A

PROJECT REPORT ON

“MICRO FINANCE – CHALLENGES FACING

FINANCIAL SERVICES”

SESSION: - 2008-2010

“Deepshikha College of Technical Education”

Jaipur
Affiliated To RAJASTHAN TECHNICAL UNIVERSITY

Guided by: -
Dr. Sonal Jain Submitted by:-
INU JAIN
VIJAY CHECHANI
AMIT SAHU
JITENDRA KUMAR
LAV KUMAR
RAJESH KUMAR AGRAWAL

TABLE OF CONTENTS
1
Section Topic Page no.
no.

(1) Introduction 1

(2) Background & Evaluation 2-6

(3) Micro Finance 7-11

(1) What is micro Finance 7

(2) Concept of Micro Finance 7
(3) Scope of Micro Finance 8
(4) Feature of Micro Finance 9
(5) Principle of Micro Finance 10
(6) Objective of Micro Finance 10
(7) Impact of Micro Finance 11
(8) Challenge of Micro Finance 11

(4) Institute of Micro Finance 14

(5) Delivery models of Micro Finance 14

(6) Micro Finance: Services 15-16

(7) Key components of a Strategy for Reducing poverty 17

(8) Current Scenario :- Micro Finance in India 21-22

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(9) SWOT Analysis 23

(10) Finding and Conclusion 24

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 ACKNOWLEDGEMENT

Execution of any project is an uphill task and it cannot be completed without support and
co-operation of others. We take this opportunity to thank those who have helped shape
this Project.

We express our sincere most gratitude to Dr. Sonal Jain for channeling our endeavors
and providing us with shadow footed guidance through thick and thin of this Project.

And finally we reach out to all the respondents who became contributed to this Study with
their time, patience and information.

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 Introduction

Microfinance is the provision of financial services (whether loans, deposit accounts,

insurance or otherwise) to poor and low income individuals and households. What
primarily distinguishes microfinance from the traditional provision of financial services,
aside from the small sums of money involved, is the absence of collateral as
security for a loan. Instead money is advanced on the basis of reputation. Since much
of the developing world does not have a formalized system of property rights the poor
are frequently unable to provide collateral, cutting them off from traditional financial
services. This is why microfinance is so important – without it the only source of credit
is the local moneylenders who may charge extortionate rates of interest and beat up
clients who do not pay on time.

Microfinance has been hailed as a new age solution to alleviate poverty and bring
economic prosperity to the rural poor. In order to achieve its goals, it should be effectively
able to reach the poor entrepreneurs and give them the required loans to start their own
businesses and provide them with continuous flow of credit to sustain their business.
However, in spite of its commendable success, its aims are far from achieved and there
are many frontiers to conquer and its reach has to be broadened. This article discusses the
concept of microfinance and examines the key principles that govern it and the factors
that hinder the growth prospects of microfinance.

Among the millennium-developed program made by UN in year 2000, the very important
goal was to reduce world poverty to half till 2015. At UN summit it was also said that:
“Micro finance is one of the practical development strategies &approaches that should
be implemented & supported to attain the bold ambition of reducing world poverty to
half.”

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 BACKGROUND AND EVALUATION

NEED FOR MICRO-FINANCE : THE GAP BETWEEN DEMAND AND SUPPLY

Since the 1950s, various governments in India have experimented with a large number of
grant and subsidy based poverty alleviation programmes. Studies show that these
mandatory and dedicated subsidised financial programmes, implemented through banking
institutions, have not been fully successful in meeting their social and economic
objectives:

The common features of these programmes were:

i. Target orientation
ii. Based on grant/subsidy, and
iii. Credit linkage through commercial banks.

These programmes:-

a. Were often not sustainable

b. Perpetuated the dependent status of the beneficiaries
c. Depended ultimately on government employees for delivery
d. Led to misuse of both credit and subsidy and
e. Were treated at best as poverty alleviation interventions.

Banks too never really looked on them as a profitable and commercial activity.

According to a 1995 World Bank estimate, in most developing countries the formal
financial system reaches only the top 25% of the economically active population - the
bottom 75% have no access to financial services apart from moneylenders -

In India too the formal financial institutions have not been able to reach the poor
households, and particularly women, in the unorganized sector.

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Structural rigidities and overheads lead to high cost of making small loans.
Organizational philosophy has not been oriented towards recognizing the poor as credit
worthy. The problem has been compounded by low level of influence of the poor, either
about their credit worthiness or their demand for savings services. Micro-finance
programmes have often been implemented by large banks at government behest

All this gave rise to the concept of micro-credit for the poorest segment along with a new
set of credit delivery techniques. With the support of NGOs an informal sector comprising
small Self Help Groups (SHGs) started mobilizing savings of their members and lending
these resources among the members on a micro scale. The potential of these SHGs to
develop as local financial intermediaries to reach the poor has gained recognition due to
their community based participatory approach and sustainability - recovery rates have
been significantly higher than those achieved by commercial banks in spite of loans going
to poor, unorganized individuals without security or collateral.

Success stories in neighboring countries, like Grameen Bank in Bangladesh, Bank Rakiat
in Indonesia, Commercial & Industrial Bank in Philippines, etc., gave further boost to the
concept in India in the 1980s.

The Global Summit on Micro Finance held in Washington in Feb ‘97 set a global target of
covering 100 million poor families with credit by 2005 - it was expected that 25-30
million of these could be in India alone.

The poor in India define the micro-finance market. The Planning Commission estimate of
1993-94 says 36% of the population or 320 million people live below the poverty line -
there would be 140-150 million women alone living below the poverty line. Assuming
that only 30% of the country’s poor women are ready to adopt micro-finance as a method
of poverty alleviation, it is estimated that 40-45 million poor women would need credit.

As against this, it is estimated that all agencies in India engaged in the provision of micro-
finance services, would have together covered barely 1 million poor people by the close
of 1998-99.

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The most prominent national level micro-finance apex organization providing micro-
finance services for women in India is the National Credit Fund for Women or the
Rashtriya Mahila Kosh (RMK).

Evaluation of Microfinance:

Microfinance, loosely defined by Woller and Woodworth (2001) as programs that extend
small loans to poor people for self-employment projects that will generate income, was
first attempted with the creation of the Grameen Bank in Bangladesh in 1983. Since that
time the microfinance movement has gained both momentum and success, with thousands
of MFIs operating in almost every county in the world (Woller and Woodworth 2001).
Following the lead of the Grameen Bank, FINCA International, another MFI, was
developed in Washington DC in 1986. Within ten years of its creation, by 1996, FINCA
had introduced the methodology of microfinance in fourteen countries, serving more than
sixty-five thousand of the poorest families in rural Latin America, Africa, and Asia (Kelly
1996). Today, tens of millions of people have been on the receiving end of microfinance
loans, with billions of dollars of outstanding loans at any given time.
Once primarily cooperatives and non profit organizations, MFIs around the world
are now professionalizing, in hopes of creating sustainable, or even profitable, institutions
to provide banking options for the poor. Commercial funding for MFIs has greatly
increased in recent years, enhancing their ability to provide both financial and non-
financial services to their clientele. Non-financial services, which have become an
integral part of the MFI framework, primarily consist of improved access to, and funding
for, education and healthcare in areas where such resources were previously out of reach.
The quest for commercial funding has also led to increased competition between MFIs,
forcing competing institutions to create innovative products and increase employee
productivity. Various savings plans, some aimed at saving for the education of
borrower’s children, have been introduced in a number of programs as one form of
innovation.

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Human resource management firms have been employed by MFIs to monitoenhance
worker productivity. A number of incentive based pay programs have been included in
the framework of MFI employee policy, most offering increased pay and
Stock options in return for increased productivity. According to Godquin (2004) success
is based in these innovative systems of incentives and non-financial services that are
inherent in the MFI framework. Others have attributed the success of MFIs to their
primarily group-based lending models and the use of women as primary borrowers.
Anderson, Locker, and Nugent (2002) credit the success of MFIs partially to their ability
to increase social capital within a region. Anderson et al also make the argument that the
success of MFIs may be more deeply rooted in social factors than economic factors. That
is, pre-existing social linkages and a heightened sense of communal dedication seen in
poor, rural communities, combined with the theology of hard work and determination
engrained in the MFI framework, create an environment conducive to MFI success.

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What is microfinance?

“Micro finance is defined a process of providing financial services to both poor and low
income households, which include loans, deposits, insurance and pensions.”

Microfinance means providing very poor families with very small loans (microcredit) to
help them engage in productive activities or grow their tiny businesses. Over time,
microfinance has come to include a broader range of services (credit, savings, insurance,
etc.) as it has been recognized that the poor who lack access to traditional formal financial
institutions require a variety of financial products.

A good definition of microfinance is, Microfinance refers to small-scale financial

services for both credits and deposits that are provided to people who farm or fish or herd;
operate small or micro enterprises where goods are produced, recycled, repaired, or
traded; provide services; work for wages or commissions; gain income from renting out
small amounts of land, vehicles, draft animals, or machinery and tools; and to other
individuals and local groups in developing countries, in both rural and urban areas’

CONCEPT OF MICRO-FINANCE

Micro-finance, as is being practiced by the National Credit Fund for Women or the
Rashtriya Mahila Kosh (RMK), could be defined as a set of services comprising the
following activities:

a) Micro- Small loans; primarily for income generation activities, but also for
credit: consumption and contingency needs.

b) Micro- Thrift or small savings from borrowers’ own resources.

savings:

10
Scope of Microfinance

D
(

Old Age
(I, S)

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THE FEATURES OF THE MICROFINANCE ARE:

1. It is a tool for empowerment of the poorest; the higher the income and better the
asset position of the borrower, the lower the incremental benefit from further equal
doses of micro-credit is likely to be.

2. Delivery is normally through Self Help Groups (SHGs).

3. It is essentially for promoting self-employment; the opportunities of wage

employment are limited in developing countries - micro finance increases the
productivity of self-employment in the informal sector of the economy - generally
used for (a) direct income generation (b) rearrangement of assets and liabilities for
the household to participate in future opportunities and (c) consumption
smoothing.

4. It is not just a financing system, but a tool for social change, specially for women -
it does not spring from market forces alone - it is potentially welfare enhancing -
there is a public interest in promoting the growth of micro finance - this is what
makes it acceptable as a valid goal for public policy.

5. Because micro credit is aimed at the poorest, micro-finance lending technology

needs to mimic the informal lenders rather than the formal sector lending. It has to: a)
provide for seasonality (b) allow repayment flexibility (c) eschew bureaucratic and legal
formalities (d) fix a ceiling on loan sizes.

12
THE MAJOR OBJECTIVES OF MICROFINANCE ARE:

• Poverty alleviation

• Empowerment of women

• Financial sustainability

• Outreach and impact

PRINCIPLES OF MICROFINANCE:

• Poor people need a variety of financial services, not just loans.

• Microfinance is a powerful tool to fight poverty.

• Microfinance means building financial systems that serve the poor.

• Microfinance can pay for itself, and must do so if it is to reach very large
numbers of poor people.

• Microfinance is about building permanent local financial institution.

• Microfinance is not always the answer.

• Interest rate ceilings hurt poor people by making it harder for them to get
credit.

• The role of government is to enable financial services, not to provide them

directly.

• Donor funds should complement private capital, not compete with it.

• The key bottleneck is the shortage of strong institutions and managers.

• Microfinance works best when it measures – and discloses – its performance.

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Impact of Microfinance

• Access to microfinance enables poor people to manage risk better and take
advantage of opportunities.

• For women, greater control over resources leads to growth in self-esteem, self-
confidence, and opportunities

• Microfinance services can result in diversification of income sources and

enterprise growth.

• Microfinance leads to an increase in household income

Challenges of microfinance

• Sustainability of the Institutions

• Recovery mechanism of Loans

• Outreach of these institutions

• Performance assessment of these institutions

• Services delivery approaches

Hierarchy of credit needs and availability from formal sources:

14
Major milestones in access to finance:

15
The various institutions delivering microfinance are:
16
 • Banks

• Financial Corporations - Specialized entities focusing on specific segments like

SC/ST, Minorities

• NBFCs - Commercial MFIs (SKS, Spandana, SHARE, SNF, Basix) - regulated by

the RBI

• Societies and Trusts (NGO-MFIs / SHPIs) and Section 25 companies

• Mutually Aided Credit Society (MACS) - community owned & managed

operations - popular in Andhra Pradesh

Delivery Models for Microfinance:

• Self Help Groups

 Home grown – co-operative like

 Savings based / savings led
 Meeting diverse needs
 largely promoted by NABARD-Public Sector Banks-Self Help Promoting
Institutions (NGOs)
 Performance - mixed

• Grameen (Joint Liability Group)

 Regimented
 Loan based
 Focused on enterprise
 Pace of growth might be a cause for concern

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Microfinance: Services

Microfinance is much broader than just micro credit - it includes other financial services

• Savings
• Remittances
• Risk mitigation products
• Financial counseling
• Lifecycle planning products

These are specialized activities, it is not easy to offer them to the poor in a cost effective
manner.

What is a microfinance institution (MFI)?

A microfinance institution is an organization that offers financial services to low-income
populations. Almost all of these offer microcredit and only take back small amounts of
savings from their own borrowers, not from the general public. Within the microfinance
industry, the term microfinance institution has come to refer to a wide range of
organizations dedicated to providing these services: NGOs, credit unions, cooperatives,
private commercial banks and non-bank financial institutions (some that have transformed
from NGOs into regulated institutions) and parts of state-owned banks, for example.

What is the difference between microfinance and microcredit?

Micro credit is a small amount of money loaned to a client by a bank or other institution.
Microfinance refers to loans, savings, insurance, transfer services, micro credit loans and
other financial products targeted at low-income clients. Micro credit has been changing
the lives of people and revitalizing communities worldwide since the beginning of time.

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 • Who are the clients of microfinance?
The clients of microfinance are generally poor and low-income people. They may
be female heads of households, pensioners, artisans or small farmers.

• How do financial services help poor and low-income people?

Anyone who has access to savings, credit, insurance and other financial services is
more resilient and better able to deal with everyday demands. Microfinance helps
poor and low-income clients deal with their basic needs. For example, with access
to micro insurance, poor people can cope with sudden expenses associated with
serious illness or loss of assets. Merely having access to formal savings accounts
has also proved to be an incentive to save. Clients who join and stay in
microfinance programs have better economic conditions than non-clients.

What is an inclusive financial sector?

An inclusive financial sector allows poor and low-income people to access credit,
insurance, remittances and savings products. In many countries, the financial sectors do
not provide these services to lower income people. An inclusive financial sector will
support the full participation of the lower income levels of the population.
How can poor people afford such high interest rates?
Micro credit interest rates are set to provide viable, long-term financial services on a large
scale, while subsidized interest rates generally benefit only a small number of borrowers
for a short period. Studies conducted in India, Kenya and the Philippines found that the
average annual return on investments by micro-businesses ranged from 117 to 847 per
cent. These high returns are commonplace among micro entrepreneurs, and while the
interest rates seem high, they usually represent only a small portion of micro
entrepreneurs’ total returns. Interest rates charged by informal moneylenders are
overwhelmingly higher than those of MFIs.

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HOW SHOULD WE MEASURE POVERTY?
• On the basis of income per capita, in most countries
between a third and half of people are below the
poverty line.
• However, broader definitions may encompass factors
such as illiteracy, malnutrition, health, access to water
supply and sanitation, economic vulnerability and
political freedom.
• A human poverty index incorporating such
considerations shows Philippines, shri lanka, and viet
nam performing much better than their income figures.

Do poor people save?

Poor people save all the time, although mostly in informal
ways. They invest in assets such as jewelry, domestic animals,
building materials and things that can be easily exchanged for
cash. Access to secure, formal savings services provides a
cushion when families need more money for seasonal expenses
and in difficult times. Secure savings accounts allow people to
guard against unexpected expenses associated with illnesses,
build assets, prepare for old age or pay for school fees,
marriages and births.

KEY COMPONENTS OF A STRATEGY FOR

REDUCING POVERTY
A policy regime for reducing poverty would promote:
• Inclusive economic growth
• Investments in human capital and infrastructure
• Good governance and civil society participation
• Effective social safety nets and targeted redistribution.

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 Microfinance could make its most effective contribution in
such a policy environment.

Why is microfinance so important for women?

In a world where most poor people are women, studies have
shown that access to financial services has improved the status
of women within the family and the community. Women have
become more assertive and confident. Furthermore, as a result
of microfinance, women own assets, including land and
housing, play a stronger role in decision-making, and take on

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leadership roles in their communities.

Microfinance Industry C
Women

100%

16.5%

50%

22 83.5%
Microfinance: Banking for the poor, not poor
banking

Linking self-help groups with banks is easily the largest and

fastest growing microfinance programme in terms of its
outreach and sustainability.

Self Help Group (SHG) – Bank linkage programme is the

largest microfinance
programme in India in terms of outreach. It is based on linking
of informal
groups of poor with banks for credit and savings.

The Indian microfinance sector reflects many of the KEY SUCESS and
remaining challenges common round the globe.

• A wide range of financial institutions offer a variety of

financial services to the poor.

• The diversity of settings and the different levels of

political, social and economic development necessitate

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 this variety of institutional types adapted to the local
context.

• Liberalized interest rates are necessary to

allow/encourage banks and MFIs to serve their low-
income customers on a sustainable basis because of the
high volume of low value transactions involved. But
India's prowess in information technology should allow
it to lead the world in the development of e-banking
solutions for the poor.

• The unparalleled banking infrastructure in India offers

a significant opportunity to accelerate, deepen and
improve the quality of access to financial services for
the poor, and to develop an inclusive, sustainable
financial system.

• There is a growing recognition that lack of human

capacity remains one of the key barriers to developing
full-fledged inclusive, sustainable financial system.

With the infrastructure already available in India, we have the

perfect springboard for creating an inclusive, competitive and
vibrant financial system that offers high quality, client-
responsive products and services to all sectors of society on a
commercial basis. The logic of commercialization is simple
"banking for the poor cannot be poor banking".

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How effective is microfinance?
The best examples of microfinance in the countries with the
most advantageous circumstances have demonstrated
profitability after many years of experimentation and
development. These best-case examples represent about 150
microfinance institutions of the more than 10,000 operating
worldwide. Together they serve approximately 40-50 million
clients, of the estimated 500
million to 1 billion poor people who could benefit from
microfinance services.

It is now recognized that microfinance can:

• Help the poor to smooth their consumption spending,

manage financial risk, earn more and build assets
• women Empower women, in particular

• Build more integrated (that is, more inclusive)financial

systems.

Current Scenario: Microfinance in India

A vibrant and developed micro-finance sector can significantly
impact economic development and distribution of wealth.
MICRO-FINANCE is the new fad in the Indian financial

25
system. It is growing rapidly and getting a lot of attention from
financial institutions, non-governmental organizations (NGOs)
and the Government, as an instrument that can transform the
lives of the poor.

Micro-finance took root in 1992-93 with the launch of the Self

Help Group (SHG)-bank linkage program by the National
Bank for Agriculture and Rural Development (Nabard). Under
the program, which has now run for over a decade, groups of
poor people — mostly women — have been formed and linked
to banks for credit.
Nabard has been proactive in this linking process and up to
March 2005 over 16.18 lakh such groups had been linked to
banks. This translated to an estimated 24.25 million poor
families being brought within the fold of formal banking
services. The cumulative bank loan disbursed since the
inception of the program stood at Rs 6,898.46 crore up to
March 2005.

The demand for micro-finance is enormous. According to the

Tenth Plan document, in 1999-2000, 26.10 per cent of the
population was living below the poverty line. Of the 260
million poor, 193 million were in the rural areas and the
remaining 67 million in the urban areas.

In terms of micro-finance, the number of people living below

or just above an austerely defined poverty line has been

26
estimated at around 400 million. Translated into number of
families, it comprises approximately 80 million households.
The financial needs of this vast population, even at a
conservative estimate of Rs 6,000 and Rs 4,500 per urban and
rural family respectively per annum, add to about Rs 40,000
crore. This sum has considerable significance for the financial
system.

On the supply side, the banking sector comprising commercial

banks, cooperative banks and regional rural banks (RRBs)
caters primarily to the demand mentioned above. According to
Nabard, by end of March, 35,294 branches of 560 banks were
involved in extending credit to SHGs. These comprised 48
commercial banks, 316 cooperative banks and 196 RRBs.
During 2004-05, these banks had disbursed Rs 2,994 crore to
5.39 lakh SHGs. Compared to the demand, this amount is
indeed miniscule.

Microfinance Indust
Growth
120

80

40

Total Clients Reached: 1997 –

1997 1999

Total clients
2001 2003 2005

Poorest clients

SWOT Analysis
27

CAGR 97-
Strengths
• Flexible lending models with individual lending option

Weaknesses
• Lack of industry experience
• Operation in few cities with limited distribution
network

Opportunities
• Growth potential for individual lending model among
urban poor which is currently just 7 % of market size
• Urban markets are untapped with little awareness of
microfinance among urban poor
• Lack of flexible lending models from the competitors

• The urban population is expected to increase to 50% of

the total population by 2030

Risks
• Transient nature/migration of the urban poor
population.

• Emergence of retail chains which compete with

roadside vendors

• Less homogeneity of culture in urban communities

which makes self help group formation difficult

• Higher default rate in individual lending

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 • Roadside selling by vendors considered illegitimate by
district authorities(Municipal corporation)

Conclusion
The Indian economy at present is at a crucial juncture, on one
hand, the
Optimists are talking of India being among the top 5
economies of the world by
205047 and on the other is the presence of 260 million poor
forming 26 % of the
total population. The enormity of the task can be gauged from
the above
numbers and if India is to stand among the comity of
developed nations, there
is no denying the fact that poverty alleviation & reduction of
income inequalities
has to be the top most priority. India’s achievement of the
MDG of halving the
population of poor by 2015 as well as achieving a broad based
economic growth
also hinges on a successful poverty alleviation strategy.
In this backdrop, the impressive gains made by SHG-Bank
linkage programme
in coverage of rural population with financial services offers a
ray of hope. The
paper argues for mainstreaming of impact assessment and
incorporation of
local factors in service delivery to maximize impact of SHG –
Bank linkage
programme on achievement of MDGs and not letting go this
opportunity.

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