that branches play a very important role in making the economy financially inclusive. Also
SHGs have been significant in the value of the IFI.

4. Conclusions and Suggestions

Financial inclusion has emerged as an important pillar for growth since the last decade. The
Government of India and Reserve Bank, having realised the importance of financial inclusion,
have not been able to achieve the desired level of financial inclusion which would have led the
economy at a smoother path. Going through the various policies for financial inclusion and the
current situation of the same, it is important to realise that various behavioural and motivational
attributes need to be taken into consideration for successful implementation of financial inclusion
strategy. Also the gap between access to and delivery of financial services need to be covered. This
would further enhance the livelihood of the people. The banks play a very important role in making
the economy financially inclusive but they are usually hesitant in providing financial services like
micro credit due to its high costs of transactions. Also the interest rate caps on the micro-credit add
to the problem. These problems make the banks concentrate more on their profitability. So such
caps should be removed so that banks are then able to formulate policies by making interest rates
flexible, which could cover their costs and provide a small profit margin as well.
Various skill enhancement trainings and awareness programmes should be organised so as to
make the poor more comfortable with the formal financial institutions rather than the informal ones.
Also easy accessible and affordable “credit plus services” should be provided to the socially and
economically excluded. The transactions made by the poor are limited to deposit and withdrawal of
cash. So to reduce the transaction costs, ‘simple to use’ cash dispensing and collecting machines,
similar to the ATMs, with clearly mentioned operational instructions, should be set up. This
would enhance financial inclusion in rural and semi-urban areas.Banks can facilitate the financial

100
inclusion process by enrolling SHGs on a large scale through bank linkage programme, designing
appropriate product on the basis of requirement of a particular group of borrowers, BF and BC
models should be used more rigorously and rural branches should be inspected more regularly.
Financial inclusion has its role in the growth of agriculture as well. Firstly, financial inclusion
would drastically reduce farmer indebtedness which is the main cause of farmer suicides. Secondly,
financial inclusion would bring in modernisation in the India agriculture by providing better risk
management tools to the farmers who would be encouraged to introduce new technology at a faster
rate.An easy access to educational loans, for all segments of the society would make India an equal
opportunity nation, a pre-condition for promoting inclusive growth.
To conclude, financial inclusion is a major step to reduce poverty in India. To do this, banks and
other financial institutions should be provided with more freedom to pursue innovations necessary
to incorporate low income consumers and still earn profits. Financial institutions should also stress
on financial literacy programmes to accelerate the financial inclusion strategy in the economy. The
contributions by Government of India and all financial institutions would open gates to a far greater
degree of financial inclusion and hence lead the country on the path of growth.

References

• Bandgar, P. K. (2012). Financial Inclusion. The Management Accountant, Vol 47, No. 1.
• Banerjee, A., & Saraswat, P. (2012). Financial Inclusion in India : An Overview. The Management
Accountant, Vol 47, No. 1.
• Barik, B. (n.d.). Financial Inclusion and empowerment of India Rural Household.
• Chakrabarty, K. C. ( 2012, December 10). Financial Inclusion – Issues in Measurement and Analysis .
RBI Bulletin.
• Chattopadhyay, A. (2012). Financial Inclusion—Indian Context. The Management Accountant, Vol 47,
No. 1.
• Chikodikar, M. (2012). Financial Inclusion—An Overview. The Management Accountant, Vol 47, No. 1.
• FICCI and M-CRIL. (2012). Promoting Financial Inclusion: Can the constraints of political economy
be overcome? FICCI and M-CRIL.
• Gokarn, S. (2011, April). Financial Inclusion : A Consumer-centric View. RBI Monthly Bulleti.
• India, G. o. (2009). Report of the Committee of Financial Inclusion.
• Iqbal, B. A. (2012). Financial Inclusion through Micro-Finance. The Management Accountant, Vol 47,
No. 1.
• JOSHI, D. D. ( 2011). Financial Inclusion & Financial Literacy. Bi Oecd Seminar.
• KELKAR, V. (2010). Financial Inclusion for Inclusive Growth. ASCI Journal of Management.
• Khan, H. R. (2012, March 12). Financial Inclusion and Financial Stability: Are They Two Sides of the
Same Coin? . RBI Bulletin.
• Kodan, A. S., Garg, N. K., & Kaidan, S. (2011). Financial Inclusion: Status, Issues, Challenges and
Policy in Northeastern Region. The IUP Journal of Financial 28 Economics, Vol. IX, No. 2.

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• Kumar, C., & Mishra, S. (2011). Banking Outreach and Household Level Access: Analyzing Financial
Inclusion in India. 13th Annual Conference on Money and Finance in the Indian Economy, (p. 33).
• Kumar, N. (n.d.). Financial Inclusion and its determinants: Evidence from state level empirical analysis
in India.
• Kumar, S. K., & Sahoo, S. (2011). Enhancing Financial Inclusion: An Overview the Catalytic Role of
MFIs in India. VSRD International Journal of Business and Management Research.
• Kuppan, S. (2012). Financial Inclusion. The Management Accountant, Vol 47, No. 1.
• Kuri, P. K., & Laha, A. (2011). Financial Inclusion and Human Development in India: An Inter-State
Analysis. Indian Journal of Human Development, Vol. 5, No. 1.
• Maiti, S. K., Banerjea, S., Majumder, A., & Sarkar, A. (2012). Financial Inclusion : A Study on the Self
Help Groups (SHGs) in West Bengal. The Management Accountant, Vol 47.
• NABARD, J. (2012-13). Potential Linked Credit Plan. Jammu: NABARD.
• Ramji, M. (2009). Financial Inclusion in Gulbarga: Finding Usage in Access. Institute for Financial
Management and Research.
• RBI. (2003-08). The Banking Sector in India: Emerging Issues and challenges. RBI.
• Sangwan, S. S. (2008). Financial Inclusion and Self Help Groups.
• Sarma, M. (2010). Index of Financial Inclusion. Indian Council for Research On International Economic
Relations.
• Singh, B. (2012). Financial Inclusion—Role of Banking Industry. The Management Accountant, Vol 47,
No. 1.
• SINHA, S. (n.d.). Microfinance Regulation for Financial Inclusion: The ‘street child’ needs nurturing….
M-CRIL.
• Srinivasan, L. (2012). Financial Inclusion—Not just a CSR but a viable business model for Banks. The
Management Accountant, Volume 47, No. 1.
• Subbarao, D. (2012, October 11). Achieving Inclusive Growth: The Challenge of a New Era. RBI Bulletin.

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 Self Help Groups under SHG Bank Linkage
Program: Growth Analysis
By

Rashpal Kaur and Sheena Jangir*

1. Introduction
Micro credit programs extend small loans to poor people for self-employment projects that
help in generating income, allowing them to care for themselves and their families. Micro credit
has come to be recognized and accepted as one of the new development paradigms for alleviating
poverty through social and economic empowerment of the poor. Credit is usually provided to groups
of individuals or village organizations that use joint-liability to enforce loan repayment. Through
group savings and loans, poor people often increase their economic security and well being. Over
the past two decades micro credit programs have emerged as one of the leading strategies in the
overall movement to end poverty. Micro credit programs have become a major tool of development
and found to be the only practical and most appropriate solution to alleviate poverty. Micro credit
programs have been employed in developing countries for some years, and their effectiveness
in the development and poverty alleviation is increasingly acknowledged (Krog, 2000). In many
countries micro credit programs have proved to be an effective tool in freeing people from poverty
and have helped to increase their participation in the economic and political processes of society
(Secretary General, United Nations, 1998).
To address the problem of micro credit of the rural poor people, the National Bank for
Agriculture and Rural Development (NABARD) has launched a scheme of providing small credits.
The scheme was launched to target the poor and the credit needy people. The scheme in its inception
has taken care of the predicaments related to the need, the right and needy users, saving habit and
behavior, the paying back pattern etc. The National Bank for Agriculture and Rural Development
(NABARD) piloted the Self Help Group -Bank Linkage Program to provide poor rural households
access to banking services. The NABARD led Pilot Project commenced with the support of the
Reserve Bank of India, from 1992. It started by promoting and financing 500 SHGs across the
entire country through the SHG- bank linkage strategy. The strategy includes financing of SHGs
promoted by external facilitators like NGOs, bankers, socially spirited individuals and government
agencies, as also promotion of SHGs by banks themselves and financing SHGs directly by banks or
indirectly where NGOs and similar organizations act as financial intermediaries as well. Through
the Self-help bank linkage program the Reserve bank of India and National Bank for Agricultural

103
and Rural Development Bank aimed to improve relations existing between the poor and bankers
with the social intermediation of NGOs (Bansal, 2003).The objective of the present article is to
study the SGH-bank linkage program in providing micro credit in India. For this purpose, data
published by National Bank for Agriculture and Rural Development in India have been used. The
data has been taken from the various reports of the NABARD, accessed from its website.
Self help groups are voluntary gatherings of persons who share needs or problems that are not
being addressed by existing organizations, institutions, or other types of groups. A Self Help Group
is a group of 10-20 people who work for the capacity building of themselves. The group members
are socio-economically homogeneous. The members of the group face similar kind of situation
and share their common interest. They are a group of people with similar characteristics like caste,
language income, creed, occupation; geographical area .The group members join hands to meet the
immediate micro financial needs. They serve as a platform to establish the banking with the poor
which is reliable, accountable and a profitable business. The goal of Self help groups (SHG) is to
become effective agents of change.
The major objectives of the self help group are to
• To enable the poor and marginalized to have access to micro-credit with bank linkages via
enterprising Self Help Groups.
• To promote the concept of SHGs by sensitizing bankers, the Government and NGOs And
generally raising awareness
• To expand the financial services to the rural and the poor people with less transaction
costs.
• To alleviate poverty and empower the women.
• To establish the faith and confidence between the rural people and bankers.

2. Models of SHG-Bank Linkage Programme

The strategy behind these models is to form small, cohesive and participative groups of the
poor and needy people together. It also encourages them to pool their savings regularly and use the
pooled savings in order to make small interest bearing loans available to the members. Bank credit
facility is also made available to the group to supplement its resources for the purpose of lending
to its members. The SHG-bank linkage program has proved to be the major supplementary credit
delivery system with a wide acceptance by banks, NGOs and various government departments.
There are models of SHG-bank linkages that have evolved over time, especially in India.
(i) SHG –bank linkage Model: This model involves the SHGs financed directly by the
banks Viz., Commercial Banks (Public Bank and Private Sector Banks), Regional Rural
banks and the Cooperatives banks.
(ii) MFI-Bank Linkage Model: This model covers financing of Microfinance Institution
(MFIs) by banking agencies for on –lending to SHGs and other small borrowers.

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2.1 SHG- Bank Linkage Model
The SHG - Bank Linkage Program is a major plank of the strategy for delivering financial
services to the poor in a sustainable manner. The search for such alternatives started with internal
introspection regarding the innovations which the poor had been traditionally making, to meet
their financial services needs. It was observed that the poor tended to come together in a variety of
informal ways for pooling their savings and dispensing small and unsecured loans at varying costs
to group members on the basis of need.
2.2 MFI –Bank Linkage Programme
Microfinance Bank linkage Programme is an important model for extending financial services
to the microfinance sector in the all over the country by raising resourses from the banks and
the other institution .MFIs could be NGO, Coopertive MFIs,NBFC( are working not for profit ),
NBFC (registered with the RBI).These MFIs seek and obtain huge loans from the banks and other
financial institution for providing micro credit .Most of these MFI entered into the Micro finance
sector only after the SHG- bank Linkage Programme was well entrenched,the turnover of these
institution grew at a much larger scale than the former .They are more aggressive and innovative
in reaching out to the poor than the formal banking system .The table below shows the data of
loan to MFIs by the banks and financial institution .In Banks all commercial banks,Regional rural
banks,Cooperative banks are included. In addition to the SHG bank linkage Model and MFI –
bank Linkage Model, Small industrial development bank of India has also supported to MFIs. The
progress under the MFI bank linkage programme over the five Years from 2007 to 2012 are loan
disbursed by the banks and the bank loan outstanding with the MFIs are flutationing.

Table 1: Progress under MFI –Bank linkage Programme

(In crore)

Paticulars Loan Disbursed by Banks to MFIs Bank Loan outstanding with MFIs
2007-2008 No. of MFIs 518 1109
Amount 1970.15 2748.84
2008-2009 No. of MFIs 581 1915
Amount 3732.33 5009.09
2009-2010 No. of MFIs 779 1659
Amount 10728.50 13955.75
2010-2011 No. of MFIs 471 2315
Amount 8448.96 13730.62
2011-2012 No. of MFIs 465 1960
Amount 5205.29 11450.35

Source: Various Issues, Microfinance Report NABARD

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3. Results and Discussion
The SHG-Bank Linkage program has come a long way since its inception in 1992. The excluded
segments of the population require products which are customized, taking into consideration their
varied needs. Their banking requirements being small, the issue of servicing and delivery in a
cost-effective manner assumes significance. The table below shows the overall growth in terms of
numbers and coverage over the last five years:

Table 2: Overall Progress under SHG Bank Linkage during the last Five Years
Particulars Savings of SHG with Bank Loans disbursed to Bank Loans Outstanding
bank as on 31st March SHG during the Year With SHGs as on 31st
march
Total SHGs Out of Total SHGs Out of Total SHGs Out of Which
Which Which SGSY
SGSY SGSY
2007-2008 No. of SHGs 50.09 12.03 12.27 2.46 36.25 9.16
Amount 3785.39 809.51 8849.26 1857.74 16999.91 4816.87
2008-2009 No. of SHGs 61.21 15.05 16.09 2.64 42.24 9.76
Amount 5545.62 1563.38 12253.51 2015.22 22679.84 5861.72
2009-2010 No. of SHGs 69.53 16.94 15.87 2.67 48.51 12.45
Amount 6198.71 1292.62 14453.30 2198.00 28038.28 6251.08
2010-2011 No. of SHGs 74.62 20.23 11.96 2.41 47.87 12.86
Amount 7016.30 1817.12 14547.73 2480.37 31221.17 7829.39
2011-2012 No. of SHGs 79.60 21.23 11.48 2.10 43.54 12.16
Amount 6551.41 1395.25 16534.77 2643.56 36340.00 8054.83
Source : Microfinance Report NABARD, Status of Microfinance in India 2011-12.

Table 2 shows the data of overall progress of SHGs bank Linkage during the last five Years.
A total of 61.21 lakh SHGs were saving with accounts with the banking sector having outstanding
saving of Rs. 5545.62 Crore as against 50.09 lakh SHGs with savings of Rs.3785.39 Crore as on
31st March 2009, there by showing a growth rate 22.2 % and 46.5% respectively . Similarly in the
year of 2009-2010 the growth rate of savings of SHGs with the Bank were 13.6% and 11.8% . In the
year 2010-2011 the growth rate of savings of SHGs with the Bank were 7.3% and 13.2%. In 2011-
2012 SHGs were savings with the bank accounts with the banking sector Growth rate are 6.7%.
Till 31St March 2009 a total of 16.09 lakh Bank Loan were distributed to SHGs during the year of
the amount of Rs. 12253.51 as against 12.27 Lakh Bank Loan distributed to SHGs 8849.26 Crore
as on 31st March 2008, there by showing a growth rate 31.1% and 38.5% respectively. Similarly in
the year 2009-2010 the growth rate of bank loan distributed are (1.4%) and 17.9%. In 2011-2012
the growth rate were (-4%) and 13.7%. While 31St March 211-2012 the bank Loan outstanding with
the SHGs are also growing which is (-9.0%) and 16.4%.

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Table 3: Region wise NPAs of bank loan to SHGs
Region Years Northern North Eastern Central Western Southern
Northern
Loan outstanding against 31.3.2010 815.13 673.48 3694.91 2462.40 1369.49 19022.88
SHG –Position as on 31.3.2011 903.14 695.25 4202.55 2365.40 1246.23 21808.59
31.3.2012 1178.28 993.27 4629.80 2780.29 1363.78 25394.59
Amount of NPA as on 31.3.2010 53.91 37.13 118.74 198.65 61.06 356.53
31.3.2011 63.66 58.56 181.07 254.04 90.42 826.36
31.3.2012 81.55 51.33 337.08 367.03 112.14 1263.59
Percentage of NPA to 31.3.2010 6.61 5.51 3.21 8.07 4.46 1.87
loan outstanding as on 31.3.2011 7.05 8.42 4.31 10.74 7.26 3.79
31.3.2012 6.92 5.17 7.28 13.20 8.22 4.98
Source: Various Issues, Microfinance Report NABARD

Through the region wise NPA of bank Loan are distributed in North, Northern, Eastern,
Central, and Western, Southern. Among the region, southern region with a NPA of 4.98% (3.79%
last year) was the lowest while central region with an alarming 13.2% (10.7%last year) was the
highest.

Table 4: Agency Wise NPA of bank Loan to SHGs (In Crore)

Region Years Commercial Commercial Bank Regional Rural Coop. Total
Bank (Public (Private Sector) banks Banks
Sector)
Loan outstanding 31.3.2010 19724.42 440.29 6144.58 1728.99 28038.28
against SHG –Posi- 31.3.2011 21412.75 470.51 7430.05 1907.86 31221.17
tion as on
31.3.2012 24406.57 1403.72 8613.58 1916.14 36340.00

Amount of NPA as 31.3.2010 513.53 23.93 218.53 67.04 823.04

on 31.3.2011 1019.90 47.09 272.82 134.30 1474.11
31.3.2012 1581.05 74.37 426.34 130.97 2212.73
Percentage of NPA 31.3.2010 2.60 5.44 3.56 3.88 2.94
to loan outstanding 31.3.2011 4.76 10.10 3.67 7.04 4.72
as on
31.3.2012 6.48 5.30 4.95 6.84 6.09
Source: Various Issues, Microfinance Report NABARD

Through the agency wise NPA of the bank loan to the SHGs are distributed in Commercial
banks which includes public sector banks and the private sector banks and others are regional rural
banks and co-operatives banks. The increase in NPA against loans to SHGs continued to escalate
during the current year as well. In the absolute terms the gross NPA against loans to SHGs increased
from Rs.1474 Crore at the end of the March 2011 to Rs.2213 Crore by March 2012.In percentage

107
terms it increased from 4.72 % last Year 6.09% during the current year. It was only 2.9% during
2009-2010.This is a matter of concern for the microfinance sector and the causes for the declining
performance of recovery are to be analyzed and remedial action initiated urgently..The total gross
NPA against loans to SHG stood at Rs.2212.74 crore as on 31.3.2012 against the total outstanding
loan of Rs.36340 crore.
During the initial years of the movement NABARD was extending refinance to the extent of
100% to the banks for lending to SHG since the SHG –Bank linkage Programme was Launched
.This is to encourage the banks to actively participate in the programme .As the banks gained
confidence in lending to SHGs and realized the business potential in extending financial services
through SHGs, they have been increasingly deploying their own recourses in a mutually beneficial
with the SHGs .SHGs had been instrumental in bringing in more business for the financing banks
by way of improving credible client base,also promoting rural and inclusive banking .Banks have
also extended other financial services like remittance,housing,insurance etc. though in limited
way to this segment .The gap between the total loans issued by banks to SHGs and the refinance
extended by NABARD for such loans started widening as a result would be seen from the table.
The refinance support from NABARD,however continues to supplement resource mobilization
for the programme .During 2011-2012,NABARD extended refinance to the extent of Rs.3072.59
crore as against Rs.2545.36 Crore disbursed during the previous year. Cumulative disbursement of
refinance by NABRD for SHG lending now stands at Rs.18479.60 Crore .

Table 5: Loan issued to SHGs by the banks and NABARD refinance to the banks
(In Crore)

Particulars Bank Loan to SHGs NABARD Refinance

2009-2010 14453.3 3173.56
2010-2011 14547.73 2545.36
2011-2012 16534.77 3072.59
Source: Various Issues, Microfinance Report NABARD

3.1 Grant Support to partner agencies for the promotion and Nurturing of SHGs:
SHG- Bank linkage programme was launched by NABARD, the self help promoting institution
(SHPI) such as NGOs(Non government organization ),Banks (Regional rural banks,District central
co-operatives banks ),Farmer Clubs and individual rural Volunteers (IRV) are being extended grant
support to organize and nurture SHGs of the poor. The growth of SHG-bank linkage programme
in the country, is the result of the difficult efforts put in by these agencies in forming and nurturing
SHGs especially in the areas where the concept never existed. In the year 2012, the financial support
extended by NABARD to various self help promoting institution.

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Table 6: Grant Support to partner agencies for MFIs
(In Lakh)

Agency Cumulative Sanction Cumulative Achievement (2012)

Amount SHG Nos. Amount SHG Nos.
NGOs 16200.59 499909 4882.31 283007
RRBs 542.19 53145 197.10 56070
Coop. Banks 857.81 71695 289.19 47515
IRVs 733.58 43223 86.02 131.5
Farmer Clubs 83.16 7689 73.81 17356
Total 18417.33 675661 5528.43 417053
Source: Various Issues, Microfinance Report NABARD

4. Conclusions and Suggestions

A bank is considered to be the pioneer in the field of micro finance. Through SHG-Bank
Linkage program, the RBI and NABARD have tried to promote relationship between the needy
poor and the bankers. The program has brought about a positive social and economic impact on
the livelihood of the poor people in rural areas. It has increased the social empowerment of poor
rural people. With the collective effort from banks, regulators, government, and voluntary sector,
more of the poor from rural areas can be brought within the ambit of financial inclusion. SHG-Bank
Linkage Program and its impact can be made sustainable with sincere interventions by banks in
the areas of awareness building, skill development, training and continuous counseling. It is just a
beginning in the area of social and economic inclusion of the rural and the poor and a successful
journey of such programs are needed to reach the destination.

References

• An sight into the SHG –Bank Linkage programme –VSRD international journal of business and
management Research,Vol 2(7),2012,356-363.
• Bera, Sayantan,(2009). SHG –Bank linkage Programme in India : An Appraisal of trends and issues,Indian
Journal of finance,Volume 3 issue 2,2009,pp 27-35.
• Bansal, H. (2003) ‘SHG- bank linkage programme in India: an overview’, Journal of Micro Finance, Vol.
5, No. 1, pp.21–49.Basu and Srivastva (2005) “Scaling up Microfinance for india’s rural poor” World
Bank Policy Research working Paper 3646.
• Gupta, Radha (2011) .Microfinance : A social Innovator,Indian Journal of finance, February,2011,pp
48-52.
• Impact of Self- Help Groups Bank Linkage Programme in India  International Journal of Trade and
Commerce-IIARTC 2012, Volume 1, No. 2, pp. 220-22.
• Krog, J. (2000) Attacking Poverty with Decentralization and Micro credit: Indian Experiences.

109
• National council of Aplied Economics Research (NCAER) .(2008) Impact and sustainability of SHG
bank Linkage Programme .NCAER,New Delhi.
• NABARD, (2012) “Report on status of microfinance in India,2011-2012”,NABARD, http:nabard.org/
microfinance/shglinkageprogress.asp: report on status of microfinance in India.
• NABARD, (2010) “Report on status of microfinance in India, 2009-2010”, NABARD, accessed from
http:nabard .org/microfinance/shglinkageprogress.asp: report on status of microfinance in India.
• Secretary General (1998) Report on Role of Micro Credit in the Eradication of Poverty, United Nations,
New York.
• Sinha (2009) “State of microfinance in India” Institute of Microfiannce, India.

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 Do Self Help Groups Promote Women
Empowerment? Case of India
By

Pooja Rani

1. Introduction
Microfinance has emerged as major strategy to combat the twin issues of poverty and
unemployment that continue to pose a major threat to the polity and economy of both the developed
and developing countries. In recent years, governmental and nongovernmental organizations in
developing countries have introduced microfinance programmes offering financial services to low
income households, specifically targeting women. This was based on the promise that women in
poor households are more likely to be credit constrained, and hence less able to undertake income-
earning activities. Access to credit has received even greater attention in the context of poverty
reduction and women’s empowerment objectives. A number of agencies- Government as well as
Non-government Organizations are today involved in micro-finance development initiatives. From
the early 1970s, women's movements in a number of countries identified credit as a major constraint
on women's ability to earn an income and became increasingly interested in the degree to which
poverty-focused credit programmes and credit cooperatives were actually being used by women.
SEWA in India, for example, set up credit programmes as part of a multipronged strategy for an
organization of informal sector for women workers. Since the 1970s, many women's organizations
world-wide have included credit and savings, both as a way of increasing women's incomes and to
bring women together to address wider gender issues. The 1980s saw the emergence of poverty-
targeted micro-finance institutions like Grameen Bank. Many of these programmes see themselves
as empowerment-oriented. In the 1990s, a combination of evidence of high female repayment
rates and the rising influence of gender lobbies within donor agencies and NGOs led to increasing
emphasis on targeting women in micro-finance programmes. Throughout the developing countries,
innovative lending programs have emerged that specializes in supplying small capital loans to low-
income entrepreneurs. In many of these programs it is common to find that a large percentage of
borrowers are women. SHG has proved to be a strategic tool for organizing women in groups and
promoting savings and thrift habits to gain access to institutional credit for their socio-economic
development and empowerment. In this paper an effort has been made to analyse the socio-economic
status of women and the progress under microfinance.

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1.1 Microfinance
Microfinance is the provision of financial services to low-income clients, including consumers
and the self employed, who traditionally lack access to banking and related services. Micro credit,
or microfinance is banking the unaskable, bringing credit, savings and other essential financial
services within the reach of millions of people who are too poor to be served by regular banks, in
most cases because they are unable to offer sufficient collateral. Micro credit fits best to those with
entrepreneurial capability and possibility. Ultimately, the goal of microfinance is to give low income
people an opportunity to become self-sufficient by providing a means of saving money, borrowing
money and insurance.According to NABARD, there are only two models of microfinance in India
1.1.1 SHG bank linkage model
The SHG – Bank linkage programme, referred to as the Indian Microfinance Model began
formally in 1992 with a set of guidelines passed by NABARD and RBI enabling commercial banks
to lend to SHGs without collateral. The self help groups are linked to banks like commercial banks,
regional rural banks and cooperative banks.NABARD (2005) explains that the Self Help Group
is a group with an average size of about 15 people from a homogenous class. They come together
for addressing their common problems. They are encouraged to make voluntary thrift on a regular
basis. They use this pooled resource to make small interest bearing loans to their members. The
process helps them imbibe the essentials of financial intermediation including prioritization of
needs, setting terms and conditions and accounts keeping. This gradually builds financial discipline
in all of them.
1.1.2 MFI bank linkage model
The role of MFIs is to enhance human capital and to evolve the bankable clients to make
poverty irrelevant. Under this model mainstream MFIs are linked to banks. Banks provide financial
assistance to MFIs so that these MFIs can further provide financial assistance to SHG and other
marginal borrowers. These two programme for the purpose of channelizing the financial services
to the poor and needy. Microfinance is a strategy or technique of creating supply of most important
financial services (credit, savings, insurance) to satisfy the demand of all those needy and poor
households which are not covered under the formal financial system.
1.2 Microfinance and Women Empowerment (Empowering through Self Help Groups)
Micro Finance is emerging as a powerful instrument for poverty alleviation in the new
economy. In India, micro finance scene is dominated by Self Help Groups (SHGs) – Bank Linkage
Programme, aimed at providing a cost effective mechanism for providing financial services to
the “unreached poor”. Based on the philosophy of peer pressure and group savings as collateral
substitute , the SHG programme has been successful in not only in meeting peculiar needs of the
rural poor, but also in strengthening collective self-help capacities of the poor at the local level,
leading to their empowerment. Micro Finance for the poor and women has received extensive
recognition as a strategy for poverty reduction and for economic empowerment.

112
 In 1976, Prof. Mohammed Yunus of Bangladesh started women’s groups in Bangladesh and
developed thrift and savings among the poorest. Now it has developed into a bank named Bangladesh
GrameenBank.Self- help groups (SHGs) play today a major role in poverty alleviation in rural
India. A growing number of poor people (mostly women) in various parts of India are members of
SHGs and actively engage in savings and credit, as well as in other activities (income generation,
natural resources management, literacy, child care and nutrition, etc.). The rural women focus in
the SHG is the most prominent element and offers a chance to create some control over capital,
albeit in very small amounts. In our country the pioneer in this field is Self-Employed Women's
Association (SEWA). Grameen model SEWA was started in 1972.In Southern India organisations
like PRADAN, MYRADA, ASSEEFA, MALAR etc. have entered into this rural credit system.
In 1991-92, a pilot project for linking about 500 SHGs with bank was launched by NABARD
in consultation with the reserve bank of India.The SHG system has proven to be very relevant and
effective in offering women the possibility to break gradually away from exploitation and isolation.
Currently, over 90% of SHGs in India consist exclusively of women and SHGs are the preferred
strategy for both credit delivery for the poor and women’s empowerment.
The main aim of microfinance is to empower women. Women make up a large proportion of
microfinance beneficiaries. Traditionally, women (especially those in underdeveloped countries)
have been unable to readily participate in economic activity. Microfinance provides women with
the financial backing they need to start business ventures and actively participate in the economy.
It gives them confidence, improves their status and makes them more active in decision-making,
thus encouraging gender equality. According to CGAP, long-standing MFIs even report a decline
in violence towards women since the inception of microfinance. The most of the micro credit
institutions and agencies all over the world focuses on women in developing countries. Observations
and experience shows that women are a small credit risk, repaying their loans and tend more often
to benefit the whole family.

2. Statement of the Problem

In olden days women were restricted to take part in any social activities and not given roles
in decision making in her family. The situation was even more worsening in rural and remote
areas. Now the situation has been changed. She is given freedom to do what she wishes. In today’s
scenario more women are engaged in income generating activities. This is because of NGO and
other financial institution came forward to provide microfinance to poor women. They believe that
a woman is the small credit risk and often benefits the whole family. The main aim of microfinance
is to empower women. This induced the researcher to focus more on the empowerment of rural
women who participates in the microfinance.
2.1 Objectives of the Study
• To analyse the overall progress of SHGs in India (2007-08 to 2011-12).
• To analyse the progress of women SHGs in India (2007-08 to 2011-12).

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 • To analyse challenges and problems faced in administration of SHGs.
• To offer suggestions for the betterment of women’s empowerment in SHGs.
2.2 The Genesis and Growth of SHGs in India
SHGs originated in the year 1975 at Bangladesh by Mohammed Yunus. In the eighties, it was
a serious attempt by the Government of India to promote an apex bank to take care of the financial
needs of the poor, informal sector and rural areas. And then, NABARD took steps during that
period and initiated a search for alternative methods to fulfill the financial needs of the rural poor
and informal sector. NABARD initiated in 1986-87, but the real effort was taken after 1991-92
from the linkage of SHGs with the banks.
In other words, the Self Help Group (SHG) in India has come a long way, since its inception
in1992. The spread of SHGs in India has been phenomenal. It has made dramatic progress. The
small beginning of linking only 500 SHGs to banks in 1992, had grown to over 0.5 million SHGs
by March 2002 and further to 8 million SHGs by March 2012. The growth of self help groups in
India is shown in the table1 given below.

Table 1: Progress of SHG- Bank Linkage Program in India

(Amount in Rupees Crores)
Year (end No of SHG Cumulative No Growth Bank Loan Cumulative Growth
march) of SHG % Bank Loan %
2007-08 2084821 5009794 71.28 8849.26 26890.00 33.2
2008-09 1111353 6121147 22.2 11253.51 39143.51 38.5
2009-10 832103 6953250 13.6 14453.30 53596.81 18.0
2010-11 508750 7462000 7.3 14547.73 68144.54 0.01
2011-12 498000 7960000 6.7 16534.77 84679.31 13.7
Source: Status of Micro Finance 2007-08 to 20011-12, NABARD

It is shown that how the number of SHGs are increased in the period 2007-08 to 2011-12. In
2006-07, 29,24,973 SHGs were linked with the banks. In 2007-08 the number of SHGs has been
increased by 71.28 growth rate i.e. 50,09,794 and bank loan increased by 33.2 . In the year 2008-09
growth rate was 22.2 and in 2009-10 growth rate was 13.6. In 2011-12 Growth rate is 6.7 and bank
loan growth rate is 13.7. The variation is grater in growth rate.
2.3 SHG as an Effective Approach to Women Empowerment
One has to believe that the progress of any nation is inevitably linked with social and
economical plight of women in that particular country. Empowerment by way of participation in
SHG can bring enviable changes and enhancement in the living conditions of women in poor and
developing nations. The underlying principle of SHG is to provide to the poorest of the poor and to
achieve empowerment. In other words, we can say that SHG is an effective instrument to empower

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women socially and economically which ultimately contributes in the overall development of the
country like India wherein still large segment of women population are underprivileged, illiterate,
exploited and deprived of basic rights of social and economic spectrum.
Several factors and strategies have been provided by the SHGs that have made a positive
contribution to the empowerment of women. These are full support and timely advice for balancing
family and business responsibilities, leadership, experience in decision making and discussions on
social issues. As a result, the numbers of SHGs have been increasing day by day.
The table 2,3,4 and 5 given below shows the progress of women SHGs during 2007-08 to
2010-11.

Table 2: Progress of Women Managed SHGS

Particulars Total Women % of Women Total Women % of Women

SHG’s SHG’s SHG’s to Total Amount SHG’s SHG’s Amount to
(Lakh) (Lakh) SHG’s (Crore) Amount Total SHG’s
(crore)
Savings Linked 50.1 22.38 44.67 3785.39 3108.65 82.12
SHG‟s
Loan Disturbed 12.28 10.40 84.69 8849.26 7474.25 84.46

Loan Outstanding 36.26 29.17 80.45 16999.91 13335.61 78.45

Source: Status of Micro Finance 2007-08, NABARD

Table 3: Progress of Women Managed SHGs

Particulars Total Women % of Women Total Women % of Women

SHG’s SHG’s SHG’s to Total Amount SHG’s SHG’s Amount
(Lakh) (Lakh) SHG’s (Crore) Amount to Total SHG’s
(crore)
Savings Linked 61.21 48.64 79.46 5545.62 4434.3 79.96
SHG‟s
Loan Disturbed 16.09 13.74 85.39 122253.51 10527.38 85.91

Loan Outstanding 42.24 32.77 77.58 22679.84 18583.54 81.93

Source: Status of Micro Finance 2008-09, NABARD

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Table 4: Progress Of Women SHGs
Particulars Total Women % of Women Total Women % of Women
SHG’s SHG’s SHG’s to Total Amount SHG’s SHG’s Amount
(Lakh) (Lakh) SHG’s (Crore) Amount to Total SHG’s
(crore)
Savings Linked 69.53 53.10 76.37 6198.71 4498.66 72.57
SHG‟s
Loan Disturbed 15.87 12.94 81.54 14453.30 12429.37 85.99

Loan Outstanding 48.51 38.91 80.33 28038.38 23030.36 82.14

Source: Status of Micro Finance 2009-10, NABARD

Table 5: Progress Of Women SHGs

Particulars Total Women % of Women Total Women % of Women
SHG’s SHG’s SHG’s to Total Amount SHG’s SHG’s Amount
(Lakh) (Lakh) SHG’s (Crore) Amount to Total SHG’s
(crore)
Savings Linked 74.62 60.98 81.7 7016.30 5298.65 75.5
SHG‟s
Loan Disturbed 11.96 10.17 85 14547.73 12622.33 86.8

Loan Outstanding 47.87 39.84 83.2 31221.17 26123.75 83.7

Source: Status of Micro Finance 2010-11, NABARD

All the above tables reveal the progress of women SHGs during the year 2007-08, 2008-
09, 2009-10, and 2010-11. It indicates that SHGs during the year 2008- 09 increased over the
year 2007-08 but the progress is slowed down in the year 2009-10. In the year 2009-10 saving
Loan disbursed and loan outstanding amount of women SHGs as a percentage of amounts of total
SHGs has been increased during that period. It was also found that employment generation with
the help of SHGs is more in below poverty line families than APL (above poverty line) families
as a member of SHGs. There is an increase in the expenditure of beneficiaries from last year
to the current year. That means it shows a positive impact of SHGs on employment generation.
The problems of unemployment as well as poverty in the economy can be solved in this way if
SHGs continuously provide help to these people. As majority of beneficiaries of all SHGs accepted
expansion of employment after getting loans. Thus SHGs leads to the way through which the
problem of unemployment can be solved and poverty can be removed in the Indian economy.

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3. Current Position of Women Shgs In India (2011-12)
The Self-Help Group programme has become a well known instrument for bankers,
developmental agencies and even for corporate houses. SHGs are not only limited to providing
financial services but also they have turned out to be focal point for purveying various services
to the poorest of the poor in many ways. With the help of this, SHG programme has become the
common vehicle in the development process. Women can start economic activities through SHG
movement. Even with the limited monetary help the members of SHGs could expand their horizon
of productive activities which have become their means of living. Economic and social upliftment
took place with SHG movement. In this way, SHG concept is getting greater support from women
as well as from the financial institutions.

Table 6: Progress of Women ShgsAsOn 2011-12

Particulars Total Women % of Women Total Women % of Women
SHG’s SHG’s SHG’s to Total Amount SHG’s SHG’s
(Lakh) (Lakh) SHG’s (Crore) Amount Amount to
(crore) Total SHG’s
Savings Linked 79.60 62.99 79.1 6551.41 5104.33 77.9
SHG‟s
Loan 11.48 9.23 80.4 16534.77 14132.02 85.5
Disturbed
Loan 43.54 36.49 83.8 36340.00 30465.28 83.8
Outstanding
Source: Status of Micro Finance 2011-12, NABARD

In the table 6 the current position of women SHGs in India. The details of total number of
Women SHGs shown saving linked, credit linked and loans outstanding for the last two years are
given in the table. It may be seen that the total number of saving linked and credit linked SHGs,
Exclusive women SHGs with banks were 79.1 percent and 80.4 percent, respectively. Further the
Percentage of loans outstanding of exclusive women SHGs to loans outstanding of total SHGs
which was 83.7 percent as on 31st march 2011 has increased to 83.8 percent as on 31st march 2012.
It shows that majority SHGs are women groups their participation in saving and credit is increasing
out of the total number of SHGs.
At present, SHG is widely used as an instrument to empower women socially and economically.
Enhancing income earning opportunities through the formation of SHGs is a viable pathway for
empowerment of women. The small beginning of linking only 500 SHGs to banks in 1992, had
grown to over 0.5 million SHGs by March 2002 and further to 8 million SHGs by March 2012.
From almost 100% of the SHGs linked to Banks at the pilot stage from southern states, the share of
southern States in the total number of SHGs linked shrank to 46% by March 2012, while the share
of eastern States (especially,West Bengal, Odissa, Bihar) shot up to over 20%. The third decade of

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the programme promises to be one of maturing the linkage programme with livelihoods support,
lot more innovations in the product range offered through SHGs and path breaking reforms in
leveraging technology to improve efficiency, while extending its outreach to more geographical
regions, especially the most resource poor regions of the country. It is widely believed that the
SHGs of the poor will be the vehicles leading the march of India’s emergence as a super economic
power in the next decade.
3.1 Problem and Challenges
From the evidence and records available with some of the Indian research institute, many
problems and challenges related to SHG has been found one of the most important issue. Here we
discuss important elements contribute to make it more Difficult for women empowerment through
micro businesses. These are:
• Lack of knowledge of the market and potential profitability, thus making the choice of
business difficult.
• Lack of regular supervision and monitoring on SHG-activities by the loan providing banks.
Inadequate book-keeping.
• Employment of too many relatives which increases social pressure to share benefits.
• Setting prices arbitrarily.
• Lack of capital.
• High interest rates.
• Inventory and inflation accounting is never undertaken.
• Inadequate book-keeping.
• Credit policies that can gradually ruin their business (many customers cannot pay cash; on
the other hand, suppliers are very harsh towards women).
3.2 Other Shortcomings Includes
• Burden of meeting: Time consuming meetings, in particular in programmes based on
group lending, and time consuming income generating activities without reduction of
traditional responsibilities increase women’s work and time burden.
• New Pressures: By using social capital, in-group lending/group collateral programmes,
additional stresses and pressures are introduced, which might increase vulnerability and
reflect disempowerment.
• Reinforcement of traditional gender roles: Lack of economic empowerment: Micro
finance assists women to perform traditional roles better and women thus remain trapped
in low productivity sectors, not moving from the group of survival enterprises to micro-

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 enterprises. There are evidence of men withdrawing their contributions to certain types of
household expenditures.

4. Conclusions and Suggestions

Rural India at present is interfaced with a thickening web of such grass root organization
namely Self Help Group bank linkage and microfinance institutions.It is widely believed that the
SHGs of the poor will be the vehicles leading the march of India’s emergence as a super economic
power in the next decade. A conclusion that emerges from this account is that micro finance can
contribute to solving the problems of inadequate rural and urban services as an integral part of
woman progress. The challenge lies in finding the level of flexibility in the credit instrument that
could make it match the multiple credit requirements of the low income borrower without imposing
unbearably high cost of monitoring its end use upon the lenders. A promising solution is to provide
multipurpose lone or composite credit for income generation, housing improvement and consumption
support. Consumption loan is found to be especially important during the gestation period between
commencing a new economic activity and deriving positive income. Careful research on demand
for financing and savings behavior of the potential borrowers and their participation in determining
the mix of multi-purpose loans are essential in making the concept work.
The organizations involved in micro credit initiatives should take account of the fact that:
• Credit is important for development but cannot by itself enable very poor women to
overcome their poverty.
• Making credit available to women does not automatically mean they have control over its
use and over any income they might generate from micro enterprises.
• In situations of chronic poverty it is more important to provide saving services than to offer
credit.
• A useful indicator of the tangible impact of micro credit schemes is the number of additional
proposals and demands presented by local villagers to public authorities.
Nevertheless ensuring that the micro-finance sector continues to move forward in relation to
gender equality and women’s empowerment will require a long-term strategic process of the same
order as the one in relation to poverty if gender is not to continue to ‘evaporate’ in a combination of
complacency and resistance within donor agencies and the micro-finance sector. This will involve:
• Ongoing exchange of experience and innovation between practitioners
• Constant awareness and questioning of ‘bad practice’
• lobbying donors for sufficient funding for empowerment strategies
• Bringing together the different players in the sector to develop coherent policies and for
gender advocacy.

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 India is the country where a collaborative model between banks, NGOs, MFIs and Women’s
organizations is furthest advanced. It therefore serves as a good starting point to look at what we
know so far about ‘Best Practice’ in relation to micro-finance for women’s empowerment and
how different institutions can work together.It is clear that gender strategies in micro finance need
to look beyond just increasing women’s access to savings and credit and organizing self help
groups to look strategically at how programmes can actively promote gender equality and women’s
empowerment. Moreover the focus should be on developing a diversified micro finance sector
where different type of organizations, NGO, MFIs and formal sector banks all should have gender
policies adapted to the needs of their particular target groups/institutional roles and capacities and
collaborate and work together to make a significant contribution to gender equality and pro-poor
development.

References
• Dasgupta, R.(2001), ‘An Informal Journey Through SHG's, Indian Journal & Agricultural Economics’,
Vol. 56 (3), July-Sept.
• Datta, S.K. & Raman, A.(1978), ‘Can Heterogeneity And Social Cohesion Coexist in Self Help Groups’,
An Evidence From Group Lending In AP in India, Indian Journal Of Agricultural Economics, Vol. 33
(4).
• Evidence from self-help groups in India, ‘International Review of Applied Economics’ Vol. 23, No. 5,
541–556.
• Hashemi, S.M., Schuler, S.R. and Riley AP (1996), ‘Rural Credit Programs and Women’s Empowerment
in Bangladesh’, World Development,Vol. 24, No. 4, pp. 635-653.
• Holvoet N (2005), ‘The Impact of Microfinance on Decision-Making Agency: Evidence from South
India’, Development and Change, vol. 36 (1).
• Littlefi, eld. E., Murduch, J. and Hashemi, S. (2003), ‘Is Microfinance an Effective Strategy to Reach the
Millennium Development Goals?’, Focus Note 24, CGAP, Washington, DC.
• Mayoux, L. (1997), ‘The Magic Ingredient? Microfinance and Women’s Empowerment’ A Briefing
Paper prepared for the Micro CreditSummit, Washington.
• Puhazhehdhi, V.( 1999), ‘Evaluation Study Of SHG's :Important Findings Of Evaluation Study In Tamil
Nadu’, Paper Presented In A Workshop, Dated 26-27 August, BIRD,Lucknow.
• Swaina,R.B. and Wallentin,F.Y. (September 2009), ‘Does microfinance empower women’.
• Narang, U.(2012), ‘Self - help group: An effective approach to woman empowerment in India’,
International Journal of Social Science & Interdisciplinary Research Vol.1 Issue 8, August 2012, ISSN
2277 3630.
• http://www.selfgrowth.com/articles/Articles_Women_Empowerment.html
• NABARD Report 2007-2008, status of micro finance in India 2011-12.
• www.narbard.org
• wcd.nic.in/empwomen.htm‎
• http://mospi.nic.in/Mospi_New/upload/w_and_m_2010.htmhttp://ncw.nic.in/frmRes_LAP.aspx

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 Social Entrepreneurship and Triple Bottom Line:
An Analysis
By

Supriya Chaudhary and Rajeshwari Malik*

1. Introduction
Social entrepreneurship  is the process of pursuing suitable solutions to social problems.
More specifically, social entrepreneurs adopt a mission to create and sustain social value. They
pursue opportunities to serve this mission, while continuously adapting and learning. They draw
upon appropriate thinking in both the business and nonprofit worlds and operate in all kinds of
organizations: large and small; new and old; religious and secular; nonprofit, for-profit, and hybrid.
Business entrepreneurs typically measure performance in profit and return, but social entrepreneurs
also take into account a positive return to society. Social entrepreneurship typically furthers broad
social, cultural, and environmental goals and is commonly associated with the voluntary and not-for-
profit sectors. Profit can at times also be a consideration for certain companies or other enterprises.
Social entrepreneurship practiced in a world or international context is called international social
entrepreneurship. In some countries - including Bangladesh - social entrepreneurs have filled
the spaces left by a relatively small state. In other countries - particularly in Europe and South
America - they have tended to work more closely with public organizations at both the national
and local level. There are continuing arguments over precisely who counts as a social entrepreneur.
The lack of consensus on the definition of social entrepreneurship means that other disciplines
are often confused with and mistakenly associated with social entrepreneurship. Philanthropists,
social activists, environmentalists, and other socially-oriented practitioners are referred to as social
entrepreneurs. It is important to set the function of social entrepreneurship apart from other socially
oriented activities and identify the boundaries within which social entrepreneurs operate.  Some
have advocated restricting the term to founders of organizations that primarily rely on earned
income – meaning income earned directly from paying consumers. Others have extended this to
include contracted work for public authorities, while still others include grants and donations.
The term  Social Business  was defined by  Nobel Peace Prize  Laureate Prof.  Muhammad
Yunus  and is described in his books  Creating a world without poverty—Social Business and
The Future of Capitalism and Building Social Business—the new kind of Capitalism that Serves
Humanity's most pressing needs. In Yunus' definition, a social business is a business: created and
designed to address a social problem, a non-loss, non-dividend company, i.e. it is financially self-

121
sustainable profits realized by the business are reinvested in the business itself (or used to start other
social businesses), with the aim of increasing social impact. Unlike a "PMB" (profit-maximizing
business, the term Yunus uses to refer to standard business in capitalism) the prime aim of the
business is not to generate profits. Furthermore, business owners are not receiving any dividend
out of the business profits, if any. Unlike a non-profit, the business is not dependent on donations
or on private or public grants to survive and to operate, because, as any other business, it is self-
sustainable. Furthermore, unlike a non-profit, where funds are spent only once on the field, funds
in a social business are invested to increase and improve the business' operations on the field on
an indefinite basis. Therefore, a social business is driven to bring about change while pursuing
sustainability. Although from a strictly profit-maximizing perspective it seems inappropriate to
pursue a goal other than profit, social business’ aim is to achieve certain social and environmental
goals. In this perspective, a social business can also be understood as a business-pursuing NGO
which is (eventually) financially self-sufficient.

2. Research Methodology
This paper is based on secondary sources only and is divided into two sections. The first part
is the study of conceptual framework of the various concepts and their evolution. The second part
is the study of various social entrepreneurs present in major countries.
2.1 Evolution of Social Entrepreneurship
The terms social entrepreneur and social entrepreneurship were used first in the literature on
social change in the 1960s and 1970s. Although the terms are relatively new, social entrepreneurs
and social entrepreneurship can be found throughout history. A list of a few historically noteworthy
people whose work exemplifies classic "social entrepreneurship" might include Florence Nightingale,
founder of the first nursing school and developer of modern nursing practices; Robert Owen, founder
of the cooperative movement; and Vinobabhave, founder of India's land gift movement. During the
nineteenth and twentieth centuries some of the most successful social entrepreneurs effectively
straddled the civic, governmental, and business worlds – promoting ideas that were taken up by
mainstream public services in welfare, schools, and health care. The terms came into widespread
use in the 1980s and 1990s, promoted by bill Drayton the founder of Ashoka: innovators for the
public, and others such as Charles Leadbeater. From the 1950s to the 1990s Michael Young was
a leading promoter of social enterprise and in the 1980s was described by Professor  Daniel
Bell at Harvard as 'the world's most successful entrepreneur of social enterprises' because of his
role in creating more than sixty new organizations worldwide, including the  school for social
entrepreneurs (SSE) which exists in the UK, Australia and Canada and which supports individuals
to realize their potential and to establish, scale and sustain, social enterprises and social businesses.
Another notable British social entrepreneur is Andrew Mawson OBE, who was given a peerage
in 2007 because of his regeneration work including the Bromley by BOW centre in East London.
A more commonly used and better understood concept is the related model of social enterprise.
This term describes broadly 'commercial activity by socially minded organizations'.  Charities

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may engage in social enterprise in order to generate funds, as per the 'OP-SHOP' model; a social
enterprise model may also be used to provide supported employment to those with barriers to
work. Some commentators define social business as a subset of social enterprise, with the specific
characteristic that, whereas a social enterprise can derive part of its revenue from philanthropy
or government grant along with its trading income, a true social business should support itself
by trading on the market. In Europe however, social enterprise and social business are treated as
synonyms. In Yunus’ book  creating a world without poverty—social business and the future of
capitalism, two different types of social businesses are proposed:
A type I social business focuses on providing a product and/or service with a specific social,
ethical or environmental goal. A prominent example is Grameen Danone.
A  type II  social business is a  profit-oriented business  that is  owned by the poor  or other
underprivileged parts of the society, who can gain through receiving direct dividends or by indirect
benefits. 
2.2 Double Bottom Line
Double Bottom Line is a business term used in socially responsible enterprise and investment.
While all businesses have a conventional  bottom line  to measure their fiscal performance—
financial  profit  or loss—enterprises which seek a  second bottom line look to measure their
performance in terms of positive social impact. The Double Bottom Line approach can be applied
to both public and private sector organizations. An excellent application of this is seen in Bernardez
(2009) (Bernardez, M. (2009). Minding the business of business: tools and models to design and
measure wealth creation. Performance improvement quarterly. 22(2) Pp.  17–72) And his other
work that includes Kaufman's mega level strategic planning (Kaufman, R. (2006). Change,
choices, and consequences: a guide to mega thinking and planning. Amherst, Ma. Hrd press inc.
To refinor in Argentina, the Sonora institute of technology, and lately for the strategic planning of a
transformation of the city of Colon in Panama. Bernardez, M. (2005). Achieving business success
by developing clients and community: lessons from leading companies, emerging economies and a
nine year case study. Performance improvement quarterly, vol. 18, Number 3. Pp. 37–55.)
Increasingly companies big and small are incorporating a "cause marketing" strategy as a
means of differentiating themselves from their competition. The increased usage of social media
is allowing these "company helping a cause" promotions to expand rapidly as people who support
the cause easily "share" the information with their friends. Examples of big Double Bottom Line
campaigns include the Pepsi refresh campaign and the Clorox promoting a bright future contest
where each company is giving away money to causes that are submitted by and voted upon by
normal everyday citizens who are trying to make the world a better place. By doing things that
are socially responsible, they are also benefitting in a way that significantly increases their ROI.
This also allows them to build a more loyal customer base, what some are calling a "strong tribe" -
internally and externally. According to the marketing strategist Gina Carr, "this is the differentiating
strategy for 21st century businesses." Another formulation is blended value promulgated by Jed

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Emerson one of the leaders in social return on investment or SROI. It attempts to get out of the
binary thinking of double bottom line.
2.3 Triple Bottom Line
The  Triple Bottom Line  (abbreviated as  TBL  or  3BL, and also known as  people, planet,
profit or "the three pillars") captures an expanded spectrum of values and criteria for measuring
organizational (and societal) success: economic, ecological, and social. With the ratification of
the United Nations and ICLEI TBL standard for urban and community accounting in early 2007, this
became the dominant approach to public sector full cost accounting. Similar UN standards apply
to natural capital and human capital measurement to assist in measurements required by TBL, e.g.
The Ecobudget standard for reporting  ecological footprint. In the  private sector, a commitment
to corporate social responsibility (CSR) implies a commitment to some form of TBL reporting. This
is distinct from the more limited changes required to deal only with ecological issues. For reporting
their efforts companies may demonstrate their commitment to CSR through the following: top-level
involvement (CEO, Board of Directors), policy investments, programs, signatories to voluntary
standards, principles (UN Global compact-ceres principles) and reporting (global reporting
initiative). Triple bottom line (TBL) accounting expands the traditional reporting framework to
take into account social and environmental performance in addition to financial performance. In
1981 Freer Spreckley first articulated the triple bottom line in a publication called 'social audit - a
management tool for co-operative working'. In this work, he argued that enterprises should measure
and report on social, environmental and financial performance.
The phrase was coined by John Elkington in his 1997 book cannibals with forks: the triple
bottom line of 21st century business.  Sustainability, itself, was first defined by the  Brundtland
commission of the United Nations in 1987. 1998 also marked the foundation of the triple bottom
line investing group by Robert J. Rubinstein, a group advocating and publicizing these principles.
The concept of TBL demands that a company's responsibility lies with  stakeholders  rather
than shareholders. In this case, "stakeholders" refers to anyone who is influenced, either directly or
indirectly, by the actions of the firm. According to the stakeholder theory, the business entity should
be used as a vehicle for coordinating stakeholder interests, instead of maximizing shareholder
(owner) profit.The triple bottom line is made up of "social, economic and environmental" factors.

Fig 1: Graphic Describing The Bottom Lines

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 "People, planet and profit" succinctly describes the triple bottom lines and the goal
of sustainability. The phrase, "people, planet, profit", was coined by John Elkington in 1995 while
at sustainability, and was later adopted as the title of the Anglo-Dutch oil company Shell's first
sustainability report in 1997. As a result, one country in which the 3P concept took deep root was
the Netherlands. "People" pertains to fair and beneficial business practices toward labour and the
community and region in which a corporation conducts its business. A tbl company conceives
a reciprocal  social structure  in which the well-being of corporate, labour and other stakeholder
interests are interdependent. A triple bottom line enterprise seeks to benefit many constituencies,
not exploit or endanger any group of them. The "upstreaming" of a portion of profit from the
marketing of finished goods back to the original producer of raw materials, for example, a farmer
in fair trade agricultural practice, is a common feature. A TBL business also typically seeks to "give
back" by contributing to the strength and growth of its community with such things as health care
and education.
"Planet"  (natural capital) refers to sustainable environmental practices. A TBL company
endeavors to benefit the natural order as much as possible or at the least do no harm and minimise
environmental impact. A TBL endeavour reduces its ecological footprint by, among other things,
carefully managing its consumption of energy and non-renewables and reducing manufacturing
waste as well as rendering waste less toxic before disposing of it in a safe and legal manner. "Cradle
to grave" is uppermost in the thoughts of TBL manufacturing businesses, which typically conduct
a  life cycle assessment  of products to determine what the true environmental cost is from the
growth and harvesting of raw materials to manufacture to distribution to eventual disposal by the
end user. A triple bottom line company does not produce harmful or destructive products such as
weapons, toxic chemicals or batteries containing dangerous heavy metals, for example.
"Profit"  is the economic value created by the organization after deducting the cost of all
inputs, including the cost of the capital tied up. It therefore differs from traditional accounting
definitions of profit. In the original concept, within a sustainability framework, the "profit" aspect
needs to be seen as the real economic benefit enjoyed by the host society. It is the real economic
impact the organization has on its economic environment. This is often confused to be limited to the
internal profit made by a company or organization (which nevertheless remains an essential starting
point for the computation). Therefore, an original TBL approach cannot be interpreted as simply
traditional corporate accounting profit plus social and environmental impacts unless the "profits" of
other entities are included as a social benefit.
2.3.1 Issues With Triple Bottom line
While many people agree with the importance of good social conditions and preservation of
the environment, there are also many who disagree with the triple bottom line as the way to enhance
these conditions. The main arguments against it are summarized below.
• Reductive method: In the triple bottom line, a corporate-oriented approach, the social—
that is, the way in which humans live and relate to each other and the environment—is

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 secondary. The economic as a domain is given an independent status which is ideologically
assumed rather than analytically argued. In the most problematic versions, the economic
is elevated to the master category and defined in terms that assume the dominance of a
singular, historically specific, economic configuration—modern globalizing capitalism.
Concurrently the environment comes to be treated as an externality or background feature,
an externality that tends not to have the human dimension build into its definition. Thus, in
many writings, even in those critical of the triple-bottom-line approach, the social becomes
a congeries of miscellaneous considerations left over from the other two prime categories.
Alternative approaches that treat the economic as a social domain, alongside and in relation
to the ecological, the political and the cultural are now being considered as more appropriate
for understanding institutions, cities and regions.
• Division of labour: It is characteristic of rich societies and a major contributor to their
wealth. This leads to the view that organisations contribute most to the welfare of society
in all respects when they focus on what they do best: the baker exchanges his loaves with
the shoemaker rather than making his own shoes - to the benefit of both and by extension
the whole of society. In the case of business the expertise is in satisfying the needs of
society and generating a value added surplus. Thus the triple bottom line is thought to be
harmful by diverting business attention away from its core competency. Just as charitable
organizations like the Red Cross would not be expected to attend to environmental issues
or pay a cash dividend, and greenpeace would not be expected to make a profit or succor
the homeless, business should not be expected to take on concerns outside its core expertise,
provided the business doesn't do obvious harm to people or the planet.
• Effectiveness: It is observed that concern for social and environmental matters is rare
in poor societies (a hungry person would rather eat the whale than photograph it). As a
society becomes richer its citizens develop an increasing desire for a clean environment
and protected wildlife, and both the willingness and financial ability to contribute to this
and to a compassionate society. Support for the concept of the triple bottom line itself is
said to be an example of the choices available to the citizens of a society made wealthy by
businesses attending to business. Thus by unencumbered attention to business alone, Adam
Smith's  invisible hand  will ensure that business contributes most effectively to the
improvement of all areas of society, social and environmental as well as economic.
• Nationalism: Some countries adopt the view that they must look after their own citizens
first. This view is not confined to one sector of society, having support from elements of
business, labour unions, and politicians.
• Libertarian: As it is possible for a socially responsible person to sincerely believe that the
triple bottom line is harmful to society, the libertarian view is that it would be arrogant to
force them to support a mechanism for the improvement of society that may, or may not,
be the best available. That is, those who would not force greenpeace and the salvation army

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 to generate a profit should not force businesses to take responsibilities outside their area
of expertise. At least in areas where a business doesn't do obvious harm to people or the
planet.
• Inertia: The difficulty of achieving global agreement on simultaneous policy may render
such measures at best advisory, and thus unenforceable. For example, people may be
unwilling to undergo a depression or even sustained recession to replenish lost ecosystems.

3. Current scenario
One well-known contemporary social entrepreneur is Muhammad Yunus, founder and manager
of Grameen Bank and its growing family of social venture businesses, who was awarded a Nobel
Peace Prize in 2006. The work of Yunus and Grameen echoes a theme among modern day social
entrepreneurs that emphasizes the enormous synergies and benefits when business principles are
unified with social ventures. The George Foundation's women's empowerment program empowers
women by providing education, cooperative farming, vocational training, savings planning, and
business development. In 2006 the cooperative farming program, Baldev farms, was the second
largest banana grower in south india with 250 acres (1.0 Km2) under cultivation. Profits from the
farm are used for improving the economic status of the workers and for running the other charitable
activities of the foundation.Some have created for-profit and for-a-difference organizations. A
recent example is Vikramakula, the Mckinsey alumnus who started a microlending venture, SKS
microfinance, in villages of Indian state of Andhra Pradesh. Although this venture is for profit, it
has initiated a sharp social change amongst poor women from villages. Other examples of social
entrepreneurs in healthcare in India is Ramanujan Bose awardee. Dr. Akash S. Rajpal, founder of
Ekohealth has been working in India in the field of healthcare against fee splitting and creating a unique
ethical facilitation and aggregation services for healthcare providers and price comparison services
for patients and help them reduce health care costs. Youth social entrepreneurship is an increasingly
common approach to engaging youth voice in solving social problems. Youth organizations and
programs promote these efforts through a variety of incentives to young people. One such program
is young social pioneers, which invests in the power and promise of Australia's young leaders. The
program, which is an initiative of the foundation for young Australians, strengthens, supports and
celebrates the role of young people in creating positive change in their communities.
Fast company magazine annually publishes a list of the twenty-five best social entrepreneurs,
which the magazine defines as organizations "using the disciplines of the corporate world to tackle
daunting social problems." In 2009, businessweek followed suit, publishing a review of America's
twenty-five most promising social entrepreneurs, defined as "enterprising individuals who apply
business practices to solving societal problems."
The internet and social networking websites have been pivotal resources for the success and
collaboration of many social entrepreneurs. Captain  Edward Zellem  of www.Afghanproverbs.
com has been working with Film Annex's Afghan development project as an example individual

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social entrepreneurship that merges his work with the study of languages and culture into the film
platform at Film Annex. These media allow ideas to be heard by broader audiences, help networks
and investors to develop globally, and achieve their goals with little or no start-up capital. The
US-based nonprofit  Zidisha  leverages the recent spread of internet and mobile technologies in
developing technologies to provide an ebay-style micro lending platform where disadvantaged
individuals in developing countries can interact directly with individual "peer-to-peer" lenders
worldwide, sourcing small business loans at lower cost than has ever before been possible in most
developing countries. In addition the internet allows for the pooling of design resources using open
source  principles. For example, the rise of  open-source appropriate technology  as a  sustainable
development paradigm enables people all over the world to collaborate on solving local problems
just as open source software development leverages collaboration.

4. Conclusions and Suggestions

According to Fred Robins'  the challenge of TBL: a responsibility to whom?  One of the
major weaknesses of the TBL framework is its ability to be applied in a monetary-based economic
system. Because there is no single way in monetary terms to measure the benefits to the society
and environment as there is with profit, it does not allow for businesses to sum across all three
bottom lines. In this regard, it makes it difficult for businesses to recognize the benefits of using
TBL for the company, itself. Some businesses have voluntarily adopted a triple bottom line as
part of their articles of incorporation or bylaws, and some have advocated for state laws creating a
"sustainable corporation" that would grant triple bottom line businesses benefits such as tax breaks.
The triple bottom line was adopted as a part of the state sustainability strategy, and accepted by
the government of Western Australia but its status was increasingly marginalized by subsequent
premiers Alan Carpenter and Colin Barnett and is in doubt.

References
• Brown, D., J. Dillard and R.S. Marshall. (2006) "Triple bottom line: a business metaphor for a social
construct." Portland state university, school of business administration. Retrieved on: 2007-07-18.
• Enhancing the role of industry through for example, private-public partnerships, may 2011.  United
Nations environment programme.
• Freer Spreckley 1981 social audit - a management tool for co-operative working.
• International institute for sustainable development  (2011).  "The triple bottom line".  Business and
sustainable development: a global guide. Bsdglobal.Com. Retrieved 2013-04-04.
•  Ekins, Paul (1992). The gaia atlas of green economics. Anchor books. P. 191. Isbn 0-385-41914-7.
• Paul James and Andy Scerri, ‘auditing cities through circles of sustainability’, Mark Amen, Noah J.
Toly, Patricia l. Carney and Klaus Segbers, Eds, cities and global governance, Ashgate, Farnham, 2011,
pp. 111–36.

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• Andy Scerri and Paul James, ‘communities of citizens and “indicators” of sustainability’, community
development journal, vol. 45, No. 2, 2010, Pp.
• Social audit - a management tool for co-operative working 1981  by Freer Spreckley  local livelihoods
publications.
• Harvard business review on corporate responsibility by Harvard Business School press sustainability –
from principle to practice goethe-institut, march 2008.
• The soul of a business: managing for profit and the common good by Tom Chappell.
• The sustainability advantage: seven business case benefits of a triple bottom line (conscientious commerce) by
Bob Willard, New Society Publishers ISBN 978-0-86571-451-9.

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 Economic Empowerment of Women in India
Through Entrepreneurship
By

Parul Deshwal

I. Introduction
Entrepreneurship refers to the act of setting up a new business or reviving an existing business
so as to take advantages from new opportunities. Thus, entrepreneurs shape the economy by
creating new wealth and new jobs and by inventing new products and services. However, an insight
study reveals that it is not about making money, having the greatest ideas, knowing the best sales
pitch, applying the best marketing strategy. It is in reality an attitude to create something new and
an activity which creates value in the entire social economic system. It is the psyche makeup of a
person. It is a state of mind, which develops naturally, based on his/ her surrounding and experiences,
which makes him/ her think about life and career in a given way. Poverty is a crucial problem for
all developing and under developed countries. India is no exception to this. Data indicate that
though the percentage of people below poverty line has been on the decline in India, the percentage
of decline is nearly one percent per annum. The pace of poverty reduction has been slow. The
Human Development Index in India is also low (0.451) when compared to other Asian countries
like Thailand (0.838), Malaysia (0.834), Sri Lanka (0.716), Indonesia (0.679) and China (0.650). In
terms of poverty capability measures also, the position is not impressive. In both economic and social
development indicators, India is far behind other countries of comparable economic development.
The problem can be tackled effectively through providing sustainable livelihood opportunities to
women who are the cruellest victims of poverty. Female headed families form a higher percentage
of the poorest households in the country. Gender inequalities have resulted in the concentration of
women in unorganized sectors and unequal pay for equal work. Even then, studies on women’s
contribution to household income reveal that women tend to contribute a higher proportion of their
income for family sustenance while men spend more for their personal comforts. The women have
achieved immense development in their state of mind. With increase in dependency on service
sector, many entrepreneurial opportunities especially for women have been created where they can
excel their skills with maintaining balance in their life. Accordingly, during the last two decades,
increasing numbers of Indian women have entered the field of entrepreneurship and also they are
gradually changing the face of business of today, both literally and figuratively. But still they have
not capitalized their potential in India the way it should be.

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 Many women in India have attained prominent or leadership positions, rising to the highest
echelonsin every walk of life -- for example as entrepreneurs, industrialists, civil servants,
police officers,airline pilots, scientists, engineers. Yet women must overcome additional barriers
to have equitableaccess to the labour market, to access control over economic resources and
entrepreneurialopportunities. The Entrepreneurship Development Process for Women in India
is increasingly beingrecognized as an important untapped source of economic growth since
women entrepreneurs createnew employment opportunities and avenues for women’s economic
independence.The Micro, Small and Medium Enterprises (MSME) sector in particular, which plays
a central role inthe economic and social development of the country and is described as an “engine
of growth” isattracting increasing policy attention. According to the MSME Annual Report 2011-
12, the MSMEsaccount for 45 per cent of India’s manufacturing output and 40 per cent of India’s
total export. From agender perspective, the MSME sector is also gaining prominence as in the
broad context of economicdownturn, one cannot afford to overlook women’s contributions and the
potential and challenges theyface at different stages of the process. Despite scarce sex-disaggregated
data on women’s participationin the MSME sector, it is recognized that a huge number of women in
India are engaged in the MSMEsector, the majority of them in the unorganized sector.In the area of
women’s entrepreneurship, and although government policies and promotion strategieshave been
giving new opportunities to women, few have come forward. According to the sameMSME Annual
Report 2011-12, only 13.72 per cent of enterprises in the registered MSME sectorwere enterprises
managed by women, representing about 2.15 lakh (or 215,000 enterprises across thecountry). It
is primarily since the last two decades that attempts to design programmes to promotewomen
entrepreneurs as a part of national development plans have begun to be taken notice of bywomen.
However, as this paper aims to demonstrate, institutional, financial, cultural, gender-based,policy
and legal framework based factors continue to hinder women’s participation inentrepreneurship.
Darrene, Harpel and Mayer, (2008) performed a study on finding the relationship between elements
of human capital and self employment among women. The study showed that self employed wom-
en differ on most human capital variable as compared to the salary and wage earning women. The
study also revealed the fact that the education attainment level is faster for self employed women
than that for other working women. The percentage of occupancy of managerial job is found to
be comparatively higher in case of self employed women as compared to other working women.
This study also shed light on similarity and dissimilarity of situations for self employed men and
self employed women. Self employed men and women differ little in education, experience and
preparedness. However, the main difference lies in occupational and industry experience. The per-
centage of population holding management occupation is lower for self employed women as com-
pared to self employed men. Also the participation levels of self employed women are found to be
less than of self employed men in industries like communication, transportation, wholesale trade,
manufacturing and construction.
Jalbert, 2000 performed a study to explore the role of women entrepreneurs in a global economy.
It also examined how women’s business associations can strengthen women’s position in business

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and international trade. The analysis is performed on the basis of facts and data collected through
field work (surveys, focus groups and interviews) and through examining the existing published
research. The study has shown that the women business owners are making significant contributions
to global economic health, national competitiveness and community commerce by bringing many
assets to the global market. As per the analysis of the research study, women entrepreneurs have
demonstrated the ability to build and maintain long-term relationships and networks to communicate
effectively, to organize efficiently, to be fiscally conservative, and to be aware of the needs of their
environment and to promote sensitivity to cultural differences. Researchers contend that women
business owners posses certain specific characteristics that promote their creativity and generate
new ideas and ways of doing things. These characteristics include focus, high energy level, personal
motivations, self employed father, social adroitness, interpersonal skills etc. There is a worldwide
pool of economically active persons, known as the Women’s Indicators and Statistical Data Base
(WISTAT), from which one can extrapolate the general number of women entrepreneurs.
Singh, 2008, identifies the reasons & influencing factors behind entry of women in
entrepreneurship. He explained the characteristics of their businesses in Indian context and also
obstacles & challenges. He mentioned the obstacles in the growth of women entrepreneurship
are mainly lack of interaction with successful entrepreneurs, social un-acceptance as women
entrepreneurs, family responsibility, gender discrimination, missing network, low priority given
by bankers to provide loan to women entrepreneurs. He suggested the remedial measures like
promoting micro enterprises, unlocking institutional frame work, projecting & pulling to grow &
support the winners etc. The study advocates for ensuring synergy among women related ministry,
economic ministry & social & welfare development ministry of the Government of India.
Women network report on Women in Business & in Decision Making focus on women
entrepreneurs, about their problems in starting & running the business, family back ground,
education, size of business unit. Some interesting facts which came out from this report are less
educated women entrepreneurs are engaged in micro enterprises, have husband & children but
have no help at home. Most of the women establish enterprises before the age of 35, after gaining
some experience as an employee somewhere else. The motivational factors were desire for control
& freedom to take their own decision as well as earning handsome amount of money. Dedication
of more than 48 hours in a week with the family support to their enterprises gave them a sense of
self confidence. However, to maintain balance between family & work life is a major challenge
before women entrepreneurs especially for those who have children & working husband. Cohoon,
Wadhwa& Mitchell, (2010), present a detailed exploration of men & women entrepreneur’s
motivations, background and experiences. The study is based on the data collected from successful
women entrepreneurs. Out of them 59% had founded two or more companies. The study identifies
top five financial & psychological factors motivating women to become entrepreneurs. These are
desire to build the wealth, the wish to capitalize own business ideas they had, the appeal of startup
culture, a long standing desire to own their own company and working with someone else did not
appeal them. The challenges are more related with entrepreneurship rather than gender. However,

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the study concluded with the requirement of further investigation like why women are so much
concerned about protecting intellectual capital than their counterpart. Mentoring is very important
to women, which provides encouragement & financial support of business partners, experiences &
well developed professional network.

2. Methodology
Human resources, both men and women of working age, constitute the basis of any type of
economic development. The role and degree of integration of women in economic development is
an index of the economic and social status of women. Though India is the largest democracy in the
world, with the highest population next to China, with regard to education, employment and status
of women, the country is far behind the developed nations of the world. The census figures indicate
that majority of women in India are illiterate, ill fed, unemployed, low paid occupying a very poor
status in the society. The concept of “Self employment” for women and thereby their empowerment
deserves a special emphasis in this context.This study focuses thatfrom the economic point of view,
if we promote the women entrepreneurship it increases the employment opportunities, generate
new income, augment the productive capacity of the society and accelerate the rate of capital
formation in the country. From the social point of view, they can offer a distinctive status for
women either as entrepreneurs or as leaders. Thus from the economic and social point of view, they
lead to women empowerment.
2.1.1 Objectives of the Study
 To examine the status of women entrepreneursin India.
 To identify the challenges and obstacles faced by women entrepreneurs in India
 To identify the factors of hindrance for women entrepreneurship in India
2.1.2 Research Methodology
According to the requirements of the objectives of the study the research design employed
for the study is ofdescriptive type. Keeping in view of the set objectives, this research design was
adopted to have greateraccuracy and in depth analysis of the research study. Available secondary data
was extensively used for the study. The investigator procures the required data through secondary
survey method. Different news articles, Books and Web were used which were enumerated and
recorded. The literature is cross checked and validated to gives the latest information.
2.2 Conceptual understanding of women entrepreneurs
Women entrepreneurs are influenced by both push and pull factors. Pull factors
include:Aspirations for autonomy and independence, personal satisfaction and achievement,
orsearch for a challenge, challenging/rejecting gender stereotypes, gap in the market, etc.Pushfactors
include: dissatisfaction with the labour market, need for greater income,unemployment, desire for
a better life or higher earnings, financial incentive and motivationfrom government/schemes for
assistance, attraction of high profit margins, etc.

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2.2.1 Status of women entrepreneurs in India
• A report published by ESCAP in 2005 titled ”Developing Women Entrepreneurs in
SouthAsia” pointed out that in India, a majority of women entrepreneurs in SMEs fall
within theage group 25-40 years. The states of Gujarat, Maharashtra and Karnataka count
a greaterproportion of entrepreneurs, mostly women from families which are already in
business orhave service-related backgrounds.
• The Indian society has evolved as a traditionally male-dominated one. Women tend to
beconsidered as the weaker sex and socio-economically depended on men throughout their
life.Women mostly occupy subordinate positions and execute decisions generally made by
othermale members of the family.
• Despite an equal population, very few women were self-employed and the majority
of them were engaged in the informal sector like agriculture, agro-based industries,
handicrafts,handloom and cottage-based industries.
Sixty-five per cent of the population in India live in villages; Self Help Groups (SHGs) have
paved the way for economic independence of rural women involved in micro entrepreneurship.
2.2.2 Ownership by gender of owner in India:
The proportion of women-managed enterprises is slightly higher in rural areas than in urban
areas.
Table 1: Percentage Distribution of Enterprises by Gender of Owner in Rural and Urban Areas
AREA FEMALE MALE
Rural 15.27 84.73
Urban 12.45 87.55
All 13.72 86.28
Source: MSME Annual Report 2011-12, Ministry of MSME, Government of India

Figure 1: Women Enterprises’ Sector

Source: Fourth All India Census of MSME 2006-07, Ministry of MSME

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2.2.3 Socio- cultural context of women entrepreneurs in India
Each and every state in India has a culture of its own. There are institutions, traditions
andrituals which foster values, modes of making choices and define relationships betweenmen
and women and their roles in both home and work settings.Women have to play multiple roles; as
a wife, mother, parent or daughter and tend tosuppress their real aspirations and identities as they
play different roles simultaneously inthe community. Women in rural areas, with low literacy rates
often take up selfemploymentto meet the pressing economic needs of their family. In the urban
context, educated women do not want to be confined to their houses and wantequal treatment and
respect from their partner. Women entrepreneurs enjoy better statuswithin their family and manage
multiple responsibilities provided they receive the crucialfamily support to do so.
2.2.4 Historical pattern of women’s entrepreneurship in India
The last two decades have witnessed phenomenal changes with regards the status and workplace
participation of women in India. Women’s entrepreneurship development has emergedparticularly
in the wake of increasing globalization, with the support of progressive social,economic and
political cross currents, technological advancement, and the media. In the 1950s, only those women
who had no male income-earners within their family becamethemselves income generators. In the
1960s, women begun to start small enterprises at home.Those were activities for self-occupation
rather than for achieving financial autonomy. In the 1970s, income generation and career choices
became equally important for many women. In entrepreneurial roles, the women increasingly
wanted their enterprise to grow and succeed.Women often joined their fathers’ or husbands business
as contributing partners on an equal footing in the 1980s. They made personal choices, stood up for
their convictions and had the courage to make new beginnings. The women in 1990s increasingly
learnt to live alone,travel alone and if need be to rear children alone. In the twenty first century even
moreopportunities arise for women and they increasingly venture to build enterprises.

3. Results and Discussions

3.1 challenges and obstacles faced by women entrepreneurs in India
Availing finance and juggling many responsibilities are major hurdles faced by women
ininitiating, requiring and managing an enterprise. Other hindering external factors includegender
discrimination, inaccessibility to information, training opportunities, infrastructure,etc. Some
internal factors such as risk aversion by women, lack of self-esteem and self confidence, lack of
vision etc. also create hinder women’s entrepreneurship.Women in India are mostly economically
dependent from their husbands which reduces theirability to bear the risks and uncertainties
involved in launching a business. The educationallevel and family background of their husbands
also influence women’s participation inentrepreneurship. Although the Indian society is fast
evolving, it remains a male-driven / patriarchal society inwhich women have to fight many battles
in order to become successful entrepreneurs.Although the principle of gender equality is enshrined
in the Constitution of India, which confers equal rights and opportunities to both men and women,

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in practice, women are stillwidely considered as “abla” i.e. weak. This de factor gender inequality
serves as a majorbarrier to women’s entry into business.
In India, parental immovable property (land/building/house) or business goes to the malechild
by succession. This is one amongst the many reasons why women face difficulty inobtaining finance,
managing the working capital and credit. In addition, women entrepreneursoften have to take loans
in the names of their husbands, fathers, or brothers and consequentlyby default involve them into
the business.Women entrepreneurs often do not have a proper organizational set-up to pump in a lot
ofmoney for canvassing and advertisements. They have to compete with seasoned menentrepreneurs
and such competition often results ultimately in the liquidation of women-ledenterprises.Gender-
insensitive business development support systems (BDS Providers) often creatediscriminatory
environment for women entrepreneurs in the process of starting and managingtheir businesses,
especially during registration, finances procurement, marketing, etc. Sectorsthatare all male-
dominated.Women need to devote considerable amount of time for their business if they want
it to grow.Meanwhile by contrast, if a woman is unable to devote sufficient time to her family,
manyconflicts will emerge. If family members are not supportive, cooperative or encouraging,women
are most likely to choose not to pursue an enterprise, as Indian women typically placemore emphasis
on family ties and relationships. Married women have to walk a fine linebetween business and
family. Women's family and personal obligations are sometimes a greatbarrier for succeeding in a
business career. Only few women are able to manage both homeandbusiness efficiently, devoting
enough time to perform all their responsibilities.After the challenges related to accessing finance,
marketing their products/services is yetanother common problem. Maintaining an existing business
or accessing fresh businessopportunities requires strategic marketing skills. Women entrepreneurs
may not be ascomfortable as male entrepreneurs in areas where they interact mostly with men. They
facechallenges due to socio-cultural and psychological factors which makes them less assertive,less
communicative and less able to negotiate and garner support for their decisions. Apartfrom that, the
size of operations is often too small to allow marketing at national/state level,women lack mobility
owing to their household responsibilities or their inability to travelalone, in addition to the lack
of information regarding channels of distribution or even theircentralized business processes may
prevent them from travelling outstation . In the international markets of imports and exports,very
few female entrepreneurs are found to be exporting or contemplating export. Apart fromabove-
cited limitations related to the scale of marketing, the procedural requirements ofexport may be a
drawback to attempting to tackle the export market.
Women’sflair for technology again, depends upon their sociocultural upbringing, which may
makethem believe it is a men-dominated field. Women who aspire to become entrepreneurswouldfind
it challenging to keep abreast of technological advancements. The installations of newmachineries
during expansion of the productive capacity and similar factors may discouragewomen
entrepreneurs from venturing into new areas. Women-controlled businesses are oftensmall and it
is at times difficult for women to access the information they need regardingtechnology, technical
training, innovative schemes, concessions, alternative markets of technology, etc. Very few

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women entrepreneurs make use of advanced software available like statistical software’s, SAP,
Accounting Packages like TALLY, Animation software’s 3D MAX,and even internet facilities.
However, technology utilization and dependence in businesses vary depending upon the type of
enterprises. Women who enter areas requiring highly technical knowledge are either supported by
their husband or achievement oriented. Once woman opt for a product or service that is technical
in nature however, they become comfortable with it very quickly. They learn to select machineries,
product attributes, deal with technical problems and oversee technical engineers. They too access
technology through exhibitions, brochures and other materials sent by suppliers.
Another challenge encountered by women entrepreneurs is a lack of management skills,usually
because of lower propensity of previous business or job experience. Furthermore, support providers
discriminate against women entrepreneurs to a large extent when providing consultations and
guidance.One more intricate problem faced by women entrepreneurs is the management of the
workingcapital. Society’s attitude towards women entrepreneurs, unequal opportunities amongst
men andwomen and broadly a lack of self-confidence haunt women entrepreneurs. This low level
ofself-confidence, will-power and optimistic attitude amongst women create a fear ofcommitting
mistakes which affects their business. The family members and the society areoften reluctant to
stand beside their entrepreneurial endeavour.Women tend to start business about ten years later than
men, on average. Motherhood andtraditional socialization pattern have been cited as reasons for
delayed entry intoentrepreneurial activities.
3.2 Measures to Remove the Obstacles
The elimination of obstacles for women entrepreneurship requires a major change in traditional
attitudes and mindsets of people in society rather than being limited to only creation of opportunities
for women. Hence, it is imperative to design programmes that will address to attitudinal changes,
training, supportive services. The basic requirement in development of women entrepreneurship
is to make aware the women regarding her existence, her unique identity and her contribution
towards the economic growth and development of country. The basic instinct of entrepreneurship
should be tried to be reaped into the minds of the women from their childhood. This could be
achieved by carefully designing the curriculum that will impart the basic knowledge along with
its practical implication regarding management (financial, legal etc.) of an enterprise. Adopting a
structured skill training package can pave the way for development of women entrepreneurship.
Such programmes can train, motivate and assist the upcoming women entrepreneurship in
achieving their ultimate goals. Various schemes like the World Bank sponsored programmes can be
undertaken for such purposes. The course design should focus on imparting input on profitability,
marketability and practical management lessons. Besides, there should be consideration in helping
the women entrepreneurs in balancing their family life and work life. As a special concern,
computer illiterate women can be trained on Information Technology to take the advantage of
new technology and automation. The established and successful women entrepreneurs can act as
advisors for the upcoming women entrepreneurs. The initiatives taken from these well established

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entrepreneurs for having interaction with such upcoming women entrepreneurs can be proved
to be beneficial in terms of boosting their morale and confidence. It may result in more active
involvement of women entrepreneurs in their enterprises. Infrastructure set up plays a vital role
for any enterprise. Government can set some priorities for women entrepreneurs for allocation of
industrial plots, sheds and other amenities. However, precautionary measures should be undertaken
to avoid the misuse of such facility by the men in the name of the women. Even in today’s era of
modernization the women entrepreneurs depend on males of their family for marketing activities.
This is simply because they lack the skill and confidence for undertaking such activities. Women
development corporations should come forward to help the women entrepreneurs in arranging
frequent exhibitions and setting up marketing outlets to provide space for the display of products or
advertisement about services made by women.

4. Conclusions and Suggestions

“Most women entrepreneurs simply got tired of working for others, had a great idea they
wanted to commercialize, or woke up one day with an urgent desire to build wealth before they
retired. So they took the big leap.” The country’s economic policy environment must be favourable
for organizations to achieve efficiencies in today’s global market. It should enable the women
entrepreneurs to provide a magical touch to an organization, whether in public or private or joint
sector, in achieving speed, flexibility, innovativeness, and a strong sense of self-determination. They
bring a new vision to the forefront of economic growth of a country. The study of entrepreneurship
has relevance today, not only because it helps entrepreneurs better fulfil their personal needs but
because of the economic contribution of the new ventures. More than increasing national income
by creating new jobs, entrepreneurship acts as a positive force in economic growth by serving as the
bridge between innovation and market place any strategy aimed at economic development would
be imbalanced without the involvement ofwomen. The hidden entrepreneurial potentials of women
have gradually been changing with thegrowing sensitivity to the role and economic status of women
in the society. Besides skill, knowledgeand adaptability in business being the main reasons for
women to emerge into business ventures, thereare various environmental factors like Policies, Legal
framework, Market and Geographical areaswhich influence women entrepreneurship development
process. This particular study shows that it is necessary to understand trends related to MSME
development in India from a gender perspective, thesize of the country and its immense diversity
will play an important role while analyzing the participation of women in the above saidsectors.
This is predicated on the fact that “women empowerment is not complete without a corresponding
adequate funding provision for the trained manpower.The greatest challenge still remains financial
intermediation. Trainees keep raising the concern about the practicability of the post-training
activities and many more. On the other hand the study shows that women empowerment is only
possible in India through Entrepreneurship Development.

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 References
• Ayadurai, Selvamalar, (2005), An Insight into The “Constraints” Faced by Women Entrepreneurs in A
War-Torn Area: Case Study of The Northeast of Sri Lanka, presented at the 2005 50th World Conference
of ICSB Washington D.C.
• Batliwala, S., “The Meaning of Women‟s Empowerment: New Concepts from Action”, in Gita Sen,
et. al., (Ed), Population Policies Reconsidered: Health, Empowerment and Rights, Harvard Centre for
population and Development Studies, 1994.
• Bowen, Donald D. & Hirsch Robert D. (1986), The Female Entrepreneur: A career Development
Perspective, Academy of Management Review, Vol. 11 no. 2, Page No. 393-407.
• Cohoon, J. McGrath, Wadhwa, Vivek& Mitchell Lesa, (2010), The Anatomy of an Entrepreneur- Are
Successful Women Entrepreneurs Different From Men? Kauffman, The foundation of entrepreneurship.
• Hackler, Darrene; Harpel, Ellen and Mayer, Heike, (2008), “Human Capital and Women’s Business
Ownership”, Arlington, Office of Advocacy U.S. Small Business Administration, August 2006, VA
22201 [74], No. 323.
• Handbook on Women-owned SMEs, Challenges and Opportunities in Policies and programmes,
International Organization for Knowledge Economy and Enterprise Development.
• Jalbert, Susanne E., (2008), Women Entrepreneurs in the Global Economy, education research. http://
research.brown.edu/pdf/1100924770.pdf.
• Mathew, Viju,(2010), “Women entrepreneurship in Middle East: Understanding barriers and use of ICT
for entrepreneurship development”, Springer Science + Business Media, LLC 2010.
• Mayoux, Linda, “Participatory Programme Learning for Women‟s Empowerment in Micro Finance
Programmes: Negotiating Complexity, Conflict and change”, IDS Bulletin, Vol. 29(4), 1996.
• Moore, D. P. &Buttner, E. H. (1997). Women entrepreneurs: Moving beyond New Generation of Women
Entrepreneurs Achieving Business Success.
• Orhan M. & Scott D. (2001), Why women enter into entrepreneurship: an explanatory model. Women in
Management Review, 16(5): 232-243.
• Rao, N. “Empowering through Organisation: Women Workers in the Informal Sector”, Indian Journal of
Gender Studies, Vol. 3 (2), 1996.
• Schuler and Hashmemi, “Defining and studying Empowerment of Women: A Research Note from
Bangladesh”, JSI Working paper No.3, Arligton, 1993.
• Singh, Surinder Pal, (2008), An Insight Into The Emergence Of Women-owned Businesses As An
Economic Force In India, presented at Special Conference of the Strategic Management Society,
December 12-14, 2008, Indian School of Business, Hyderabad .
• Stormquist,Nelly, The theoretical and Practical Bases for Empowerment, in (ed.) DigumartiBhaskara,
Women Education and Empowerment, The International Encyclopedia of Women, Vol.2.,Discovery
Publishing House, New Delhi,1998.
• Winn, Joan, (2005), “Women Entrepreneurs: Can we remove the Barriers?” International Entrepreneurship
and Management Journal,1(3): 381-397.
• Damwad, (2007), Women Entrepreneurship – A Nordic Perspective, August 2007, Nordic Innovation
Centre.Women Entrepreneurship Development in India, www.indianmba.com/Faculty_Column/
FC1073/fc1073.html
• Women in Business & Decision Making – A survey on women entrepreneurs, women network, euro
chambers Association of European Chambers of Commerce and Industry.

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 An Empirical Analysis of Growth of SHG and
Microfinance Channels in India
By

Narender and Shilpi Devi*

1. Introduction
Poverty is one of the common obstacles in achieving higher growth and enhancing the standard
of living of the people in the most of the low income countries like India. Over the years most of
the countries have been pursuing various programs and policies to cope up such big problems. Out
of such policies one of the most important and effective one is Micro finance. As credit plays vital
role in beginning and expanding the business, microfinance has been treated as an important tool
for economic development. Microfinance is not just about giving micro credit to the poor rather it
is an economic development tool whose objective is to assist poor to work their way out of poverty.
It covers a wide range of services like credit, savings, insurance, remittance and also non-financial
services like training,counselingetc.The year 2005 was announced as the year of Microfinance by
United Nations and poverty declined from 50% in 1981 to 25% in 2005.
Microfinance is defined as a development tool that grants or provides financial services and
products such as very small loans, savings, micro-leasing, micro-insurance and money transfer to
assist the very or exceptionally poor in expanding or establishing their businesses (Robinson, 1998).
Microfinance sector has grown rapidly over the past few decades. Nobel Laureate Muhammad
Yunus is credited with laying the foundation of the modern MFIs with establishment of Grameen
Bank, Bangladesh in 1976. Today it has evolved into a vibrant industry exhibiting a variety of
business models.

2. Methodology
This paper is based on secondary data collected from Status of Microfinance in India published
by NABARD in 2012.To endeavor the above objectives present research paper also data sources
like Micro-Credit Rating International Limited (M-CRIL),World Bank Reports, different annual
reports of National Bank for Agriculture and Rural Development (NABARD) and used various
references journals, websites and books in order to support the arguments.
2.1 Microfinance in India
Microfinance sector has grown rapidly over the past few decades and works as a tool for socio-
economic up-liftment in a developing country like India. It is expected to play a significant role in
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poverty alleviation and economic development. Nobel Laureate Muhammad Yunus is credited with
laying the foundation of the modern MFIs with establishment of Grameen Bank, Bangladesh in
1976. NABARD took this idea and started concept of Micro Finance in India.Both Reserve bank of
India and National Bank for Agriculture and Rural Development (NABARD) have been spreading
the promotion and linkage of SHGs to the banking system through refinance support and initiating
other proactive policies and systems .Microfinance Institutions (MFIs) in India exist as NGOs
(registered as societies or trusts), Section 25 companies and Non-Banking Financial Companies
(NBFCs). Commercial Banks, Regional Rural Banks (RRBs), cooperative societies and other large
lenders have played an important role in providing refinance facility to MFIs. Banks have also
leveraged the Self-Help Group (SHGs) channel to provide direct credit to group borrowers.
Indian Microfinance Institutions are predominantly NGOs i.e., nearly 80 % of the Microfinance
Institutions operate under the Society/Trust form which is for the not-for-profit sector with a
clear development agenda. Apart from this, other important legal forms are being used by Indian
Microfinance Institutions. 10 % of organizations operate under the company structure; 5% are
section 25 companies (Section 25 of the Indian Companies Act, 1956); 2% as Cooperatives; 2% as
Non Banking Finance Companies (NBFCs); and 1% as Local Area Banks (LAB).

(Source:M-CRIL India Indices of Microfinance)

3. Channels of Microfinance
The two important models/channels of microfinance involving credit linkages with banks in
India are (i) SHG - Bank Linkage Model: This model involves the SHGs financed directly by the
banks viz., CBs (Public Sector and Private Sector), RRBs and Cooperative Banks. (ii) MFI - Bank
Linkage Model: This model covers financing of Micro Finance Institutions (MFIs) by banking
agencies for on-lending to SHGs and other small borrowers.

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3.1 SHG – Bank Linkage Programme:
This is the bank-led microfinance channel which was initiated by NABARD in 1992. Under
the SHG model the members, usually women in villages are encouraged to form groups of around
10-15. The members contribute their savings in the group periodically and from these savings
small loans are provided to the members. In the later period these SHGs are provided with bank
loans generally for income generation purpose. The group’s members meet periodically when the
new savings come in, recovery of past loans are made from the members and also new loans are
disbursed. This model has been very much successful in the past and with time it is becoming more
popular. The SHGs are self-sustaining and once the group becomes stable it starts working on its
own with some support from NGOs.

(Source:NABARD status of microfinance in India 2011-2012)

Above graphs covers the broader components of the programme, namely inclusive growth,
savings, loans and the recovery performance of SHG bank linkage. NABARD has played a key role
not only in promoting SHGs but also in standing behind the SHG-Bank Linkage Programme.
3.2 Micro Finance Institutions:
Those institutions which have microfinance as their main operation are known as micro
finance institutions. A number of organizations with varied size and legal forms offer microfinance
service. These institutions lend through the concept of Joint Liability Group (JLG). A JLG is an
informal group comprising of 5 to 10 individual members who come together for the purpose of
availing bank loans either individually or through the group mechanism against a mutual guarantee.
Below table shows the progress under the years related to MFI banking linkage.

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(Progress under MFI-Bank Linkage Programme)

(Source:NABARD Status of microfinance in India 2011-2012)

The fact that Commercial Banks (and financial institutions like SIDBI) are losing their
confidence in lending to MFIs is evident from the fact that the fresh lending to MFIs by banks
during the year declined by over 38% as compared to last year. There has also been a marginal
decline in the number of MFIs availing fresh loans from Banks in spite of the fact that the loan
outstanding against MFIs has come down by almost 17% during the year. If the trend continues,
this sector is likely to face serious resource crunch and could affect its outreach plans in the near
future.

(Source:Microfinance India State of the sector report 2012)

Graph shows comparison of SHG and MFI client outreach and generates trends in between
the years. During 2011-12 MFI contributes near 27 millions as compare to SHG which is 57 million
and total contribution near to 84 which is less as compare to previous year 2010-11 (i.e. 94.3)
3.3 Micro Finance Institutions (Development and Regulation) Bill, 2012:
Bill was introduced in the LokSabha on May 22, 2012. The Bill aims to provide for the
development and regulation of micro finance institutions. Its salient features are as follows.

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 • A micro finance institution (MFI) is defined as an organisation, other than a bank,
providing micro finance services. These services are defined as micro credit facilities not
exceeding Rs 5 lakh in aggregate, or with the Reserve Banks (RBI) specification Rs 10 lakh,
to each individual. Other services like collection of thrift, pension or insurance services
and remittance of funds to individuals within India also come under micro finance services.
• The Bill allows the central government to create a Micro Finance Development Council
with officers from different Ministries and Departments. This council will advise the central
government on policies and measures for the development of MFIs.
• In addition, the Bill allows the central government to form State Micro Finance Councils.
These councils will be responsible for coordinating the activities of District Micro Finance
Committees and reviewing the MFIs in their state.
• District Micro Finance Committees review the development of micro finance activities
within the district, monitor over-indebtedness and monitor the methods of recovery used
by MFIs. These committees can be appointed by the RBI
• The Bill requires that all MFIs to obtain a certificate of registration from the RBI. The
applicant needs to have a net owned fund of at least Rs 5 lakh.
• Every MFI will have to create a reserve fund and the RBI may specify a percentage of net
profit to add to this fund. There can be no appropriation from this fund unless specified by
the RBI.
• At the end of every financial year, MFIs are required to provide an annual balance sheet
and profit and loss account for audit to the RBI.
• The RBI is responsible for redressal of grievances for beneficiaries of micro finance
services.
• The Bill gives the central government the authority to delegate certain RBI powers to the
National Bank of Agriculture and Rural Development or any other central government
agency.
• The central government has the power to exempt certain MFIs from the provisions of the
Bill.
• The Bill allows the RBI to impose a monetary penalty of uptoRs 5 lakhs for any contravention
of the Bills provisions. No civil court will have jurisdiction against any MFI over any
penalty imposed by the RBI.

4. Conclusions and Suggestions

Microfinance sector has grown rapidly over the past few decades and works as a tool for socio-
economic up-liftment in a developing country like India it works as tool in economic development

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by providing Empowerment of women, increase in personal income, living standards of people and
providing banking services to the non reachable .SHGs and MFI are two channels for providing
services with banking linkage programme. SHG banks linkage programme much contributed as
MFI over the years and some facts come in front after analyzing the current status of microfinance
after year 2006-07 generates higher growth till year 2010 to 2011 .But after the AP case growth rate
of microfinance shows negative impact in self help group formation ,savings to banks and other
financial services A coin has always two phase ,same as some shortness in current microfinance
policy.MFI needs to create more sevices for future prespective and interest rates should be reduced
for far access by low income families,itsupto the NABARD ,RBI and government by making
effective policies by taking as a development tool for the growth of the Indian economy.

References

• CRILEX-the M-CRIL India Indices of Microfinance.

• Micro Finance Institutions (Development and Regulation) Bill, 2012.
• Microfinance India; The Social Performance Report 2012.
• http://www.microfinanceindia.org/uploads/publication_link_files/social-perfomance-management-
report-2012.pdf
• Microfinance-current status and growing concerns http://www.iitk.ac.in/ime/MBA_IITK/
avantgarde/?p=475
• Microfinance India State of the Sector Report 2012 . http://www.microfinanceindia.org/uploads/
publication_link_files/state-of-the-sector-report-2012.pdf
• NABARD Status of Microfinance in India 2010-2011.http://www.nabard.org/
english/..%5CPublication%5CSMFI%202010-11.pdf
• NABARD Status of Microfinance in India 2011-2012.
• http://www.nabard.org/english/..%5CPublication%5CSMFI2012.pdf
• Research work on impact of microfinance on development of Micro and small enterprises.
• http://www.grgsms.com/wps/wp3.pdf
• Samarpreet, June 2010.Microfnance in India:A state wise analysis.

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 Mobile Banking in India: Challenges and
Prospects
By

Kanwaljeet Kaur

1. Introduction
Mobile Banking refers to the provision and availability of various banking services with the
help of mobile telecommunication devices. The services include facilities to conduct bank and stock
market transaction, to administer accounts and to access customer information. Mobile banking
is a system which allows customers of a financial institution to conduct a number of financial
transactions through a mobile device such as mobile phone. Today mobile has become an important
channel for banks. Consumers are becoming more comfortable while using their mobile devices.
Mobile banking is different from mobile payments which involve the use of a mobile device to pay
for goods or services. In the beginning mobile banking services were offered over SMS which was
called as SMS banking. When smart phones with WAP support came in 1999, the European banks
were the first to offer mobile banking to their customers. Up to 2010, mobile banking has been
performed with the help of SMS or the mobile web. Apple’s success with i-phone and the growth
of phones based on Google’s Android, there is increasingly use of special client programs(apps).
which are downloaded to the mobile device. The study by Mapa Research shows that over a third
of banks have mobile device detection.

Mobile banking is used in those parts of the world where very little infrastructure is available
as is the case of remote and rural areas. In these places, banks are available only in big cities and
customers have to travel hundreds of miles to the nearest bank.In Iran, Mobile banking services
are provided by banks such as Persian, Tejarat, Mellat, SaderatSepah, Edbi, and Bankmelli. In
Guatemala, Banco industrial provides the service. In Mexico, mobile service is available with
Omni life, Ban comer and MPower Venture. In Kenya, it is the M-Pessa Service which is used
to pay utility bills as well. It is mainly used to transfer limited amounts of money. IN 2009, Zain
launched their own mobile money transfer business in Kenya and other African countries which is
known as ZAP. In Somalia, Hormuud Telecom Company provides mobile banking service. In 2009,
Telenor Pakistan launched a Mobile banking solution in coordination with Taameer bank. In India,
Eko India Financial Services, the business correspondent of State Bank of India and ICICI Bank
provides bank accounts, deposit, withdrawal and remittance services, micro-insurance, and micro-
finance facilities to its customers through mobile banking. In a single year i.e.2010, the growth in

146
mobile banking users was over 100 percent in Kenya, 200 percent in China, 150 percent in Brazil
and 110 percent in USA.On 31March 2011, Dutch Bangla bank launched the first mobile banking
service in Bangladesh. The service is started with ‘Agent’ and ‘Network’ support from mobile
operators. Out of 160 million people in Bangladesh, only 13% have bank accounts. Now Dutch-
Bangla Bank can reach out to the rural and unbanked population, out of which 45% are mobile
phone users. Under this service, any mobile handset with subscription to any of the six existing
mobile operators of Bangladesh is able to utilize the service. Under this service, bank nominated
Agents perform banking activities on behalf of the banks like opening mobile banking account,
providing cash services like receipts and payments and dealing with small credits. Cash withdrawal
from a mobile account can be done from an ATM validating each transaction by mobile phone and
PIN instead of Card and PIN. Other services that are delivered through mobile banking system are
person- to-person, person-to-business, business to person, government-to-person. In India, Eko
India Financial Services, the business correspondent of SBI and ICICI provides bank accounts,
deposits, withdrawal and remittance services, micro insurance and micro finance facilities to its
customers through Mobile banking.

According to the study conducted by Teaneck, N.J and San Rafael (July 30,2013) consumers
are increasingly expecting banks to help improve their mobile life styles by providing anytime,
anywhere capabilities, customised user experiences, shopping and social features and value added
services. The study surveyed more than 700 consumers from a diverse group of U.S. financial
institutions, age ranges, annual incomes, genders, ethnicities, and education and employment
backgrounds to understand their mobile banking expectations, emerging trends and current and
future needs. The main findings of the study are;
• Anytime, anywhere capabilities: Consumers look for more functions and they want
more options.
• Customised user experiences: Tablets have emerged the winners as 41% of survey
respondents wanted to use tablets compared with smart phones and 60% of tablet
owners preferring a tablet for mobile banking. Consumers are now using both devices
for different purposes. They want features optimized to suit each device’s form factor.
• Better shopping and social experiences: Consumers want their bank to offer better
shopping and social experiences. They also prefer offers from banks rather than other
mobile payment medium. Consumers are open to using social networking features on
mobile banking apps/websites for accessing information on new products and sharing
opinions.
• Value-added services: Consumers are seeking services that give them security, easy
mobile payment and provide information on spending a bill payment pattern.

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2. Methodology
The paper describes the various services provided by the mobile banking which are very
useful to the customers. A brief description is given about the mobile banking services which are
available in India. The paper has been divided into two parts. One part covers the various challenges
which are currently faced by the mobile banking. The other part focuses on the future of mobile
banking which is very bright in the coming years. Secondary data information has been used which
is collected with the help of books and Internet.
2.1 Objective of the Paper
To study the emerging challenges in the Mobile Banking and its future prospects.
Discussion: Mobile banking consists of three inter-related concepts.
• Mobile Accounting
• Mobile Brokerage
• Mobile Financial information services.
Accounting and Brokerage are transaction based services whereas financial information is a
non-transaction service provided by mobile. The non-transaction based services of information are
necessary for conducting any transaction. E.g. for preparing a money remittance, balance enquiry
is essential. It implies accounting and brokerage services are used in combination with information
services. Information services can be used independently.
• Mobile Banking Services
A Account Information
1 Mini statement and checking of account history
2 Alerts on Account activity
3 Monitoring of term deposits
4 Access to loan statement
5 Access to Card statement
6 Mutual funds
7 Insurance policy management
• Payments, Deposits, Withdrawals and Transfers
1 Cash-deposits and withdrawal on an ATM
2 Funds transfer: Domestic and international
3 Handling of Micro-payment

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 4 Tickets for travel and entertainment
5 Processing of Commercial payment
6 Mobile and Direct to Home package recharging
7 Bill payment
8 Peer to peer payments
9 Withdrawal at banking agent
10 Deposit at banking agent
SMS messages will help the system to check if the client has sufficient in his wallet and will
authorize a deposit or withdrawal transaction. Kenya’s M-PESA mobile banking service allows
customers of the mobile phone operator Safari com to hold cash balances which are recorded on
the SIM cards A U.S.basednon profit micro lending agency is using the Zidisha technology which
allows residents of developing countries to raise small business loans from web users worldwide.

3. Challenges for Mobile Banking

• Different Handset: In the market different mobile phone devices are available. This makes
a big challenge for banks to offer mobile banking solution on any type of device. Some
devices support Java ME and some support SIM Application Toolkit, a WAP browser or
only SMS. Initial interoperability issues have been localized. India is using portals like
R-World to enable the limitations of low end java based phones. Interoperability is largely
dependent on the banks themselves. SMS are helpful in providing basics but they are difficult
to operate if the transactions are complex. Java based (installed applications) provide better
security and are east to use. They allow development of more complex capabilities similar to
internet banking. There is a fear that there is a challenge of interoperability between mobile
banking applications due to lack of common technology standards for mobile banking. But
in practice banking interfaces are well defined and money movements between banks follow
the ISO-8583 standard. When mobile banking will mature, money movements between
Service providers will adopt the standards as are followed in the banking world. Mobile
Banking Association Banking Sub-Committee published the Mobile Banking Overview
for financial institutions in January 2009. In its report it discussed the merits and demerits
of Mobile Channel Platforms such as SMS, Mobile Web, Mobile Client Applications, and
SMS with Mobile Web and Secure SMS.
• Security:The other very important challenge is the security of financial transactions which
are executed from remote location and transmission of financial information over the
air. They must be addressed jointly by mobile application developers, wireless network
service providers and the bank’ IT departments. Followings are the major issues related
with security.

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  If the bank is offering smart-card based security, the physical security of the device
becomes very important.
 In the case of stolen device, the hacker should require at least an ID/Password to
access the application.
 Before imitating a transaction, authentication of the device with service provider is
must. It would ensure that unauthorized devices are not connected.
 User ID/ Password authentication of bank’s customer.
 Encryption of the data being transmitted over the air.
 Encryption of the data that will be stored in devices for off-line analysis by the
customer.
One-time password is the latest tool used by service providers against the cyber fraud. Every
time when the customer wants to perform transaction using the online or mobile banking interface,
he makes request for OTP. When the request is received by service provider, the password is sent
to the consumer’s phone via SMS. The password is expired once it is used.
It is clear from this that SMS gateway providers can provide a decent quality of service for banks
and financial institutions in regard to SMS services. This industry requires the provision of service
level agreements.
• Scalability and Reliability:Another challenge for the banks is to scale-up the mobile
banking infrastructure to handle exponential growth of the customer. With mobile banking,
the customer can be anywhere in the world, the banks need to ensure that the systems are
up and running in a true 24x7 fashion. When the customers find mobile banking more
useful, their expectations from the bank will increase. If the banks are unable to meet the
performance and reliability expectation they may lose customer confidence. In India there
has been a phenomenal growth in the use of Mobile Banking applications. Leading banks
are adopting Mobile Transaction Platform and the Central Bank is publishing guidelines
for mobile banking operations.
• Application Distribution:It will be difficult for the customers to visit bank or connect to
a web site for regular upgrade of their mobile banking application. It is expected that the
mobile application itself check the upgrades and updates and download necessary patches.
But it is not so easy as there are many issues to implement this approach
• Personalization:Customers will expect from the mobile application to support personal
things such as:
 Preferred Language
 Date/ Time format
 Amount format
 Default transactions
 Standard Beneficiary list
 Alerts

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3.1 Mobile Banking in India: State Bank of India
State Bank Freedom offers-convenient, simple, secure, anytime and anywhere Mobile
banking.
3.1.1 Mobile Banking Service over Application/ Wireless Application Protocol (WAP)
This service is available on java enabled/ Android mobile phones (with or without GPRS)
or i-phones where the user is required to download the application on to the mobile handset. This
service can also be availed via WAP on all phones (java/non java) with GPRS connection. Following
is the list of functions which are available.
• Funds transfer (within and outside the bank)
• Immediate Payment Service
• Enquiry services
• Cheque book request
• Demat Enquiry service
• Bill Payment (utility bills, credit cards, Insurance premium), Donations and Subscriptions
• Mobile/ DTH Top up
• M Commerce (Merchant payments, SBI life insurance premium)
 Rules regarding business
• All Current/ Saving Bank Account holders in P segment and Currentr accountholders in
SME segment are eligible.
• Transaction limit per customer per day is Rs.50, 000/- with a calendar month limit of Rs.2,
50,000/-.
• All customers can avail the Service irrespective of their telecom service provider.
• The service is free of charge. SMS/GPRS cost will be borne by the customer.
3.1.2 Mobile Banking Service over SMS
This service is available on all phones (java/non java) with/ without GPRS connection. There
is no need to download the application. Ordinary SMS charges are applicable. The following
functions are available under this scheme.
• Enquiry Services
• Mobile Top up
• DTH Top up/ recharge
• IMPS-Mobile to Mobile Transfer
• Change MPIN

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 Rules regarding Business
• All Current/ Savings Bank Account holders in P segment and Current accountholders in
SME segment are eligible.
• Transaction limit per customer per day is Rs.1, 000/- with a calendar month limit of
Rs. 5,000/-. However, customers desiring to transact up to Rs. 5,000 per day or Rs. 25,000/-
per month may do so after obtaining an One Time Password (OTP).
• All customers can avail the service irrespective of telecom service provider.
• The service is free of charge. SMS cost will be borne by the customer.
• As a precaution, customers are requested to delete all the messages sent to the number
9223440000, after the response for their request has been received.
3.1.2 Mobile Banking Service over USSD (Unstructured Supplementary Service Data)
This service is available on all phones (java/non-java) with/without GPRS connection. There
is no need to download the application. The main functions available under this scheme are as
follows.
• Enquiry Services (Balance Enquiry/ Mini Statement).
• Mobile Top up.
• Funds Transfer (within bank).
 Rules regarding Business
• All Current/ Saving Bank Account holders in P segment and Current Account holders in
SME segment are eligible.
• Transaction limit per customer per day is Rs.1000/- with a calendar month limit of
Rs. 5,000/-.
• The service is available for subscribers of select telecom operators only.
• The service is free of charge. USSD session chargers will be borne by the customer.
• The service is session based and requires a response from the user within a reasonable time.
3.2 Future of Mobile Banking
More and more people are using Smartphone and tablet based devices. The mobile banking
functions will enable customer connection across entire customer life cycle much comprehensively
than earlier period. If all the services of a branch can be accessed through smart phones, customers
would not like to go to bank. The use of banking services on smart phones has become a game
changer. Some banks are expecting increasing number of customers switching to a primarily mobile
model. The mobile trend may force branch closures. From phone voice identification to personalized

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bank services delivered straight to a home will be a welcome trend. In the coming years, mobile
banking world would achieve superior customer experience with bi-directional communications.
According to Tracey Weber, Citigroup director for consumer internet and mobile banking in North
America, Mobile money is “not the next big thing- it is already a big thing”.
In the United States alone there are 75 million people who either have no bank account or
rely on non bank services for their needs. But many of them have some kind of mobile phone and
they will be the potential mobile banking customers. According to the World Bank, there are 1.8
billion people worldwide who have a mobile phone but no bank account. Million of these people
will be linked for the first time to the financial system by mobile applications. On an international
level, mobile financial services offer access to a vast number of markets which were previously
unreachable. It is true in case of underdeveloped regions or for emerging markets.
Some of the objective based functions of mobile banking are:
• Communication enrichment: Video Interaction with agents and advisors.
• Pervasive Transactions capabilities: Comprehensive “mobile wallet”.
• Customer Education: Test drive for demos of banking services.
• Connect with new customer segment: Connect with Gen Y-Gen Z using games and
social network ambushed to surrogate bank’s offerings.
• Content monetization: Micro level revenue themes such as music, e-book download
• Vertical positioning: Positioning offerings over mobile banking specific industries.
• Horizontal positioning: Positioning offerings over mobile banking across all the
industries.
• Built the bank’s brand while enhancing the Mobile real estate.

4. Conclusions and Suggestions

It is clear from the above discussion that although mobile banking is facing many challenges
but it has a bright future. Mobile phones are no longer a communication device; they can be used
for other purposes including executing business operation. It is very useful for the customers. Just
sitting at home, they can have access to all the facilities. They will be free from the hassle of going
to bank and wait for their turn. Today the market is customer friendly. Anything which is liked by
customers will overcome all the challenges. As it is very convenient for the customers, they will
fight a case for it. It will be helpful for all those people who own the mobile but do not have Bank
account. As with any revolution, the old order gives way to new one. Similarly banks are one
group of players on the mobile-money battlefield. Telecommunication companies, internet and
technology firms, retailers and others are also in this fight of mobile money. The mobile market is
one of the fastest growing markets. If certain challenges like the security of financial transactions
are properly addressed, then the future will become brighter.

153
 References

• Owens, John and Anna Bantug-Herrera (2006): Catching the Technology Wave: Mobile Phone Banking
and Text-A-Payment in the Philippines.
• Ovum Analyst Research, European Retail Banking Investment Strategies (2013).
• Tiwari, Rajnish; Buse, Stephan and Herstatt, Cornelius (2007): Mobile Services in Banking sector: The
Role of Innovative Business Solutions in Generating Competitive Advantage, in: Proceedings of the
International Research Conference on Quality, Innovation and Knowledge management, new Delhi,
pp.886-894.
• Tiwari, Rajnish and Buse, Stephan (2007): The Mobile Commerce Prospects: A Strategic Analysis of
Opportunities in the Banking Sector, Hamburg University Press.

154
 Challenges of Social Entrepreneurship:
An Exploratory Analysis
By

Sanjay Nandal and Sunil Kumari*

1. Introduction
When the whole world insanely runs behind building products and companies there is always
a group that fails to grab attention. They hide themselves from spotlights and work genuinely
towards a noble cause. Social entrepreneurs are the ones who redefine entrepreneurship by working
for a social cause that generally gets oppressed in a mad rush towards inventing products that can
comfort human living. Mahindra has taken an impressive step by creating a platform called “Spark
the rise” where entrepreneurs across India, who are change makers, get to connect to one another,
exchange ideas and compete. Indian social entrepreneurs poured into this event with great ideas
and the best ones that are creating an impact in the country were voted as winners5.As we know
that social entrepreneurs perform a variety of operations in urban as well as rural areas for social
cause and create the social capital but why entrepreneurs are not coming forward to resolve the
social problem? Is the reason being it non-profit? Answer lies in problems or challenges to be faced
by social entrepreneurs to come forward in entrepreneurship. Need to know the reasons/ problems
of lacking social entrepreneurship, initiated the researcher to make a study on this topic. The
good feedback of success and attention will naturally give confidence to new entrants, motivating
more and more social entrepreneurs. Peredo& McLean (2006) specify that there are nevertheless
tremendous hurdles and challenges that many social entrepreneurs face while operating in India
and that hinder the entrance of new social entrepreneurial ventures.
Kate ganly& Johanna Mair (2009) investigated how social entrepreneurs remove the
institutionalized inequalities and social exclusion through community development work. Suresh
Seth &Sudesh Kumar (2011) addressed the growing trends of social entrepreneurs in Indian
business including the history of social entrepreneurship in India and the new initiatives taken by
various social entrepreneurs. However, many of India’s social entrepreneurs continue to struggle
as the social venturing landscape lacks appropriate sources of financing, proper regulations,
societal recognition and suitable information systems. Therefore, it’s the right time for various
non‐governmental organizations (NGOs), governmental organizations and social entrepreneurs to
come forward to encourage further development of social entrepreneurship in India. Sarah Allen,
Anar Bhatt, Usha Ganesh &Nisha Kumar Kulkarni (2012) stated in their survey that served as the

155
foundation for this report targeted for-profit social enterprises across six sectors that directly impact
the quality of life for people at the base of the economic pyramid (BoP): agriculture, education,
energy, healthcare, livelihood development and water/sanitation.
Partap Singh (2012) attempted an analytical, critical and synthetic examination of
socialEntrepreneurshipin India and stated in his study that social entrepreneurship is expected to
be the next big thing to influence India as the country juggles to achieve a balance between a
growing GDP growth, ensuring inclusive growth and attempting to address issues ranging from
education, energy efficiency to climate change.4While much previous research work has focused
on “entrepreneurship” side of the equation, being the new concept there has been a little work on
social entrepreneurship and various challenges before the innovators coming forward in this field
that justifies the researcher to select this issue for research purpose.
1.2 Social Entrepreneurs in India
In India the concept of social entrepreneurship is gaining a momentum in now days. Various
NGOs are being established in this field which is being provided with the foreign aid too. Some of
the popular social in entrepreneurship are;

Name of Name of Purpose of Organization

Organization Entrepreneur
Craft Ashram HastashilpiGurukul - focuses on being a learning and production centre locally
Ladakhi Women’s ThinlasChorol -expose women in the village to people and cultures they would
Travel Company normally not have as much contact with
Milaap Sourabh Sharma Milaap is a micro-lending organization that is committed to boost
income generation and enhance living conditions among the poor
in India.
Goonj Anshu Gupta Goonj had demonstrated that ‘cloth’ can be a powerful
development resource for India’s last-mile communities. Goonj
collects, sorts, repurposes and redistributes the excess and under-
used resources of urban households to the rural and urban poor,
where ‘material poverty’ is the deepest
Udyogini VanitaViswanath Udyogini is setting up producer-owned, fair trade, rural value
chains in agriculture and natural resources, by putting a new
generation of tribal women entrepreneurs and female business
development service providers, in charge.
Neurosynaptic Sameer Sawarkar NCPL is catalyzing the broken ecosystem of primary healthcare
Communications and Rajeev Kumar service delivery in rural India through its indigenous and award
Pvt. Ltd winning technology innovation, ReMeDi™ (Remote Medical
Diagnostic) – a rural telemedicine and telediagnostic solution

156
Industree Crafts NeelamChhiber Industree Crafts Foundation triples incomes of marginal artisans
by moving them from being ‘piece rate workers’ to owners and
entrepreneurs of grassroots community enterprises. It works both
at the production and market ends of complex supply chains and
has impacted more than 10,000 artisans living below the poverty
line, by putting them in charge of their own enterprises.
HUSK POWER GyaneshPandey Husk Power Systems (HPS) is lighting up the darkest (and not
SYSTEMS coincidentally, the poorest) rural regions of India through a
proprietary technology that cost-effectively converts bio-mass
waste (primarily rice husks, but also such bio-wastes as mustard
husks/stems, corn cobs, and some varieties of grasses) into
electricity.
MAGIC BUS Matthew Spacie Magic Bus has pioneered a ‘Sport for Development (S4D)’
curriculum that harnesses the transformative power of sport to
enable extremely marginalized children to tap into their inner
agency, reflect deeply on life choices, and exercise positive
development decisions vis-a-vis education, health, gender and
livelihoods – levers that are critical for their growth as active
citizens and future participants of the India growth story
WATERLIFE SudeshMenon Waterlife India makes safe and clean drinking water accessible
INDIA and affordable for under-served communities who live in
geographies with high water contamination.

2. Research Methodology
Being the study exploratory in nature and mainly primary data based, it went through survey
of 50 social entrepreneurs selected on purposive sampling from. Data has been analyzed with
mean scores & overall index and tested its validity with x2-test which has also been used to find
the association between variables taken for the study and future prospect of social enterprises.
Computations were made as below:
• Ascertaining the level of effectiveness for individual parameters.
The scores for the parameter are derived by multiplying the number of respondents with the
respective score and its subsequent summing. Effectiveness index was calculated by applying the
formula:
Actual scores obtained for the statement x 100
Maximum obtainable score for the statement
The overall effectiveness Index is calculated by using the formula:
Top scores obtained for the four parameters x 100
Sum of maximum scores obtainable for four parameters

157
 Overall index has been taken as benchmark
X2- Values has been computed as below:
∑(Observed Value- Expected Value)2
Expected Value
Significance of x2- Value has been checked at degree of freedom as computed below:
= (r-1) (c-1)
Where r = total number of rows and c = total number of columns

Results and Discussions

Following parameters as shown in table1 were specified to quantify the challenges faced by
social entrepreneurs. Further proper weights were given to each specification.

Table1: Parameters of the Variables with their Scores N=50

S.N Variables Parameter /Specifications
Strongly Agree Indifferent Disagree Strongly Mean
Agree Disagree
1. Lack of Financial Resources 24 26 1.48
2. Lack of education 18 32 1.36
3. Lack of Financial assistance 19 27 4 1.30
4. Scale of investment is low 11 29 10 1.02
5 Lack of Govt support 17 23 10 1.14
6 Comparative disadvantages to the 18 22 10 1.16
Business
7 Challenge in Operational 8 27 15 .86
8 Lack of skilled manpower 17 33 .34
9 Social & cultural impact 15 7 28 .16
10 Exclusive products for social needs 29 15 6 .40

Ten problems as stated in table 1 have been taken as challenges confronted to social
entrepreneurs either in starting or running their enterprises. Rating by respondents to all stated
problems clearly indicates that these problems are really being faced by them. There is neither
negativity nor zero in mean scores of the variables which shows that all variables have impact on
social entrepreneurship. Respondents assigned the least score to the variable “social and cultural
impact” that indicates that social entrepreneurship is not much affected by social and cultural
factors. Highest influential factor is “lack of financial resources” that means major problem of
social entrepreneurs, is money scarcity which needs Govt support.

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Table 2: Mean Indices of stated variables along with their Ranking

S.No. Determinants/ Factors Mean Scores Mean Index Ranking

1 Lack of financial resources 1.48 .161 1
2 Lack of education 1.36 .147 2
3 Lack of Financial assistance 1.30 .141 3
4 Scale of investment is low 1.02 .111 6
5 Lack of Govt support 1.14 .123 5
6 Comparative disadvantages to the Business 1.16 .126 4
7 Challenge in Operational .86 .104 7
8 Lack of skilled manpower .34 .037 8
9 Social & cultural impact .16 .017 10
10 Exclusive products for social needs .40 .043 8

Table 3: X2- Values

Variables Shrinking Stagnant Expanding Total
Lack of financial resources Nil (1.46) 2 (2.23) 11 (9.1) 13 (.26)
Lack of education 1 (.13) Nil (.17) Nil (.69) 1 (.02)
Lack of Financial assistance 3 (.96) 5 (1.44) Nil (5.6) 8 (.16)
Scale of investment is low 1 (2.54) 1 (3.97) 20 (15.4) 22 ( .44)
Lack of Govt support 1(.72) 1 (1.08) 4 (4.2) 6 (.12)
Total 6 (.12) 9 (.18) 35 (.70) 50 (1)
X2 = 32.26 that is significant at degree of
freedom 8
Note: Brackets contain Expected Values

Table2 shows that 12% social entrepreneurs are shrinking their businesses of which major
reason is lack of financial assistance with 3 entrepreneurs out of six. 18% of the selected social
entrepreneurs are having their businesses stagnant; there has also been the major factor scale of
investment. However 70% of the respondents are expanding their business houses which indicates
that despite of various problems being faced by them most of the social entrepreneurs are crazy and
enthusiastic towards their business goals sustaining their ethical standards. They are taking these
problems as a challenge. Furthermore overall X2 – Value i.e. 36.26 is also significant at degree of
freedom 8 which validates the results of the study.
Top five ranked factors (given in table2) have been taken into account to validate the study
and to know the future business prospects of rural women entrepreneurship

159
4. Conclusions and Suggestions
Some suggestions which can enable the Indian social entrepreneurs to face the challenges
confronted by them are as under:
• Social entrepreneurs should participate in developing curriculum that creates social
entrepreneurship skills in their students so that high quality managers and promoters cab
be produced.
• Social ventures should make aware the consumer and set market standards by following
network approach to increase demand for their products.
• Regional balance should be made by the growth of social entrepreneurship in the country.
Balanced growth of social entrepreneurship in the country can solve the societal problem
of the community and health of the country.
Above stated analysis reveals, being facing various challenges/ problems like lack of financial
resources and Non- Cooperation of Govt., lack of infrastructural facilities, high transactional cost,
, and competition with big giants etc, that majority of social entrepreneurs are expanding their
businesses over a period of time. To cater the social problems, there is a need to provide training,
infrastructural facilities, financial assistance in terms of venture capital, Govt. as well as family
support and marketing environment etc. With the right assistance they can strengthen their capacities
besides adding to adding to wealth and national productivity. Potential is there but solution to these
problems can put forth the good business prospects to such enterprises.
References
• Bornstein David (2005) “In My Opinion.” EBF 20: 50-51.
• C. Brooks 9 2007) : “Social Entrepreneurship- A modern Approach to Social Value creation” viewed
at http://entrepreneurship.okstate.edu/files/Social_Entrepreneurship_A_Modern_Approach_to_Social_
Value_Creation.pdf
• Dr. Partap Singh (2012) ; “Social Entrepreneurship: A Growing Trend in Indian Economy” International
Journal of Innovations in Engineering and Technology (IJIET), Vol. 1 Issue 3 Oct 2012, ISSN: 2319 –
1058, pg 44-52.
• Kate ganly& Johanna Mair (2009), “ Social Entrepreneurship in India” IESE Occasional Papers, OP-
169- E, May 2009, published by IESE Business School, viewed at http://www.iese.edu/research/pdfs/
OP-0169-E.pdf
• Suresh Seth &Sudesh Kumar (2011); “Social Entrepreneurship: A Growing Trend in Indian Business”
Entrepreneurial Practice Review, Volume 1 Issue 4 Winter 2011, pg 4-19.
• Sarah Allen, Anar Bhatt, Usha Ganesh &Nisha Kumar Kulkarni (2012) “A Study of India Social
Enterprise Landscape ” viewed at http://intellecap.com/sites/default/files/publications/intellecap_
landscape_report_web.
• Social Enterprises that Strive to Make India Better At http://www.siliconindia.com/news/startups/58-
Indian-Startups-to-Participate-in-Googles-Great-e Shopping- Festival-nid-135655-cid-100.html
• Sourabh Sharma, “Social Entrepreneurship in India” at http://tejas.iimb.ac.in/interviews/42.php
• Suresh Seth &Sudesh Kumar, "Social Entrepreneurship: A Growing Trend in Indian Business”
Entrepreural Practice review, Volume 1 Issue 4 Winter 2011, pg 4-19.

160
 Employment Generation and FDI in India:
An Analysis
By

Abdul Wahab and Shirin Rais*

1. Introduction
Indian economic indicators have shown considerable improvement recently. Therefore, it will
be interesting to examine the impact of growing integration of Indian economy on employment
creation in India since the country is home to second largest population in the world. When
economic reforms were initiated it was assumed that increase in gross domestic product in post
reform period will have a trickledown effect in the form of increase in production levels in various
sectors implying high overall employment rates. Further it was assumed that reforms will provide
employment opportunities by increasinglabour intensive industries in organised sector and will
raise labour productivity too which will reduce the dependence of labourers on unorganised sector
: as its contribution to the economy remains unaccounted, labours are underpaid and are deprived of
social security benefits. However, the frequency of labour intensive industries in post reform period
was not encouraged and they remain isolated from the favourable of impact economic reforms.
The foreign investments in India were supposed to diversity the manufacturing sector and hence
raise employment opportunities. However, FDI went mainly in the services sector which provides
employment to highly skilled/trained labour force which is few in numbers.
In this background our objective in this paper is to assess in detail the role of FDI inflows in
employment generation in India in the post reform period and how FDI can be utilise to accelerate
employment opportunities in India. Section 1 analyses employment scenario in India while section
2 and 3 discuss the impact of economic reforms on employment generation in FDI rich and export
oriented industries in India.

2. Employment Scenario in India

The quality of employment is a multidimensional and subjective concept and hence difficult
to define. Conceptually, it may refer to quality of life the job provides or quality of work per
se. In the economics literature, the focus of the good-job versus bad-job debate is on wages or
income. Wages earned in the labour market is naturally an important indicator of the quality of
employment because it provides individuals with a source of livelihood (Nayer, 2009). However,
India’s significant record on employment growth has not been adequate in view of a faster growth
of labour force (Papola and Sahu, 2012).

161
 The employment generating sectors in India are many but agricultural sector remains the
largest employer followed by textile industries, small scale industries, etc. There are reasons for this
also. India has large force of unskilled labourers who are effectively employed in the agriculture
sector thereby proving the theory that in poor economies primary sector cater to large demand of
employment. Reforms were supposed to change this structure by raising labour productivity or
frequency of skilled labour and shifting labour force towards secondary and tertiary sectors which
is a feature of a rich economy. However, in post reform period in India overall employment in
agricultural sector has gone down due to lack of incentives followed by migration of labours from
rural to urban areas in search of better opportunities.
Over the years due to lack of incentives by the government policies for primary sector, this
sector experienced a reduction in employment rates. Further the secondary and tertiary sector relied
mostly on capital intensive techniques of production rather than labour intensive techniques since
Indian labour remains poorly skilled leading to low per capita output, which is the prime reason
why India lacks labour intensive industries.
However, an interesting phenomenon emerges out when we study the employment scenario in
export oriented industries in India. These industries played an important role in raising employment
rates in India in all the three sectors of the economy while foreign direct investments in India
increased job opportunities for highly skilled workforce in India.
2.1 Foreign Direct Investment Inflows and Employment:
The post reform period witnessed large scale inflows of non-debt creating capital in the form of
foreign direct investments. Initially it was thought that establishment of multinational corporations
will create job opportunities for large unskilled labourers thereby, increasing employment rates.
However, the direct investments in India were in selected sectors, mostly technology incentives
sectors with high levels of per capita output rather than in labour intensive industries. Direct
investors have largely ignored the labour incentive industries as they possess comparatively low
per capita output. Table 1 shows the industries that have attracted largest FDI inflows in India.

Table 1 : Sectors with Highest FDI Inflows in India

Industries FDI Inflows FDI Inflows ($ million)

Services Sector (Financial and Non-Financial ) 27668
Computer (Hardware and Software) 10821
Telecommunications 10611
Housing and Real estate 9655
Construction (including roads and highways) 9491
Automobile 6199
Power 6156
Source: Factsheet, Department of Industrial Policy and Promotion, 2011, New Delhi.

162
 The table shows that most of the foreign direct investment inflows in India were in technology
incentive industries because they provide quick return and profit margin is quite high due to high
per capita output. The employment rates in tertiary sectors increased manifolds but it provided jobs
to highly skilled/talented population. Direct investors have largely ignored manufacturing sector
which have comparatively low per capita output. The manufacturing sector needs to be reformed by
encouraging foreign investments particularly in the labour intensive industries. Foreign investors
should be given incentives to invest in this sector which will help in augmenting per capita output.
This sector also witnessed tremendous improvement in the exports performance.
2.2 Sector Wise Employment in Export Sectors in India:
In India the impact of economic reforms on foreign trade was also stupendous. India’s exports
witnessed a big surge in post reform period (Fig. 1). It will be interesting to examine the contribution
of the agricultural sector, manufacturing sector and services sector in employment creation in India.
Exports specially globalisation have been regarded not only an important engine of growth
but also increase better employment opportunities. Export oriented sectors are found to pay better
wages and provide better conditions of work including social protection. In so far as the Indian
exports have grown rapidly, increasing from only 5.8 percent of GDP in 1991 to about 15 percent in
2009-2010, and major part of them has been in the category of labour intensive products, they can
be presumed to have made a significant contribution to the growth of quantity and quality (Papola
and Sahu, 2009).

Figure 1 : Overall Exports in India: 1980-1981 to 2009-2010

Source: Based on data given in Economic Survey 2011-2012.

163
2.2.1 Agricultural Sector
In agricultural sector there are tremendous opportunities to expand employment. This is due
to many reasons.
1. India has a large number of unskilled labour forces who can be effectively employed in
agricultural sector.
2. Secondly, still large scale agricultural production in India remains labour intensive.
3. Thirdly it is not possible to transform the unskilled workforce into trained /human resource. It
is useless to believe on the illusion that someday this labour force will turn into human resource
and will eventually shift to secondary and tertiary sector. In Indian setup this is something
unworkable. There is a need to create adequate employment opportunities in agricultural
sector itself. Further food security remains the greatest constraint in sustainable development
of our country which could be overcome by diversifying production process in agriculture by
providing incentives to work in this sector.
The study shows that the impact of growth in export oriented agricultural items have increased
employment opportunities in production of export oriented crops which shows that exports of
agricultural product helped to raise employment rates in India.

Around 52 percent of workforce in India is employed in agricultural sector according to

NSS 66th round. Top five states with highest growth rates in agricultural sector in India as per
the survey of Assocham Survey in 2011 were: Gujarat, Maharashtra, Chattisgarh, Orissa, Andhra
Pradesh.

In post reform period fruits and vegetables, rice, spices, oil cakes, are the largest foreign
exchange earners in agricultural sector as their share in total exports kept on increasing continously
(Fig. 2). India is the second largest producers of fruits and vegetables in the world. In 2009-2010
fruits and vegetables turned out to be the highest exporting items from India among agricultural
products. The leading producers of fruits and vegetables in India are Andhra Pradesh, Jammu
and Kashmir, Karnataka, Maharashtra,Orissa, Gujarat, and Kerela. Horticulture particularly
floriculture has an immense opportunities as a source of earning foreign exchange through exports
along with generating employment. In India due to day by day growing hotel business the demand
for horticulturists is growing and just a right direction can turn this sector among the largest
employment creator in India. The main rice producing states in India are West Bengal,Bihar,Uttar
Pradesh, Madhya Pradesh, Andhra Pradesh, Orissa, Jammu and Kashmir. Rice is again labour
intensive products. In many cases family members are involved which provides them employment
opportunities. Large scale production of cotton takes place in Gujarat, Maharashtra, Andhra
Pradesh, Punjab, Haryana, Karnataka, Rajashthan, Madhya pradesh, Tamil Nadu, Orissa. Cotton
being a cash crop is on high demnad in domestic market as well as in international market. Largest
Spice producing states in India are: Karnataka, Tamil Nadu, Kerela, Gujarat, West Bengal, Andhra

164
Pradesh, Madhya Pradesh, Orissa, Arunachal Pradesh, Rajasthan, Bihar etc. India is one of the
largest oil cake producing regions in India. Major states producing oil cakes are: Gujarat, Rajasthan,
Bihar, Haryana, Orissa, Punjab.

Among all the agricultural commodities ,these commodities witnessed a sharp increase
in exports. As they are all labour intensive commodities they over the years led to a substantial
improvement in employment rates. Therefore, it will be true to say that exports oriented agricultural
products were able to create employment opportunities in India but in few selected states only.
Among them most of the stes are rich states like: Andhra Pradesh, Karnataka, Maharashtra,Kerela,
Gujarat, Punjab, Tamil Nadu, etc.

Therefore, in post reform period employment rates in agricultural exports products

improved but in selected states producing exports associated agri-products. The overall scenario
is worrisome. There exits bottlenecks which decelerate the production process in overall
agricultural sector.

Figure 2 : Exports of Main Agricultural Products in Post Reform Period in 2009-2010

($ million)

Source: Various issues of Economic Survey, Government of India,New Delhi.

With the declining share of agriculture in GDP, the continuing high pressure of population
on agriculture and the increasing fragmentation of land holdings leading to decreasing availability
of cultivated land area per household, the agriculture sector alone would hardly be in a position to
create additional employment opportunities to sustain the livelihood of the rural households. This
calls for creation of additional employment opportunities in the non-farm and manufacturing sector,
especially in agro based rural industries which have area specific comparative advantage in terms of
resources endowment and development possibilities. This would require suitable skill development

165
of the people so as to gainfully employ them in non-farm activities. This alone would be able to
make agriculture viable in a sustainable manner. In addition, by creating more employment and
absorbing some of the surplus labour in agriculture, this will contribute to achieving our objective
of inclusive growth. (State of Indian Agriculture 2011-12)
It becomes extremely important for India to generate employment potentials in agricultural
sector since still large untrained/unskilled labour force can be gainfully employed in agricultural
sector.
2.2.2 Manufacturing Sector
The significant surge in Indian exports included particularly manufacturing goods in post
reform period.
The dynamics of the manufacturing sectors have undergone changes since the 1980’s with
gradual reforms in rules and regulations governing the industrial business environment. Further
with full scale easing of trade restrictions in the 1990’s with lowering of industrial tariffs and
non-tariff barriers, the labour intensive manufacturing units could become engines of employment
generation through emphasis on export promotions and large scale production for the domestic
markets (ICRIER, 2008)
Figure 3 shows the share of major manufactured items in total exports. We will now analyse
the employment opportunities provided by these industries.

Fig. 3 : Share of Top Manufacturing Industries in India’s Total Exports (%) in 2009-2010

Source: Self Calculation based on data from Economic Survey 2011-2012.

166
 Out of 28 industries in terms of National Industrial Classification (NIC) 2-digit codes under
the coverage of the survey, major employment providing industries were Food Products (13%),
Textiles (12%), Basic Metals (8%), Wearing Apparel (7%), Other Non-Metallic Mineral Products
(7%), Machinery & Equipment Not Elsewhere Classified (6%), Chemicals & Chemical Products
(5%), Motor Vehicles, Trailers & Semi-Trailers (5%), Fabricated Metal Products Except Machinery
& Equipment (4%), where figures within brackets denote percentage share of the manufacturing
industry in total number of persons engaged by the factory sector (Annual Survey of Industries
2008-09). It is here we observe that these are the manufacturing industries which have largest share
in Indian exports. Also they are largest employment generating industries in manufacturing sector
in post reform period.
India’s Gems and Jewellery industry is one of the major export earners as well as one of
the fastest growing sectors of the economy. In the last four decades this industry has performed
impressively with exports increasing from $28 million (1960) to around $16 billion (2000) to $40
billion in June 2012. The main contributor to this impressive performance of the industry came
from the diamond sector, which accounted for near 74 percent of India’s exports. In the past decade
(1990-2000), however it is the jewellery sector which averaged a growth of nearly 40 percent per
annum and ensured India’s competitiveness in this industry. Manufacture of jewellery and related
articles ranks within the top 10 labour intensive sectors of Indian manufacturing (ICRIER, 2008). It
is highly employment intensive sector as it provides large employment opportunities to 1.3 million
people.
The apparel industry of India is third largest labour intensive industry which accounts for
around 20 percent of industrial output and more than 30 percent of export earnings. Apparel industry
and allied areas provide employment to around 80 million people in India. Production of apparel
in India was until recently reserved for the small scale sector, defined as those with machinery
investment of less than $230,000 (ICRIER, 2008).
Indian chemical industry is twelfth largest in world and third largest in Asia. The chemical and
allied product is an important sector in Indian economy. Exports from this sector are 12.71 percent
of total exports. In 2008, Department of Chemicals and Petrochemicals estimated that chemical
industry provided employment to around 1 million people. As per twelfth five year plan chemical
segment in India is poised for substantial growth and offers immense potential for investment as
well as employment generation. It is estimated that additional investment of $ 7-10 billion is feasible
in this segment over the 12th plan period which could generate additional direct employment of
quarter of a million people and much more indirect employment. The two important states Gujarat
and Maharashtra accounts for more than half of the national output of this industry followed by
Tamil Nadu, Up and Andhra Pradesh (RBI,2011).
Here again we can observe that top most export oriented manufactured product producing
states are mainly rich states. They have created enough employment opportunities in export oriented
manufactured products. However, benefits remained confined to few states.

167
Table 2 : Per Capita Exports in Small Scale Industries

SSI| Exports Per capita export

Year Employment (Million nos.)
$US Million (in $ US million)*
1980-81 7.1 2078 292.68
1981-82 7.5 2309 307.87
1982-83 7.9 2116 267.85
1983-84 8.42 2093 248.57
1984-85 9 2137 237.44
1985-86 9.6 2263 235.73
1986-87 10.14 2851 281.16
1987-88 10.7 3372 315.14
1988-89 11.3 3790 335.40
1989-90 11.96 4579 382.86
1990-91 15.83 5386 340.24
1991-92 16.6 5632 339.28
1992-93 17.48 6140 351.26
1993-94 18.26 8068 441.84
1994-95 19.14 9258 483.70
1995-96 19.79 10903 550.93
1996-97 20.59 11056 536.96
1997-98 21.32 11958 560.88
1998-99 22.06 11642 527.74
1999-00 22.91 12508 545.96
2000-01 24.09 15278 634.21
2001-02 24.93 14938 599.20
2002-03 26.02 17773 683.05
2003-04 27.14 21249 782.94
2004-05 28.26 27690 979.83
2005-06 29.49 33935 1150.73
2006-07 59.47 40309 677.80
2007-08 62.63 50202 801.56
2008-09 65.94 - -
2009-10 69.54 - -
*Authors Calculation.
Source: Directorate General of Employment and Training. Ministry of Labour & Employment, Government of India,
New Delhi.

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 Small Scale Industries: Further in post reform period small scale industries which are
labour intensive industry were successful in generating employment opportunities in India. Table
2 shows that the exports from small scale industries in India increased tremendously from US
$ 2078 million in 1980-81 to US $ 5386 million in 1990-91 to US $ 50202 million in 2007-
08. This was accompanied by a substantial increase in employment which increased from 7.1
million in 1980-81 to 15.83 million in 1990-91 to 69.54 million in 2009-10. This was followed
by substantial increase in per capita exports which amounted to $ US 292.68 million in 1980-81
to $ US 340.24 million in 1990-91. However, after 1991 it increased substantially to $ US 801.56
million in 2007-08.
This means that export oriented small scale industries were able to generate enough
employment opportunities for unskilled/untrained workforce in India.
2.2.3 Services Sector
In post reform period service sector contribution to exports increased substantially. Today the
top employment generating sector in India is services sector and they provide soaring salaries too.
However, the services sector is highly skill oriented sector. It requires high level of human resource
which is few in numbers in India. The largest employment generating industries in future are: retail,
healthcare, telecom, information technology. All these industries come under the services sector.

Table 3 : All India Percentage of Total Number of Individuals Employed in Services Sector
Sub-Sectors2004-05
Wholesale and Retail Trade 37.0
Hotels and Restaurants 5.0
Transport Services 13.0
Communication Services 2.0
Financial Services 2.0
Real Estate and Renting Services 0.5
Business Services 2.0
Public Administration and Defence 11.0
Education Services 11.0
Health Services 3.0
Other Social, Community and Personal Services 11.0
Services Sector (Aggregate) 100.0
Source: NSSO, Surveys on Employment.

India is among the top five exporters of services among developing countries. Within services
sector the largest exports component is software services while largest employment generation is in
wholesale and retail trade (Table 3).

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 The share of India in world exports of services increased from 0.6 per cent in 1990 to 2.8 per
cent in 2008. Services accounted for 20 per cent of India’s exports in 1990 and it increased to 59.2
per cent in 2008. India is the second largest exporter of business services among the emerging Asian
economies which provides employment to 2 percent of total individual employed in services sector.
Further in post reform period the contribution of exports from service sector increased substantially
leading to overall increase in employment in services sector in post reform period by providing
diversified employment opportunities.
Therefore, the overall scenario shows that employment rates have increased in labour intensive
export oriented ‘agriculture’ and ‘manufacturing sector’ while ‘services sector’ have opened up
doors for highly skilled workforce in India. However, still agricultural sector remained the largest
employer in India (Table.3).

Table 3 : Sector Wise Employment in India

Sectors / Years 1983 1987-88 1993-94 1999-00 2004-05

Agriculture 68.6 65 64.7 59.9 56.4
Manufacturing 13.8 15.9 14.8 16.3 18.8
Services 17.6 19.1 20.5 23.9 24.8
Source: National Sample Survey Organisation, Surveys on Employment.
Therefore, exports in post reform period in India helped in increasing employment in all the
three sectors in India.
3. Conclusions and Suggestions
The study shows that economic reforms have led to acceleration in job creation in both FDI
rich and export oriented industries in India, the only difference is in the nature of employment
opportunities created in both the sectors. FDI has mainly gone in the services sector therefore,
increasing and diversifying employment opportunities in the services sector. However, these
employment opportunities are only for highly educated professional which are small in numbers.
On analysing the pattern of employment in export oriented agricultural products we find that
employment opportunities have increased manifold in post reform period. Since there are only
some export oriented agricultural products produced in few rich states in India therefore, increase in
employment opportunities in the production of these export oriented agricultural products remained
skewed and could not affect the overall employment scenario in agriculture. Exports oriented
manufacturing industries were also successful in creating enough job opportunities in post reform
period. Exports based small scale industries also created enough employment opportunities along
with increase in per capita output in the small scale industries. Therefore, measures should be taken
to divert FDI in agricultural and manufacturing sector which shelters one of the largest unskilled
labour force in the world and has potentials to augment employment opportunities. The paper
concludes that foreign capital inflows in the form of foreign direct investments are advantageous
for employment creation in India.

170
 References
• Annual Survey of Industries 2008-09, Ministry of Statistics and Programme Implementation National
Sample Survey Office, Government of India, New Delhi, p.12.
• ICRIER (2008), A Study on Labour Intensity and Employment Potential of Indian Manufacturing, Indian
Council for Research on International Economic Relations (ICRIER), New Delhi, pp. 41, 80, 142.
• Nayyer, Gaurav (2009), “The Nature of employment in India’s Service Sector”, Discussion Paper Series,
Department of Economics, University of Oxford, Oxford, September, p.5.
• NSS 66th Round July 2010- June2011, Ministry of Statistics and Programme Implementation, Government
of India, New Delhi.
• Papola T.S and Sahu, ParthaPratim (2012), Growth and Structure of Employment in India, Institute for
Studies in Industrial Development (ISID), New Delhi, pp.3,69.
• RBI (2011), Productivity, Efficiency and Competitiveness of the Manufacturing Sector, Reserve Bank of
India, Government of India, Mumbai, 17th June.
• State of Indian Agriculture 2011-12, Department of Agriculture and Cooperation, Ministry of Agriculture,
Government of India, New Delhi , pp.3.

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 Dimensions of performance of Micro Finance:
A Conceptual Exploration
By

P.A. Lakshmi Prasanna, Ashok Kumar, Prawin Arya, Shiv Kumar*, Anil Kumar and D.R. Singh

1. Introduction
In recent years micro-finance has attracted the attention of researchers and policy makers,
donors worldwide for various reasons. Microfinance is “provision of thrift, credit and other financial
services and products of very small amounts to the poor in rural, semi-urban and or urban areas for
enabling them to raise their income levels and improve living standards”(NABARD, 1999). Micro-
credit or micro lending refers to the supply of loans when features of the transaction, borrower,
or the project to be funded make lending unprofitable, under traditional bank lending technology
(Gonzalez-vega, 1997). Jean-claudeLorin (1988) raised three issues regarding micro-credit viz;
i) should we look at micro-credit as fundamentally an institutional issue within the framework of
global financial sector development and reform? ii) Should we look at micro-credit as fundamentally
one of the main elements for small and micro-enterprise development? and iii) should we look at
micro-credit as fundamentally a mechanism for poverty alleviation? Various agencies are interested
in promotion of micro-credit or micro-finance focusing on some or all the above listed issues in the
world. (Kumar et.al. 2004) argued that micro-credit functions as a political safety-net, dampening
resistance at the community level to liberalization policies.
Some evidences showed that micro-finance as one of the effective instruments to address
poverty. This is because of the ability of micro-finance programs to deal with twin issues of
increasing productivity by creating employment and developing human capital. Some financial
agencies view microfinance as a process of socio-economic engineering involving large number
of formal and informal agencies for extending banking services to people who do not have access
to banking system. On the other hand, it is now being realized that microfinance can be put to use
for various developmental purposes such as livelihood promotion, developing the local economy,
building democratic people’s organizations and changing wider systems or institutions within a
Society etc. (Fisher and Sriram, 2002).

2. Conceptual exploration of performance

There are many dimensions of micro finance and performances of these dimensions
are evaluated to assess the overall success of these institutions in achieving the targeted goals.

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Therefore, Conceptual frameworks for performance evaluation of these indicators namely, stake
holders, repayment, group dynamics, outreach, empowerment, gender focused- empowerment and
inter linkage of performance are discussed in details.
2.1 Stake holder analysis
Defining performance as meeting a goal, Schreiner (1997) identifies that performance of a
subsidized microfinance organization (MFO) affects at least six groups of stakeholders with its own
goals viz; society, poor customers, the poor, donors, workers and investors. Different measures for
performance are presented in table 1. The framework highlights the web of agency relationships
and their agency costs constraining the MFO to help the poor. The relevant question for which
answer need to be sought is “Does microfinance help the poor more than one way?”.

Table 1 : Different measures for performance evaluation of stake holders

Stake Goal to maximize Question asked Opportunity cost Measure

holder
Society Benefits-costs of Are the gains from Gain from best other Benefit-cost analysis
all people in the an MFO more than use of public funds
world its costs?
Poor Benefits-costs of Are the gains of Gain from best other Repeat use
customers poor customers using an MFO more source of loans
than costs?
The poor Benefits-costs of Is an MFO the best Return to the Cost-effectiveness analysis
the poor way to help the poor in best other (cost to the poor per unit of
poor? development project output)
Donors Benefits to the How much micro- Return to the poor in Market leverage (the ratio
poor from micro- finance is sparked by best other MFO of output of an MFO to the
finance Donor funds? public funds used by an
MFO).
Workers Life of an MFO Would an MFO Inflation and cost to Financial self-sufficiency
shrink if donors left? MFO of market debt (Maintaining the real value
of subsidized funds trapped
in equity while paying
market prices for other
funds)
Investors Profit Will an MFO earn Return on best Private profitability
more than a firm of investment of like
like risk? risk

Performance from the view point of poor customers is repeat use of loans for which lenders
expect sustainability which depends on repayment performance.

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2.2 Repayment performance
Repayment performance of micro-finance varies with its approach viz; individual or group
based. The performance of group lending as reported in the literature is mixed, suggesting that the
concept is by no means a universal or one that can easily be transplanted or reproduced (Conning,
1996). Accordingly frequent questions regarding group lending are:
• What mechanisms lead to higher/lower repayment of group lending in micro-finance?
• Is group lending superior over individual lending in terms of repayment performance, if
so, why and when?
• When borrowers will choose group loans over other sources of loans?
In general, literature has associated the following attributes with group lending viz;
a) Good recovery performance
b) Lower transaction cost to lender
c) Improved outreach
d) Instrument for poverty reduction
The lower transaction cost to lender is the i) direct consequence of pooling of loan transactions
under group lending, thereby leading to reduction in transaction cost per loan and finally resulting
in savings in transaction cost and ii) partial shifting of screening, monitoring and enforcing cost on
to the group itself. This is achieved by introducing induced externality feature of joint liability in
loan contracts.
Joint liability is a contract in which the provision of the private good (for example, an
individual’s access to credit) is made conditional on the provision of the public good (group
repayment) (Matin, 1997). In joint liability lending, loans are given to individual members but the
whole group is jointly liable for the repayment of each member’s loan (Kumar et.al. 2007). The
theories identifying determinants of repayment performance in group lending theorize that this
joint-liability helps in achieving higher repayment by addressing i) ex-ante moral hazard (ability
to pay) by focusing on borrowers efforts, ii) ex-post moral hazard (willingness to pay) by focusing
on borrower’s strategic default iii) adverse selection (borrowers nature in selecting projects) and
iv) by provision of credible mutual insurance (ability to pay in case of failures). Group lending
purports to pass off screening, monitoring and enforcement of the loans to the peers and economizes
on prohibitively high transaction cost of delivering small loans. But how these outcomes are
facilitated? On the other hand, why some theories predict higher default in joint liability group
loans, is an important question in this regard. To have a better understanding, a review of theories
of determinants of repayment performance in micro-finance and empirical evidences is relevant in
this context.

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 Most of the theoretical foundations of the special features of new types of financial contracts
in micro-finance spring from the theory of contracts and the economics of information which in
turn are drawn from principal agent theory (Jorge, 2000). Thus, these theories focus on reducing
transaction costs by handling information asymmetries through creating appropriate dynamic
incentives in financial intermediation.
Another important feature in most of the micro-finance programs is the use of “social
collateral”. Both ex-ante and ex-post moral hazard in formal credit markets are handled through
collateral or equity. But in micro-finance market, the features of borrower say poor (unable to offer
any collateral) and informal nature, necessitates a look into other mechanisms for handling these.
One such mechanism observed in literature is use of “social capital” in enforcing joint liability.
Some arguments for group lending are mediated by social capital. Social capital includes the social
and political environment that shapes social structure and enables norms to develop (Bastelaer,
2000, Kumar et.al 2010). Social capital is the links and commonalties that bind a group of people
together and determine their social interactions (Karlan, 2002). The borrowers’ personal reputation
under group lending serves the same purpose as physical collateral does under ordinary lending,
specifically; it raises the cost to the borrower of defaulting. The stronger the social connections, the
larger the stakes, and thus the higher the repayment. But how does social capital /social collateral
affect repayment of group lending? Is it by improving screening or by monitoring or by peer
pressure or by social sanctions or by insurance or by some other mechanisms? Getting answers to
at least some of these interesting questions is the objective of this review attempt.
2.3 Theories on determinants of repayment performance of group lending
2.3.1 Moral Hazard and limited enforcement as the rationale of joint liability lending
Stiglitz (1990) used a model with moral hazard and limited liability to argue that joint liability
group loans can allow borrowers to obtain larger loans through group based programs than through
individual loans. However he arrived at this result by proceeding under the full-side contract
assumption that is monitoring within the group is achieved perfectly and without any cost (Itoh,
1993, Tirole 1990). He was mainly concerned with how group lending improves the investment
choice of borrower’s by inducing peer monitoring based on better information, thereby compelling
borrowers to utilize loans properly and raise borrower’s ability to repay. Besley and Coate, (1993)
set up a repayment game for group lending illustrating how the formation of a group led to both
positive and negative effects of repayment compared to individual loans. They formulated a
strategic default model : as “good” individuals observe others defaulting, they themselves default
as well since they will not receive a new loan even if they repay and they will suffer no scorn from
others for defaulting. The focus of the model was to examine how joint liability contracts can be
used to create incentives for group members to apply social penalties on each other to alter each
member’s willingness to repay a loan after the project outcomes have been observed i.e handling
ex-post moral hazard .The model also predicts higher defaults in joint liability loans due to positive

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covariance between income of group members. The models developed by Stiglitz (1990), Varian
(1990), Banerjee et al. (1994), Besley and Coate (1995) and Armendariz de Aghion (1999) focused
exclusively on ex-post monitoring and loan repayment. Besley and Coate (1995) and Aghion (1999)
focus on how group lending affects a borrower’s willingness to repay debt. These game theoretic
models place emphasis on enforcing loan repayment by imposing social sanctions on strategic
defaults. According to Armendariz and Gollier (2000) these approaches, disregard the ex-ante
process of peer group formation, and in particular, it fails to pin down the different characteristics
of participant borrowers and the corresponding information structures which are likely to facilitate
the success of peer group systems.
Bringing together two different stands in literature on agency contracting viz monitored
lending (hierarchical) and principal multi-agent analysis (which has assumed that monitoring
and enforcement within group is perfect and costless), Conning (1996) models group lending as
a multi-task principle multi agent problem. Conning (1996) used the assumption of decreasing
returns to monitoring and concluded that “social collateral” to replace missing physical collateral
can be created through group loan but only under particular circumstances. This is because group
borrowers must in effect meet collateral requirements not just as borrowers but also as monitors.
For this reason, group loans will only be chosen over other sources of finance when group members
have a decided cost advantage in monitoring and sanctioning each other relative to outside lenders
and intermediaries. The model shows that as the required costs of monitoring rise faster within
a group than in one side monitored arrangements, the choice between group loans and other
arrangements will in general depend on the average net-worth of the borrowers involved and the
size of the loans as well. The focus of the model is handling ex-ante moral hazard (i.e. ability to
repay). The ability of the group to create social collateral in addressing the ex-ante moral hazard
rested upon collateral diversification effect identified by Diamond (1984). The economic principle
underlying this effect is that the total requirement on two less than perfectly correlated projects
will in general be set less than on two perfectly correlated projects. Thereby in group lending each
borrower divests himself of part of his own project in order to acquire a stake in other borrower’s
project by becoming a monitor/ cosigner (Conning, 1996). This increases the incentives for the
borrower to work to raise the probability of success on each project because where he lost only
his limited physical collateral assets for failure on any one project in collateral based loan, he now
risks losing the positive returns he might have earned on other projects i.e incentive diversification
effect (Conning, 2000). Hence, borrowers will prefer to join groups where the returns to their
projects are not too correlated, for reasons quite apart from conventionally defined risk sharing.
The results of the model are dependent in a crucial way on the assumed timing of the game. Hence,
Conning (1996 and 2000) opined that it is not enough simply to create a joint liability contract to
induce peer-monitoring, the contract must also rely on a particular timing sequence and requires
commitment and also there is need for strategies aimed at reducing the possibility of collusion.
In Besley and Coate (1995) model, the nature of repeated interactions does not change with
the chosen lending format and social sanction behaviour is treated as exogenous (Yeon-kooche,

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2001). He points out the largely unexplained nature of peer sanction behavior in peer monitoring
models and developed a model endogenizing the punishment behavior by introducing repeated
interaction among group members. Yeon-koo model studies the effect of contract design on the
repeated game played by multiple agents. He argues that built in penalty mechanism associated
with the joint liability contract can make group lending attractive in comparison with the individual
lending in the repeated environment. He puts forth the argument that the joint liability feature
associated with group lending affects the incentive problems in two ways. Since the additional
returns generated by a group member is used to repay the other member’s loans (with positive
probability), each member does not have as much incentive in generating his return as he would had
been individually liable for his loan. This free-riding problem tends to lower the member’s incentive
for effort, all else equal. On the positive side, group members pool their resources and hence their
idiosyncratic project risks in repayment, which lowers the probability of a default (compared to
individual lending). Consequently, a lender will lower risk premium, which tends to improve
their incentives, all else equal since entrepreneurs internalize his return with a greater probability.
Despite the seeming-trade-off, his model shows that the free-rider effect dominates the liquidity
effect, thus making the group lending undesirable, provided that the effort raises the project return
in the sense of the monotone likelihood ratio property. When the group members operate their
projects repeatedly, the free-rider problem associated with group lending can actually alleviate
the incentive problems of agents and therefore increase their credit-worthiness. Hence Yeon-koo
model tests whether group lending is desirable, particularly in comparison with individual loans
in alleviating the incentive problem for efforts. The main assumptions used in the study are i)
monotone likelihood ratio property ii) realized project returns are verifiable but that the efforts are
unobservable to the investor and iii) cross reporting of mutual observation is prohibitively costly.
Yeon-koo- results suggest that interlocking the fates of the agent through liability contract can be
desirable in repeated setting due to the dynamic punishment strategy that it makes available.
Bond and Rai (2002) model the effectiveness of “social sanction” and “threat of future credit
denial” as substitute to physical collateral in microfinance. Their model suggest that these forms
of social collateral are imperfect substitute to perfect collateral as imposition of successful social
sanctions requires the successful navigation of a delegation problem, while credit denial lacks
a market value and thus may be prone to a severe adverse selection problem. Further the model
suggests that at least under some circumstances, social sanctions can be effective even outside
the joint liability setting. But social sanctions become less effective as the individual imposing
the sanction is endowed with greater commitment ability. Further the model suggests that in
microfinance, loan size is small because, under limited enforcement the total punishment counting
both physical assets as well as the social collateral, that a defaulting borrower can be threatened
with in limited and so repayment will be small. Through their model, they observed that (i) more
competition may hurt successful MFIs, in part because of adverse selection problem (ii) the desire
to have MFIs achieve financial self-sufficiency may be simply unrealistic. They also suggested that
microfinance innovation of finding collateral substitute is of much less value in a country where

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enforcement already functions well compared to country where enforcement is poor, this in turn is
due to fact that the pool of borrowers not currently served by the formal financial sector in former
country are expected to possess projects of a much lower quality than the same group in the later
country. This explains why microfinance is successful in some countries but not in other counties.
2.3.2 Adverse selection as the rationale for joint liability lending
Armendariz and Gollier (1998) developed an adverse selection model where borrowers have
no information about their potential partners and nevertheless group lending reduces interest rates
due to a collateral effect. Laffont and Guessan (1999) developed a model focusing on adverse
selection only as a foundation for group lending. They reported that when entrepreneurs do not
know each other, with independent types, group lending brings no improvement. Their model
showed that when the members of the group do not know each other, there is no collateral effect
and such an effect appears only when the borrowers know each other. Laffont (2000) proposed
a model to study the role of group lending in discrimination when collusion between borrowers
is possible. The model considers exogenously fixed potential pairs of entrepreneurs who carry
projects with correlated returns. He concluded that when collusion between borrowers under
complete information is allowed for, group lending as an instrument improves discrimination.
Ghatak (2000) developed a model to show that lending to self-selected groups of borrowers
and making them jointly liable for each other’s loan repayment, a lender can achieve high repayment
rates when the borrowers cannot offer any collateral. His model is based on the presumption
that deliberate creation of externalities through joint liability will induce positive assortative
matching in group formation (i.e safe borrowers will end up with safe borrowers as partners and
risky borrowers with risky partners). He points out that previous theories focused on role of joint
liability in encouraging either peer monitoring (which alleviate moral hazard problem) or peer
pressure (which ensures better enforcement). Model shows how lenders can exploit the degree of
joint liability to screen borrowers with different probabilities of repayment. The model shows that
maximum amount a risky borrower will be willing to pay as a side-transfer to a safe borrower to
have her as a partner is strictly less than the minimum amount a safe borrower will need be paid
to compensate her from having a risky partner. The intuition behind the outcome is, under joint
liability lending the type of the partner matters only when the partner’s project fails. The model
does not depend on whether safe and risky borrowers have the same or different expected project
returns. Stiglitz and Weiss (1981) credit model showed that under the assumption that risky and
safe projects have the same mean return, but risky projects have a greater spread around the mean,
results in underinvestment in case of same nominal rate of interest charge by banks. De Meza
and Webb (1987) credit model showed that under the assumption of risky projects having lower
mean returns (i.e expected return of risky borrowers is lower than safe borrowers) results in over
investment when same nominal interest rate (the interest rate at which bank makes zero profit)
is charged by bank. Ghatak argued that starting from the situation where the safe borrowers are
driven out of the credit market as in Stiglitz and Weiss model, joint liability lending can be used to

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attract safe borrowers back into the market. Ghatak emphasizes the screening role of joint liability
in group lending in handling adverse selection. Gangopadhyay and Lensink (2001) argued that the
joint liability contracting equilibria worked out in Ghatak have a serious draw back in that, even
though incentive compatible ex-ante, they violate ex-post rationality. Further Gangopadhyay and
Lensink showed that by interpreting Ghatak’s opportunity cost of labor as the reservation utility
of women (as women enter the labour market only when wage being offered is sufficiently high)
one can explain the higher women participation in group lending. By extending the same argument
and based on empirical evidences on outreach of micro-finance programs (reporting that it is better
off “poor rather” than the “starky” poor getting benefited from these programs) they question the
rationality of seeing joint liability contracting as a part of poverty alleviation program.
Armendariz and Gollier (2000) developed an adverse selection model where peer group
systems are shown to trigger lower interest rates and remove credit rationing in the case where
borrowers are uninformed about their potential partners and ex-post state verification by banks is
costly. The model theorizes that in this case peer group system can be viewed as an effective risk-
pooling mechanism. The authors’ explanation for the improvement in efficiency in this case is that
whenever a risky partner fails then a safe borrower suffers relatively less than a risky borrower, a
safe borrower losses less than the full amount of the partner’s debt. Thus group lending in this case
makes repayment rates be random for both types of borrowers, but it does so in a way that reduces
the extent to which risky borrowers can take advantage of being pooled with safe borrower in the un-
segregated credit market, while saving on auditing cost. Thus, Armendariz and Gollier concluded
that, i) success through peer group lending in the no information case is due to a collateral effect
whereby group lending reduces the negative externalities from risky to safe borrowers, whereas in
the full information case it is due to a self-selection effect whereby group lending simply insulates
safe borrowers from potentially risky partners ii) thus assortative matching is not necessary in order
for peer group lending to be welfare improving.
Xinhua (2002) used a search approach to examine how joint liability lending can enhance loan
repayments as compared to unsecured individual liability schemes. This model integrates the cross-
sectional asymmetric information and inter-temporal uncertainty about investment opportunities
and project outcomes. The model explores the role played by joint liability in affecting the effective
cost of borrowing to different borrowers, the impact of uncertainties about investment availability
on the borrower’s project search decision and the implications of all this for average rate of loan
repayments. Xinhua’s search model uses the interest rate, and joint liability cost to borrowers as
parameters to determine the acceptability of projects under joint liability. He argues that joint
liability serves as a substitute for collateral in curbing default risk, where the effective cost of
borrowing is related to group risk type under positive assortative matching and where safe groups
prefer joint liability more than their risky counterparts. The model shows that from the perspective
of a borrower’s individual well being, borrowers with risky projects can also benefit from joint
liability if the interest reduction allowed by joint liability is significant. In other cases where this
reduction is insufficient, they may be made worse off by forming a group and acting less risky.

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The model also shows that while higher interest rates always have an adverse incentive effect on
the investment action of borrowers, raising joint liability may exert positive incentive impact if the
interest rate is low or an adverse incentive impact if the interest rate is high.
2.3.3 Both adverse selection and moral hazard as rationale for joint liability lending
Information models in credit usually analyzed one type of asymmetric information at a
time (moral hazard, adverse selection or ex-post moral hazard) and study the consequences of
the introduction of collateral, monitoring and other changes in terms of loan contracts. Noticing
this fact, Navajas (1999) developed models to represent alternative lending technologies and the
resulting loan contracts when the lender simultaneously faces moral hazard (action of borrowers)
and adverse selection (productivity type of borrowers) in markets where collateral is scarce. The
models showed that depending on the lender’s lending technology, available information, and
the borrower’s collateral endowments, different loan contracts are offered that match different
borrower classes. He concluded that low productivity borrowers prefer the standard loan contract
since, in this case, the possibility of cross subsidization from high –productivity borrowers exists. If
the additional costs are reasonable, high productivity borrowers prefer a personalized loan contract.
The study also concluded that competition will change the types of loan contracts supplied in
the market and thereby will influence the borrowing possibilities of different classes among the
poor. Navajas’s models showed that as the interest rate increases, average profits of micro-finance
institutions increase up to a maximum only, to decrease afterwards. This is because that average
profits are impacted in three ways, i) profits increase because repayment from all successful
borrowers increases, ii) the proportion of non-diligent borrowers increases, reducing adverse
expected repayment and iii) the absolute number of borrowers drops, making it more difficult to
dilute fixed handling costs. Thus the models showed that a lower default rate might be obtained
by charging lower interest as at lower interest rates, borrowers are left with enough residual to be
diligent, so arrears are minimized,
2.3.4 Joint liability as a rationale for creating dynamic incentives
In practice joint liability in micro-finance is implemented by creating threat of termination of
access to credit in future. This is an induced inter-temporal externality. Hence to capture this effect
there is need for multi-period models and dynamic models. Realizing this, some theories of joint
liability are developed in recent literature by introducing the dynamic features.
Jorge (2000) evaluated different contract design characterized by different rationing rules
used by the lender as each rationing rule generates a different repayment set and repayment frontier,
which defines the feasible combinations of wealth and initial debt that would sustain the contract
between the lender and the borrowers, thus avoiding default. In analyzing group contract Jorge
(2000) utilized two types credit rationing models i.e. i) loans are defined as a proportion of the
combined aggregate endowment of the members of the group and ii) loan sizes are defined by the
lender according to a pre-established rule, which defines a monotonic increment in the size of the

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loan as the relationship between the group and lender matures. Further Jorge (2000) introduces two
different models of loan distribution among members of a group i.e. a) loan shares are in proportion
to endowment of individual members b) loan share is equal among members. The main conclusions
are by solving the models and reasons there off are as follows: a) When the lender defines the
group loan size as a proportion of the combined aggregate endowment and when the group loan is
divided equally between the members, there are potential gains to be made in repayment behaviour
if the endowments of the borrowers are of different size, b) When the group loan is not distributed
equally among members of the group, for some combination of endowment levels of the two group
members, repayment rates improve, but for other combinations repayment rates worsen, with
respect to the borrower receiving the larger share of the group loan. For this member, repayment
rates worsen when she assesses her partner’s endowment to be high enough and, therefore she
expects her to default. Consequently it is better for her to run away with a larger share of the loan
than remaining within the contract and possibly having to repay the full group loan. The borrower
who receives the smaller share, however, still finds it optimal to remain within the contract, as she
is still credit-constrained, due to the smaller share of the group loan that she receives. The overall
repayment rates of the group do not worsen due to the credit constraint of the second borrower, who
still finds repayment of the whole as her optimal choice.
If the lender defines the group loan independently of the aggregate endowment, there are no
productivity gains from access to financial markets, and the group loan is divided equally among
members of the group, it is optimal for both borrowers to default once a given level of indebtedness
is reached, regardless of their level of wealth. If sufficient productivity gains are added, the optimal
policy will be repayment for both borrowers at all levels of endowment and indebtedness. Hence
Jorge (2000), finally concluded that the effect of group lending on overall repayment rates is
dependent on the rules of disbursement defined by the lender (rationing rule) and the distribution
of loan proceeds among the members of the group (distribution rule). No general conclusion can
be reached. In the cases when there is any improvement in repayment rates, it is because one of the
members remains credit constrained.
2.3.5 Joint liability as a rationale for insurance
Sadoulet (2000) studied borrower’s participation and repayment strategies (i.e. borrowers
willingness to repay), in a context in which they are not always able to repay. He notices that several
previous studies on joint liability lending, by passed the endogeneity of repayment behaviour
by assuming incentive issues away (borrowers repay when they can do so), or circumvent the
endogeneity of participation and group formation by taking group composition as given. Sadoulet
and Carpenter (1999) tested for credit groups matching risk homogeneously incorporating matching
frictions (information, enforcement, or partner availability problem) Lesink and Mehrteab(2003)
carried out empirical studies for testing the homogeneous matching in group formation in Eritrea.
Their results strongly indicate that groups are formed heterogeneously even after controlling for
matching frictions.

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 Sadoulet (2000) argued that group lending provides an important forum for borrower
insurance. The setting used by Sadoulet is that after realization of project returns, each member
must decide how much to contribute towards the repayment of the group loan; neither borrower is
restricted to repaying his own share. When both borrower’s project are successful, one borrower
ends up covering the entire amount of the group loan (up to his expected surplus) at every period,
whether the partner’s project is successful or not.

Sadoulet identified three stationary repayment strategies open to borrower and arrived
at the inferences: i) when both borrowers are relatively safe, they engage in mutual insurance
equilibrium, ii) If one partner becomes less safe, the cost of insuring his partner outweighs
expected future benefits since his project fails too frequently. Similarly, the cost for his partner
to insure him increases. The equilibrium is then one without insurance, each repays the share
allotted to them when both projects are successful, and the group defaults when one of the partners
cannot repay, iii) one-sided insurance equilibria can exist, provided one borrower is much safer
than the other. Value of access to future loans is so important for the borrower that he is willing
to provide insurance despite never receiving any transfer from the other partner. This equilibrium
will however be dominated by separate individual loans, unless he receives a substantial transfer
and iv) if both partners are relatively risky, then one gets an equilibrium in which the group
strategically defaults. No part of the loan is ever paid, even when both projects are successful. He
concluded that i) the provision of insurance in a group is a necessary condition for group loans
to be preferred to individual loans, ii) unless insurance is provided, the repayment rate cannot
be higher in group lending than in individual loans, since no part of the loan is ever repaid when
one project is successful and iii) insurance provision in a group is, however, not sufficient for
group lending to be preferred to individual loans. In one sided equilibria, the party providing
insurance (without receiving any transfer) is worse off than when borrowing individually, unless
the partner receiving insurance pays a transfer to him.

Sadoulet model results regarding preference of individuals for group loan is in contrast to the
conclusion arrived at by Diagne (1999), Stiglitz (1990) and Wydick (1999), i.e. borrowers would
always prefer individual loans over group loans where they have access to them.

Paal and Wiseman (2004) defined social capital as “the surplus that an agent receives by adhering
to the group risk sharing arrangement instead of retreating to autarky” model, insurance provision
and lending to a community of borrowers who are connected by risk- sharing arrangements that are
themselves subject to enforcement problems. They showed that an outside lender, if he conditions
his repeated interactions with each borrower on the history of his interactions with all the group
members, can earn a higher profit than he could through offering individual liability contracts, even
in the absence of informational asymmetries. Further they observed a non-monotonic relationship
between loan repayment performance and level of endogenous social capital and hence infer that
there is no presumption that increased social capital reduces loan delinquency.

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2.4 Is the joint liability sufficient condition for good repayment in group lending?
Rai and Sjostrom (2001) argued that joint liability is not enough to efficiently induce borrowers
to help each other, it is also necessary to ask borrowers to make reports about each other (i.e.
cross reporting). Abstracting away from moral hazard and adverse selection, focusing on strategic
default model, they analyzed the incentives for mutual assistance. They argued that an inefficient
way to induce mutual assistance is by simple joint liability scheme without cross-reports. In mere
joint liability scheme, harsh collective punishments would be imposed in equilibrium whenever the
group cannot repay all the loans even by pooling its resources, and this is inefficient. Hence, joint
liability loans can encourage risk sharing only at the price of excessive punishment in equilibrium.
Cross reporting reduces the equilibrium punishment. Cross-reporting scheme shifts the bargaining
power in the favor of unsuccessful agents. Even if borrowers can collude on the reports they send,
unsuccessful borrowers can still compel their successful partners to make repayments on their
behalf. They concluded that neither joint liability nor cross reporting is necessary if borrowers can
side contract ex-ante (complete state contingent contract). If villagers can only side contract in the
interim (it involves only agreement about what to say to the bank and how much to repay), then
the design of the bank’s lending scheme is crucial. Besley and Coate (1995) argued that Grameen
lending is innovative because it builds on the enforcement capabilities of villagers, but Rai and
Sjostrom suggested that Grameen lending is innovative for just the opposite reason, it compensates
for impediments to enforcement by having cross reporting mechanism.
2.5 Insights from theories
The theories reviewed in the previous section are based on several assumptions regarding
credit market, loan characteristics, borrowers characteristics, time period of contracts, extent of
social ties in groups and their ability to harvest local information, how the groups are formed etc.
The main insights from the theories are:
• Repayment performance in group lending is the resultant outcome of interaction of i)
individual borrower characteristics, ii) group characteristics (formation and functioning)
iii) lender’s characteristics and socioeconomic context in which the above three entities
interact.
• Joint liability enforced in terms of threat of termination of future access to credit acts as
dynamic incentive and determines group behaviour.
• Joint liability also aid in creation of credible insurance and thus aids in improving repayment
performance.

3. Determinants of repayment performance in group lending under micro-finance

Bratton (1986) analyse the performance of group loans compared to individual loans using
data from Zimbabwe reported that group loans perform better than individual loans in years of good
harvest and worse in drought years when peers are expected to default. Wenner (1995) studied 25

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Costa Rican credit groups and reported that repayment performance was greater among groups
which are able to engage in active screening of members.
Sharma and Zeller (1996) analyzed data on 1725 loan transactions of 128 groups participating
in BRAC, ASA, and RDRS in Bangladesh using Tobit model. In this model delinquency rate was
used as dependent variable and vector of loan characteristics, group characteristics, community
characteristics, and vector of loan characteristics were used as dependent variables. The results
reported that rate of default were increasing with group size, loan amount, higher the proportion of
members in the group that are related to each other and groups with higher share of non-agricultural
income. On the other hand the study reported that lower is the default rate in case of i) higher the
dependency ratio, ii) higher the percentage of female members in group, and iii) the group is formed
on it own. Zeller (1998) also fitted Tobit model on 146 groups (randomly selected) from six different
group-lending programs in Madagascar spread across four agro-ecological regions to investigate
the effects of intra-group pooling of risky assets or projects by controlling for community-level
and program design factors that influence the repayment rate of group loans. He reported that a)
repayment performance of groups was positively related to community level characteristics, namely;
monetarization level and number of retailers for agricultural inputs, b) the groups that are located in
communities with a high exposure to covariate risks had a significantly lower repayment rate than
do those with lower exposure, c) saving services offered by the program improved the repayment
rate of the group, d) the larger group size significantly improves repayment performance, e) the
wealth of group members does not improve the repayment rate, and the capacity to repay seem not
to matter in actual repayment performance, f) repayment rates increase with more diversification
of the group’s joint asset portfolio, but there is an optimal degree of risk pooling among members
within a group, increased diversification beyond this point leads to lower repayment rate, g) social
cohesion (measured by the number of social bonds that members share with their peers ) increased
significantly the repayment rate, h) repayment improves with timely repayment loans, i) neither
keeping financial records nor charging annual membership fees is of significant for the repayment
performance, j) groups that had internal agreements and rules of conduct recorded good repayment
performance. He concluded that the diversification of the joint asset and enterprise portfolio among
members of the same group and related risk pooling and the social cohesion among members could
augment the repayment performance in group–lending schemes.
Paxton (1996) using a variation of the Besley and Coate model (1993) drawing upon the theories
in psychology viz; perceived responsibility and social motivation model tested the hypotheses that
i) the presence of opposing forces affecting loan repayment can result in an inherent instability in
group loan repayment, ii) the reason for having arrears is an important determinant of whether the
group will exert peer pressure or help the group member with arrears, and iii) other determinants
of loan repayment may overshadow the role of peer pressure and group solidarity. In the Group
lending repayment model of Paxton, three equations were used to capture three stages in the game,
i.e. i) existence of repayment problem ii) the member having repayment problem informing group
or solving independently and iii) repayment in case of reported problem by a member. He inferred

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based on 140 credit groups in Burkina Faso that urban homogeneous group with good leadership
and training and prior history of working in groups had the highest probability of repaying the
loan. However, the “domino effect “(when one or more members of a credit group default due to
the default of other members) and matching problems (credit terms and conditions are no longer
appropriate for each member as credit cycles continue) were significant factors influencing loan
default, creating a destabilizing effect on over all repayment.
Wydick (1999) analysed data collected on 137 self-selected groups in Guatemala found that
peer monitoring significantly affects borrowing group performance through stimulating intra-group
insurance. Group pressure is found to have a small effect in deterring moral hazard, while the effect
of social ties among members is statistically insignificant. He reported that the success of group
lending is derived from peer monitoring (captured by variables average distance in kilometers
between member’s businesses, members are engaged in same line of business, members know
weekly sales of other members) and group’s willingness to apply internal pressure on delinquent
members (captured by variables number of members in borrowing group, moral obligation to
repay group loan, willingness to pressure, opinion on feasibility of applying sanction) rather than
the institution’s ability to harness previously existing social ties to improve loan repayment. He
inferred that borrower groups function both as miniature insurance networks and as juries.
Karlan (2002) claimed that the existing empirical research on the relationship between social
capital and repayment as inconclusive partly due to the endogeneity problem in group formation
(self-selection). He analysed data on group lending program (FINCA) in Peru, where in when
the lending groups are formed the initial members neither select each other nor or neighborhood
based i.e. groups are with exogenous levels of initial social capital. Cultural fragmentation index
(calculating the probability that two individuals randomly drawn from a group are of the same
cultural back ground), and geographic concentration (calculating the average distance of each
current member to the members of the original group, for each individual the percentage of the
original group members that live within a five/ ten minute walk) were used as measures of social
capital. He inferred that both cultural similarity and geographic concentration negatively predict
default and concludes that both social capital measures matter greatly to the effectiveness of peer
monitoring and enforcement of lending contracts. The author also reported suggestive evidence
that social capital helps groups distinguish between true negative shocks and mere reneging. The
author concludes that peer lending is more effective if individuals who live closer and are more
alike culturally are grouped together.
Controlling for household incentives and capacities, Hauge (2002) analyzed data collected
from groups under three programs in Chiles central Valley. The three programs though employed
features of group-based credit methodologies but with significant differences in their design
and implementation as well as in the characteristics of groups they formed. He reported that the
repayment performance among groups the three programs is largely consistent with the strength of
the unique instruments used by each lender to induce repayment.

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 Godquin (2002) analyzed Bangladesh micro finance institutions (MFI) data using Probit
model and reported the following observations a) Social ties among the group, proxy by age of the
group had a significant negative impact on repayment rates, b) the social ties of the borrower out
of his group have the expected positive impact as well as the proxy for dynamic incentives. Group
homogeneity in terms of sex, proved to have a positive impact on repayment performance but not
in terms of age or education level, c) the size of the group showed a non-linear effect revealing the
conflicts of the benefits of peer monitoring and insurance, d) Non-financial services did not show
a positive impact in all the cases where MFIs tend to attribute bigger loans to borrowers who have
access to these services. Further, he drew attention to the endogeneity of the principal and duration
of the loan in the determination of the repayment performance and advised the use of instrumental
variables for future analysis of repayment rate.
Kevane and Mknelley (2002) based on two visits to the same program community in 1996
and 2000 in Burkinafaso observed high turnover and increasingly varied borrowing behaviour. The
problems stemmed from i) The absence of real self-selection essential for joint liability to function
(Edgcomb and Barton 1998), ii) The joint guarantee mechanism across the entire credit association
rather than the smaller solidarity groups led to greater inconvenience and dissatisfaction for “good”
borrowers. Paxton (1996) suggested that in good years the mutual guarantee mechanism common to
group lending may result in higher repayment than individual lending, but poorer repayment in bad
years due to the domino effect. Kevane and Mknelley (2002) endorsed the results reported by Paxton
(1996) that inflexible loan terms are one of the major reasons for client exit from the program.
While many of the studies explained and tested, positive and negative externalities, associated
with “joint liability” feature, there were some studies which concluded that while “group
guarantee” may be important and work for the few loan cycles thereafter, it weakens and becomes
largely irrelevant (Yaqub, 1995; Sharif, 1997). Matin (1997) reported that the only way in which
joint liability works is via the staff pressure induced peer pressure, which is effective only up
to manageable repayment problem. As number of on-time repayers decrease, “unzipping effect”
results in ineffectiveness of staff pressure induced peer pressure. Matin (1997) also indicated that
“Group fund” is playing a significant role as a “loan guarantee fund”. Jain (1996) and Matin (1997)
report that with more mature groups, the joint liability is transmuted into individual liability.
Ahlin and Townsend (2003) tested a wide range of the predictions of group lending with
joint liability, such as the impact of interest rates, loan size, the degree of joint liability, group
homogeneity and the level of group monitoring and social sanctions. They found that lower interest
rates, lower joint liability payments and higher levels of human capital are correlated to higher
repayment rates. They also analysed survey data from 262 Thai joint liability groups of the Bank
for Agriculture and Agricultural Cooperatives (BAAC) and from 2880 households. They found
that (i) Besley and Coate model of limited enforcement is strongly supported in the more rural and
poorer region of Thailand and (ii) In the more prosperous region, support was found for the Stiglitz
model of moral Hazard and the Ghatak model of adverse selection.

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 Gomez and Eric Santor (2003) utilizing data from two North American microfinance
institutions found that those enrolled in group loan programs outperform individual borrowers in
terms of default probabilities.
The discussion highlights the divergent (sometimes conflicting) results regarding repayment
determinants which in-turn is due to (i) Divergent conceptualization of theoretic models (ii)
Divergent measures of repayment (iii) Divergent measures of determinants. This divergence is
presented in following Table 2.

Table 2 Divergent results regarding repayment determinants

Variable
Group size
Occupational composition of
group
Average land holding of group
members
Proportion of members in a group
that are related to each other
Other sources of credit
Indicator of Study
Monitoring Sharma and Zeller (1996)
Group pressure Wydick (1999)
Risk sharing Zeller (1998)
Control variable Ahlin and Townsend (2002)
Monitoring Wydick (1999)
Homogeneity Paxton (1996), Olomola (2002)
Risk sharing/ covariance Zeller (1998)
Ahlin and Townsend (2002)
Repayment capacity Zeller (1998)
Productivity Ahlin and Townsend(2002)
Low moral hazard in bailing out Sharma and Zeller (1996)
members with difficulty in repay-
ment
Difficulty in imposing sanctions
Cost of monitoring Ahlin and Townsend (2002)
Homogeneity in group there by Zeller (1998)
reduce repayment problem
Indicate credit worthiness on one Paxton (1996)
hand and on the other hand give
rise to expectation that there may
be a repayment problem

It can be observed that a particular variable has been interpreted differently in different
contexts by different researchers, which is summarized in Table 2. This highlights the possibility
that influence of a variable on repayment performance can be through several channels. The
discussion in previous paragraphs also highlighted the importance of group dynamics in group-
based microfinance irrespective of inclusion or exclusion of joint liability. However influence of
group dynamics is expected to be more in case of joint liability based credit programs.

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3.1 Group Dynamics
Marr (2002) criticizing individual focused approaches in performance evaluation studies of
micro-finance. He argues for a framework encompassing in depth analysis of group-dynamics and
their influence on performance parameters in joint liability lending. Giving centre stage to the study
of group dynamics, and using the principles of Social psychology and imperfect information, Marr
recorded some observations regarding micro-finance in the case of Peru as:
(i) Group-based microfinance schemes are often unable to harness local information, and
hence resort to inflicting increasingly severe sanctions in order to achieve high re-
payment rates. This results in severe damage to group cohesiveness and hit the poor-
est and most vulnerable the hardest, creating more poverty and undermining the very
foundations of the microfinance schemes. This in turn is due to the fact that raising and
sharing private information gathered through peer monitoring is an extremely difficult
exercise, mainly due to high cost arising from complex social relationships that devel-
op amongst group members and between members and MFI officers.
(ii) Nearly 70 % of the group members who left the microfinance program before its end in
Peru are “very poor” and their likely-hood of leaving program is more at the beginning
of the program or when the group has 2-3 years of maturity.
(iii) New group members in place of dropouts, are selected from less poor backgrounds
leading to consistent diversion from the target population towards better-off segments
of society. This in turn is giving rise to the original inefficiencies of credit market
where in very poor are rationed out from credit schemes.
On similar lines Mahmud (2002) opined that the nature of group formation and operation has
not featured in the discussion of the institutional aspects of development efforts by means of group
approach. Heyer et.al (2002) argue that in studying behaviour of groups and their performance, it is
essential to categorize groups into i) groups functioning for overcoming market failures, ii) groups
functioning for establishing their claims, and iii) groups performing pro-bono function (i.e. seek to
alter the distribution of benefits within society). They also emphasized the need for differentiating
different modes of group functioning in assessing the outcome of a group functioning. The modes
of operation are listed as i) Power / control in Hierarchical relations with intra-group bargaining
playing an important role, ii) The use of material incentives, quasi–market operations, and iii)
cooperation among members to achieve group objective. Using these criteria, they categorize
Women’s groups of Bangladesh as “claims” group addressing the problem of empowerment.
Mahmud (2002) claimed that joint liability in this group is aiding in default minimization.
Alkire and Deneulin (2002) criticized the single most used assumption regarding motivation
of individual as utility maximization and the principle of self interest and argued that motivations
are complex, multiple, partially endogenous to the social ,economic context as well as to peculiar
features of situation. Further, Fehr and Gachter (2000) argued for a model of human behaviour

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that extends the rational choice approach and incorporate preferences for reciprocity, equity and
also desire to punish hostile intentions and reward kind intentions. They argued that interaction of
these diverse motivations and the institutional setup is responsible for outcomes of group actions.
The implications of above two arguments is that group-dynamics is outcome of interaction of
group (Consisting of individuals of multiple complex, partially endogenous motives) with societal,
policy, program and agro-climatic context. The group-dynamics in turn determines effectiveness of
group action in terms of parameters like efficiency, equity, empowerment of vulnerable etc.
3.2 Dropouts and defaults indicators of group dynamics
From discussion in earlier paragraphs dropouts and defaults indicators of group dynamics can
be identified. Karlan (2001) opined that dropouts in microfinance program are probably impacted
differently than those who remain and any impact analysis which ignores them is akin to cherry-
picking one’s successes, ignoring one’s failures, and then claiming victory. He listed two types
of problems due to dropouts viz; i) incomplete sample bias: this is due to the fact that those who
dropout presumably were impacted differently and potentially worse than those who remained
and ii) attrition bias: this bias is created because those who dropout are different from those who
remain, irrespective of the program impact. He found that higher measures of social capital viz,
cultural fragmentation index and geographic dispersion index indicated lower dropout rates. By
further analysis he found that those with higher levels of social capital are more likely to remain in
the group after default than those with lower levels of social capital, indicating suggestive evidence
that social capital helps groups distinguish between true negative shocks and mere reneging and
those who have negative shocks are forgiven and thus allowed to continue borrowing. Hassan and
Shahid (1995) also categorized reasons for dropout as: i) Related to social pressure (peer pressure
over loan repayment. Family disapproval, family problems), ii) Related to resource constraint
(inability to finance weekly loan repayment, group fund not refunded, savings not available for
with drawl in emergency, iii) Program related (unpaid loan installment resulting in the expulsion of
the client, low interest on savings, member unable to count and sign her name and cancellation of
membership while away) and iv) migration, death, joining another NGO and no access to vulnerable
development cards.
Further, the Association for social Advancement (1995) identified internal factors in the
program’s design and operation as the major problem leading to dropouts. The programs low credit
ceiling and the rule against multiple loans were the most important factors followed by frequent
loan repayments and joint liability.
On annual membership dropout rate from three microfinance programs of Bangladesh
(BRAC, RD-12, and Grameena Bank), Khandker (1998) reported that overall annual membership
dropout rate was low. His further observations regarding dropout were i) The higher dropout rate
at BRAC for both men and women in 1992 is attributable to policy change allowing only one
member per household, and also expulsion of members who defaulted on loan repayment or failed
to keep up with organizational disciplines (Khan and Chowdary (1995) also reported that one more

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policy change viz; in RD program emphasis on women led to expulsion of male members). ii)
Rural electrification increased the dropout rate in Grameena Bank and investment in roads reduced
dropout rates in BRAC. This in turn is due to the fact that development of theses infrastructure
facilities influence on alternative income earning opportunities for the poor. iii) Initially the dropout
rates of Grameen Bank members increased with branch age, but as branches matured, this rate
fell. iv) Members training in employment and income generation increased dropout rates, while
training in other skills reduced them. Analysing findings of Khan and Chowdary (1995), Wright
(1999) observed over three quarters of the respondents from among the discontinuing category
and reported that they voluntarily dropped out while a quarter was expelled. The proportion of
those expelled was higher among males, while the proportion of those dropped out voluntarily was
larger among the female members”. Thus Wright suggested that only a small proportion of dropout
in Bangladesh microfinance program is resulted from policy change in the programs. Evans et.
al (1999) also reported in their study in Bangladesh that 11 percent of the eligible non-member
households in their survey were former members of BRACs rural development programme that
had subsequently dropped out. Dropout households tended to be smaller, with lower education;
male and more frequently participated in other nongovernmental organizations. Further, in Shakti
Foundation for Disadvantaged women in Bangladesh, 14 percent dropout in 1998 and 9 percent
dropout in 1999 were reported (Murray, 2001). The largest number (33%) reported small loan size
as reason for dropout followed by too many meeting (28%), meetings are too long (25%), did not
want to pay for a defaulting member (25%) and loans were too expensive.
Regarding dropouts from East African Micro-finance Institutions, Hulme (1999) reported
that i) Both poorer and wealthier clients have a similar propensity to dropout depending on the
nature of financial services. However the reasons for dropout are different. ii) In micro-finance
program K-REP in Kenya, Scaling down loan size growth, allowed shift down to its target group,
but increased the rate at which relatively wealthier members dropper-out from SHGs. iii) There
is evidence that in Uganda, that the poorer dropouts are pushed out of MFI because of problems
repaying their loans and /or meeting the savings requirements. iv) The dropout behaviour of average
clients (clients while being far from wealthy, have incomes that place them above the national
poverty line) depends upon the nature of the MFI’S product and the dynamics of the individual
households’ livelihood. When loan size is bigger and context is characterized by saturated markets,
economic down turn etc, clients’ dropout voluntarily or “pushed out” due to repayment difficulty.
v) The reasons for dropout of wealthier members as a) The desire for larger loans as the maximum
loans given by MFIs are “too small” for their growing business b) Annoyance at having anticipated
loans delayed because of other group members being in arrears and c) Frustration with the amount
of time spent in group meetings and in trying to recruit new members to replace dropouts. vi)
There was no clear evidence indicating that women were more or less likely to dropout. vii) Age
clearly plays a role in dropout. In PRIDE, a Tanzanian MFI, clients younger than 21 years dropped
out at higher rate, those older than 60 dropped out at the lowest rate, while those between 21 and
60 dropped out at a similar rate to one another. Thus Hulme concluded that while external factors

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influence exit rates, to a very high degree it is the design feature of the MFI products that fuel
dropout and high dropout rate (60 percent per annum) in East Africa is explaining limited outreach
of MFIs.
3.3 Outreach
Microfinance program design by way of inducing group dynamics in a given context
determines outreach of the program. Navjas et. al (1998) listed six aspects of outreach as i)Depth
(proxy by poverty), (ii) worth to user (indicated by borrowers willingness to pay for loan), (iii)
cost to user (cost of loan), (iv) Breadth, (v) length (of time frame in which MFI produces loans
and vi) scope. Using these aspects they defined outreach as Worth minus Cost, weighted by depth,
summed across breadth of users and scope of contracts, and discounted through length of time.
Using the Index of Fulfillment Of Basic Needs (IFBN) as proxy for depth (absolute poverty),
analyzing outreach of five micro-lending programs in Bolivia, report that i) the programs reached
the richest of the poor and poorest of the rich much more than they reached the poorest of the poor
ii) group lenders have deeper outreach than individual lenders and iii) rural lenders had deeper
outreach than urban lenders.
Amin et.al (1999) defined a vulnerable household, as a household vulnerable to idiosyncratic
risk analysed outreach performance in two villages of northern Bangladesh. They concluded that
micro-credit members are poorer than non-members in both the villages. They observed that female
headship of household is significantly associated with vulnerability in both villages and households
arable land holdings are not significantly associated with vulnerability in either village. Hence,
they opined that a micro-credit program that targets female-headed households would have more
success at reaching the poor and vulnerable than one that targets the landless. Further, they opined
that micro-credit may better reaching the poor and vulnerable in villages where the opportunity for
diversification exists, as micro-credit programs require weekly repayment and focus on non-farm
credit.
Recognizing the costliness of measuring absolute poverty level of households, and multi
dimensionality of poverty, Zeller et. al (2001) and Henry et. al (2001) sought to gather household
information on dimensions of (i) human resource indicators (ii) Dwelling indicators (iii) Asset
indicators (iv) Food indicators and (v) other indicators. Sharma et. al (2000) assessed relative poverty
level of MFI in four case studies (Central America, East Africa, Southern Africa and South Asia)
and observed that the outreach of MFIs are consistent with their mission, priorities, and targeting
practices. Zeller and others showed that in countries where poverty is extreme, the indicators
capturing transitory or chronic food insecurity tend to become more important in differentiating
the relative poverty of households, while in countries with higher incomes, the accumulation of
consumer assets tends to contribute more significantly to distinguish relative poverty differences
between households. While analyzing outreach of a microfinance program (COMPARTAMOS)
in Mexico, Zeller et. al (2002) observed that one fourth of the clients reached by the microfinance
program is very poor (belongs to poorest tercile), thus the MFI has not achieved striking depth of

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outreach neither at the regional nor at the household level. The observations made was that credit
led MFIs have a deeper outreach; have more female, illiterate and impoverished clientele than the
average population of the country.
3.4 Empowerment
The prevalent dominant framework of sustainability and outreach in analyzing performance
and potentials of micro-credit, as narrower view of looking at development was criticized and for
putting development back into the provision of micro-financial services was argued (Fisher and
Sriram, 2002). Thus, they suggested exploring developmental purposes to which micro-finance can
be put, that go well beyond integrating a range of micro-financial services for poverty alleviation,
like livelihood promotion, developing the local economy, empowerment, building democratic
peoples’ organizations and changing wider systems or institutions within society. In line with this
view recent studies exploring present contribution and potential of microfinance in “empowerment
“are being attempted. More specifically empowerment of vulnerable is the developmental outcome
explored; the vulnerable may be “women” or “income poor “ or “asset poor “ and so on. In Indian
context also macro-level literature on microfinance speaks about its ability in contribution of
addressing credit market failure but micro-level it speaks about empowerment of vulnerable more
specifically women.
John Snow, Inc (JSI, 1990) defined empowerment as the ability to take effective action. In
particular it is the ability to make and carry out significant decisions affecting one’s own life and the
lives of others. Accordingly, JSI identified six general areas or domains of women empowerment
as: i) sense of self and vision of a future, ii) Mobility and visibility, iii) Economic security, iv)
Status and decision making power within the household, v) ability to interact effectively in the
public sphere and vi) participation in non-family groups. Barbara and Mona (2001) opined that
empowerment process is not a linear one, but more similar to loop or spiral. Kabeer’s (1999) notion
of empowerment refers to the process by which those who have been denied the ability to make
choices acquire such ability. According to this conceptualization the dimensions of empowerment
are i) access and claim over resources, ii) the process of decision-making, and ii) achievements.
Empowerment has been defined as combination of Economic Independence, Political Knowledge,
Political Activism and Mobility (Eric Brahm 2000). According to UNIFM (2000) gaining the
ability to generate choices and exercise bargaining power, developing a sense of self-worth, a
belief in one’s ability to secure desired changes and the right to Control one’s life are important
elements of Womens’ empowerment. The definition emphasizes that empowerment is about
change, choice and Power. According to Mayoux (2000) empowerment is a process of change by
which individuals or groups with little or no power, gain the power and ability to make choices that
affect their lives. In this conceptualization the dimensions of empowerment are i) Power within
(enabling articulation of aspirations), ii) Power to (enabling to develop necessary skills and access
to resources), iii) Power with (enabling to articulate collective interest and organize to achieve
them) and iv) Power over (changing the underlying inequalities in power and access to resources).

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According to Barbara and Mona (2001) empowerment in its broadest sense refers to an individual’s
or group’s increased power. Thus in a development context it refers both to “internal” change
within an individuals’ sense of self and autonomy and “ External change” in social status and basic
Power relationships in Society. In the context of Women “Empowerment” refers to an institutional
environment that enables women to take control over material assets, intellectual resource and
ideology (Rachel 2001). According to Cheston and Kuhn (2002) empowerment consists of access
to material, human and Social Resources together with ability to use these resources for making
necessary strategic changes. According to Gooptu (2002) empowerment does not simply mean
better economic condition or bargaining power but it encompasses a struggle through which extant
social perceptions are challenged and through which alterations are sought in power relations. The
steps involved in this process through group action are (i) Recasting of identity, reconceptualization
of capabilities and redefinition of subjectivity, (ii) Construction of community and iii) Political
action to challenge extra forms of power. In other words it means attainment of self-reliance,
confidence, and dignity and transferring that image to influence other members of the community
with the ultimate aim of undertaking effective collective bargaining. This conceptualization is more
relevant to the case of empowerment through collective action as in the case of group approach in
microfinance.
The main implications of above definitions are that empowerment can be aimed at through
individual approach or group approach. Empowerment through a program aims at creation of an
institutional environment which enables an individual or group or an organization, a) To get legal
access to, b) To secure control over, c) To get power to make decisions regarding use of a resource
or ideology and also d) Acquire ability to use the resource or ideology. Evaluation of empowerment
through microfinance refers to looking into aspect that how far the microfinance is able to create an
institutional environment congenial for empowerment of vulnerable individuals.
From above definitions one can infer that efforts towards empowerment encompass creation
of institutional environment for developing and exploiting potentiality of an individual. This can be
achieved through targeting individual action or collective action. In certain situations empowerment
through collective action is more effective due to its “voice” effect and “Size” effect (pooling of
resources) and also common interest of the group. In the context of SHGs the first channel through
which group based microfinance can aid in empowerment is that it provides an opportunity for
vulnerable people to organizing into group (i.e. construction of community in terms of Gooptu
(2002) conceptualization). These SHGs have access to institutional financial resources which intern
translated into an individual’s access to financial resources provided that the individual is part of
the group and contributes towards group goal. The result is the economic empowerment of the
individual by addressing (at least partially) prevailing inequality in access to institutional financial
resources.
Through this approach building up and consolidation of social capital aids in individual’s access
to Social resources (i.e. drawing of outside support). While Gooptu (2002) conceptualization of

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community construction outlines the possibility of forging social capital through collective action, in
group-based microfinance it is generally emphasized the groups are based on “historically” inherited
stock of social capital. This is because in case of microfinance, the objective of group formation
consists of both efficiency and empowerment and hence there is need for member’s contribution
not only as a member (contributing his share in repayment of loan etc) but also as monitoring
agent (monitoring other members contribution in repayment of loan etc). In microfinance generally
regular meetings are insisted which not only aid in consolidating social capital, transparency, skill
development in accounting but also provides an opportunity for accessing and sharing information
(acquired through programs of skill development and other training programs etc), which in turn
can aid in efficient utilization of resources (for example, knowing about marketability potential of
particular investment activity etc).
3.5 Gender Focus-equity–empowerment.
It is being widely argued that unless specifically targeted, women tend to have inferior access
to financial resources than do men (Fletschner, 2000, Mahmud, 2002). According to Fletschner
(2000), although poverty in itself is a very serious obstacle for women attempting to get credit,
there are also imperfections of the financial markets that specifically constrain women’s access to
credit. These are: i) Institutional constraint – legal regulations or social norms that condition the
type of economic activities. Women can engage in and the extent of Women’s access to and control
over resources, ii) Supply side constraints – constraints that originate from biased lending practices,
iii) Demand side constraints – the obstacles that may inhibit women from applying for loans even
when there are funds available to them.
Some studies documented that the inefficient resource allocation at household level are partly
due to imperfectly shared information between family members (Katz, 1997; Carter and Katz,
1997). Similarly other studies (Almeyda, 1996; Weidemann, 1992; Lycette and White 1989) reported
that lack of knowledge about available funds and application procedures prevent Women from
taking advantage of many sources of credit. Fletschner (2000) reported that Women’s employment
possibilities and their opportunities for starting or enlarging their own micro enterprises are
constrained by factor that they may not have access to information on alternative projects they could
work on. Further, women use sources of information that are different from men. So these kinds of
information problems can be addressed to some extent through group approach in microfinance.
Microfinance services that foster group formation and self-management by women have additional
potential to empower women through exposure to new ideas, mutual support, fostering identity
beyond the family and the opportunity to cultivate leadership roles and responsibilities (Barbara
and Mona 2001). Further, group formation and management can link clients with networks beyond
their neighborhood or community (Barbara and Mona 2001). The group created in microfinance
is becoming the focal point for other development programs of public sector like schemes of
“Deepam” (provision of LPG at subsidized deposit facility) and “ Gruhini”(Housing loan scheme)
in Andhra Pradesh. There by it is enabling these women to secure control over other resources also.

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Hence, it is being opinioned that addressing these credit market imperfections that affect women,
will not only aid in addressing gender inequality in access to credit (human right perspective) but
also in overall development (by addressing inefficient resource allocation) both at household level
(Cheston and Kuhn 2002, Mooji, 2002) and country level. The other rationale for targeting women
in microfinance are the poorest of poor (Cheston and Kuhn 2002), efficiency and sustainability (i.e.
better repayment) (Chestonand Kuhn 2002; Mooji, 2002), cost effective conduits through which
inputs reach household ( Mahmud 2002) and empowerment of women (Cheston and Kuhn 2002,
Mahmud 2002).

4. Conclusions and Suggestions

Development workers identified several other developmental purposes for which microfinance
can be put to use, like prevention of debt bondage, risk management, governance. Hence they also
indicate performance dimension of microfinance. However in most of the studies, performance
dimensions received focus are (i) Repayment performance (ii) Group dynamics (iii) Outreach
and (iv) Empowerment. These performance dimensions are interlinked. Repayment contributes
to sustainable availability of micro financial services. Repayment in turn is influenced by group
dynamics, which in turn is the outcome of interaction of contextual factors with microfinance program
design. Group dynamics influences (depth of) outreach which in turn influences empowerment
(providing access to, and enabling control over resources). Gender focus in microfinance is
addressing gender inequality in credit access and contributing to empowerment. Empowerment
aids in development, results in improvement in repayment and contributes to sustainability to
microfinance. In this way the selected performance dimensions are highly interlinked.
It may be concluded from the aforesaid discussions that micro finance has many dimensions
and these dimensions are interlinked. As discussed in details, there are many important methods/
models with some merits and demerits in specific conditions/locations /for impact assessment/
evaluation of the performance of each indicator. The performance of each dimension is important
for overall performance of MFI to induce an overall impact on the livelihood of the stake holders.

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 Impact of Microfinance on the livelihood of
impoverished farmers’ in the situation of debt:
A Case study of Punjab
By

Nitish Khurana and ShavetaKohli*

1. Introduction
Peasant society and culture has something generic about it. It is a kind of arrangement of
humanity with some similarities all over the world (Redfield, 1956, p25). In this way, Redfield
summarized a wide comparison made of peasants in different period and countries. The peasantry
appears to be a ‘type without localization- not a typical anthropologist’s community’. A peasant is an
agricultural worker who subsists by working a small plot of ground. The word ‘Peasant’ is derived
from 15th century French paisant meaning one from the pays, or countryside, ultimately from the
Latin pagus, or outlying administrative district (when the Roman Empire became Christian, these
outlying districts were the last to christianise, and this gave rise to “pagan” as a religious term).
The term peasant today is sometimes used in a pejorative sense for impoverished farmers. Peasants
make up the major part of humanity, a proportion that will remain the same indefinitely.India’s
peasantry is known in the world for its work. But now circumstances have been changed as people
are leaving their primary occupation and it is no more profitable for them to produce. Cost of
cultivation is all time high. If we talk about those who are still in agriculture they are the sufferers
and they are facing crisis. Peasant fulfill their needs by taking loans either from credit co-operative
societies or from local money lenders. Government has introduced so many schemes for them
but still the share of informal sources in case of providing credit to farmers is more as compare to
formal sources. India’s majority of population around 52.1% is still dependent on agriculture for
their survival. On the other hand the share of agriculture in GDP is falling every year.
It is a truism that credit is the lifeblood of any business where there are assets there will also
be liabilities. Every loan is a debt and accumulation of debt is indebtedness. It should be recognized
that borrowing is not a sign of weakness, but an important need of the cultivator to meet his expense
– it is only if his repaying capacity is exhausted then he should be called indebted, or in debt trap.
The average amount of the outstanding loan increases with the size of the land holding, but what is
more interesting is that the proportion of indebted farmers also increases with the size class. Further,
even among very small and marginal farmers, the amount of outstanding loan is substantial, given

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the likely low incomes from such small holdings, which suggests some sort of cumulative process
leading to a debt trap for the very resource poor cultivators. Farmer’s cash returns from agriculture
are barely enough to service their debt.
In India, prior to the year 1951, agriculture was a thoroughly neglected sector and no
deliberate effort was made by the government to uplift the cultivators from their deteriorating plight
of impoverishment and indebtedness. The heavy debt burden was first traced out very concretely
and comprehensively by All India Rural Credit Survey of 1951-52. The cultivators in our country
are deeply involved in debt. In 1961-62, the non institutional credit agencies accounted for nearly
81.6% of the debt of the cultivators, as per All India Debt and Investment Survey. Data reveals
that the debt burden of the cultivators owing to the non-institutional agencies was of the order
68.3%. Moreover with the advent of Green Revolution, cash needs in agriculture have increased
manifold. But majority cultivators can’t meet such increased cash needs out of their own savings.
As it has been rightly pointed out, “the farmer in UDC’s can’t expect their capital needs to come
from savings, because their income from farm operations is barely sufficient to provide minimum
necessities of life (FAO, 1955).
The widening gap between the owned and required capital has called for borrowing. It has
necessitated the institutional agencies like co-operatives and commercial banks to take a big role
in providing credit because expanding credit needs can no longer be adequately met by traditional
money lenders. With the increasing institutionalization of agricultural credit, the problem of
farmer’s indebtedness has achieved a new dimension. Institutional credit agencies very often try to
distribute their loanable funds in such a way as to minimize their risks. In this, they always prefer
large farmers to smaller ones. Thus there was more inflow of institutional credit to large size of
farms keeping the smaller ones always under the mercy of private agencies. Due to this tendency
of small farmers they continue to suffer from chronic indebtedness as they borrow from private
sources at high rate of interest. The share of institutional credit, which was little over 7 per cent in
1951, increased manifold to over 68 per cent in 2010, reflecting concomitantly are markable decline
in the share of non institutional credit from around 93 per cent to about 30 percent during the same
period. However, the latest NSSO Survey reveals that the share of non-institutional credithastaken
are verseswing which is a cause of concern. But where institutional finance failed microfinance
fulfills that purpose especially in the case of those who can’t avail institutional credit.
A large part of Indian households (slightly more than 50%) have no access to formal financial
services. Most of their access to financial services is through informal channels such as money
lenders and chit funds which have existed since times immemorial. While they are easy to access
for credit, they come to the customers at a very high cost. The need for saving is met in only a
limited way if any. Some of the other critical customer needs such as remittances and insurance are
not even met. The challenge is not only of the reach of formal channels but it is compounded by
the fact that the formal channels often have need for high amounts of documentation and long lead
times which make them practically unusable for the customers. The potential impact of increased

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access to financial services is enormous, both for individual welfare as well as for overall economic
growth of our nation. Those whose income is low, irregular or unpredictable can benefit greatly
from simple and accessible financial tools that enable them to increase their productivity, save
towards larger goals, and take advantage of products such as insurance coverage that so far have
been out of reach for them.
From a global perspective, it is assumed that in the aftermath of the global financial crisis,
microfinance has begun to enter a more mature and sustainable growth phase. Followed by the rapid
expansion over the years, the focus of the microfinance sector has turned towards accelerating the
improvements in governance, responsible finance practices and regulatory capacity. Further, risk
management, which has become a post-crisis priority for all financial institutions, has improved
considerably in the microfinance sector, which is essential, given that it is offering an increasingly
diversified range of innovative financial services to the poor.

1.1 Microfinance in India

Microfinance in India is currently being provided by three sectors: the government, the private
sector and charities. These three sectors, as large as they are, have only a small fraction of the capital
and geographic scale required to meet the overwhelming need for finance amongst India’s rural
poor. Broadly, the total number of microfinance sector clients stood at 168.6 million as at the end
of March 2011 (Table 1). Of this, 43.3 million were customers of commercial banks. This number
had declined from the previous year’s level of 45.2 million. Overall, like in the previous year, the
SHGs and MFIs put together had reached about 8 million clients more than the commercial banks.

Table 1 : Estimation of microfinance credit clients (millions)

2008 2009 2010 2011

Commercial Banks 41 39.2 45.2 43.3
( including RRBs)
PACS Borrowers 28.5 28.7 30 31.0
SHG Members 47.1 54 59.6 62.5
MFI Clients 14.1 22.6 26.7 31.8
Total 130.7 144.5 161.5 168.6
Source: SHG data from NABARD and MFI data from Sa-Dhan . The Bharat micro finance quick report 2012 and mix
market data

Thus, with the passage of time the access to micro finance increases and its contributing in
the lives of poor and helps in eradicating poverty gradually. Steps must be taken to increase its
availability and accessibility so that the cherished dream of financial inclusion can be fulfilled.

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1.2 How do one can form SHG or participate in one such group?
Under the SGSY, the individual beneficiaries and members of SHGs are called Swarozgaries.
 Generally, a Self-Help Group (SHG) consists of 10 to 20 members. However, in difficult areas
like deserts, hills, areas with scattered and sparse populations and in case of minor irrigation
and disabled persons, this number may be from 5 – 20 persons.
 List of Below Poverty Line (BPL) households identified through BPL census, and duly approved
by Gram Sabha forms the basis for identification of families from which the members of Self
Help Groups (SHGs) are drawn.
 District Rural Development Agencies (DRDAs) initiate and sustain the process of social
mobilization for formation, development and strengthening of SHGs through facilitators viz.
NGOs, CBOs, Banks, Community Coordinators, Animators and Self – Help GroupPromoting
Institutions (SHPIs).

2. Methodology
The present study is based on survey research design based on three villages namely Garhi,
Mehatpur, SimbhalMajara of district SBS Nagar and around 150 households had been surveyed
i.e. 50 households from each village and only those farmers are chosen who belongs to category of
possessing less than 1 hectare of land. With the help of structured schedule we tried to fulfill our
objectives.
SaheedBhagat Singh Nagar (Nawanshahr) was carved out of Hoshiarpur and Jalandhar
districts of Punjab in November 7, 1995 on the auspicious occasion of birthday of Sh. Guru Nanak
DevJi as the sixteenth district of Punjab State. District name has been derived from the head-quarter
town of Nawanshahr. Nawanshahr town is said to have been built during the reign of AlaudinKhilji
(1295-1316) by his Afgan Military Chief Nausher Khan. Previously it was called “Nausar” but
with the passage of time, the town came to be known “The Nawanshahr”. Nausher Khan had
constructed five forts known as Havelis, whose remains still exist. This district is situated on the
right bank of mighty river Sutlej. The Distance of state capital Chandigarh (Known as the most
beautiful and planned city of India) from the district is of approximately 92 Kms. Nawanshahr
District is surrounded by four districts. The west border of the district touches Jalandhar, east
border touches with RoopNagar (Ropar) district, the northern border of the district meets with
district Hoshiarpur and in south it touches with Ludhiana (known as the Manchester of India) and
Kapurthala District. Nawanshahr district, located in the eastern part of the Punjab State, forms a
part of the Bist-Doab region.
Geographically, it lies between North latitudes of 30°48’45” and 31°16’15” and East
longitudes of 75°46’00” and 76°26’30” covering a geographical ambience of 1190 sq.km. The
area is bounded by Hoshiarpur district in the north, Siwalik Hills in the northeast, Sutlej River in
the south, Kapurthala district in the northwest and Jalandhar in the west. The district came into

202
effect on 1992 by carving out 3 blocks (Banga, Aur and Nawanshahr) from Jalandhar district and
2 blocks (Saroya and Balachaur) from Hoshiarpur district. Administratively, Nawanshahr district
is divided into 2 tehsils namely Nawanshahr and Balachaur comprising five-development blocks.
There are 4 towns and 471 villages. Out of which 465 are inhabited and 6 are uninhabited. The
total population of the district is 6, 14,362 has increased from 5, 87,468(as per census 2011). The
percentage decadal growth rate is however reduced from 10.58 to 4.58 in 2011. Majority of the
population reside in the rural area.
Physiographically, the area is bounded by NNW- SSE trending Siwalik Hills in the northeast
and antecedent Sutlej River in the south, which forms the main drainage basin. A number of
seasonal streams (‘’choes’’ in local parlance) originate from the Siwalik, which drain the area
during monsoon season. At times these choes bring down flash flood in sub-mountainous region,
particularly in Balachaur and Saroya blocks. The deforestation carried out in the Siwalik foothill
zones has further aggravated the menace of flash flood as they are causing extensive soil erosion on
one hand and deposition of sand and silt in fertile fields on the other. The Sutlej River being snow
fed is perennial although the flow varies considerably during the year. Agriculture constitutes the
main source of economy and most of the area is fertile and good land use management is practiced.
The land utilisation pattern of 2005-06 shows that net area sown is 94. 0 sq.km. While area under
forest cover and land put to non-agricultural uses are 17.0 sq. km and 7.0 sq. km, respectively.
The main canal passing through the area is Bist Doab canal, which irrigates the western part of the
district. The total area irrigated by canals is 10 Sq.km. which is just 1.2% of the total. The average
holding of surveyed farmers in this region is 5.45 acres.

3. Results and Discussions

Out of all the surveyed farmers very less proportion of farmers reported any member of the
household as a member of SHG. Overall, only 35% families are having any member as a member
of SHG. But, people are becoming aware of it day by day after analysing the benefits of SHGs.
Table 2 shows the proportion of households having members of SHGs which is as follows:

Table 2: Proportion of households having any family member as a member of SHGs

Area/Locality Any member of the household Percent
is a member of SHG
Garhi 20 40
Mehatpur 15 30
SimbhalMajara 17 34
Total 52 34.67 ̴ 35
Source: Field Survey

This shows that after the introduction of SHGs for providing micro finance to rural poor
basically to small and marginal farmers’, number is very less. There is need to enhance the

203
availability and accessibility of micro finance as it can help to bring out these impoverished people
from poverty and they can survive with dignity by starting their own small enterprises. There are
various reasons as to why they have joined SHG but majority of them replied they joined SHG to
overcome economic at the time of need as it provides inter-loaning facility at reasonable rate of
interest. Table 3 shows reasons for joining SHG.

Table 3 : Reasons for joining SHGs

Area/Locality Number Percent
For availing Loan at reasonable rate 48 32
of interest
For economic independence 35 23.33
For family welfare 24 16
For social security 16 10.67
For availing subsidy 27 18
Total 150 100
Source: Field Survey

Thus, majority of them availed this for the purpose of availing loan at reasonable rate of interest
and the second purpose is for achieving economic independence. To increase the accessibility of
this type of loan the foremost thing is to become people aware about this type of facility for them
as out of 150 surveyed farmers 50 reported to be unaware of it and 48 knows but don’t have full
information how to avail it so steps must be taken to make people aware of this kind of facility.
3.1 Households in Debt
Out of all the surveyed farmers 117 farmer households are in debt i.e 78% of farmers are
facing situation of debt. Table 4 clearly shows this as follows:

Table 4: Debt situation of sampled households

Area/Locality Number percent

Garhi 32 64
Mehatpur 43 86

SimbhalMajara 42 84

Total Indebted 117

Source:Field Survey

Thus, majority of the farmer households are indebted in village mehatpur and almost similar
proportion in village SImbhalMajara. Peculiar thing in this case is that, village in which majority of
the farmer households are involved in SHG, the incidence of debt is less on them. Clearly village
Garhi is having more farmer households involved in SHGs.

204
3.2 Comparison of burden of debt between SHG and non SHG household:
It is depicted in table 5 that mean value of SHG household varies significantly from those of
non SHG and the F statistic is significant at 5 percent level of significance. It means that level of
burden of debt of non SHG household is higher as compare to level of incidence of debt of SHG
household.
Table 5: Comparison of burden of debt between SHG and non SHG household
Category Mean SD Z Statistic

SHG Household ( n1= 45) 102841 132118.19

35.95*
Non SHG Household ( n2=72) 15660.67 202818.19

Source: Field Survey; * significant at 1% level of significance

Out of all 117 indebted farmer households only 45 are members of SHG. With the help of
Z statistic we will analyse the significance of burden of debt on both the categories. Thus, result
shows significant difference between the debt burden of both the categories and those whose doesn’t
belong to SHG are heavily burdened as compare to those who are involved with SHGs.

4. Conclusions and Suggestions

Thus, these SHGs are playing a vital role in economic uplift of rural poor households and this
can play a major role in eradicating poverty. Financial inclusion is the main agaenda of 12th Five
Year Plan and this can be fulfilled with the help of these SHGs. A good SHG is only that which has
homogeneous membership, small membership, habit of small savings among members as it helps
in building up strong common fund etc. We conclude that these SHGs reduces the burden of debt on
farmers’ as significant difference is there between the mean values of those who belongs to SHGs
and non SHGs. Steps must be take to increase the membership of these SHGs so that more and
more rural poor can avail these kind of facilities and comes under banking net.

References
• Food and Agricultural Organisation(1985), “ Agricultural Price Policies, Paper Presented to the 23rd FAO
Conference, Rome.
• NSSO (2005), Situation Assessment Survey of Farmers: Indebtedness of Farmer Households,
NSS 59th Round (January–December2003), Report No. 498 (59/33/1), Ministry of Statistics and
ProgrammeImplementation, Government of India, New Delhi.
• NSSO (2005), “ Household Indebtedness in India as on 30.06.2002, All India Debt and Investment
Survey, NSS 59th Round, (January-December 2003), National Sample Survey Organisation,Government
of India, Report No. 501 (59/18.2/2).
• Puhazhendhi (2013), “ Micro Finance India: state of the sector report 2012” Sage Publications, ISBN:
978-81-321-1090-3 (PB).
• Sultana et.al (2011), “ Impact of Micro- Credit on Economic Empowerment of rural women” A scientific
Journal of Krishi Foundation, The Agriculturists 8(2): 43-49 (2010).
205
 Assessment of Key Reasons of Life Insurance
Policies Lapsation among Households:
An Exploratory Study in Haryana
By

Silender Singh

1. Introduction
Like meeting other basic needs, utmost priority should be given to pay the premium in time
through any means as borrowing and begging. However, it is not a common practice in the country.
LIC of India has been reported of having 17 to 18% lapsation of life insurance policies in the year
2000. After opening of the life insurance sector, it has been increased to 39.91% (lapsation by
number) in the year 2005, 24.61% in the year 2006. As per record of Insurance Regulatory and
Development Authority (IRDA) around 9.1 million policies were lapsed in 2009 and some private
players have shown a lapse ratio as high as 50% or even more. In terms of lapsation in premium
amount, there is an increasing trend from 4.40 to 6.95% (total lapse premium Rs. 20521.50 Crores)
for the period of 2004-05 to 2006-07. Moreover, the data available with Insurance Regulatory
and Development Authority and Life Insurance Council reveals that the retention ratio which was
95% in 2002-03 has been declined to about 83% in the year ended March 2009. Shri S. B. Mathur,
formerly Chairman of LIC and presently Secretary General, Life Insurance Council and a lobby
of national industries said “Lapse ratio beyond 10% is not healthy for economy as well as for the
health of Life insurance companies”. LIC since its inception and most of the private players are
facing this problem continuously. The data in Life insurance Fact Book, published by American
Council of Life Insurers revealed that life insurance lapsation ratio is 6.9% in the year 2009 which
was 6.5% in the year 2005. So, study has attempted to find out main reasons of policies lapsation.
The study has review earlier studies and taken the related variables which are not cover as a
reasons of policy lapsation. The emergency fund hypothesis (EFH) (Outreville, 1990; Kuo, Tsai and
Chen, 2003; Kim, 2005) argues that individual will be more likely to lapse a life insurance policy
when faced with economic hardship. The interest rate hypothesis (IRH) (Schott, 1971; Pesando,
1974; Kuo, Tsai, and Chen, 2003) stated that policy owner may be willing to remove funds from a
life insurance policy (either by way of loan or surrender) in order to take advantage of higher market
rates. The policy replacements hypothesis (PRH) (Outreville, 1990; Russell, 1997; Carson and
Forster, 2000) states that policy lapses may occur simply because the policyholder has identified a

206
more attractive policy with better terms or rates. Further, (NikKamariah 1995). Found that when
insurance agent not makes the customer-oriented behaviour, sold policies after some time may
lapse. After the sale, agents provide follow-up service and help customers make policy changes in
response to changing needs. This would justify the importance of continuous research to satisfy the
customers in this dynamic marketing industry. It is readily apparent that investigation of customer-
orientation behaviour in life insurance industry is accentuated. Smith, 1987) Selling skill is the
ability the agent employs to consummate a sale successfully. This skill can be developed through
essentially two broad means: formal training and sales experience gained through exercising the
selling job over time (Darmon, 1992).The customers often base their evaluation of their satisfaction
with a company largely on the services provided by the customer. Consequently, there is an interest
in determining factors which can lead to and increase the customer-orientation. As reported by
Kimball (1994), relationships and emotions are the keys to success in selling. People buy from
salespeople they like and trust. This fact makes price and the company brand insignificant when
clients make a buying decision, hence increasing the importance of a producer. The insurance
company can distribute its products only if consumers buy them and consumers can be expected to
buy life insurance only if agents sell it to them (Oakes, 1990).
Present study has tapped the untapped area as services of agents and companies, and other
aspects which were not cover all variables in the earlier studies as a whole.

2. Research Methodology
Objective: To assess the key reasons behind the lapsation of different individual life insurance
products.
H01: There is no significant effect of intimation of premium on lapsation of policies among the
households.
H02: There is no significant effect of visit of agent at home of households before and after sale of
policy.
H03: There is no significant effect of different reasons for lapse of policies on lapsation among the
households’ demographic variables.

2.1 Determination of sample size

To confirm the sample size of 800 was adequate, calculations for sample size determination
by proportion were made as follows, using the maximum possible population variation ( =.18 or
18%) as per study of the Insurance Regulatory and Development Authority on Lapsation of all
life insurance companies in India by Kannan R. et. al (2008). The precision of the D in the present
study was 0.05 for a 95 percent confidence level (z=1.96). n=2/D2, n= (.18)(1-0.18)(1.96)2/(0.05)2 =
226.71 or 227 rounded to the next higher integer.

207
2.2 Size of sample, data collection method and tool
Non-Probabilistic Convenience-cum-Judgement sampling was used and responses of 800
households residing in four districts i.e. Sirsa, Rohtak, Karnal and Panchkula of Haryana state were
taken through well structured questionnaire. The study has focused on assessing the top five players
in industry i.e. Life Insurance Corporation (LIC), Bajaj Allianz, ICICI Prudential, HDFC Standard
and SBI Life. These companies account for 82 per cent market share of life insurance business. The
study has taken 160 respondents proportionately from each company and district. The term life,
whole life, endowment, money back and units linked insurance plan are covered under the study.
2.3 Data analysis strategy
To analysis and interpret the frequency distribution, mode, mean, Standard deviation, and
t-value and F-test is used to confirmation of results. Lapsation: In general, lapse is the discontinuance
of the policy by non-payment of premiums due. In accordance with Kuo et al. (2003), the term
“lapse” refers to both surrender and lapse.

3. Results and Discussions

Lapsation Reasons Among Households

Table 1 shows that before completion of grace period 7.5 per cent households received
intimation for deposit of premium and 92.5 per cent received after completion of grace period.

Table 1: Descriptive and Inferential Statistics

(Intimation of Premium instalment of Policy Lapse)
Descriptive Statistics
Before Completion of After Completion of Inferential Statistics
Intimation
Grace Period of Policy Grace Period of Policy
N % N % t-value d.f. Sig. (2-tailed)
Received 60 7.5 740 92.5
-45.610 799 .000
Not Received 740 92.5 60 7.5
Total 800 100.0 800 100.0 Mean of Paired Difference
.08 .93 -.850
S.D .264 .264 .570
*Significant at .01 level.
Source: Primary (Data processed through PASW 18.0)
It is giving the impression that intimation not received before grace period may be more
affective for lapsation of life policies under study.
The same is tested by t-value at degree of freedom 799 at .01 per cent significance level
that intimation received after completion of grace period has significance effect on lapsation of
households’ policies…….H1.

208
Table 2: Agent Visit at Home Of Households Before and After Sale of the Policy

Before Purchase of
After Purchase of Policy
Total Visit Policy t-value d.f. Sig.(2-tailed)
N % N %
One 50 6.25 68 8.5
Two 347 43.38 123 15.4
Three 163 20.37 20 2.5
Four 200 25.00 30 3.8
Five 36 4.5 31 3.9
-25.816 799 .000*
Nil 4 .5 528 66.0
Total 800 100.0 800 100.0
2.84 0.81
2.84 1.47
S.D 1.166 1.869
*Significant at .01 level.
Source: Primary (Data processed through PASW 18.0)

Table 2 shows that the agent frequency of the visit at home of households before and after
the sale of policy was (Mean= 2.84) and (Mean=1.47) respectively. When the study has checked
it other way it is found that after excluding frequency of nil visit the agent has visited at the
home of households before the sale of policy was (Mean=2.84) and after the sale of policy it was
(Mean=0.81). It reveals that before the sale of policy agents has visited approximately 3 times,
whereas, he visited after sale of policy hardly one time.
The same is tested by t-value at 0.01 level of significance with degree of freedom 799 and
found that frequency of visit of agent has significant effect on lapsation of policy and rejected the
null hypothesis……………………… H2.
Table 3 and Table 4 show the exploratory and confirmatory data analysis on the basis of
responses collected towards reasons of lapsation from households with lapse policies under study
by using 5-point Likert scale (5= Mostly Agree, 4=Slightly Agree, 3=Slightly Agree, 2= Mostly
Disagree And 1= Completely Disagree). Then, it was found that households are agreed with the
reasons of lapsation namely policy not fulfilled my needs (=3.89, S.D. =1.500) and unavailability
of fund/income shock (=3.59, S.D. =1.768). On the contrary, they are least agree with the
unemployment (= 2.96, S.D. = 1.814) product rate of return in the market ( =2.82, S.D. =1.841),
and loos of bequest motive (=1.36, S.D. =.875).

209
Table 3: Exploratory Statistics towards Reasons of Lapsation of Policies Purchased by
Households
Exploratory Analysis
Reason
Mostly Completely
Mostly Agree Slightly Agree Slightly Disagree Total
Disagree Disagree
Policy not fulfil my N 410 192 48 0 150 800
needs % 51.3 24.0 6.0 0 18.8 100.0
N 249 190 0 0 361 800
Unemployment
% 31.1 23.8 0 0 45.1 100.0
Product compara- N 278 80.0 41 20 381 800
tive rate of return in
% 34.8 10.0 5.1 2.5 47.6 100.0
the market
Unavailability of N 427 107 11 20 235 800
fund/Income shock % 53.4 13.4 1.4 2.5 29.4 100.0
Loss of bequest N 0 58 40 30 672 800
motive % 0 7.3 5.0 3.8 84.0 100.0
Source: Primary (Data processed through PASW 18.0).

Table 4: Confirmatory Statisticstowards Reasons of Lapsation of Policies had purchased by

Households
Confirmatory Statistics
Family size Age Income Education Occupation Gender
Reason Mean S.D.
(df=4, 795) (df=5, 794) (df=3, 796) (df=5, 794) (df=5, 794) (df=1, 798)
F Sig F Sig F Sig F Sig F Sig F Sig
Policy not ful-
3.89 1.500 3.230 .012 10.151 .000* 9.580 .000* 10.638 .000* 20.102 .000* 1.178 .278
fil my needs
Unemploy-
2.96 1.814 1.420 .225 11.327 .000* 11.018 .000* 15.326 .000* 20.048 .000* 22.809 .000*
ment
Product com-
parative rate
2.82 1.841 7.846 .000* 10.474 .000* 16.821 .000* 18.869 .000* 4.220 .001* .347 .556
of return in
the market
Unavailabil-
ity of fund/ 3.59 1.768 1.720 .143 2.336 .040 6.063 .000* 16.021 .000* 22.740 .000* 2.954 .086
Income shock
Loss of be-
1.36 .875 13.256 .000* 4.850 .000* 4.285 .005* 18.911 .000* 9.164 .000* 9.439 .002*
quest motive
*Significant at .01 level.
Source: Primary (Data processed through PASW 18.0)

210
 As far as F-statistics (ANOVA) is concerned at 0.01 level of significance with respective
degrees of freedom by rejecting null hypothesis for different demographics variable, Table 3
(a) shows that family size-wise towards the reasons of lapsation of life policies on the basis of
products comparative rate of return in the market and loss of bequest motive and age-wise they are
significantly differ on all reasons under study, except, the reasons of unavailability of funds/income
shock. On the basis of income-wise, education-wise and occupation, they are totally different
on all reasons of lapsation and gender-wise they were found significantly different in terms of
unemployment and shock of bequest motive………........….H3.

4. Conclusions and Suggestions

Out of 800 households responses study reveals that before completion of grace period 7.5
per cent households received intimation for deposit of premium and 92.5 per cent received after
completion of grace period. It gives the impression that intimation not received before grace period
may be more affective for lapsation of life policies under study.
Agent frequency of visit at home of households (800) before and after the sale of policy was
(Mean= 2.84) and (Mean=1.47) respectively. When the study has checked it other way it is found
that after excluding frequency of nil visit the agent has visited at the home of households before
the sale of policy was (Mean=2.84) and after the sale of policy it was (Mean=0.81). It reveals that
before the sale of policy agents has visited approximately 3 times, whereas, he visited after sale of
policy hardly one time. It is concluded that agents hardly care their sales policies it may be reason
of lapsation.
On the basis of responses collected from households it was found that households are
agreed with the reasons of lapsation namely policy not fulfilled my needs (=3.89, S.D. =1.500)
and unavailability of fund/income shock (=3.59, S.D. =1.768). On the contrary, they are least
agree with the unemployment (= 2.96, S.D. = 1.814) products rate of return in the market ( =2.82,
S.D. =1.841), and loos of bequest motive (=1.36, S.D. =.875). It is concluded that income shock
(Outreville, 1990; Kuo, Tsai and Chen, 2003; Kim, 200, argues that individuals will be more likely
to lapse a life insurance policy when faced with economic hardship), needs of households and poor
after sale services are leading reasons for lapsation of policies under study.
It is suggested that the agent should visit to the home of household after sale of policy
consequently it will enhance the possession period which is vary with lapsation. Company should
given intimation of premium instalment to be deposited before the premium due date. At the time
of selling agent should consider age, income, occupation and family size it may help in persistency
of policies.
Further area of Research
The study has cover only five life insurance companies working in four districts of Haryana.
It may be extended by covering all life insurance companies registered with Insurance Regulatory
Development Authority of India and for all states in India.

211
 References

• Carson, James M. and Mark D. Forster, (2000) Suitability and Life Insurance Policy Replacement,”
Journal of Insurance Regulation, Vol. 18, No. 4, pp. 427-447.
• Darmon, Rene Y. (1992) Effective Human Resource Management in the Sales Force. Westport,
Connecticut: Quorum Books.
• Kannan R., Sarma K. P., Rai A. V., Sarma S. K. (2008) Lapsation and its impact on Indian Life Insurance
Industry (2002-07), Insurance Regulatory and Development Authority, Occassional Paper: 1/2008, P. 04.
• Kimball, Bob. (1994) AMA Handbook for Successful Selling. Lincolnwood, Ill.
• Kim, Changki, (2005) Modelling Surrender and Lapse Rates with Economic Variables. North American
Actuarial Journal, Vol.9, No. 4, pp. 56-70.
• Kuo, Weiyu, Chenghsien Tsai, and Wei-Kuang Chen, (2003) An Empirical Study on the Lapse Rate: The
Cointegration Approach. Journal of Risk and Insurance, Vol. 70, No. 3, pp. 489-508.
• NikKamariahNik Mat. (1995). Determinants of Sales Performance in Insurance Industry: A Cross-
Cultural Comparison between the UK and Malaysia. PhD thesis, The University of Aston in Birmingham.
• Oakes, Guy. (1990)The Soul of the Salesman—The Moral Ethos of Personal Sales. Atlantic Highlands,
N.J.
• Outreville, J. Francois, (1990) “Whole-Life Insurance Lapse Rates and the Emergency Fund Hypothesis,”
Insurance: Mathematics and Economics, Vol. 9, pp. 249-255.
• Pesando, James E., (1974) “The Interest Sensitivity of the Flow of Funds through Life Insurance
Companies: An Econometric Analysis,” Journal of Finance, Vol. 29, No. 4 pp. 1105-1121.
• Russell, David T., (1997) “An Empirical Analysis of Life Insurance Policyholder Surrender Activity,”
Dissertation.

212
 Trend and Pattern of Structural Changes in
Punjab and the Indian Economy:
A Comparative Analysis
By

Jasmine Kaur

1. Introduction
A basic change in the framework of an economy highlights the term “structural change”.
Structural change is the vehicle of economic growth and economic growth, in turn induces structural
change (Van Gamert, 1986). For structural changes to occur, the economic development is a pre-
requisite. Economic development implies progressive changes in the socio-economic structure of
a country. It has been observed that in an underdeveloped economy, the share of agriculture is
the highest. Development involves a steady decline in agriculture share in GDP (Gross Domestic
Product) and continuous increase in shares of industries, trade banking, construction and other
services. Apart from a rise in output, it also involves changes in composition of output, shift in the
allocation of productive resources, and elimination or reduction of poverty and unemployment.
Thus structural changes would imply as those changes which take place primarily due to economic
development and result into shifts in the shares of GDP and labour force from primary sector
to secondary and to the tertiary sector. Industrialization is the driver of technical change, and
overall productivity increases are mainly the end result of the re-allocation of labour from low
to high productivity activities. In other words, the typical pattern involves initially a shift from a
low productivity agricultural to a high productivity industrial economy through industrialization-
an increase in the share of industrial/secondary sector in output and employment combined with
a declining importance of the agriculture/primary sector. The subsequent post-industrialization
stage is one whose chief feature is the rising importance of the services/tertiary sector, even at the
expense of industry.

Structural changes are experienced differently by different economies (developed and

developing). The productivity growth in developed countries mainly relies on technological
innovation whereas for developing countries, growth and development are much less about
pushing the technology frontier and much more about changing the structure of production towards

213
activities with higher levels of productivity. For example, a developing country can attain growth
and structural changes by adopting and adapting existing technologies, but promoting faster growth
of high productivity activities and side by side, substituting imports and gaining entry into the world
markets for manufacturing goods and services, through rapid accumulation of physical and human
capital.Output growth in the higher-productivity sectors will be required in the process of structural
change if remunerative jobs are to be generated for all workers and the increase in unemployment
is to be prevented. The growth process also, therefore, entails a dramatic change in the employment
structure, involving a shift from the primary sectors into industry and subsequently, into services.
Almost all developing countries have become more ‘globalized’. They have phased out quantitative
restrictions on imports, slashed tariffs, encouraged FDI’s and exports, and in many cases, opened
up to cross-border financial flows. This has led to the dynamic structural changes. The causes and
outcomes of structural changes have been presented in Box 1.

Structural change : causes and outcomes

Source: Inclusive growth, Full employment, and Structural Change: Implications and policies for Developing Asia- Jesus
Felipe.

This paper attempts to examine the crucial question of structural transformation in the Punjab
and the Indian economy in the last three decades; i.e. the period 1980-2010, in a comparative
framework. The concept of structural transformation can be viewed from two dimensions. One
is analyzing the structural changes mainly in terms of income growth, and the second is in terms
of employment. But we limit our scope by analyzing only the income growth associated with the
transformation of the economy due to time constraint. Further the paper seeks to explore structural
shifts mostly among the three broad sectors of the economy i.e. agriculture, industry and services.
Changes at the subsectoral level are also presented, but no detailed analysis and comparison has
been attempted. The paper attempts to analyze differential pattern of sectoral growth rates and

214
consequent structural changes in the economies of India and Punjab. The main objectives of the
present study are:
1. To examine the trends and patterns of structural changes in India and Punjab for the period
1980-2010.
2. To analyze the growth and sectoral distribution of income in India and Punjab.
3. To explore the similarities and dissimilarities in the pattern of structural changes between
India and Punjab.
4. To understand the implications of the emerging pattern of structural changes in both the
economies.

2. Methodology
The analysis presented in this paper is based on data drawn from the CSO’s National Accounts
Statistics (NAS) for both India and Punjab. The growth performance of Punjab is studied on the
basis of the available data on the Gross State Domestic Product (GSDP). The GSDP is used to
measure economic growth of state, although the SDP in Punjab is inadequate to fully reflect the
actual picture of the economic status as it ignores remittances from people working in other states
and outside the country. Since time series data for a long period is not available at single base
price, the whole data has been converted into constant (2004-05) prices, using splicing method
calculating linking ratio. For calculating the growth rates, the Semi-log model was applied to the
data by the equation: log y = a + bt. Growth rate, r = {Antilog (b) -1}*100, t= time with b= slope.
The shares of the different sectors and sub-sectors in the GDP and its growth are computed (in
percentage terms) for Punjab and India as a whole.

3. Growth Performance in India and Punjab

In this section, the growth performance of Indian economy and the Punjab economy are
analyzed, i.e. by studying the growth performance, in terms of GDP growth, at the aggregate
level and at the sectoral and sub-sectoral levels for the period 1980-81 to 2009-10. The study uses
the Gross Domestic Product (GDP) data at 2004-05 prices, published by the Central Statistical
Organization. An analysis of the growth performance of the economy will help us to apprehend the
shift in the structural composition and the contribution of various sectors.
3.1 Trends in Growth Rates in GDP in India and GSDP in Punjab
The long-term trends in GDP growth rates are reviewed across broad sectors. We estimate
the growth rates of the broad sectors of the economy over the last three decades. Table 1 gives the
growth rate of aggregate GDP and in major sectors for the period 1980-2010, followed by Figure
1 for the same.

215
Table 1: Growth Rates of GDP in India and GSDP in Punjab

Growth Rates (Comparison)

Period India Punjab
Primary Secondary Tertiary Total Primary Secondary Tertiary Total
1980-81 to 1990-91 3.2 5.6 6.8 5.2 4.8 6.8 3.7 4.7
1990-91 to 2000-01 3.2 6.3 7.8 6.1 2.6 6.9 5.1 4.5
2000-01 to 2009-10 3.1 8.9 9.2 7.8 2.5 9.3 6.9 6.2
2000-01 to 2004-05 2.2 7.0 7.4 6.0 1.9 4.0 5.3 3.8
2004-05 to 2009-10 3.3 9.2 10.3 8.6 2.5 13.1 8.3 7.9
Note: Growth rates are estimated using semi-log model.
Figure 1: (Growth Rates of GDP in India and GSDP in Punjab)
Source: Central Statistical Organization, National Accounts Statistics.

The growth rates of GDP in India and GSDP in Punjab in primary, secondary and tertiary
sectors in India and Punjab respectively are given in Table 1 to examine the fluctuations in their
growth rates.
- Primary sector: The primary sector growth rates in India remained more or less consistent
at 3% for a time span of three decades. Whereas it was higher for Punjab i.e. 4.8% in
1980s. Though agriculture plays a pivotal role in the entire Indian economy and Punjab
has performed better in agricultural production. This is probably due to the reason, that it
has a favorable environment in the extensive level topography, sub-tropical continental
climate, fertile soils, and favorable conditions of water supply through water bodies and
irrigation, with policy and fiscal incentives. In 1990s, satisfactory growth could not be
observed and the worst performance was of the agricultural sector. Its growth rate fell to
2.6% and 2.5% in the 1990s and 2000s respectively, which was lower than the national
average.
- Secondary sector: This sector continued to depict an increasing trend in the growth rates
over the years for both India and Punjab, but he growth rates were higher for Punjab
compared to India. The slow pace of reforms and their inefficient implementation have
made Indian manufacturing sector in-competitive. On the other hand, Punjab recorded
an upswing in the growth rate in 2000s at 9.3%, as the state policies were not favoring
services led growth. Disaggregating the last decade, we note a tremendous rise in the
growth rate for Punjab during 2004-05 to 2009-10 i.e. a 13.1% growth rate, which is more
than the national average.
- Tertiary sector: This sector on the other hand, depicts a fairly opposite story. Here we
see rising growth rates for both the economies, but it is more for the Indian economy as
a whole. It is particularly due to the economic reforms which opened up the gates for
Liberalization, Globalization, etc. Punjab has lagged behind if compared with the Indian
growth rates.

216
3.2 Trends in Sectoral Composition in GDP in India and GSDP in Punjab
The change in the sectoral composition of GDP from the primary sector towards that of the
secondary and tertiary sectors is a major component of describing the structural transformation.
The Indian experience over the decades, are shown below:

Table 2: Sectoral Distribution of GDP in India

Sector 1980-81 1990-91 2000-01 2004-05 2009-10

Primary Sector 39.5 33.3 25.2 21.9 16.9
Secondary Sector 23.2 24.2 24.3 25.1 25.8
Tertiary Sector 37.4 42.5 50.5 53.0 57.3
Total 100 100 100 100 100

Figure 2: Sectoral Distribution of GDP in India

Source: Central Statistical Organization, National Accounts Statistics.

Table 2 and Figure 2 illustrate that in the case of India, the share of the primary sector declined
from 39.5% in the 1980-81 to 33.3% during the 1990-91. It further drastically declined to 25.2% in
2000-01 followed by 21.9% in 2004-05 and 16.9% in 2009-10. Thus the primary sector depicts a
falling trend in the shares over the years. The secondary sector rapidly did not see much change in
its contribution over the years. The tertiary sector has shown a high degree of change as compared
to that of the secondary sector. Thus the share of secondary sector has moved from 23% in 1980-81
to about 26% in 2009-10 but that of the tertiary sector increased from 37% to almost 60% of the
GDP.

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 The change in the sectoral composition of GSDP in Punjab is presented for the same years in
Table 3 and Figure 3.

Table 3: Sectoral Distribution of GSDP in Punjab

Sector 1980-81 1990-91 2000-01 2004-05 2009-10

Primary Sector 39.1 39.7 34.9 32.7 25.2
Secondary Sector 17.0 20.7 24.7 24.7 31.0
Tertiary Sector 43.9 39.6 40.4 42.6 43.8
Total 100 100 100 100 100

Figure 3: Sectoral Distribution of GSDP in Punjab

Source: Statistical Abstract of Punjab: Various issues

In Punjab, the share of primary sector declined but rather slowly from 39% in 1980-81 to
25.2% in 2009-10. While the share of the secondary sector seems to gradually increase overtime. It
increased from 17% in 1980-81 to 20.7% in 1990-91. It remained constant in 2000-01 and 2004-05
at 24.7% and finally rose to 31% in 2009-10. The tertiary sector’s share on the other hand, fell from
43.9% in 1980-81 to 39.6% in 1990-91, but recorded an upswing after this period reaching 44% in
2009-10. This means that the share seems to be increasing at snail’s pace.
3.3 Sectoral Contribution of India’s GDP and Punjab’s GSDP Growth
A sector’s contribution to overall growth depends both on the growth rate and its relative size.
Thus, even a fast growing sector may not contribute much to the overall growth if it is small in
size, while a slow growing sector may make a bigger contribution if it is large. Hence, an analysis

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of the contribution to the GDP and GSDP growth by sector is demanded to gain better insight into
the structural change and composition of GDP and GSDP. This will demonstrate which sector has
contributed to the growth of the GDP and GSDP aggregate and at what levels.
One way for calculating the growth rates is the Semi-Log model. The slope co-efficient
measures the relative change in Y for a given absolute change in the value of explanatory variable
(t). Using calculus and the equation: , where: a is the intercept term, b is the slope
and t is the time:

Or we can say that it’s the ratio between the relative change in Y and absolute change in t.
If we multiply the relative change in Y by 100, we get the percentage change or growth rate in
Y for an absolute change in t. For analyzing the data, we make use of the Semi-Log model. For
analyzing the data, we make use of the Semi-Log model. This decomposition provides information
on two aspects- firstly, as to much the sectoral growth rate could affect the aggregate output growth,
and secondly, as to how much the aggregate growth rate is sensitive to each sector’s growth rate,
determining each division’s weight-age in the aggregate growth rate.
Calculating the growth rates is described by Chenery and Syrquin (1986a). The relation
between the aggregate and the sectoral growth can be derived by differentiating with respect to
time the definition of total output (the sum of sectoral output), and expressing the result
in growth rate terms:

Where and are the growth rates of and the respectively, and the weights are the sectoral
output shares, is the contribution of sector to the overall growth.
Table 4 and Table 5 illustrate the share of sectors in the growth of GDP in India and GSDP in
Punjab.

Table 4: Contribution of sectors in the growth of GDP in India

Period Primary Secondary Tertiary GDP growth rate

1980-81 to 1990-91 22.7 25.1 52.2 5.2
1990-91 to 2000-01 15.7 25.2 58.9 6.1
2000-01 to 2009-10 8.7 28.5 62.6 7.8
2000-01 to 2004-05 8.8 28.1 63.1 6.0
2004-05 to 2009-10 7.6 26.2 64.8 8.6
Source: Central Statistical Organization, National Accounts Statistics.

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 The contribution of the primary sector towards the overall GDP growth has seen a steep
decline from 23% in 1980-81/1990-91 to 8% during 2000-01/2009-10. We see a further decline in
it in the latter half of 2000s i.e. after 2004-05 it stood at 7.6% of the GDP. The contribution of the
secondary sector remained more or less constant over the years. Its share stood at 28.5% in 2000-
2010. But the tertiary sector’s contribution has witnessed fast upward trend. It was 52.2% in the
1980s, increased to 58.9% in the 1990s, and further jumped to 62.6%, contributing more than half
of the GDP growth.

Table 5: Contribution of sectors in the growth of GSDP in Punjab

Period Primary Secondary Tertiary GDP growth rate

1980-81 to 1990-91 40.5 26.8 32.7 4.7
1990-91 to 2000-01 21.9 34.8 43.3 4.5
2000-01 to 2009-10 12.6 39.8 47.0 6.2
2000-01 to 2004-05 16.9 26.1 57.1 3.8
2004-05 to 2009-10 9.2 45.9 45.2 7.9

Similarly, from Table 5, we notice that in Punjab, the contribution of the primary sector
towards the overall GSDP is showing a declining trend over various periods of time. The primary
sector has contributed 40.5% of the GSDP in the 1980s, declined drastically to 21.9% in the 1990s
and further to 12.6% in the 2000s. The contribution of the secondary sector increased over the years
from 26.8% in the 1980s to 39.8% in the 2000s. We witness an increase in the share from 26.1%
during 2000-01 to 2004-05, to 45.9% in 2004-05 to 2009-10. The tertiary sector’s contribution has
increased but at a slower pace when compared with India. It stepped up from 32.7% in the 1980s to
43.3% in the 1990s and to 47% in the 2000s. But here we notice that the share declined in the latter
half of the 2000s, from 57.1% in 2000-01 to 2004-05 to 45.2% in 2004-05 to 2009-10.

3.4 GDP and GSDP Growth at Sub-sectoral Level

The sub-sectoral growth performance is analyzed in order to get a more comprehensive idea
about growth and transformation taking place in the Indian and Punjab economy. Firstly, we analyze
the Indian scenario through Table 6.
We observe from Table 6, that the sectoral distribution for agri and allied has declined
drastically from 36.9% in 1980-81 to 29.8% in 1990-91, and further reduced to 22.3% in 2000-01.
It then fell at a less sharp rate than before after 2000-01. The sub-sector, mining and quarrying
sectoral contribution was more or less constant over these three decades i.e. it ranged in between 2
to 3%. In the secondary sector, manufacturing is the predominant activity. Its sectoral share has
remained constant over the years and stayed around 15%. In the post-1980s, manufacturing sector
was responsible for same rise in the secondary sector GDP levels, followed by electricity, gas and

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Table 6: Sub-Sectoral Distribution of GDP

Sl.
Sectors 1980-81 1990-91 2000-01 2004-05 2009-10
No.
1 Agri & Allied 36.9 29.8 22.3 19.0 14.6
2 Mining & quarrying 2.6 3.5 3.0 2.9 2.3
3 Manufacturing 14.2 15.2 15.5 15.3 15.9
4 Construction 7.5 7.0 6.6 7.7 7.9
5 Electricity, Gas and Water supply 1.5 2.0 2.2 2.1 2.0
6 Transport, Storage & communication 4.9 5.2 6.9 8.4 10.2
7 Trade, Hotels and restaurants 11.7 12.4 14.6 16.1 16.4
8 Banking & Insurance 2.4 4.0 5.5 5.8 7.9
Real Estate, Ownership of dwellings and
9 business services 5.9 7.5 9.0 9.0 9.3
10 Public administration 5.5 6.5 6.5 5.9 6.0
11 Other services 7.0 7.0 7.9 8.0 7.5
12 Gross state domestic product 100.0 100.0 100.0 100.0 100.0
Source: Central Statistical Organization, National Accounts Statistics.

water supply, and the construction sector. Although the construction sector’s growth rate has been
high if compared with the other sub-sectors. The sectoral distribution of all these sub sectors is
seen to behave constantly over time. The service sector is one of the fastest growing sectors of
the economy. This sector is not dominated by one important sub-sector like in the case, secondary
sectors. Transport, storage and communication, Banking and insurance and personal services have
almost similar shares in services sector in GDP. But Transport and Financial services seem to be
contributing the most in terms of the growth of GDP as compared to the other sub-sectors in the
2000s due to fast growth. Trade, hotels and restaurants seem to have the highest sectoral share which
accounts to 16.4% in the 2009-10. Public administration and other services on the other hand, seem
to have a constant rate at 6 and 7% respectively. Banking and insurance has comparatively a small
share in services, although it had a high growth rate. This high growth of the sub-sectors of the
secondary and tertiary sectors helped the economy to achieve higher levels of economic growth.
We observe from Table 7, that the sectoral shares for agri and allied declined slowly from
39.1% in 1980-81 to34.9% in 2000-01, and then to 25.2% in 2009-10. The sub-sector, mining and
quarrying showed negligible share in the GSDP growth, which remained more or less equal at
0.02%. The manufacturing sector’s sectoral share increased at a stable rate, it was 9% in 1980-81,
increased to 16.9% in 2000-01, fell marginally in 2004-05, but again picked up its share in 2009-10,
which was 19.8%. Construction contributed to about 6-7% of the total GSDP, whereas there was a
considerate increase in the electricity, gas and water supply.

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Table 7: Sub-Sectoral Distribution of GSDP

Sl.
No. Sector 1980-81 1990-91 2000-01 2004-05 2009-10
Agri & Allied (Agriculture, Forestry
1 & Logging and Fishing) 39.1 39.7 34.9 32.6 25.2
2 Mining & Quarrying 0.0 0.0 0.0 0.0 0.0
3 Manufacturing 9.0 13.5 16.9 15.1 19.8
4 Construction 6.1 4.2 4.8 6.5 7.7
5 Electricity, Gas and Water supply 1.9 2.9 3.0 3.1 3.5
Transport, Storage & Communica-
6 tion 1.9 2.5 4.0 6.4 6.9
7 Trade, Hotels and Restaurants 14.9 12.5 13.0 12.3 11.2
8 Banking & Insurance 1.2 2.4 3.9 4.5 7.1
Real estate, Ownership of dwellings
9 and Business services 9.4 7.4 6.0 5.7 5.0
10 Public Administration 3.0 3.8 4.2 4.8 4.7
11 Other Services 13.5 10.9 9.4 8.9 8.9
12 Gross State Domestic Product 100.0 100.0 100.0 100.0 100.0

A continuous increasing trend has been noticed by the share of services sector in Punjab as
well. Transport, storage and communication, and Banking and insurance seem to be contributing the
most in terms of the levels of GSDP. Transport, storage and communication; Banking and insurance
and Public administration depicts an increase in the sectoral shares over the years. Trade, hotels
and restaurants share seems to behave in a constant manner at 12% in all the years. Real estate,
ownership of dwelling and business services shows a decline in its share, along with other services.
This high growth of the sub-sectors of the secondary and tertiary sectors helped the economy to
achieve higher levels of economic growth (Lakhwinder Singh and Sukhpal Singh, 2002).

India-Punjab Comparison: Highlights

• Reviewing the trends in the growth rates of GDP and GSDP in India and Punjab
respectively, we find that the growth rates for Punjab in the primary sector were low at
2.5% during the 2000s in comparison with India which stood at 3.1%. An interesting fact
which is noticed is that the secondary sector’s growth rate for Punjab is higher than that of
India. In the 2000s, it stood at 9.3% for Punjab, while it was 8.9% for India. Tertiary sector
on the other hand, had a major stake at the all India level; its growth rate in India was 9.2%
whereas it was 6.9% for Punjab. Punjab’s growth rate increased significantly in the latter
half of 2000s.

222
• While studying the trends of sectoral composition in GDP and GSDP in India and Punjab
respectively, we notice that the primary sector’s share declined in a consistent manner over
the years, since the beginning of new industrial policies of 1991. The secondary sector’s
share is seen to rise with minor changes in India, while that of Punjab shoot up more
than at the all India level. It grew from 17% in 1980-81 to 31% in 2009-10. Currently,
manufacturing sector’s share is more in Punjab than what it is in India at a whole. Tertiary
sector’s share in India seems to have risen in a constant manner over the years, but a higher
increase is seen after 2000-01, while in Punjab, its share in this sector fell in the years of
reforms, but increased after that.
• Revisiting the sectoral composition of India’s GDP and Punjab’s GSDP, in the 1980s,
the contribution of primary sector towards both GDP and GSDP almost coincided for
India and Punjab, but with the adoption of New Industrial Policy, we observe a decline
in the contribution. This decline was more in case of India compared to Punjab. As far
as secondary sector is concerned, Punjab’s share was lower than that of India up to late
1990s. But it picked up momentum in the 2000s and in this decade it (39.8%) went ahead
of India’s (28.5%) GDP. However, we observe an entirely different trend in the tertiary
sector. During the 1980s, India’s tertiary sector lagged behind that of Punjab. But after the
adoption of New Industrial Policy, India’s GDP share in this sector went far ahead than that
of Punjab.
• Activities in Agri and allied depicted an overall declining trend. As far as Punjab is concerned,
we observe an initial rise in the sector since 1980s, but after 1990-91, gradually it fell. The
rate of decline was quite substantial for India as a whole. The share of manufacturing
sector was quite low (9%) in Punjab as compared to India (14.2%) during 1980-81. But
in 2000-01, we observe an entirely different picture with the share of Punjab increasing at
an increasing rate as compared to India. Tough it fell during 2004-05, but again it picked
up momentum and increased up to the level of 19.8%. Tough there were wide differences
in the shares of construction activities in Punjab and India, but subsequently, we observe
that there they inhibit the tendency to converge, this can be clearly seen from their shares
in 2009-10 with India’s share being 7.9% and that of Punjab being 7.7%. Same kind of
trend can be seen in Banking and insurance and transport, storage & communication sector
and both inhibit a rising trend in the share while the rise is more for India than in Punjab.
During 1980-81, Punjab’s share (14.9%) in trade, hotels and restaurants was much larger
than that of India (11.7%). But the share was almost the same in 1990-91, but later we
observe a marginal decline in Punjab’s share while for India we observe a rising tendency.
There was a rising trend for India in real estate, ownership of dwellings and business
services sector, but there was only a marginal rise in the share after 2000-01 and there was
a declining trend for Punjab. Share of other services declined in Punjab over the years but
it remained more or less constant for India (7-8%).

223
4. Conclusions and Policy Implications
It is observed that Punjab’s economic growth rate has been consistently lower than of India
over the past three decades. It has maintained a better growth in agriculture and also in industry
especially manufacturing, but lower in tertiary sector. It need not necessarily follow the growth
pattern as of India which is service-led, but it is important that the state’s comparative advantages
are identified and better utilized. Towards that end, the State government and the Union government
of India needs joint efforts to remove the constraints in realizing the potential. They need to deal
with problems posed by the functioning of the macroeconomic policies, i.e. monetary and fiscal
policies. People want a corruption free state, increased transparency, equality, impartiality and rule
of law and an accountable administration.The government’s role should be limited to that of an
effective facilitator and coordinator of the process of growth (good governance). Punjab economy
has experienced deceleration of economic growth in the post-reform period contrary to acceleration
of economic growth of the national economy as well as majority of the major states of the country.
The major constraints thathave impinged upon the development process of the Punjab economy
are structuralrigidities, macroeconomic policies, human capital development, low investment-
GSDPratio, demand and supply factors and non economic factors such as social, political andan
active international border.
The government needs to focus on the diversification of agriculture, as this is of paramount
importance to Punjab due to its agrarian nature. Steps should be taken to rejuvenate the primary sector
due to the crisis in the farm sector. Other than farming, Punjab has little primary resources. There
are no coal, mineral or fossil fuel deposits that can be tapped. The major industries are textiles and
readymade garments, motor parts, cycle and cycle parts and manufacturing of various food products.
The real growth potential in future is anticipated to be in agro-processing. Thus, the government
should emphasize on the secondary sector of Punjab to lead the growth process further. An appropriate
institutional mechanism and financial institutions should be diversified to help the sick industrial
units. The major deceleration in agricultural growth had a dampening effect on the industrial sector in
Punjab in the 1990s. The major challenge in the development of industry is due to Punjab’s land being
highly fertile and expensive as compared to other parts of India, thus making this sector relatively
uncompetitive. A number of existing industriesin Punjab are dominated by the small scale sector. The
industrial scenario in Punjab has suffered from the lack of modernization of the small scale units,
which contribute about half of the total industrial production in the state. The Government of India
should also set up special economic zone, (SEZ), for linkage with the global market with focus on
the export of industrial products. It is essential to set up industries in the large and medium (L & M)
sector in the state for their balanced growth. Appropriate facilities and incentives should be provided
to multinational companies (MNCs) to set up manufacturing facilities in the state, especially in agro-
food processing, light engineering and electronic hardware industries. NRIs should be encouraged to
invest in the state.
Also the regional disparities within the districts of Punjab should be removed. There is
growth potential in the services sector so opportunities should be tapped to promote income and
employment.

224
 In conclusion, it may be stated that Punjab has to develop a model of its own, based on its
limited natural resources, abundant human resources, wide base of agriculture and small-scale
industries and with many opportunities available in the field of Information Technology. All the
potential that exists can be realized with the help of clear policy directions, which are required to
be given to tap these resources. Once this is mobilized, the sky is the limit.

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