DIWAKAR EDUCATION HUB

UNIT-10
ENTREPRENEURSHIP
MANAGEMENT
AS PER NEW UPDATED SYLLABUS
SPECIAL THANKS Dr. Mahesh Sharma

Also contribute by – DIWAKAR RAJPUT & NEHA SHARMA

2019

NO.1 SUPPORTIVE INSTITUTE UGC-NET

 Entrepreneurship Development
Entrepreneurship development is the process of improving the skills and knowledge of
entrepreneurs through various training and classroom programs. The whole point of
entrepreneurship development is to increase the number of entrepreneurs.
By doing this, the pace at which new businesses or ventures are made gets better. On a
wider level, this makes room for employment and improves the economy of a business
or country. The steps below will explain how to create an effective entrepreneurship
development program and how to go about enhancing it.
1. Outline the objectives of the program and focus on the venture
development
Entrepreneurship development aims at individuals who want to start or possibly expand
a business. Entrepreneurship development also focuses a lot on enhancing the ideas
and potential of an entrepreneur.
The aims of a program have to be clearly explained otherwise the program will never
reach its full potential. The development of a venture also has to be outlined in the
program. Without these two, there will be no clear goal.
2. Select educated people who have high entrepreneurial potential
An entrepreneurship development program requires that various people be selected.
However, most programs tend to look for a specific group of educated people rather
than target everyone. Ideally, you have to look at the education and traits that you are
looking for, in an entrepreneur, and match them with the people who have applied for
the program.
Most people say that public funds should be spent on people who need the most help.
The resources of an entrepreneurship development program are usually (and
unfortunately) limited. It is hence better to choose people who will prove to be really
useful and benefit the entire community.
3. Select uneducated people who have high entrepreneurial
potential
A development project on women’s entrepreneurship in Nepal was recently conducted. It
was found that women who couldn’t meet the essential needs of their family or
themselves were usually more eager to learn about different ways to earn money as
compared to women who were better off. However, such women usually face many
problems.
Even though such women are not educated, they have great entrepreneurship potential
because they have the right motivation. Such people need to be aided by assistance
packages where training can be given on entrepreneurship. This will instill confidence
and teach them the skills they need in order to provide for their family.
4. Identify the local market and search for people who have
potential in it
 Entrepreneurship development programs should first identify the local market and aid
potential entrepreneurs who know a lot about it. These people need to be able analyze
and then design unique ideas based off the needs of their surroundings.
By concentrating on select local entrepreneurs, the effects of the program can be easily
and quickly seen within the community. Later on, programs can help improve their
knowledge in their sector. In fact, it is creativity and the thirst for innovation that truly
matters rather than the market’s size. In later programs, the introduction of new products
and product features can be added. This will add value and increase the size of the
market
5. Provide support through private sector-based organizations
Support should be obtained from private organizations that are both financial and
knowledge-based. This helps reduce the cost of the entrepreneurship development
program and increases its effectiveness.
Private organizations that could support entrepreneurship development programs
include universities, consulting companies and various NGOs. Large enterprises are
also encouraged to support entrepreneurship development programs as this their
sponsorship that will help reduce unemployment.
6. Provide an easy yet detailed methodology that will help
entrepreneurs improve in the short and long-run
Entrepreneurial development programs aim at being simple to understand and teach
skills that entrepreneurs can use after the program. It also contains courses that aim at
developing their skills and ideas. These are required if entrepreneurs wish to
successfully exploit the local market.
They also need to be taught how to gather the required resources in order to meet the
goals of their venture. The program also needs to have outlined methods through which
entrepreneurs can improve the performance of their business in the long run.
Entrepreneur development training proves to be highly effective when finance, quality
assurance, marketing and productivity are linked to the training program. As an example,
when development banks are involved earlier in the process of training, an entrepreneur
will easily understand credit processes and the also praises the bank’s business plan.
7. Implement special measures to improve the usefulness of
trainers and facilitators
The Success of an entrepreneurship development program also relies on the
commitment and quality of the many facilitators and trainers. Any trainer or facilitator in
the program needs to understand the culture and lifestyle of the group in order to better
integrate themselves and serve the group.
The selection of proper trainers is based on the amount of business experience they
have and the how much knowledge they have about their local business environment.
Training facilitators can significantly improve their usefulness in tackling the needs of
entrepreneurs.
8. The selection of areas for pilot programs must be right
 Entrepreneurship development programs are usually too restricted in terms of where it is
done and what people are involved in the program. Selecting pilot target areas will
usually depend on the ease at which support institutions are available.
It will also depend on the interest people take in entrepreneurial development programs.
These facts can never be the same for any two geographical locations and hence must
be considered carefully.
9. Launch pilot ED programs and develop as needed
Analyzing pilot feasibility is an effective way of launching a major entrepreneurship
development program. If the program shows signs of high promise, it can be launched
on a national level. By relying on the sponsors for support rather than donor support, the
program will be able to expand past local development while maintaining high quality.
This is especially important when the support of donors starts to fade.
10. A successful entrepreneurship development program
requires government policies
Entrepreneurship helps the economy of a country grow and creates new jobs.
Government policies usually have a substantial impact on the number of entrepreneurs
in a country.
While there are many governments that say they do support entrepreneurial businesses,
they usually do not have many specific policies and programs that effectively support
entrepreneurial development.
Creating an effective entrepreneurship development program may not be easy but then
again, it is not impossible either. By carefully following the ten points above, you are well
on your way to creating an entrepreneurship development program that not only benefits
your company in the short run but in the long run as well.

Process of Entrepreneurship Development

In a very general sense, development refers to enhancing an existing potential or
asset through the process of learning and application. It is a process of evolving
one’s skills in a systematic manner. Therefore, same goes for the process of
entrepreneurship development. But before we dive headfirst into the process of
entrepreneurship development, let us first shed some light upon what the term
entrepreneurship development entails.
Definition of Entrepreneurship Development
Basically, entrepreneurship development is basically the process of improving the
skill set as well as the knowledge of the entrepreneurs. This can be done through
various methods such as classroom sessions or training programmes specially
designed to increase the entrepreneurial acumen.

Another definition of this term could be the process of enhancing the capacity to
develop, manage and organize a business venture while keeping in mind the risks
associated with it.

But instead of complicating things with big words and sophisticated

terminologies, let us understand it simply. The process of entrepreneurship
development is nothing but helping the entrepreneurs develop their skills through
training and application of that training. It instils in them the quality of making
better decisions in the day to day business activities.

Now that we understand the meaning of entrepreneurship development, let’s

discuss the process of entrepreneurship development.

Process of Entrepreneurship Development

Clear View of the Objective of the Program

Before you get into training the prospective entrepreneurs, it is very important to
have a clear objective and plan in mind about what the program is going to
encompass.
Without a proper plan and direction, the training would not yield the desired
results. This would lead to a loss of time, money, effort and most of all, valuable
potential.

Selecting the Potential Targets

It is important to select the potential targets who are willing to enhance their skills
and who can be identified as the people who have some amount of business
acumen. These can be further divided into two categories- the educated target
audience and the uneducated target audience.

Educated audience refers to the target people who have a decent educational
background and want to be entrepreneurs. These people have the motivation to put
their education to use by starting a venture and working for themselves.

Uneducated audience refers to the people who are not as privileged as others in
terms of education about the market and have the potential to become
entrepreneurs. These people are constantly looking for alternative ways to earn
money and support their families. Therefore they are highly motivated and, given
the right training and direction, can prove to be exceptional entrepreneurs.

Identifying Local Talents and Markets

The process of entrepreneurship development program can be seen as most

effective and efficient when it is applied in the local markets and on the local
entrepreneurs who know about it. These people understand and absorb the
knowledge way more quickly and can apply it in the current scenario because of
which the results of the program can be seen more quickly and effectively.

Choosing the Right Location

In India unfortunately, these programs can only be launched where support

institutions and resources are available, but ideally, these programmes should be
planned and launched in the areas where most people are interested and willing to
take advantages of these programmes so that this opportunity can be used most
effectively and there is no loss of resources.

Tying up with Institutions

A lot of times these programmes involve tying up with various institutions like
universities, NGO and some private institutions. This is done to give a real-world
experience to assist the program and give the people some idea of the situations in
the real world.

Develop the Entrepreneurship Program as Needed

People and their skill sets are different and develop over time. Thus, it is very
important to keep developing the programs to suit the needs of the people enrolled
in it. Moreover, the focus must be on harnessing their strengths and working to
minimize their weaknesses.

Analyze the Result for Future Development

This is a very important and final step in the process of entrepreneurship

development. After the program has run its course, it is very important to analyze
the effectiveness of the program. This is necessary to ensure that in future more
effective programs can be developed. For this one has to minimize the
shortcomings of the existing program.

Solved Question for You

Question: Is entrepreneurship development important for existing entrepreneurs?

Answer: Entrepreneurship development programs are developed for both aspiring

as well as existing entrepreneurs. This is because these programs are also designed
to help the entrepreneur expand their existing enterprise. These programs are more
effective on the existing entrepreneurs. It is because they already know a lot about
their markets and industry. Hence can effectively apply the learnings in their
business and analyze the results more quickly,

Entrepreneurial Competencies
KEY CONCEPT

Is there such a thing as a ‘natural-born entrepreneur’? According to this Idea there is not. Specific
techniques and habits must be practiced and developed by all would-be entrepreneurs. And as well as
business competencies, entrepreneurs need interpersonal and self-leadership skills too; however, these
are often overlooked. Read on for advice on how to build and put these skills into practice.

IDEA SUMMARY

Are entrepreneurs born or made? Commonly, characteristics such as risk seeking, assertiveness and
vision are considered typical of a successful entrepreneur. But these are innate predispositions or
 aspects of temperament; by using them as yardstick, it is wrongly concluded that only certain types of
people make good entrepreneurs or are capable of worthwhile innovations. Instead, this Idea proposes
that ‘entrepreneurial behaviour’ can be learned and developed.

The question is not who entrepreneurs are, but what they do, and more important than business skills
can be other competencies that provide a foundation for those business skills.

The research behind this Idea is based on empirical studies of hundreds of entrepreneurs, which
revealed that entrepreneurial behaviour is the result of a combination of:

 strong motivation to achieve something; and

 the capabilities to achieve it.

Furthermore, there are three levels of competencies, which all entrepreneurs need:

1. Personal competencies: creativity, determination, integrity, tenacity, emotional balance and self-
criticism.
2. Interpersonal competencies: communication, engagement/charisma, delegation, respect.
3. Business competencies: business vision, resource management, networking, negotiating skills.

Previous research has also highlighted other competencies that make up the ‘ingredients’ of a
successful entrepreneur, including initiative, ambition and even luck.

BUSINESS APPLICATION

Though the key take away from this Idea is that entrepreneurship can be learnt by anyone, it’s not
something that can simply learn in a classroom. Even once key business knowledge has been
acquired, the entrepreneur still has to learn how to use it in practice - something that can only be done
through practice. In this respect, ‘leaning by doing’ is useful. Other tips include the following:

 Have a clear understanding of industry evolution, knowledge of the effects of globalization,

techniques for developing markets, etc. Some training in an academic environment (e.g. business
schools) may help with this, particularly where case methods/working groups are used to teach.
 Practice developing your interpersonal competencies. Certain skills, such as communication,
delegating and respecting others can only be acquired through practice and developing ‘habits of
character’.
 Habits of character may not strictly be related to business but are to do with the kind of person the
entrepreneur is and what he/she does. These are indispensable, alongside ‘technical habits’ and
‘skills’.
 The only way to acquire the habits essential for entrepreneurs is by acting in a way consistent with
them. Only then do these habits become the ‘driving force’ of successful entrepreneurial ventures.
Literature Review and Hypotheses
Competencies are defined as measurable or observable skills, knowledge, abilities and behavior of an individual
that would allow him or her to lead a successful life, or work activities. According to Businessdictionary.com,
competence or competency can be defined as “A cluster of related abilities, commitments, knowledge, and skills
that enable a person (or an organization to perform effectively in a job or situation. Competence indicates
sufficiency of knowledge and skills that enable someone to act in a wide variety of situations. Because each level
of responsibility has its own requirements, competence can occur in any period of a person’s life or at any stage
of his or her career. In the same manor, competencies acquired by Entrepreneurs would help them lead a
successful and responsible business and would help them sustain and grow their new businesses once
developed. To this end, we believe that previous researches did not define a single set of competencies that
would fit for all purposes; in fact, this largely depends on the purpose of use. Therefore, employees required
competencies vary significantly, based on the purpose or position within a particular organization. It may also
vary from one industry to the other, though; previous work done on competencies for successful Entrepreneurs
did not distinguish the required competencies for the different industries in the Entrepreneurial context [1],
however, argues that competencies of Entrepreneurs can be defined as base features such as: traits, motives,
self-image, skills and knowledge, eventually resulting in creating a new venture, and further survival and growth
[2] defines Competencies as people’s characteristics that enhance their performance or effectiveness at work.
Sanchez argues that those competencies apply to successful managers and in turn he further argues that
characteristics apply to successful Entrepreneurs. Sanchez also believes that those characteristics or skills can
be trained and developed in Entrepreneurs as well as Managers. According to Wei et al. [3] believe that startup
Entrepreneurs despite having a good project and further exerts serious efforts to succeed, they end up in failure.
They argue that, there are several reasons behind this failure, yet they concluded that both Entrepreneurial
personality and competencies have a very high significance among all reasons.

Many researchers have studied the core competencies that are the key for Entrepreneurs to succeed.
Mitchelmore et al. (2008) argue that the term competency holds at least two distinct meanings: behavioral
competency, which an individual possesses and demonstrates, and performance-related competency, being a
minimum standard of performance. According to Bird [1] competencies necessary to launch a new venture or to
plan a new venture may be conceived as “baseline” and highly effective Entrepreneurs are those who go beyond
launching and into organizations that survive and grow. Furthermore, Bird debates that competencies can be
acquired through learning, and, therefore, it is important to identify those competencies as an opportunity for
learning to improve on the success factor of Entrepreneurs. From the above, it is, therefore, required to split
competencies into Entrepreneurial sets of competencies; that would help an Entrepreneur establish a business,
but then the sustainability of the business is only achieved through the managerial set of competencies acquired
by the Entrepreneur to move to the next level. In between those two sets of competencies, there lies a wider
range of competencies including the human relations and communication competencies [4] split out the core
competencies into two distinct groups and argued that those are the most important competencies; those were
Entrepreneurial competencies, and Managerial Competencies. They have further defined the Entrepreneurial
competencies as those necessary to identify and envisage the opportunity, while acting on it to capture and
benefit from that. While, they defined the managerial competencies as those required for capturing and utilizing
essential resources to pursue business interests and related deeds [5] argue that managerial skills are different
from the Entrepreneurial skills. However, for successful Entrepreneurs both sets of skills go hand in hand to
ensure a continuously successful growing business. Richardmore et al. (2008) believe that, there is a set of four
competency groups that help an enterprise to be established and grow: a) Entrepreneurial Competencies, b)
Business and Management Competencies) Human Relations Competencies (HRC), d) Conceptual and relations
competencies suggest that there are 17 competencies for successful Entrepreneurs sub-grouped in six groups,
they suggest that not all successful Engineers and scientists are as well successful Entrepreneurs; Entrepreneurs
are subject to Entrepreneurships opportunity identification and management through gaining from those
opportunities. According to Zafar and Khan ] argues that personal capabilities and leadership skills are factors
affecting success experience and knowledge. Zafar and Khan, [] and Cox and Jennings (1995) believe that
decision-making and its innovativeness are key factor towards success [further identify opportunity recognition as
an important characteristic of Entrepreneurs also, state that the enterprises with managers who have high levels
of Entrepreneurial competencies have always been successful; they are also characterized for their ability to
scan the environment for new opportunities and thus position their ventures towards achieving the required
sustainable success that every Entrepreneur strives to achieve. Mitchelmore et al. (2010), propose a clustered
set of 4 categories as Female Entrepreneurs Competency model for which all the 41 competencies were
grouped.

To conclude, there has been a consensus that a successful Entrepreneur should be visionary enough to see his
established firm goals and objective. He/she should be able to identify the opportunities and act on to capture
those opportunities utilizing a set of Entrepreneurial Competencies. He/she should be able to lead his established
enterprise through the path towards success. This requires the Entrepreneur to establish a set of Business and
Management Competencies, and in order to do so, he/she should be able to select the right team to help him
achieve the goals, which requires the Entrepreneur to have some level of Human Relations Competencies to be
developed. Throughout the life of his newly established enterprise, he/she will need to sell his ideas to different
stakeholders, which requires him/her to have a certain level of Business Development and Conceptual and
Relationship Competencies. To this end, this paper is based on [3] model that comprises 17 unique
competencies, clustered into 6 competency groups as well as Mitchelmore et al. proposed set of competencies.
Furthermore, the initial list was reviewed with 6 successful Egyptian Entrepreneurs and ended up with a
proposed of 5 clusters of Entrepreneurial competencies that to be tested in the Egyptian context as follows:

Entrepreneurial competencies: A set of competencies which would allow the Entrepreneur to identify and capture
opportunities in the environment, but would also require innovation and creativity as well as being adaptable and
quick in responding to changes. The subset would include 5 distinct competencies as follows: a) Scan
environments for opportunities, b) Innovation and Creativity and Idea generation, c) Willingness to take risks, d)
Fast and dynamic, f) Adaptability and Proactivity.

Conceptual and relationship competencies: This competency includes a mix of relationship building
competencies and personal traits, the subset would include 5 distinct competencies: a) Conceptual and
relationship competencies, b) Perseverance, persistence and Desire to succeed, c) Self-confidence and Self-
motivation, c) Interpersonal and Oral communication skills, d) Integrity, f) Political competence.

Business development competencies: Once an idea is created, and an opportunity is captured, then comes the
importance of idea selling to the partners, investors, co-workers, customers and the public, in order to generate
revenues and sustain success. The subset includes 5 distinct competencies as follows: a) Visioning, b) Idea
selling, c) Marketing selling, d) Relationship building and networking, f) Formulating and implementing strategies
for exploiting opportunities.

Human relations competencies: Those include skills and competencies typically shared by a HR functions and
business line functions in larger organizations. They include Leadership, selection, hiring and staffing and
employee development and motivation. The subset includes 5 distinct competencies and skills as follows: a)
Leadership skills, b) Selection and hiring a diversified team, c) Employee development and Performance
Management, d) Motivate others, f) Management skills.

Business and management competencies: The factor includes competencies relating to a typical range of
‘business tasks’ such as: technical expertise in the relevant business, Management skills, and planning and
budgeting skills. The subset includes 5 distinct competencies or skills as follows: a) Technical skills, b)
Developing management systems, c) Development of operational systems, d) Planning business activities, f)
Problem solving.

Moreover, through the review of literature around Entrepreneurs’ success, researchers have not agreed to a
single definition of Entrepreneurial success specially when measuring success of newly created enterprises, in
fact [6] concluded that there are few reasons for this: a) Nascent firms have difficulty measuring their success in
the conventional methods since they lack the standardized accounting measures and performance indicators. b)
Comparing different industries and service sectors make it difficult as each acquire unique financial basis and
thus incomparable. c) New firms tend not to share or disclose financial results. d) In addition and through
interviews with Egyptian SMEs, it shows that the majority of the new businesses operates in a parallel or informal
economy, and, therefore, is unwilling to share formal financial results conclude that most researchers go a
distance from measuring success in the conventional way and use subjective measurements of success argue
that financial results, although easily quantifiable, but are far from being the sole important measure. They
suggest that the initial subjective success is measured as a combination of several factors: a) Attaining
Entrepreneur’s expectations, b) Survival, c) Ability to attract outside capital. They further argue that the value
addition and uniqueness of the innovation attributes to the success; innovation can apply to either product or
service. Therefore this paper suggests using the following criteria to measure Entrepreneurs’ success: a)
Sustainability of business: According to Hattab a successful new Entrepreneurial venture has an age between 3
and 42 months (3 ½ years). b) Ability to attract additional outside capital: a successful new venture with
promising returns has the ability to attract outside capital. It is, however, not essential for successful
Entrepreneurs to grow through acquiring outside additional capital. Rather, some prefer to grow organically, but
their ability to attract outside capital is an indication of being a successful new Entrepreneurial venture. According
to Stefanovic et al. (2010), access to capital, is one of the factors affecting success. c) Growth (Revenue, Sales,
Labor, customer base etc.): according to Perez and Canino the most indicative factor used to measure success
was the company’s growth, this contributed to a significant 31% of all indicators in the journals reviewed. Growth
is attributed to profit, revenues, manpower or customer base. d) Providing value added product/service: Carlend
et al. (2002) argue that the distinguishing factor between an Entrepreneur and small business owner is the
innovation and tendency to growth provided as part of the venture strategy.

H1: There is a positive linear relationship between Entrepreneurial Competencies and success of the
Entrepreneurs in Egypt.
H2: There is a positive linear relationship between Entrepreneurs Conceptual and Relationship Competencies
and the success of the Entrepreneurs in Egypt.

H3: There is a positive linear relationship between Entrepreneurs Business Development Competencies and the
success of the Entrepreneur in Egypt.

H4: There is a positive linear relationship Entrepreneurs Human Relations Competencies and the success of the
Entrepreneur in Egypt.

H5: There is a positive linear relationship Entrepreneurs Business and Management Competencies and the
success of the Entrepreneur in Egypt.

Method Participants
The researchers conducted a comprehensive literature review for previous researches completed in the area of
Entrepreneur’s Competencies required for successful startup of business, and the area of success measurement
of nascent business. A semi-structured interview of 7 SMEs followed the literature review stage, 6 of those were
successful Entrepreneurs, while the seventh had discontinued the business as he had experienced difficulties. All
7 SMEs contributed to the enhancement of the literature reviewed proposed model to match the Egyptian market.
During the early stage of this research, a qualitative approach was followed through the SMEs interviews to
enable better understanding of the subject. Later after landing to a proposed model, and development of
research hypothesis, a quantitative approach was followed through the dissemination of the survey
questionnaire, analyzing the results and concluding the statistical outcomes to test the relationship between the
variables. According to Egyptian Junior Businessmen association based in Cairo-Maadi, there are circa 600
business executives and Entrepreneurs registered on the active membership of the association, and accordingly
a convenient sample of 86 were selected for the dissemination of the survey questionnaire, yet only 42
responded to the survey, with 2 incomplete surveys, resulting in a response rate of 49%, and complete survey
respondents of 47% of the sample.

Procedure
Based on the type of data of this research, the Logistic linear analysis is used to modify the model. The
dependent variable, Entrepreneur’s success and all its dimensions, are binary variables. If the dependent
variable (Y), is one of the binary response or dichotomous variable, such as Male/Female, Yes/No, Success/Fail,
Present/Absent or Smoking/ Nonsmoking, logistic regression can be used to describe its relationship with several
predictor variables, X1,X2,…,X-k and an (adjusted) odds ratio can be estimated [12] for a binary response, y, the
expected value of y, E(y)=π, where π denotes Probability P(y=1). The log model is:

Equation: Logistics Model

Through algebraic manipulation the above formula can be represented as follows:

Notice that although the regression model is linear on the right side, the left side is a nonlinear function of the
response variable π.

Also, since π=P(y=1 or success), then 1–π=P(y=0 or failure).

The ratio is known as the odds of the event y=1 or success occurring.

Six distinct logistic regression analyses were conducted in this study; one distinct regression for each of the five
dimensions and a collective regression at the end [13-16]. To reach the best model that fits the data, the
backward stepwise method was used to reach the set of all significant variables [17,18].
 Intrapreneurship
Definition: An Intrapreneurship is the system wherein the principles of entrepreneurship are
practiced within the boundaries of the firm. An intrapreneur is a person who takes on the
responsibility to innovate new ideas, products and processes or any new invention within the
organization.

An intrapreneur is the individual who thinks out of the box and possesses the leadership skills
and does not fear from risk. Thus, an intrapreneur possesses the same traits as that of an
entrepreneur.

The concept of an Intrapreneurship can be well understood in contrast to the entrepreneurship.

Following are the points of distinction between these two terms:

1. Intrapreneurship is restorative in nature, i.e. an organization encourages the employees to

practice the entrepreneurial principles to counter stagnation within the firm or transform the slow
growth of the company into a high-growth. Whereas the entrepreneurship is developmental in
nature, i.e. an individual creates something that has never existed before, such as a new
product, process or a new venture itself.
2. In intrapreneurship, the major challenge that individual faces are from the company’s
culture itself. Sometimes, the corporate relationships and the mindsets of employees acts as a
hurdle in the path of an intrapreneur. Whereas, in the case of entrepreneurship, the market is the
only enemy. An entrepreneur has to scrutinize the market conditions thoroughly to cross the
hurdles coming in his way.
3. An intrapreneur has an access to firm’s resources such as funds, manufacturing setups,
marketing facilities, and other supporting activities to give shape to his dreams. Whereas an
entrepreneur has to arrange his own resources such as own funds or the borrowed funds,
manufacturing facilities, marketing facilities, etc.
4. An intrapreneur does not have the ownership of a new venture and is not even independent to
take decisions, whereas an entrepreneur is the whole sole owner of the new venture established
by him. Also, he is independent to take any decisions with respect to his setup.

Thus, an Intrapreneurship is a practice of creating the entrepreneurial environment within the

organization, thereby enabling the employees to apply their entrepreneurial skills in the job roles;
they are assigned to.

Defining Intrapreneurship

Intrapreneurship means behaving like an entrepreneur while working within a large organization.

LEARNING OBJECTIVES

Define intrapreneurship as a means of enabling organizational change and the pursuit of an innovative culture

KEY TAKEAWAYS

Key Points

 The intrapreneur acts as an “inside entrepreneur ” who focuses on innovation and creativity
while operating within the goals and environment of an organization.
 Intrapreneurs bring their ideas to the firm to generate new products, processes, or services and
thereby act as a force for change within the organization. Intrapreneurship adds to the
innovation potential of an organization.
 In many ways, the benefits of intrepreneurship are difficult to forecast and thus difficult to
justify. As a result, good managers must be long-term oriented and open-minded to implement
entrepreneurship.

Key Terms

 entrepreneur: A person who organizes and operates a business venture and assumes much
of the associated risk.
 innovation: A change in customs; something new and contrary to established customs,
manners, or rites.

Intrapreneurship means behaving like an entrepreneur while working within a large organization.
According to social scientist Joseph Schumpeter, introducing new technologies, increasing efficiency
and productivity, and generating new products or services are all qualities characteristic of
intrepreneurs.

Intrapreneurs and Corporate Management

Intrapreneurship is now known as the practice of a corporate management style that integrates risk-
taking and innovation approaches. It also incorporates the reward and motivational techniques that
are traditionally thought of as being the sole province of entrepreneurship.
The intrapreneur acts as an “inside entrepreneur” who focuses on innovation and creativity while
operating within the goals and environment of an organization. Intrapreneurs bring their ideas to the
firm to generate new products, processes, or services and thereby act as a force for change within the
organization. Capturing a little of the dynamic nature of entrepreneurial management (trying things
until successful, learning from failures, attempting to conserve resources, and so on) adds to the
innovation potential of an otherwise static organization without exposing those employees to the risks
or accountability normally associated with entrepreneurship.

Theory and Practice

Incorporating entrepreneurial concepts into traditional corporate environments is easy to promote in

theory: capturing the innovative attitudes of small start-ups within the larger organizational context
(i.e., with more resources) seems intuitive. In reality, entrepreneurship is often much easier to discuss
in a classroom than to integrate into an actual organization. There are many reasons for this that
generally boil down to simple issues of size and corporate inertia.

Companies are built on structures and hierarchies which in turn create a dependable and repeatable
operational process. This process leads to value creation, and efficiency is always a focal point in
operational contexts. When innovation and intrepreneurship enters this equation they are often seen
as costs without tangible and definite benefits, and as lacking consistency and applicability to the
current model. In many ways, the benefits of intrepreneurship are difficult to forecast and thus difficult
to justify. As a result, good managers must be long-term oriented and open-minded in order to
capture the benefits of instilling an intrepreneurial spirit.

Building Support for Intrapreneurship

Building internal support for intrepreneurship is a prerequisite to creating meaningful change in an

organization.

LEARNING OBJECTIVES

Justify the role of the intrapreneur, not only as an innovative thinker but also a strategic communicator capable of
initiating change organizationally.

KEY TAKEAWAYS

Key Points

 An intrapreneur is tasked not only with creating a new and innovative concept but also with
communicating the concept in a way that builds support for the new initiative.
 One useful way to integrate stakeholders and speak the language of upper management is to
numerically demonstrate that a new idea is financially and strategically feasible.
 Building support by identifying and communicating with key stakeholders and decision -makers
is essential to bringing change to an organization.
 Intrapreneurs must also be willing to become change agents: people who act as catalysts for
incorporating new ideas within the organization. Intrapreneurs, from this perspective, must
display strong leadership and communication skills.

Key Terms

 comprehensive: Broadly or completely covering; including a large proportion of something.

Building support is important when you are bringing change to the organization. Employees bold
enough to be intrepreneurs must recognize the challenge they are taking on from the organizational
frame. Organizations have great momentum and are, in most cases, inherently resilient to change.
This places a great strain on an innovative employee with an interesting idea because s/he is tasked
not only with implementing the idea but also with communicating it to key decision-makers to gain
approval.

Key Stakeholders

Intrapreneurs need to know who the key stakeholders are and how to capture their attention. For
starters, upper management is often where the decision-making power lies. Having access to upper
management, and understanding the strategic motivations behind their decisions, plays an integral
role in building top-down support organizationally. Customers are also key stakeholders because their
needs are the primary determinant of organizational trajectory. Recognizing what customers want and
learning how to give it to them more effectively are integral to successful intrapreneurship.

One useful way to integrate stakeholders and speak the language of upper management is to
numerically demonstrate that a new idea is financially and strategically feasible. A net present value
(NPV) analysis factors in the total time it will take to initiate a new project, along with costs incurred
and value generated over a given timeframe. This enables intrapreneurs a tool to communicate, in
today’s dollars, how much a given new venture will cost compared with how much it will bring in (i.e.,
a profit margin).

Leadership Strategies for Change

Successful change management is more likely if leaders:

 Create a definable strategy – Define measurable stakeholder aims, create a business case for
their achievement (and keep it continuously updated), monitor assumptions, risks,
dependencies, costs, return on investment, and cultural issues affecting the progress of the
associated work.
 Communicate effectively – Explain to stakeholders why the change is being undertaken, what
the benefits of successful implementation will be, and what how the change is being rolled out.
 Empower employees – Devise an effective education, training, or skills upgrading scheme for
the organization.
 Counter resistance – Identify employee issues and align them to the overall strategic direction
of the organization. Adapt the change initiative when necessary to mitigate discontentment.
 Support employees – Provide personal counseling (if required) to alleviate any change-related
fears.
 Track progress – Monitor the implementation and fine-tuning as required.

These six components of change are the responsibility of management to create and implement.
Rural Women Entrepreneurs: What does it take?
Sabse jyada munafa chuski mein hai (The biggest margin lies in small ice pops)”, says Shanti Devi with the definitive
confidence of a seasoned entrepreneur. Shanti, a resident of Kotwana village in Bihar’s Gaya district runs an ice-
cream production and sales unit that has an annual revenue of INR 1.9 million and employs 22 workers for a
significant part of the year. While sharing the long list of ice-cream flavours she vends, Shanti also signals at a
much larger phenomenon. “Every third shop in this market is run by a JEEViKA member, ranging from grocery
and utensil stores to a newspaper agency.”
Shanti is the microcosm of a transformative ecosystem that has nurtured 1.8 million new and existing women
entrepreneurs while creating 800,000 new jobs in India. The JEEViKA that Shanti refers to, is a World Bank
supported program of the Government of Bihar aimed at empowering women through Self-Help groups (SHGs),
commodity specific producer groups and higher federations. The approach scaled up nation-wide under
the National Rural Livelihoods Mission (NRLM) is driving growth and job creation in rural areas through women-
owned enterprises.

Today there are 45 million rural women across India that are mobilized into self-help groups under the NRLM
umbrella. Some 3.9 million SHGs and their federations have been empowered with skills, access to finance,
markets, and business development services. This is triggering a huge change in the lives of the rural women.
Women: Harbingers of Change
Now women are taking charge, becoming entrepreneurs, and providing jobs to other women.
Over the past 15 years the World Bank has invested USD 3 billion in the unique approach referred to as the rural
livelihoods approach to women’s economic empowerment.

The institutions have leveraged USD 25 billion of formal credit over the last five years fuelling a virtuous cycle of
productive investment and enabling households to diversify and enhance incomes.

Technical assistance and direct links with some of the biggest private sector companies such as Walmart, Olam,
ITC India, NCDEX and TechnoServe are helping bridge the gap between demand and supply, creating more
inclusive value chains that deliver economies of scale for producers while improving efficiency for market players.

The World Bank’s portfolio of agriculture and rural transformation projects in India now totals USD 1.7 billion, out
of which almost USD 500 million focuses on women-centred enterprise promotion.
There are examples galore that demonstrate the efficacy of this approach in driving sustainable enterprises
across sectors.

Women even in active conflict countries such as Afghanistan have run successful enterprises. Miss Rezaee of
the all-women Alghochak Potato Chips Cooperative at Azdar village of Bamyan recalls: “When we first started
making chips, we neither had equipment and expertise to cook the chips nor were there properly established
markets for us to sell to. The Afghanistan Rural Enterprise Development Program (AREDP) provided us the
equipment, training and a direct link to 11 schools in Bamyan where we supply 70kgs of potato chips daily.” The
cooperative is one of the 300 small enterprises receiving support from the AREDP, supported by the World Bank
and Afghanistan Reconstruction Trust Fund(ARTF). The program has created employment opportunities for
nearly 12,000 households in Bamyan Province alone. The Government of Afghanistan is now planning to
replicate a model akin to NRLM nation-wide (with twinning arrangements with India) with the support of ARTF
and International Development Association (IDA) – the Women’s Economic Empowerment Rural Development
Program (WEERDP).

Self Employed Women’s Association (SEWA)[1] has connected nearly 800 rural homes in Gujarat in partnership
with AirBnB, generating incomes averaging USD 500 a month for hundreds through a “service enterprise” that is
home based– a preferred option for millions of women in India and South Asia in general. Tourism operators,
transportation services and culinary services have mushroomed in and around these AirBnB homes to cater to
this new clientele. Women have invested considerable sums in their home “enterprises” with better sanitation and
running water facilities to attract clients, now 40 percent of whom are international. Clearly, mentorship at district
and block levels for budding enterprises enhance their success rates. Lean IT based on mobile and cloud-centric
solutions is helping drive many of these enterprises.

Aaranyak Farmer Producer Company in Purnea, Bihar has reached USD 2 million in annual turnover, by
adopting technology-based solutions for collective aggregation of maize from small farmers, delivering
transparent pricing and leveraging online commodity trading platforms to find the most remunerative markets.
Similarly, artisan groups in Madhubani, Bihar have been linked to technical assistance partners for design
upgradation while e-commerce platforms are being utilized for reaching premium market segments.

NRLM has unleashed the latent entrepreneurial energy of millions of women in rural India. With a massive
outreach, the community institution network has the potential to be at once both the enterprise and the market
where small businesses of complementary nature exist and thrive in a symbiotic manner. However, a word of
caution – self-employment through running of small rural enterprises whether for men or women is not always
sustainable.

As Bannerjee and Duflo have pointed out[2] that these are in many cases a means to “buy a job when a more
conventional employment opportunity is not available”. These women rural entrepreneurs will need skills, talent,
and an appetite for risk to grow their small businesses into successful enterprises. We are seeing this happen
now to some extent with a sub-set of these businesses through unique public-private-community partnerships in
South Asia that brings in the younger, more educated generations into the running of the business.

For now, the juggernaut of women entrepreneurs rolls on. Shanti, who has accessed INR 500,000 (approx. USD
8000) from her SHG, chuckles “For all I knew, people don’t like ice cream in winters. But I was wrong. This year, I
had a few carts operating in the winter season too with special discounts for my SHG members.” Who says only
big brands know how to build consumer loyalty!

[1] SEWA’s initiatives are independent of the Government of India’s National Rural Livelihoods Mission (NRLM)
[2] Poor Economics, Abhijit Bannerjee and Esther Duflo, Random House India, 2011.

Challenges faced by women entrepreneurs in rural India

introduction

The journey of an entrepreneur, especially a woman entrepreneur, is filled with challenges (Ghosh
and Cheruvalath, 2007; Rai and Srivastava, 2013). More so, if the entrepreneurial venture is in a
rural part of a developing country, as it faces additional challenges of ‘remoteness from markets,
inadequate access to suppliers, lack of skilled labour, etc.’ (Galloway and Mochrie, 2006: 174), and
poor workers, inadequate infrastructure and ‘a culture not supportive of entrepreneurship’ (Ozgen
and Minsky, 2007: 50). While social entrepreneurship has led to the empowerment of women in
India by providing women with ‘economic security, development of entrepreneurial behaviour, and
increased contributions to the family’ (Datta and Gailey, 2012: 569), entrepreneurs continue to face
a variety of challenges. Kumbhar (2013: 193) has summarized various issues faced by Indian
women entrepreneurs in the rural context, including:

absence of definite agenda of life, absence of balance between family and career obligations of
women, poor degree of financial freedom for women, absence of direct ownership of property…, no
awareness about capacities, low ability to bear risk, problems of work with male workers…, lack of
self-confidence…, mobility constraints and lack of interaction with successful entrepreneurs.

Given such myriad problems, it is appreciable that Malavika Sharma, a woman entrepreneur, has
set up an entrepreneurial venture called ‘Avika’1 in a rural part of Jharkhand2 State in India, and
has done well and also greatly benefited the society.

The case of ‘Avika’ provides students of entrepreneurship with a good example of the challenges
faced by women entrepreneurs in rural settings in developing countries. The social entrepreneurial
venture, Avika, has an all-woman workforce comprised of skilled artisans, who produce high-quality
handicrafts using traditional methods, and most of whom only do part-time work from their own
homes. The case helps students understand how the venture has innovatively evolved its business
model to successfully overcome operational and market hurdles. Rapid growth has brought new
challenges and opportunities for the entrepreneur to consider.

We start with a brief overview of Malavika Sharma, the founder of Avika. We then delineate and
describe the myriad problems faced by the venture, the strategies to counter these, and the
evolution of the venture’s business model. We conclude with the strategic alternatives being
considered to overcome the current problems.
Key learning outcomes

(1) to gain insight into the operational challenges faced by an entrepreneurial venture employing
uneducated rural women, working part time; (2) to understand the inevitable inter-twining of
business and social issues, given the rural context; (3) to analyse various strategic business-
expansion alternatives; (4) to help understand the socio-cultural and business context of an
emerging economy, specifically India; (5) impact of rural entrepreneurship on community
empowerment/social cohesion and the role of local initiatives.

The case of Avika

As Malavika Sharma put down the phone on a warm afternoon in September 2015, she had
reasons to be happy. She had bagged another large order from a leading Indian clothing retailer,
for supplying hand-embroidered, traditional Indian garments. As she made a checklist of tasks to
execute the order, her thoughts drifted to all that she had achieved in the 7 years since she started
Avika, her entrepreneurial venture. She realized that despite the rapid growth, many challenges
remained, and she needed to remain focused and motivated as ever.

Malavika’s story

The name ‘Malavika’, meaning ‘the princess of the ancient kingdom of Malawa’, has its origins in
the Sanskrit play ‘Malavikagnimitram’ by the famous ancient poet Kalidasa (Wikipedia, 2016). The
story narrates the life of a princess in exile who overcomes all odds to achieve what she truly
desires. These days, Malavika is a popular name for Hindu Indian girls.

In 2004, Malavika Sharma graduated with an MBA from XLRI, a leading business school in India.
She worked as an HR professional with a couple of multinational companies for a few years;
however, unlike most of her MBA classmates who were trying to climb up the corporate ladder,
Malavika yearned to start something of her own, particularly for societal benefit.

Malavika hailed from Brambe, a village in the underdeveloped state of Jharkhand. In 2008, on one
of her visits home, she was deeply moved by the poverty and lack of work opportunities available
to rural women. Encouraged by her mother, Malavika decided to do something about it. Malavika
recalled,

I got up close with women in the hinterland. In many cases, they were the sole breadwinners of their
families…yet led a repressed life. They couldn’t do what they dreamt…were answerable (to male
members of the family) for every little action…I decided to help them earn more money, but above all
some self-respect (Bose, 2012).

She started training rural women to produce hand-embroidered garments. She soon realized that
mere training was not enough. Malavika then used her savings to set up Avika. The objective was
to provide a means of livelihood to poor rural women-artisans. Within a few months of starting her
 venture, Malavika quit her job, shifted base to rural Jharkhand and pursued her entrepreneurial
venture on a full-time basis.

About the social entrepreneurial venture ‘Avika’

As an organization, Avika was set up to empower rural women through economic development. It
focused on providing training and earning opportunities by producing traditional, hand-embroidered
garments. Starting off with seven women in 2008 (Sharma, 2012), within a few months, the
recently started venture trained nearly 300 women artisans. As there was no local industry to
absorb this trained workforce, she started a manufacturing unit for hand-embroidered garments.
The venture’s workforce grew rapidly, and by 2015, it supported nearly 700 women artisans.

The early challenges

Throughout its early years, the entrepreneurial venture faced numerous challenges (refer Table 1),
including:

Table 1. Historical path of Malavika’s entrepreneurial journey and key challenges faced at every stage
of evolution.
Creating a market

When Malavika first started her venture, the Jharkhand government was already training rural
artisans. The state government had set up the Jharkhand Silk Textile and Handicraft Development
Corporation (Jharcraft) for providing training on a variety of handicrafts including painting and
embroidery on silk, jute, khadi and cotton (‘Jharcraft’, n.d.). However, this was not enough.
Malavika explained:

The trained artisans received little support once their training was over. What was most needed was
to develop a market, and keep out agents and middlemen who routinely exploited the artisans’ lack of
market access. (‘Malavika interview’, 2015)

Unlike rural home-based businesses in sectors such as retail or hospitality (Newbery and
Bosworth, 2010), Avika’s products were intended for well-off urban customers and had no demand
locally where they were produced. Rural enterprises are known to rely on both associative and
communal relationships, especially at the start-up stage (Newbery and Bosworth, 2014). Similarly,
to spread awareness about her venture, Malavika used her corporate contacts to set up exhibitions
at large Indian companies (Mankani, n.d.), such as Infosys, Wipro and TCS in metropolitan cities.
Malavika recalled:

This experience was invaluable to understand what kind of designs, materials, colours, sizes,
textures, fits, etc. were popular with customers. I had never sold anything in my life before. Seeing
customers appreciate our products gave me confidence and helped me realize the high prices that
customers were willing to pay for finely hand-produced artistic creations.

Soon, Malavika started supplying products to Mother Earth, a chain of clothing stores on a ‘sale-or-
return model’, wherein anything left unsold for a period of 3 months was returned by the store. This
sometimes left Malavika saddled with inventory. As a response to this situation, Malavika set up a
website ‘’ and listed the unsold inventory there. Later, the website became a regular channel to sell
handicraft products. Malavika also occasionally received orders from other Indian clothing retail
chains such as FabIndia, directly or through buying houses (refer Figure 1 for Avika’s business
model).

Figure 1. Avika’s business model. Source: Authors’ interviews with Malavika Sharma.
Illiteracy, extreme poverty and risk aversion

The rural artisans were mostly illiterate, extremely poor and most often belonged to lower castes.
Malavika recalled:

The ground reality was that most artisans trained under the government’s schemes were going back
to menial labour or doing other low-value-addition activities. The government’s model of only
providing training almost never worked. The women-artisans did not have the capital, business
acumen and risk appetite to become entrepreneurs.

Malavika aimed to fill these gaps. By purchasing raw material on behalf of artisans, Malavika
ensured that they did not lack working capital. By getting job orders from clothing retail chains,
Malavika minimized risks and provided the artisans with a market.

An evolving operational model

The venture’s business model evolved significantly over time (refer Figure 2). Initially, Malavika
wanted the women to work within her venture’s premises. This system was not preferred by the
women workers as they had other responsibilities at home such as cooking, looking after kids and
helping out on farms. Most women could only spare 3–4 h/day and that too at a different time on
each day. The embroidery work was treated as something that they would do side by side in
parallel with their other activities. In addition, the highly patriarchal rural society looked down upon
women venturing out of their homes for work.

Figure 2. Evolution of Avika’s operational model. Source: Authors’ interviews with Malavika Sharma.

To overcome these difficulties, Malavika altered the operational model and began to give the
women raw materials (comprising of silk cloth, threads, hand-embroidery instruments and design
sheets) and allowed them to do the embroidery at their own homes. However, initially, this model
also did not work very well. Deliveries were late and often the work was of poor quality or
damaged. In such situations, Malavika was unable to honour the time and quality commitments
 made to her clients and ran the risks of losing large orders or not getting paid for work. Malavika
recalled:

I was stumped. Women did not want to work at our centre where we could control quality. The work
they did at home was casual and of poor quality. My reaction was to start cutting payments as a
punishment for late deliveries or poor quality work. To my surprise, this loss of wage had no real
impact on their behaviour.

My eureka moment came three years ago. I realized that rural women saw money differently than us
city folk. For them, only actual money in hand is money. Money notionally earned through a contract,
had no meaning in their lives. When they signed up for a piece of work, I assumed that they mentally
accounted for the money they were going to earn. However, they saw it differently. If they could not
do timely and good quality work, and I docked their payment, they saw nothing wrong with that and
accepted the lesser payment rather stoically and without much regret.

Based on this insight, Malavika changed the operational model once again. She stated,

I changed my policy. If an artisan did not deliver according to the commitment, I still paid her the
originally promised amount. But I stopped giving work to any such person for the next three months.
Suddenly, there was big improvement in discipline levels. I realized that more than the amount they
were making, these women valued consistency of income.

While the workforce kept growing, there was constant churn. Some of the trained women migrated
to cities for better earnings prospects. Skilled artisan girls got married and moved to another village
or stopped working for many months. Sometimes, there were exponential jumps in new recruits
from villages where the girls trained at our centre got married into – they added an entire batch
(30–80 women). Thus, the production capacity of the venture kept varying.

Self-help groups

Over time, the operational model evolved further. Malavika encouraged women to work in groups
in their own household clusters. She helped them organize into self-help groups (SHGs)
comprising of seven to eight women. Each group had one woman in charge who took work orders
from Malavika. The leader distributed work among the SHG members. To ensure discipline and
quality, Malavika devised a policy, whereby if any member of an SHG delayed their deliverable or
produced poor quality work, then the entire SHG was suspended for a month and was not offered
any raw materials to participate in the next monthly cycle. This meant a loss of income for all
women in the SHG.

What types of innovation are there?

The term innovation is very versatile and is frequently inflated. A clear definition of the term is important for a
clear, common understanding in companies. To this end, there are various types of innovation with regard to the
object of innovation and the degree of innovation. This knowledge of classification is necessary for innovation
management.
What is the purpose of types of innovation?

Why do we deal with types of innovation? From the point of view of innovation management, the types of
innovation and thus the classification of innovation have a strategic and process-related significance.

A clear definition of the desired innovation object and degree of innovation is important for the innovation
strategy. This determines where an organization wants to innovate.

The classification is also relevant for the innovation process, since the different types of innovation have
different requirements for the innovation process. A radical innovation requires a more comprehensive process
with different decision-making structures than a small incremental innovation.

Object of innovation - What is being innovated?

Innovation can happen anywhere, whether it is a profit-driven or non-profit organization. It can affect the
performance of the organization itself, i. e. the product or service, but also the structures of how the service is
provided. The first classification is thus the object of innovation.

Product innovation: Products concern both material products and intangible services such as services that meet
customer needs and are thus acquired by the customer. With product innovations, a company earns its money
and tries to differentiate itself from the competition.

Service innovation: service innovations are like product innovations when it comes to selling them directly to
the customer, e. g. insurance or management consultancy. Even if services are not actively sold, as in the case of
manufacturing companies, each company still provides services to its customers, for example in logistics,
complaints, sales advice, etc., even if they are not actively sold. This is also where innovation comes in when it
comes to differentiation and customer enthusiasm.

Business model innovation: The business model is the way a company functions and earns money. The
business model innovation encompasses innovations in strategy, marketing, supply chains, value creation,
pricing or cost structures.

Process and technology innovation: As the name implies, these are technological innovations, such as the
creation of products and services. In principle, they are also process innovations. These include, for example,
production processes or IT technologies for apps. Product innovations, quality improvements or cost savings
often go hand in hand with process and technology innovations.

Organizational innovation: Organizational innovations affect the process and organizational structure. These
can be organizational process innovations or management innovations, e. g. new tools for measuring customer
satisfaction or optimizing delivery processes to reduce costs.

Social innovation: Social innovations are innovations where the benefit lies with society and the purpose is not
primarily profit. Examples include innovation in education, poverty reduction, equal opportunities and health.

Environmental innovation: All innovations that contribute to improving the environment are environmental
innovations. This concerns for example environmentally friendly products, contributions to environmental
protection or the avoidance of emissions.

An innovation can affect several innovation subjects at the same time. Logically, there is no clear demarcation
here. For example, a product innovation can be a process and environmental innovation at the same time. Or a
business model innovation usually also brings with it a product and organizational innovation.
Degree of innovation - How new is the innovation?

How new an innovation is is often a subjective consideration. An innovation can therefore be called new

 for a company,

 for a market or industry, or

 for the whole world.

Another frequently used classification for innovation according to novelty is according to the extent of change:

 Radical innovationsare new products, services or processes and involve

significant change and innovation. Accordingly, the impact is also greater - for
example, new markets can be created as a result.

 Incremental innovationsare the optimization and further development of existing

products, services or processes. The purpose and benefits are optimization of
customer benefit, cost reduction, repositioning, adaptation for introduction into
new markets or adaptation to new circumstances such as new laws and
standards.

Accordingly, radical innovations are basic innovations and revolutions, while incremental innovations are
improvements, adaptations or follow-up innovations and thus evolutions.

Whether an innovation is radical or incremental is often very much in the eye of the beholder. Therefore, clear,
objective differentiation is often challenging.

This is shown by the example of the iPhone. Apple and Steve Jobs are polarizing in this respect, one of them
believes that his products were not innovative, while others see him as the ultimate innovator. Individually, most
the technologies were not new. But the iPhone, as a product that launched the new smartphone market, was a
revolutionary innovation. The business model with apps was also extremely innovative. Who would have
thought that mobile phone software would become a separate market?

It is important for companies and their innovation management that they define criteria for themselves,
according to which innovations are divided into incremental and radical innovations. Examples of criteria are
return on investment, amount of investment costs, payback period, patentability, etc. Thus, innovative ideas with
a high ROI, high investment costs, longer payback periods and which are patentable would be radical.

Another, currently very popular classification according to the novelty

 Sustaining innovations:Preserving or continuous innovation refers to the

improvement of existing, similar to incremental innovations. This type of
innovation focuses on current customers and their needs.

 Disruptive innovations:Disruptive stands for replacing and disruptive and

describes innovations that shape a new market. Disruptive innovations mostly
originate in the low-end segment, in less attractive segments. However, as the
maturity of technology and products increases, they are gradually attacking the
mass market and thus replacing existing services.
Other types of innovation

In addition to the subject of innovation and the degree of innovation, there are other classifications.

One of them is the trigger for innovation - what triggered the innovation? A distinction is made between market
pull and technology push.

 Market pull innovationsoriginate from the market and are initiated by a specific
customer request.

 Technology-push innovationsare the result of new technologies for which suitable

application possibilities are sought and implemented.
The literature on innovation types also contains a division into closed and open innovation, although this refers
more to innovation management than innovation itself.

Closed innovation involves only internal resources for generating ideas, developing and implementing
innovations. Open innovation also integrates external partners such as customers, research institutes or
suppliers into the innovation process.

Conclusion: What types of innovations are there?

The main classification is according to the object of innovation and the degree of innovation. There are blurring
boundaries in the classification of innovation types. Where exactly the boundaries between the individual types
of innovation in these categories lie must be determined by organizations themselves. This classification has a
strategic relevance for innovation management, namely to determine the focus in the innovation strategy. The
other purpose is to initiate the individual innovation projects into the innovation process. This is because a
small, incremental innovation in the product area requires different processing than a radical innovation in the
production process.

Types of Innovation
It is remarkable how many people are under the false assumption that companies are either innovative or not.
This is a very polarizing and simplistic perspective that does not take into account the different types of
innovations that companies can and do pursue.

For this post, let’s break down innovation into two dimensions: Technology and Market, which gives us the
following 4 types of innovation:
Incremental Innovation
Incremental Innovation is the most common form of innovation. It utilizes your existing technology and increases
value to the customer (features, design changes, etc.) within your existing market. Almost all companies engage
in incremental innovation in one form or another.

Examples include adding new features to existing products or services or even removing features (value through
simplification). Even small updates to user experience can add value, for example below is an older version of
Constant Contact’s email schedule page:
There is nothing majorly wrong with this page, however it is easy to see that the page title is “Schedule”, yet there
are no schedule settings anywhere to be seen. In fact, in this version, you have to click on the yellow schedule
button on the upper right-hand corner to actually pop up the schedule settings. In addition, there is a huge empty
space on the right side of the page that does not contribute much value to the user. Below is a more current
version of the same page:
This updated version replaces the “Schedule” title with the title of the email campaign. This makes it easier for
the user to see which campaign they are working on. Actual schedule settings have replaced the awfully huge
empty space on the right-hand side, which makes it possible for the big yellow “Schedule” button to actually
schedule. Also, larger sized form fields have been introduced to allow easy clicking on those elements. All
these changes, which may seem as just updates, are actually small incremental changes focused on adding
more value to an existing product. They will prove to be incrementally innovative if customers have a better
experience with the product and are able to schedule email campaigns much easier.

Disruptive Innovation
Disruptive innovation, also known as stealth innovation, involves applying new technology or processes to your
company’s current market. It is stealthy in nature since newer tech will often be inferior to existing market
technology. This newer technology is often more expensive, has fewer features, is harder to use, and is not as
aesthetically pleasing. It is only after a few iterations that the newer tech surpasses the old and disrupts all
existing companies. By then, it might be too late for the established companies to quickly compete with the
newer technology.

There are quite a few examples of disruptive innovation, one of the more prominent being Apple’s iPhone
disruption of the mobile phone market. Prior to the iPhone, most popular phones relied on buttons, keypads or
scroll wheels for user input. The iPhone was the result of a technological movement that was years in making,
mostly iterated by Palm Treo phones and personal digital assistants (PDAs). Frequently you will find that it is not
the first mover who ends up disrupting the existing market. In order to disrupt the mobile phone market, Apple
had to cobble together an amazing touch screen that had a simple to use interface, and provide users access to
a large assortment of built-in and third-party mobile applications.

Architectural Innovation
Architectural innovation is simply taking the lessons, skills and overall technology and applying them within a
different market. This innovation is amazing at increasing new customers as long as the new market is
receptive. Most of the time, the risk involved in architectural innovation is low due to the reliance and
reintroduction of proven technology. Though most of the time it requires tweaking to match the requirements of
the new market.

In 1966, NASA’s Ames Research Center attempted to improve the safety of aircraft cushions. They succeeded
by creating a new type of foam, which reacts to the pressure applied to it, yet magically forms back to its original
shape. Originally it was commercially marketed as medical equipment table pads and sports equipment, before
having larger success as use in mattresses. This “slow spring back foam” technology falls under architectural
innovation. It is commonly known as memory foam.

Radical innovation
Radical innovation is what we think of mostly when considering innovation. It gives birth to new industries (or
swallows existing ones) and involves creating revolutionary technology. The airplane, for example, was not the
first mode of transportation, but it is revolutionary as it allowed commercialized air travel to develop and prosper.

The four different types of innovation mentioned here – Incremental, Disruptive, Architectural and Radical – help
illustrate the various ways that companies can innovate. There are more ways to innovate than these four. The
important thing is to find the type(s) that suit your company and turn those into success.

15 Types of innovation
15 types of innovation (illustrated by car / mobility examples).
for inspiring your innnovation challenges.
Remarkable innovations combine different types !
1. Incremental innovation
Incremental innovation seeks to improve the systems that already exist, making them better, faster cheaper.
2. Process innovation
Process innovation means the implementation of a new or significantly improved production or delivery method.

3. Red ocean innovation

Red Oceans refer to the known market space, i.e. all the industries in existence today. In red oceans, industry
boundaries are defined and accepted, and the competitive rules of the game are known. Companies try to outperform
their rivals to grab a greater share of existing demand usually through marginal changes in offering level and price. As
the market space gets crowded, prospects for profits and growth are reduced. Products become commodities, and
cutthroat competition turns the red ocean bloody. (source)
4. Service innovation
Service Innovation can be defined as “a new or considerably changed service concept, client interaction channel,
service delivery system or technological concept that individually, but most likely in combination, leads to one or
more (re)new(ed) service functions that are new to the firm. (source)

5. Business model innovation

Business Model Innovation (BMI) refers to the creation, or reinvention, of a business itself. Whereas innovation is
more typically seen in the form of a new product or service offering, a business model innovation results in an entirely
different type of company that competes not only on the value proposition of its offerings, but aligns its profit
formula, resources and processes to enhance that value proposition, capture new market segments and alienate
competitors. (source)

6. Sustainable innovation
Eco-innovation is a term used to describe products and processes that contribute to sustainable development
7. Frugal innovation
Frugal Innovation is about doing more with less. Entrepreneurs and innovators in emerging markets have to devise
low cost strategies to either tap or circumvent institutional complexities and resource limitations to innovate, develop
and deliver products and services to low income users with little purchasing power.(source)
Frugal engineering.

More examples Functionall Trend briefing

8. Blue ocean innovation
Blue Oceans represent the unknown market space, i.e. all the industries not in existence today. Blue oceans are
defined by untapped market space, demand creation, and the opportunity for highly profitable growth. In blue oceans,
competition is irrelevant because the rules of the game are not set. Blue oceans can be created by expanding existing
industry boundaries or by reconstructing industry boundaries. (source)
9. Radical innovation
Radical innovations (sometime referred to as breakthrough, discontinuous or disruptive innovations) provide
something new to the world that we live in by uprooting industry conventions and by significantly changing customer
expectations in a positive way. Ultimately, they often end up replacing existing methods / technologies. (source)

10. Open source innovation / Crowdsourcing

In production and development, open source is a philosophy or pragmatic methodology that promotes free
redistribution and access to an end product’s design and implementation details
c,mm,n

Volkswagen crowdsources its way to a Hover Car

11. Experience innovation
Companies that try to create holistic experiences by emotionally engaging their consumers.

12. (Im)possible innovation

13. Disruptive innovation

A disruptive innovation is an innovation that helps create a new market and value network, and eventually goes on to
disrupt an existing market and value network (over a few years or decades), displacing an earlier technology.

14. User led innovations

The user is king. It’s a phrase that’s repeated over and over again as a mantra: Companies must become user-centric.
But there’s a problem: It doesn’t work. Here’s the truth: Great brands lead users, not the other way around. (source)
15. Supply chain innovation
Supply chain innovation is about applying best practices and technological innovations to your own supply chain in
order to reduce such cycle and wait times and other waste (to use a Lean term) in your in-house processes. (source)

Generating and screening ideas for

new products
Successful new product development (NPD) starts with identifying good product ideas and using
reliable criteria to decide which ideas to pursue.

You should take the following steps before you allocate funds to new product development.

Idea generation

Write a customer needs list based on the information you gather from the sources identified below.
You should try to identify existing weaknesses in your products, gaps in your product range and areas
for product improvement.

Brainstorm product issues

Work with your existing team members to brainstorm product issues. Your sales and service staff
speak to your customers daily, hearing feedback about your products and the customers' needs.
Capture the feedback, product observations and ideas from your team. Make sure you recognise their
ideas and promote a shared culture of innovation.

Use your research and development (R&D) processes

Use your business's existing R&D processes. Identify modifications you could make to existing
products, or adaptations for new products, consistent with feedback from your market and customers.

Review your quality assurance (QA) processes

Note any issues in your products and identify potential ideas for addressing gaps in quality.

Review your customer complaint records

Identify common weaknesses in your existing product range, and look for areas where improvement
is most needed. Learn about managing customer complaints.

Review your research

Review your customer research and market research, and plan further market and customer surveys
if you identify research gaps. What are your customers telling you they're looking for? What do they
find frustrating or limiting about your products? How do they use your products most?

Talk to your suppliers and other business partners

Talk to manufacturers, retailers and sales reps to capture their knowledge of your products and
thoughts for improving them.

Research and understand your competition

Try to understand your competition. Review your competitors' product range and consider how the
market is responding to them. Do any of their products seem to be meeting needs that yours aren't?

Study catalogues and product information

Make sure you have a comprehensive understanding of existing products available in your market.

Idea screening

With your list of potential new product ideas, you now need to decide which ideas to pursue and
which to discard. Consider your competition, your existing products, their shortcomings, and the
needs of your market. Draw on the customer needs list you have developed, and the areas for
product improvement you have identified.

Develop a set of criteria to evaluate your ideas against. Your criteria might include:

 most prominently identified customer needs

 product improvements most needed
 the benefits to your target market
 the technical feasibility of the idea
 the level and scope of research and development required
  the profitability of the idea. What is its potential appeal to the market? How would you price it?
What are the costs in bringing it to market - overall and per unit?
 where the product fits in the market. Is there a gap? How close is it to competitor products?
 the resources it will require in development
 the marketing potential of the idea
 the fit with your business profile and business objectives.

SWOT analysis
A SWOT analysis can help you to identify the strengths and weaknesses of each idea.

Innovation support
Your innovative approach and your steps to foster innovation in your team will help you realise your
new product goals. Find out about innovation advice, grants and support.

Difference Between a Business Plan

and a Feasibility Study
Many people don’t know that there is a difference between a business plan and a feasibility
study.

Many a time when people contacting me, they ask for a feasibility study instead of asking for
a business plan. That is why I always interview them to know exactly what they want to use
it for and in the course interacting with them, I get to understand that what they need is
actually a business plan and not a feasibility study. In this article, I will explain more for your
understanding.

Table of Content:

1. What is a Business Plan and a Feasibility Study?

2. Main Purpose of a Business Plan and a Feasibility Study
3. Content
4. Outline of a Business Plan and a Feasibility Study
5. Challenges of a Business Plan and a Feasibility Study

So let us start with the first one which will give us a brief overview of what a business plan
and a feasibility study is all about

1. What is a Business Plan and a Feasibility Study?

Business plans and feasibility studies are vital business tools for analysis and also for making
decisions in a business. But a feasibility study is not the same thing as a business plan
because a feasibility study gives a conclusion or recommendation would be completed prior to
developing the business plan.

A Feasibility study is done to determine whether a proposed business has a high enough
probability of success that it should be undertaken. A feasibility study is carried out first in
order to know if the business will be viable before venturing into it. Before a company can
invest in a business or launch a new product, a feasibility study is done to determine if there
will be a return on investment.

According to Rochester.edu, a feasibility study can be defined as “a controlled process for

identifying problems and opportunities, determining objectives, describing situations, defining
successful outcomes, and assessing the range of costs and benefits associated with several
alternatives for solving a problem.”

There can also be used to make decisions about whether to launch a new product in an
existing company or enter a new market. Feasibility studies are sometimes termed
cost/benefit analyses because the projected costs of the project are compared to the
expected benefits to yield a conclusion.

Business plans are blueprints for implementing actions that have already been deemed
feasible by the company’s management. So a business plan is like a roadmap for your
business that outlines goals and details how you plan to achieve those goals.

Business plans map out the direction a company intends to take to reach its revenue and
profit objectives in the future. They are a compilation of numerous decisions made by the
management team about how the company should be run. A business plan is done after a
feasibility study has been carried out. If the recommendation of the feasibility study says
negative, then there will be no need to venture into the business. Then if the feasibility study
says the business will be feasible, then a business plan is developed which will then map out
plans and strategies to adopt in order to achieve business goals including revenue
generation, market penetration, customer acquisition, marketing and sales strategies among
others.

A business plan can be done for internal use or external use. The internal use of a business
plan is for the management and staff of the company while the external is for shareholders,
investors, for bank loan and customers.

2. Main Purpose of a Business Plan and a Feasibility

Study
In short, a feasibility study gives a conclusion or recommendations while a business plan
gives the roadmap.

The feasibility study helps determine whether an idea or business is a viable option.
Therefore, a feasibility study is done first before investing a dime in the business. Before
considering approaching investors, you must have done your study to know that the business
is feasible before taking any decision. That is why a feasibility study gives a conclusion or
recommendations.

A business plan will map out the roadmap/strategies to achieve your business goal because a
business plan assumes a business is going to viable and presents the steps necessary to
achieve success. If you are looking forward to approaching an investor or trying to get a bank
loan, what you need is the business plan. Some investors might request for a feasibility study
first before the business plan

3. Outline of a Business Plan and a Feasibility Study

Below is the outline of a business plan:
 Executive Summary
Business/Company Overview
Products/Services
Market/Industry Analysis
Strategy
Operation Plan
Management/Personal plan
Sales Forcast
Financial Plan
Appendices and Exhibits

A good outline for a feasibility study includes:

Introduction
Product or Service
Technology
Market Environment
Competition
Industry
Business Model
Market and Sales Strategy
Production Operations Requirements
Management and Personnel Requirements
Regulations and Environmental Issues
Critical Risk Factors
Financial Predictions Including: Balance Sheet, Income Statement, Cash Flow
Statement, Break Even Analysis, and Capital Requirements
Conclusion

4. Challenges of a Business Plan and a Feasibility Study

Looking at both the business plan and feasibility study, you will discover that both attempt to
predict future outcomes using assumptions about what is likely to happen in the business and
the business environment which include government policies, the market, competition, risk
among others, any poorly done feasibility study can lead to a costly mistake. If a business is
not viable and the recommendation says the business will be viable, the end result will not be
palatable. This will affect the business plan and the operation of the business adversely.

A poorly done business plan – poor projections, strategies, analysis, business model,
environment factors among others can easily be adjusted in the course of running the
business but the same cannot be said of a feasibility study because in a feasibility study, an
incorrect conclusion can be costly — it could mean launching a venture that has very little
chance of surviving or approving a project that wastes the company’s human and financial
resources.
technical marketing

The term “technical marketing” has two meanings, though they are often related. Classically, technical marketing
is any method of marketing focused on the specifications and key features of a product, designed to appeal to
customers with a base technological understanding of the product. However, technical marketing has also grown
to encompass any use of modern technology as a marketing tool.
Adobe TV is a great example of technical marketing in both senses of the term. It is a tool Adobe Systems uses
to communicate the features and appeal of complex software to customers who already use such software on a
regular basis. The tutorials on Adobe TV assume a certain degree of comfort with computer technology and even
the specific program being featured. Rather than simply raising awareness about a program and making it seem
attractive to those who know nothing about it, Adobe TV increases the appeal of a program by teaching users
how to implement its more advanced features.
Adobe TV also uses modern technology such as embedded Internet video as a marketing tool. Again, this is
intended to reach customers who already have a certain degree of comfort with the technology Adobe is
marketing. Instead of using media like books, home video, or television to deliver tutorials, Adobe TV's video
tutorials reach customers who are certain to be literate about Internet technology.
Any company that has a technically complex product or whose customers tend to be technically educated people
can benefit from technical marketing.
If, for instance, a company wants to market a line of advanced factory equipment, its customers are likely to
already know about the technical aspects of factory equipment in general. The company should create marketing
materials that outline the technical specifications of the equipment, such as how fast the equipment works, what
temperatures it can safely handle, and how much electricity it consumes every hour. These aspects are more
important to the company's customers than simple branding.
A company doesn't necessarily need to appeal exclusively to highly informed customers to benefit from technical
marketing. Car companies often advertise vehicle specifications in mass marketing materials like television
commercials, though they can't be certain their audience truly understands what the specs mean. This includes
simple concepts like how many miles per gallon of gas the vehicle gets, the horsepower of its engine, and the
particular kind of brakes it uses. These specifications might sound impressive even to an audience with little
knowledge of car engineering.
Before a technical marketing campaign begins, everyone on a marketing team must work closely with the
product's developers to acquire a thorough understanding of a product or service.
For example, if an electronics company wanted to begin marketing a new, high-end digital video camera intended
for filmmaking, the marketing team should spend time with the people at the company who designed, built, and
tested the camera to discover what the camera can do and what its technical specifications mean. This allows
marketing professionals to create effective advertising materials for people like movie directors,
cinematographers, and videographers who already understand digital photography.
While the marketing team is learning about the product, they should also conduct market research to determine
who is most likely to be interested in the product, and what is most important about it to them. The team at the
electronics company might read consumer data and conduct surveys to find out what kinds of people are likely to
buy the new camera, and which specifications they value the most in cameras.
Using market research data and knowledge they learn from the developers, a marketing team creates advertising
materials for their product and places them in strategic media channels. The team at the electronics company
could craft an advertisement outlining the camera's specifications to be placed in a film industry magazine, as
well as create the camera's product page on the company website. Informational materials are highly effective in
technical marketing, so the electronics company should also create valuable content like blog posts and videos
related to the camera that will link to the product web page.
Throughout the advertising campaign, the marketing team should have a method to collect customer feedback
about the product. Adjustments to the campaign should be made using the feedback collected. (See also B2C
Marketing)
Technical marketing is an interdisciplinary field. It relies on a team of people who have a diverse set of skills,
ranging from great research, to creative design and excellent communication. The following are just a few
positions that are highly valuable on a technical marketing project.
In the preliminary stages of a technical marketing campaign, the team will rely on a researcher to gather and
analyze information about the product's related market and consumer behavior. Market researchers need to have
a meticulous attention to detail, the ability to speak to a wide variety of people during surveys, and strong
communication skills to convey what they have learned from their research.
Education/Experience
Market researchers should have a bachelor's degree in marketing, business, psychology, or sociology. Previous
experience in a data-focused field like analysis or database management is very helpful.
In today's technology-driven business world, consumers will almost certainly seek out a company's website to
learn more about a product. This is especially true for consumers who are searching for technical specifications.
A web designer is in charge of coding and creating the visual layout of a website. This requires high computer
literacy and experience with many kinds of business software, including programs for coding, graphic design, and
image editing.
Education/Experience
Web designers should have a Bachelor of Science degree in marketing, web design, or computer science. It is
very important for a designer to include a portfolio of original website designs with any resume to demonstrate
ability and creativity.
Because so many products advertised with technical marketing are complex and require some training to use,
instructional materials can be very effective marketing tools. Instructional designers create everything from
ebooks, to video tutorials and other educational materials that teach customers about a product and how to use
it. This requires strong written and verbal communication skills, as well as comfort with multimedia technology like
video and sound editing, web publishing, and word processing software.
Education/Experience
Instructional designers should have a bachelor's degree in marketing, business, education, English, or
communications. It can be useful to have previous experience in a teaching position, in a writing-focused
position, or in a media-focused role.
Those who are interested in learning the professional skills necessary to participate in technical marketing
campaigns and other advanced strategies should consider applying to a marketing education program. A
marketing program provides an extensive examination of the business and philosophy of modern marketing,
while giving students hands-on experiences that are invaluable in the pursuit of a marketing career.
Early coursework in marketing concentrates on establishing a firm foundation of marketing concepts and
practices. This includes classes that teach vital team-building and communication skills that will be important for
working effectively in any marketing department. These preliminary classes will also discuss marketing campaign
finance for realistic budgeting concepts, as well as the basics of branding and advertising content.
For students who are most interested in technical marketing, the technology-focused courses in a marketing
program will be the most important. These classes will familiarize students with business tools like widely used
office suite software for word processing and database management, and also more complex programs for web
design and data modeling. Marketing technology classes not only teach students how to use existing software,
they also teach tomorrow's professionals how to learn new software quickly and effectively.
A marketing education culminates in advanced work with business simulations and in-depth case studies of
marketing campaigns from the real world. Students will be expected to create their own campaigns, applying all
they have learned to demonstrate a true understanding of the skills they will have to implement later in the
workplace. This fast-paced, interactive approach to business education prepares aspiring marketing
professionals to be valuable assets on any marketing team, whether it is part of a large corporation, a small start-
up, or anything in between.

Small Scale Industries of india

Small scale industries (SSI) are those industries in which manufacturing,
providing services, productions are done on small scale or micro scale. For
example, these are the ideas of Small scale industries: Napkins, tissues,
chocolates, toothpick, water bottles, small toys, papers, pens. Small scale
industries play an important role in social and economic development of India.
These industries do a one-time investment in machinery, plants, and industries
which could be on an ownership basis, hire purchase or lease basis. But it does not
exceed Rs. 1 Crore. Let us discuss in detail about it.

Small Scale Industries

Essentially small scale industries comprise of small enterprises who manufacture
goods or services with the help of relatively smaller machines and a few workers
and employees. Basically, the enterprise must fall under the guidelines set by the
Government of India. At the time being such limits are as follows,

 For Manufacturing Units for Goods: Investment in plant and machinery must be
between 25 lakhs and five crores.
 For Service Providers: Investment in machinery must be between 10 lakhs and two
crores.
In developing countries like India, these small scale industries are the lifeline of
the economy. These are generally labor-intensive industries, so they create much
employment. They also help with per capita income and resource utilization in the
economy. They are a very important sector of the economy from a financial and
social point of view.

Examples and Ideas of Small Scale Industries

 Bakeries
 Candles
 School stationeries
 Water bottles
 Leather belt
 Small toys
 Paper Bags
 Xerox and printing
 T-shirt Printing
 Photography
 Beauty parlors

Characteristics of Small Scale Industries

 Ownership: Such units are generally under single ownership. So it is a sole

proprietorship or sometimes a partnership.
 Management: Both the management and the control generally is with the
owner/owners. So the owner is actively involved with the daily running of the
business.
 Limited Reach: Small scale industries have a restricted area of operations. So they
meet local and regional demand.
 Labor Intensive: These small scale industries tend to use labor and manpower for
their production activities. So their dependence on technology is pretty limited.
 Flexibility: These units are more adaptable to their changing business
environment. So in case of sudden changes or unexpected developments, they are
flexible enough to adapt and keep carrying on. Large industries do not have this
advantage.
 Resources: They use local and readily available resources. This also helps the
economy with better utilization of natural resources and less wastage.
.

Role of Small Scale Industries in the Indian Economy

Total Production
These enterprises account for almost 40% of the total goods and services produced
in the Indian economy. They are one of the main reasons for the growth and
strengthening of the economy.

Employment

These small scale industries are a major source of employment in the country. The
whole labor force cannot find work in the formal sector of the economy. So these
labor-intensive industries provide a livelihood to a large portion of the workforce.

Contribution to Export

Nearly half of the goods (45-55%) of the goods that are exported from India are
produced by these small enterprises. About 35% of direct exports and 15% of the
indirect exports are from the small scale industries. So India’s export industry
majorly relies on these small industries for their growth and development.

Welfare of the Public

Other than economic reasons, these industries are also important for the social
growth and development of our country. These industries are usually started by
the lower or middle-class public. They have an opportunity to earn wealth and
employee other people. It helps with income distribution and contributes to social
progress.

Solved Question for You

Q: State some objectives of small scale industries.

Ans: Some of the important objectives are

 Create employment
 Improve per capita income of lower income groups and also improve their
standard of living
 They also help backward regions with economic development
Micro, Small and Medium Enterprises
(MSME): The Importance in Indian
Economy
For a country to grow, the government should actively promote business enterprises.
Among business enterprises, the Micro, Small and Medium Enterprises (MSME) deserve
special attention. Though MSMEs are small investment enterprises, but their contribution
to the Indian economy is very significant.

What are MSMEs?

Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 which was
notified on October 2, 2006, deals with the definition of MSMEs. The MSMED Act, 2006
defines the Micro, Small and Medium Enterprises based on

1. the investment in plant and machinery for those engaged in manufacturing or

production, processing or preservation of goods and
2. the investment in equipment for enterprises engaged in providing or rendering
of services.

The guidelines with regard to investment in plant and machinery or equipment as

defined in the MSMED Act, 2006 are:
 Investment in plant and Investment in equipment

Nature of machinery excluding land excluding land and building

activity of and building for enterprises for enterprises engaged in

the engaged in manufacturing or providing or rendering

Enterprise production, processing or of services (loans up to Rs 1

preservation of goods crore)

Micro Not exceeding Rs.25.00 Lakhs Not exceeding Rs.10.00 Lakhs

More than Rs.25.00 lakhs but More than Rs.10.00 lakhs but

Small does not exceed Rs.500.00 does not exceed Rs.200.00

lakhs lakhs

More than Rs.500.00 lakhs but More than Rs.200.00 lakhs but

Medium does not exceed Rs.1000.00 does not exceed Rs.500.00

lakhs lakhs

Note: The investment in plant and machinery is the original cost excluding land and
building and other items specified by the Ministry of Small Scale Industries vide its
notification no. S.O. 1722 (E) dated 05.10.2006.

List of enterprises that are engaged in providing or rendering services

The illustrative lists of enterprises that are engaged in providing or rendering services
are:

 Small road and water transport operators (original investment in vehicles up to

Rs.200.00 lacs under Priority sector)
 Retail trade (with credit limits not exceeding Rs.20.00 lakhs)
 Small business (whose original cost price of the equipment used for the purpose of
business does not exceed Rs.20.00 lakhs
 Professional and self-employed persons (whose borrowing limits do not exceed
Rs.10.00 lakhs of which not more than Rs.2.00 lakhs should be for working capital
 requirements except in case of professionally qualified medical practitioners setting
up of practice in semi-urban and rural areas, the borrowing limits should not exceed
Rs.15.00 lakhs with a sub-ceiling of Rs.3 lakhs for working capital requirements)

Significance of MSMED Act 2006

With the enactment of MSMED Act 2006, the paradigm shift that has taken place is the
inclusion of services sector in the definition of Micro, Small and Medium Enterprises,
apart from extending the scope to Medium Enterprises.

Share of MSMEs in India

The Micro, Small and Medium Enterprises occupies a strategic importance in terms
of output (about 45% of manufacturing output), exports (about 40% of the total
exports) and employment (about 69 million persons in over 29 million units throughout
the country) based on the Planning Commission, 2012. It is observed worldwide that
as income increases the share of the informal sector decreases and that of the formal
SME sector increases.

Worldwide Trends in SME Sector

 Japan – SMEs employ 70% of the wage earners and contribute 55% of the value
added.
 Thailand – SMEs employ 60.7% of the population while contributing 38% to the
GDP.
 China – SMEs contribute to over 68% of the exports – in the last 20 years created
more SMEs than the total number of SMEs in Europe and the US combined.

Note: In China, an industrial SME is defined as having up to 2,000 employees, while a

small business has less than 300 employees and a medium sized business has
employees between 301 and 2,000.

What is the Importance and role of MSMEs in Indian Economy?

To generate large scale employment

In India, capital is scarce and labor abundant. MSMEs are thought to have lower capital-
output and capital-labour ratios than large-scale industries, and therefore, better serve
growth and employment objectives. The MSME sector in India has grown significantly
since 1960 – with an average annual growth rate of 4.4% in the number of units and
4.62% in employment (currently employing 30 million). Not only do MSMEs generate the
highest employment per capita investment, they also go a long way in checking rural-
urban migration by providing people living in isolated areas with a sustainable source of
employment.

To sustain economic growth and increase exports

Non-traditional products account for more than 95% of the MSME exports (dominating in
the export of sports goods, readymade garments, plastic products etc.). Since these
products are mostly handcrafted and hence eco-friendly, there exists a tremendous
potential to expand the quantum of MSME led exports. Also, MSMEs act as ancillary
industries for Large Scale Industries providing them with raw materials, vital components
and backward linkages e.g. large scale cycle manufacturers of Ludhiana rely heavily on
the MSMEs of Malerkotla which produce cycle parts.

Making Growth Inclusive

MSMEs are instruments of inclusive growth which touch upon the lives of the most
vulnerable and marginalized. For many families, it is the only source of livelihood. Thus,
instead of taking a welfare approach, this sector seeks to empower people to break the
cycle of poverty and deprivation. It focuses on people’s skills and agency. However,
different segments of the MSME sector are dominated by different social groups.

The Twelfth Plan has listed the following as the objectives for the MSME
sector

 Promoting competitiveness and productivity in the MSME space.

 Making the MSME sector innovative, improving technology and depth.
 Enabling environment for promotion and development of MSMEs.
 Strong presence in exports.
 Improved managerial processes in MSMEs.

Evolution and Performance of the MSME Sector in India

Pre-Liberalization

 During the post-Independence period, small firms were expected to play an

important role in the development process, especially in absorbing surplus labor
and achieving an equitable income distribution. This is the traditional stylized role
assigned to small industries.
 At the beginning of the industrialization process, flexibility in production and the
ability to offer differentiated products allow smaller firms to grow rapidly.
 Later, large-scale firms come to dominate the size distribution, making up a greater
share of output, employment, and value-added because of scale economies,
managerial efficiency, better access to finance and infrastructure, and a favorable
tariff structure.
Post-Liberalization

 The growth rate of MSME, on an average, has declined considerably in terms of

units and even employment but has improved marginally in terms of output and
exports, in the post-liberalization period compared to the pre-liberalization period.
 This could be probably due to – (a) With the threat of competition, new MSME units
would not have come up as significantly in the liberalization period as compared to
the pre-liberalization period (b) The new MSME units that came up after
liberalization may have been much more capital intensive than those that have
come up in the past – with some proportions of the existing MSME units having
modernized themselves to rely less on labour and also to take advantage of
developments in the global market (c) Unable to face the competition some MSMEs
exited the market, thereby affecting MSME employment and output initially.
 However, though it appears that the MSME growth performance (in terms of
employment, output, and exports) might have suffered initially but it has been able
to recover impressively subsequently in the decade of 2000s.
 The share of the registered MSMEs in India’s GDP more than doubled during this
period and its share in total organized sector employment increased to 34% during
the same period. Although the share of registered MSME exports declined sharply
initially, it bounced back to 12% in 2006-07.
 The improved economic health of registered MSME sector is reflected in another
parameter i.e. industrial sickness. Sickness in the registered MSME sector has
declined both absolutely and relatively. This may be the outcome of improvements
in management deficiencies, insufficient financial control, research and
development, obsolete technology, inadequate demand, shortage of raw materials,
infrastructure bottlenecks, etc.
 There are two more issues concerning MSME performance:

1. Ancillarisation – the promotion of inter-firm linkages between large firms and

MSME through subcontracting and ancillarisation in both public and private sectors
has been an important dimension of India’s MSME policy. Any growth of
ancillarisation and sub-contracting would be advantageous to the MSME sector by
way of assured marketing, covered technical assistance, finance, and supply of raw
materials and training. During this period the percentage of ancillary units increased
from 5 percent. Note that however a significant proportion of MSME subcontracting
and ancillarisation are informal in nature. The growing inter-firm linkages, formal as
well as informal, would have benefited the economic performance of MSME sector.
2. The degree of internationalization – world over, an export strategy has been the
primary foreign market entry mode adopted by MSMEs in their internationalization
efforts – this has been observed in the Indian context as well. At the national level,
several factors contributed to the increasing trend of MSME internationalization like
– structural shift in the composition of MSME exports from traditional to non-
traditional items, modes of entry such as MNCs and e-Commerce etc.
Policy Towards Small-Scale Industries

 Though MSMEs were recognised as important for employment generation and

equitable distribution of income from the earliest days of Indian Independence, it
appears that the objectives of policies stressing the role of MSMEs are not being
realised.
 Since independence in 1947, especially since the late 1950s, development has
been wide-ranging, both in terms of programs and regions. Policy measures
included inter-alia fiscal concessions, subsidized and directed bank credit, and
technical and marketing support, along with reservations of products for exclusive
production by the MSME sector.
 These policy measures were in tune with the other policies such as the domestic
investment and foreign trade policies that became more restrictive over the years.
 Since the mid-1980s there has been a gradual turnaround in policy, including
reforms in the tax system and liberalization of import policy.
 The shift in MSME policy emphasis from protection to the promotion of
competitiveness began with the introduction of an exclusive policy for MSME in
1991. Since then, the policy support in the 1990s and early 2000s has been large to
enable the MSMEs to overcome key challenges to their performance and growth,
namely, finance, technology, and marketing, among others.
 To operate these programs and to monitor their progress, new agencies and
institutions have been set up, and the existing ones strengthened at the national,
regional, state, and lower levels. There is also a special bank for MSMEs – SIDBI.
The SSIs have their own associations and are also represented in the national and
state level associations of large-scale industries.

Evaluation of the Reservation Policy

 The policy of reserving products for exclusive manufacture in the small-scale sector
was started in 1967 with forty-seven items; the list of reserved items rose to 873 in
1984.
 The number of items on the reserved list for the SSI sector was brought down to
836 by 1989.
  The pace of reforms accelerated after 1991: average tariff rates have been steadily
lowered, quantitative restrictions have been removed, and domestic investment
policies have been liberalized.
 Over time, the number of items on the reserved list has also been reduced and
stands at 605 in 2005.
 With liberalization, since all the items on the reserved list can now be imported,
MSMEs face competition from foreign enterprises even though large scale
industries in India cannot produce these products.
 The Censuses of the SSIs also suggest that the policy of reserving goods for
production by SSIs has not been very effective. The number of units making
reserved products was small compared to the overall size of the MSME sector, and
the reserved products account for a small share of the total value of output in the
MSME sector.
 Also, it appears that the export performance of India may have suffered because of
the reservation policy. Most growing economies witness a changing structure of
exports, with a high growth of exports of labour-intensive and resource-based
industries. The export structure of India has not changed much in the last two
decades, and this may be because many commodities in the potential high-growth
category come under the reserved list.

What are the challenges of MSME?

 Most of the unregistered MSMEs would predominantly comprise micro enterprises,

particularly confined to rural India, operating with obsolete technology, limited
access to institutional finance etc. And there is a need to transform the huge
unregistered MSME into registered MSME.
 Need to improve the competitiveness of the overall MSME sector.
 Access to technology.
 IPR related issues.
 Design as a market driver.
 Wasteful usage of resources/manpower.
 Energy inefficiency and associated high cost.
 Low ICT usage.
 Low market penetration.
 Quality assurance/certification.
 Standardization of products and proper marketing channels to penetrate new
markets.
 The definition for MSMEs must be updated – considering inflation and availability of
better technologies since the last change in 2006.

Recent Initiatives

 As part of the National Manufacturing Competitiveness Programme (NMCP) – 10

specific initiatives were taken to enhance the competitiveness of the entire value
chain of the MSME sector.
 Limited Liability Partnership (LLP) Act, 2008 was introduced to enable early
corporatization of MSMEs and tap the capital market for fund raising. Accordingly,
MSME platforms are created in BSE and NSE in 2012.
 To develop a roadmap for the development and promotion of MSMEs, a task force
was created by the Prime Minister of India in 2009. The Task Force, which
comprised, among others, six specific theme-based sub-groups (on credit,
 marketing, infrastructure, technology, skill development, exit policy, labor, and
taxation) submitted its report in 2010 suggesting: (1) Immediate policy measures (2)
Medium-term institutional measures (3) Legal and regulatory structures to create a
conducive environment for entrepreneurship and growth of MSMEs.

 The Inter-Ministerial Committee for Accelerating Manufacturing in Micro, Small and

Medium Enterprises made recommendations on – (a) the promotion of start-ups (b)
facilitating operation and growth (covering credit, technology, and marketing) (c)
closure and exit (d) labour laws and regulations.
 These policy initiatives are clear and consistent, aimed at transforming the
ecosystem for the MSMEs sector by influencing: (1) Birth (encouraging Start-Ups)
(2) Operations and growth (by simplifying laws and regulations, and facilitating
their access to credit. Better technology and dynamic markets, apart from skilled
labour and reliable infrastructure) (3) Orderly and easy exit

 Thus, the emerging focus of India’s MSME policy aims at covering the entire
lifecycle of MSMEs to ensure a healthy, vibrant and competitive MSME sector.

Role of Government Agencies in development of SSI Sector The fourth role of

government agencies in development of SSI sector, it highlights Industrial Policy
Resolution (IPR) 1948, Problems Faced by Small Scale Industries in India, Sources of
Industrial Finance for Small Industries in India, Programmes and Schemes for Promoting
SSI sector, Institutional Support for Small Scale Industries, Small Industries Development
Organisation, National Manufacturing Competitiveness Programme, Flow of credit to SSI
sector, Government's Promotional Policy and Support Network, Government Promotional
Framework and Assistance to small Scale Industries, The Non-government Promotional
Structure, Development of Small Scale Industries During Five Year Plan Periods and
Maharashtra Small Scale Industries Development Corporation Limited (MSSIDC). Small
and medium enterprises are the backbone of industrial development. It is very important
for both developed and developing country Small and medium enterprises always
represented the model of economic development, which emphasized high contribution to
domestic production, significant export earnings, low investment requirements,
employment generation, effective contribution to foreign exchange earning of the nation
with low import-intensive operations. The contribution of small scale industries (SSIs) has
been remarkable in the industrial development of the country. It has a share of 40% in the
industrial production. 35% of the total manufactured exports of the country are directly
accounted for by this sector. In terms of employment generated, this sector is next only to
agriculture employing approximately 14 million people. . Overall, the small industry sector
has done quite well and has enabled the country to achieve considerable 159 industrial
growth and diversification. Small scale industries are less capital intensive and suit the
Indian economic environment with scarce resources and large population base. In addition,
it is highly and has a scope for labor-intensive for building upon the traditional skill and
knowledge. Small scale industries have remained high on the agenda of all political
parties, intelligentsia and policy makers since independence as a legacy of Gandhian
philosophy. Some of the Government Policies for development and promotion of Small-
Scale Industries in India are: 1. Industrial Policy Resolution (IPR) 1948, 2. Industrial
 Policy Resolution (IPR) 1956, 3.Industrial Policy Resolution (IPR) 1977, 4.Industrial
Policy Resolution (IPR) 1980 and 5.Industrial Policy Resolution (IPR) 1990.Since
Independence, India has several Industrial Policies to her credit. So much so that Lawrence
A. Veit tempted to say that “if India has as much industry as it has industrial policy, it
would be a far well-todo nation.” With this background in view, in what follows is a
review of India’s Industrial Policies for the development and promotion of smallscale
enterprises in the country. 1. Industrial Policy Resolution (IPR) 1948: The IPR, 1948 for
the first time, accepted the importance of small-scale industries in the overall industrial
development of the country. It was well realized that small-scale industries are particularly
suited for the utilization of local resources and for creation of employment opportunities.
However, they have to face acute problems of raw materials, capital, skilled labour,
marketing, etc. since a long period of time. Therefore, emphasis was laid in the IPR, 1948
that these problems of small-scale enterprises should be solved by the Central Government
with the cooperation of the State Governments. In nutshell, the main 160 thrust of IPR
1948, as far as small-scale enterprises were concerned, was ‘protection.’ 2. Industrial
Policy Resolution (IPR) 1956: The main contribution of the IPR 1948 was that it set in the
nature and pattern of industrial development in the country. The post-IPR 1948 period was
marked by significant developments taken place in the country. For example, planning has
proceeded on an organised manner and the First Five Year Plan 1951-56 had been
completed. Industries (Development and Regulation) Act, 1951 was also introduced to
regulate and control industries in the country. The parliament had also accepted ‘the
socialist pattern of society’ as the basic aim of social and economic policy during this
period. It was this background that the declaration of a new industrial policy resolution
seemed essential. This came in the form of IPR 1956.The IPR 1956 provided that along
with continuing policy support to the small sector, it also aimed at to ensure that
decentralised sector acquires sufficient vitality to self-supporting and its development is
integrated with that of large- scale industry in the country. To mention, some 128 items
were reserved for exclusive production in the small-scale sector. Besides, the Small-Scale
Industries Board (SSIB) constituted a working group in 1959 to examine and formulate a
development plan for small-scale industries during the, Third Five Year Plan, 1961-66. In
the Third Five Year Plan period, specific developmental projects like ‘Rural Industries
Projects’ and ‘Industrial Estates Projects’ were started to strengthen the small-scale sector
in the country. Thus, to the earlier emphasis of ‘protection’ was added ‘development.’ The
IPR 1956 for small-scale industries aimed at “Protection plus Development.” In a way, the
IPR 1956 initiated the modem SSI in India.

Major Causes of Sickness in Small Scale Industries

and Remedies
mall Scale Industries (SSIs) play vital role in the economic development of a
country. Some SSIs turn out to be sick due to various reasons. Some of the major
causes for sickness in small scale industries are dealt in brief.

Sickness in SSI – Causes and Remedies

1. Inadequacy of working capital

Some units turn out sick due to inadequacy of working capital. There may exists
delay in sanction of working capital by financial institutions. Industrial units find
it difficult to meet out day to day operations due to the time gap between sanction
of term loan and working capital needs. Shortage of Working Capital is one of the
main reasons for sickness.
2. Non-availability of credit
Sickness in SSI sector may be attributed to non-availability of credit. Delay in
getting loans may result in stoppage of work or lead to production loss. Low
production may lead to reduced sales which in turn may lead to financial loss.

3. Poor and obsolete technology

Some industrial units use technology which is outdated. Out dated technology
may affect the quantity and quality of production. This results in production loss
and reduces demand for the goods.
4. Non availability of raw material
Some units may require raw material which are scarcely available. Sometimes,
the raw material required by the unit may not be available in abundance. Hence,
this affects the production and the sales of the goods. If the raw material is not
abundantly available, then the industrial units have to spend a large amount of
money to buy them. This may result in financial loss.

5. Marketing problems
Sometimes, the industrial units may not know as to how to create demand for the
products. Lack of marketing knowledge may result in less demand for the goods.
Similarly, there may be less demand for the goods produced by the SSI due to
competition or change in the taste of the buyers.

For example, lot of units producing dyes and ceramics have been found sick in
Gujarat and Tirupur.

6. Erratic power supply

Shortage in power supply affects the industries. This results in delay in
production of goods and leads to financial losses.

7. Labour problems
The relationship between the employer and the employees may not be cordial.
Some of the labour problems such as strike, lay off, lock out may lead to industrial
sickness.

8. Poor Management
The entrepreneur must be a good planner, organizer and a manager. If the
Industrial Unit promoters lack managerial skills, then it may lead to several
problems.
9. Inadequate attention to R&D
Industries have to allocate a part of money in research and development to
survive and compete with competitors. Failure to focus on the above may lead to
industrial sickness

10. Diversion of resources

If the employer utilizes the funds obtained for the business for any personal
purposes, then diversion of funds will lead to industrial sickness. The funds used
for personal purposes cannot be regenerated and hence it may result in delay in
payment of loans or financial crisis for the borrower of the loan.

11. Globalization
Small scale industrial units may find it very difficult to compete with large scale
industries and foreign competitors. Inability of the units to face growing
competition due to liberalization and globalization may lead to industrial
sickness.
12. Dispute among partners
There may arise dispute between the partners or family members running the
unit. This results in stoppage of work and leads to industrial sickness.

13. Overambitious projects

The project may not be technically feasible, such an overambitious project is one
of the reasons for industrial sickness.

Remedial measures to overcome Sickness

Some of the remedial measures to curb and overcome sickness in industrial
undertakings are as follows:

1. Identifying sickness at initial stage

Sickness in Small Scale Industries are not a sudden phenomenon but it is a
gradual process taking 5 to 7 years eroding the health of a unit beyond cure.
Therefore, the identification and detection of the sickness at incipient stage is the
first and foremost measure to detect and reduce industrial sickness. Sickness
must be identified at initial stage.

2. Financial assistance
Lending agencies need to relax their lengthy process and other norms for
extending credit to the SSIs. To combat the incidence of sickness financial
institutions should grant credit without delay to SSI sector.

A number of initiatives can be undertaken to overcome credit problems such as:.

1. Increasing Working capital limit.

2. Enhancing the powers of bank managers of specialized bank branches in
offering credit to SSI.
3. Strengthening the mechanism for discounting bills.
4. Reduced rate of interest.
These measures would improve the flow of credit and keep a check on the
incidence of sickness.

3. Improving Infrastructure
Infrastructure facilities can be improved by setting up industrial estates. Common
testing centres etc., infrastructural problems can be solved by improving the
roadways, waterways, establishing telecommunication systems.
4. Technology Up-gradation
Funds may be provided by the financial institutions for adoption of advanced
technology. Similarly, some sort of training may be provided for use of the latest
technology to overcome technological problems. Technological up-gradation can
help to overcome technological obsolescence.

5. Marketing assistance
Marketing assistance may be provided to entrepreneurs for marketing the goods
produced by them. Government must help to market the goods. Government and
Non Government Organizations (N.G.Os) can come forward for marketing the
goods produced by the SSI sector. The problem of poor marketing of the products
can be solved by coordinated efforts of entrepreneurs and promotional agencies.
6. Liquidation
It is better to wind up the business when there is no possibility to revive the unit.

7. Government Interventions
Interventions must be made by the government to prevent sickness. Periodic
review of financial statements can help to identify and prevent sickness at initial
stage.

8. Training
A proper environment must be created where an entrepreneur will be educated
and will have a proper knowledge, skill and experience about internal and
external environment of business to compete with large-scale industries and
multinational companies.

9. Rehabilitation
Potentially viable sick units should be dealt well for the purpose of rehabilitation.
Rehabilitation is a remedy considered for industrial units, which have already
become sick and for the units that are on the verge of collapse.
Under the provisions of SICA, 1985, the Government of India has established
Board for Industrial and Financial Reconstruction (BIFR) in January 1987 for
determining the preventive, ameliorative, remedial and other measures which are
required to be taken in respect of sick industrial company and for expeditious
enforcement of rehabilitation schemes.

The main objective of SICA is to determine sickness and expedite the revival of
potentially viable units or closure of unviable units (unit here in refers to a Sick
Industrial Company). It was expected that by revival, idle investments in sick
units will become productive and by closure, the locked up investments in
unviable units would get released for productive use elsewhere.

The measures taken by BIFR are

1. Legal
2. Financial restructuring
3. Managerial
Rehabilitation Programmes
Taking into consideration the many sick micro, small and medium (MSM)
industries, the MSM policy has provided a separate package for rehabilitation of
such industries in India.

The policy proposes to set up a rehabilitation fund for sick industries, which will
be managed by the Industries Commissioner and the Director of Industries and
Commerce. Funds will be infused into the committee based on the
recommendation of a State-Level Rehabilitation Committee (SLRC).

The rehabilitation fund, among other things, will be used for meeting 75 percent
of the cost of the cause that made the industry unviable, and to sanction an
interest subsidy of 4 per cent for two years on rehabilitation/bridge loans up to
Rs.15 lakh to the sick MSM industries.

The rehabilitation measures would ensure that most units under lockout would
be able to open at an early date and appealed to MSM units to avail of the
facilities the government was providing them.

The rehabilitation programme involves the following depending upon the nature
of sickness.

1. Change of Management
2. Development of a suitable management information system
3. Settlement with the creditors for payment of their dues in a phased manner,
taking into account the expected cash generation as per viability study.
4. Determination of the sources of additional funds needed to refinance.
5. Modernization of plant and equipment or expansion of an existing
programme or even diversification of the products being manufactured.
6. Concession or relief or assistance allowed by the state level corporation,
financial institutions and Central Government.
Industrial Sickness in India: Meaning,
Causes and Suggested Remedies
Meaning:
One of the adverse trends observable in the corporate private sector of India is
the growing incidence of sickness. It is causing considerable concern to planners
and policymakers. It is also putting a severe strain on the economic system,
particularly on the banks.

There are various criteria of sickness. According to the criteria accepted by the
Reserve Bank of India “a sick unit is one which has reported cash loss for
the year of its operation and in the judgment of the financing bank is
likely to incur cash loss for the current year as also in the following
year.”
A major symptom of sickness is a steady fall in debt-equity ratio and an
imbalance in the financial position of the unit. Simply put, a sick unit is one
which is unable to support itself through the operation of internal resources (that
is, earnings plough-back). As a general rule, the sick units continue to operate
below the break-even point (at which total revenue = total cost) and are, thus,
forced to depend on external sources for funds of their long-term survival.

Industrial sickness creates various socio-economic problems. When an industrial

unit falls sick those who depend on it have to face an uncertain future. They fear
loss of jobs. Even if they do not lose jobs they do not get their wages and compen-
sation in time and are, thus, forced to live in extreme hardship.

Of course, sickness is not a special problem of India. It is, undoubtedly, a global

phenomenon. Even in industrially advanced countries there are numerous cases
of bankruptcy or liquidation. These sick units are nursed back to health through
mergers, amalgamations, takeovers, purchase of assets, or outright
nationalisation. When the-problem becomes really alarming or unmanageable,
the unit is permitted to die its natural death.

Causes:
Industrial sickness has become a major problem of the India’s corporate private
sector. Of late, it has assumed serious proportions. A close look reveals that there
are, at least, five major causes of industrial sickness, viz., promotional,
managerial, technical, financial and political.
An industrial unit may become sick at its nascent stage or after working for quite
some time. For instance, two major traditional industries of India, viz., cotton
textiles and sugar, have fallen sick largely due to short-sighted financial and
depreciation policies. Heavy capital cost escalation arising out of price inflation
accentuates the problem. The historical method of cost depreciation is highly
inadequate when assets are to be replaced at current cost during inflation.

Moreover, since the depreciation funds are often used to meet working capital
needs, it does not become readily available for replacement of worn-out plant and
equipment. The end result is that the industrial unit is constrained to operate
with old and obsolete equipment, its profitability is eroded and, sooner or later,
the unit is driven out of the market by the forces of competition.

External vs. Internal Causes:

The factors leading to sickness can be due to reasons of finance, technical issues,
mismanagement, non-availability of raw materials, power or natural calamities or
disasters such, as fire or earthquake or a combination of such factors.

The causes of industrial sickness may be divided into two broad

categories:
ADVERTISEMENTS:

(i) external and

(ii) internal.

External causes are those which are beyond the control of its management and
seen to be relatively more important than internal causes.

The causes which have been identified so far include:

(a) Delay in land acquisition and building construction

(b) Delay in obtaining financial assistance from public financial institutions

(c) Delayed supply of machinery by the manufacturers

(d) Problems related to recruitment of technical and managerial staff

(e) Delay on the part of the Government in sanctioning licences, permits, etc.

(f) Shortages of basic inputs like power and coal. Other causes include
(g) Cost over-runs due to factors beyond the control of management

(h) Lack of demand for products or shift of demand to products of rival firms due
to delays in project implementation

(i) Unsatisfactory performance by collaborators—financial and technical

(j) Large changes in the scale of operation and optimum product mix in the long
run and, last but not the least

(k) Changes in the policy of the Government relating to movement of goods from
one place to another within the country

The primary cause seems to be:

(i) “Lack of experience of the promoters in a specific line of activity”.

The other causes are:

(ii) Differences among various persons associated with the promotion and
management of the enterprise

(iii) Mechanical defects and breakdown

(iv) Inability to purchase raw materials at an economic price and at the right time

ADVERTISEMENTS:

(v) Failure to make controls effective in time, in case of deficiencies in workings

(vi) Deteriorating labour-management relations and the consequent fall in

capacity utilisation

(vii) Faulty financial planning and lack of balance in the financial (capital) struc-
ture.

It is often observed that many projects are started without proper feasibility
study. Hardly any long-term view of the future is taken. Instead, a project is
sought to be managed on the basis of myopic vision, inadequate analysis and
improper approach. Often industrial projects are started on an ad hoc basis
without gathering much information about the expertise and competence needed
for the purpose.
Moreover, once the construction work is started on the basis of a project report,
there is no periodic assessment (or review) of the economic viability of the
project. Often major changes in the political and economic environment (such as
change in the party in power or change in Government) make the basic assump-
tions underlying the project unrealistic or inappropriate. Yet the project is made
to remain operational without considering the after-effects.

So, there are various reasons that make industries sick. The prime among this is
market-related. Market obsolescence is one of the prime reasons for units turning
sick. A striking example is that of the jute industry, where “the non-avail- ability
of raw materials and constant power shortages have made many units sick. And
bankers are not normally very responsive in helping a company that has gone
sick.

Incidence:
In Dec. 1980 the total number of sick units was 24,550, involving outstanding
bank credit of Rs. 1,809 crores. As at the end of March 2000, the total number of
sick units stood at 307,399 involving an outstanding bank credit of about Rs.
23,656 crores. Of these 14,793 were potentially viable, 278,423 were non-viable
and the viability of the remaining 14,183 has not been decided.

Three major industries affected by industrial sickness are jute, engineering goods
and textiles. Some of the industries such as the real estate, light consumer goods,
automobile, diamonds and many others are reeling under the impact of steep fall
in demand, inadequate supply of finance, large proportion of non-performing
assets and constraints of finance due to huge amounts of funds getting blocked in
ageing receivables

Government Policy:
A number of measures have been taken to tackle the problem of industrial
sickness. The importance of detection of sickness at the incipient stage has been
emphasised by the RBI. The policy framework in respect of measures to deal with
the problem of industrial sickness has been laid down in the guidelines issued on
October 1981 (which were subsequently modified in February 1982) for guidance
of administrative ministries of the Central Government, State Governments and
financial institutions.

The salient features of these guidelines are the following:

(a) The administrative ministries in the Government will have specific
responsibility for prevention and remedial action in relation to sickness in
industrial sector within their respective charges. They will have a central role in
monitoring sickness and coordinating action for revival and rehabilitation of sick
units. In suitable cases, they will also establish standing committees for major
industrial sectors where sickness is widespread;

(b) The financial institutions will strengthen the monitoring system so that it is
possible to take timely corrective action to prevent incipient sickness. They will
obtain periodical returns from the assisted units and from the Directors
nominated by them on the Boards of such units. These will be analysed by the
Industrial Development Bank of India and results of such analyses conveyed to
the financial institutions concerned and the Government.

(c) The financial institutions and banks will initiate necessary corrective action
for sick or incipient sick unit based on a diagnostic study. In case of growing
sickness, the financial institutions will also consider taking of management
responsibility where they are confident of restoring a unit to health. The Ministry
of Finance will have to issue suitable guidelines for management;

(d) Where the banks and financial institutions are unable to prevent sickness or
ensure revival of a sick unit, they will deal with their outstanding dues to the unit
in accordance with the normal banking procedures. However, before doing so,
they will report the matter to the Government which will decide whether the unit
should be nationalised or whether any other alternative- including workers’
participation in management— can revive the undertaking.

(e) Where it is decided to nationalise the undertaking, its management may be

taken over under the provisions of the Industries (Development and Regulation)
Act, 1951, for a period of six months to enable the Government to take necessary
steps for nationalisation.

(f) Finally the industrial undertakings presently being managed under the
provisions of the Industries (Development and Regulation) Act, 1951, will also be
dealt with in accordance with the above principles.

Concessions:
The Government has also provided certain concessions to assist revival of sick
units without direct intervention. For example, the Government has amended the
Income-tax Act in 1977 by addition of Section 72A by which tax benefit can be
given to healthy units when they take over the sick units by amalgamation, with a
view to reviving them.

The tax benefit is in the form of carry forward of the accumulated business losses
and un-provided depreciation of the sick companies by the healthy companies
after amalgamation. A scheme for provisions of margin money to sick units in the
small-scale sector at soft terms to enable them to obtain necessary funds from
banks and financial institutions to implement their revival scheme has been
introduced from January 1, 1982.

Moreover, financial assistance in the form of long-term equity up to Rs. 15 lakh to

units with a project cost not exceeding Rs. 10 lakhs at a nominal service charge of
1% is available to potentially viable sick SSI from the National Equity Fund.

Establishment of BIFR:
The Central Government has set up a Board for Industrial and Financial Re-
construction (BIFR) with effect from 12 January 1987 in pursuance of enactment
of the Sick Industrial Companies (Special Provision) Act, 1985. This is a major
step for intervening at an early stage and detecting, preventing, as well as taking
ameliorative, remedial and such other measures which to be taken with respect to
sick and potentially viable companies.

The role of the Board for Industrial and Financial Reconstruction (BIFR) needs a
re-look in the face of a steep rise in the number of industries turning sick. BIFR
was constituted to facilitate the revival of industries deemed sick. When an
industry turns sick, BIFR acts as an operating agency (generally the lead financial
institution having the largest loan exposure among the creditors) to devise a
revival strategy proposal.

Progress in the right disposal of sick company cases registered with BIFR has
been slow on account of the conflicting interests between the companies and the
creditors (banks and financial institutions, government bodies/agencies) and cer-
tain lacunae in the SIC A Act. The rehabilitation schemes met with 40-45%
failure, as a result of which many of the cases had to be reopened.

The rate of registration/sickness increased substantially during 1997-98 due to

(a) the recessionary trends prevalent in industry, (b) poor financial market
conditions, and (c) the tough stance taken by banks/financial institutions (FIs)
towards defaulters/potentially sick companies under their non-performing assets
(NPA) accounts for rescheduling of repayments, etc.

The problem appears even more acute if we take note of potentially sick BIFR
companies, as also the NPAs of FIs and banks. In fact, the NPAs of banks and
others have continued to rise.

Upto 1997-98 the outstanding bank credit against sick companies has reached an
abnormal’ proportion of over Rs. 23,658 crores, in March’ 2000. Over 15 lakh
workers have been affected by companies turning sick.

IRBI (IIBI):
The Industrial Reconstruction Bank of India (IRBI) set up in 1985 has initiated
various steps for checking the growth of industrial sickness and helping in
industrial revival. From April 1997 the name of IRBI has been changed to
Industrial Investment Bank of India (IIBI). By March 2000, cumulative financial
assistance sanctioned and disbursed by it stood at Rs. 10.090 crores and Rs. 7,353
crores, respectively.

A significant measure taken during 1986 was the setting up of Small Industries
Development Fund (SIDF) in the IDBI. This is meant to provide special financial
assistance to the small-scale sector. The Fund would be used for providing refi-
nancing assistance not only for development, expansion and modernisation, but
also for the rehabilitation of the small-scale sick industries.

Modernisation Fund:
The Government has set up two funds, namely the Textile Modernisation Fund
and the Jute Modernisation Fund, for modernisation of the textiles and jute
sector. Under these two funds, assistance is provided not only to the healthy units
for modernisation at 11.5% rate of interest; but also’ to sick but potentially viable
units. Special loans are given to the weak units for meeting a part of the
promoters’ contribution.

Goswami Committee Report:

The Committee on Industrial Sickness and Corporate Restructuring under
chairpersonship of Dr. Omkar Goswami submitted its report in July 1993.

The main recommendations of the Committee with respect to sick

companies are:
(a) For early detection of sickness the definition of sickness should be changed
to:-

(i) Default of 180 days or more on repayment to term lending institutions, and

(ii) irregularities in cash credits or working capital for 180 days or more.

(b) Amendment of the Urban Land (Ceiling & Regulation) Act, 1976 to improve
generation of internal resources of sick companies.

(c) Empower the BIFR for speedier restructuring, winding-up and sale of assets of
companies; and

(d) A sick company’s own reference of BIFR should be voluntary, not mandatory.

SICA Amendment Act, 1994:

The modifications brought in the Sick Industrial Companies (Special Provisions)
Act, 1985 by the 1994 Amendment Act pertain to the changes in the definition of
SICA, expansion of the term operating agency, clarification that an enquiry as to
sickness shall be deemed to have commenced on receipt of a reference by the
BIFR complete in all respects, scope for reverse merger, “deemed
consent” after the lapse of 120 days, “single window concept” for release of
funds by banks/financial institutions to the sick company, monitoring
implementation of sanctioned revival schemes by BIFR, holding on operations by
financial institutions/banks/State Governments, empowering the Central
Government, State Government, banks, institutions, etc., to report cases of
potential sickness, etc.
In the definition of sickness the period for the registration of an industrial
company as sick has been reduced from seven to five years. Furthermore, the
condition of incurring cash losses during the preceding two years has been
waived. This means that an industrial company would be considered a sick
industrial company once its net worth is completely eroded and has been regis-
tered for not less than five years.

Suggested Remedies:
Some of the effective measures which may be taken for revival of sick units are
technical help, professional counselling and improved management. Also, the role
of professionals and experienced management becomes more important in times
of sickness.
In addition to technical and professional consultants, no sick industry will ever be
able to recuperate without sufficient, timely and soft finance. Bankers are the key
to the problem. The role of the bankers needs to be redefined and a new direction
needs to be given to support aid and lift sick industrial units from the situations
that befall them. It is also the level of service and support in terms of financial
advice, assistance in related matters of insurance, release of hypothecated assets
and timely finance.

The Sick Industrial Companies (Special Provisions) Bill, 1997, passed by Lok
Sabha, introduced encouraging changes. It suggested that a time-bound
procedure was to be adopted within which the scheme has to be sanctioned and
BIFR would play the role of a mediator and not a court.

Technical obsolescence and financial mismanagement are also important factors

that lead to industrial sickness. As per the new provisions, an opportunity will be
given to get an unanimous consent to a scheme from all concerned, failing which
secured creditors will attempt to form a scheme and, if all this fails, the
undertaking would be sold off. Only if it is not possible to do that, the BIFR may
order winding up of the company.

What is a Financial
Institution?
What Does Financial Institution Mean?
What is the definition of financial institution? A financial institution is responsible for
the supply of money to the market through the transfer of funds from investors to the
companies in the form of loans, deposits, and investments. Large financial institutions
such as JP Morgan Chase, HSBC, Goldman Sachs or Morgan Stanley can even control
the flow of money in an economy.
The most common types of financial institutions include commercial banks, investment
banks, brokerage firms, insurance companies, and asset management funds. Other
types include credit unions and finance firms. Financial institutions are regulated to
control the supply of money in the market and protect consumers.
Let’s look at an example.

Example
Bank ABC is a shareholder-owned institution that offers banking and investment
services to a wide range of customers. The bank acts as an intermediary between retail
and institutional investors, who supply the funds through deposits and retail and
institutional investors, who are looking for financing. The bank pays a 2% interest on the
deposits it accepts from households and businesses from the interest earned from
lending services. In addition, the bank offers fund management and health and life
insurance services through its subsidiaries.

Furthermore, Bank ABC operates in the wholesale market, seeking to lend large
conglomerates and corporations as well as government agencies. In this context, the
bank has a highly-equipped advisory team, which offers corporate finance, forex, capital
markets and investment management services.

The bank is regulated for the protection of consumers. Hence, its funds undergo strict
scrutiny by the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve
System. These two Federal agencies are responsible for guaranteeing that the bank will
be able to repay the borrowed funds.

Commercial Bank
Definition: Commercial Bank can be described as a financial institution, that offers basic
investment products like a savings account, current account, etc to the individuals and
corporates. Along with that, it provides a range of financial services to the general public
such as accepting deposits, granting loans and advances to the customers.

It is a profit making company, which pays interest at a low rate to the depositors and charges
higher rate of interest to the borrowers and in this way, the bank earns the profit.

Types of Commercial Bank

 Commercial banks are classified into two categories i.e. scheduled commercial
banks and non-scheduled commercial banks. Further, scheduled commercial banks are
further classified into three types:

 Private Bank: When the private individuals own more than 51% of the share capital, then that
banking company is a private one. However, these banks are publicly listed companies in a
recognized exchange.
 Public Bank: When the Government holds more than 51% of the share capital of a publicly listed
banking company, then that bank is called as Public sector bank.
 Foreign Bank: Banks set up in foreign countries, and operate their branches in the home country
are called as foreign banks.
Non-scheduled commercial banks refer to the banks which are not covered in the Reserve
Bank of India’s second schedule. The paid-up capital of such banks is not more than Rs. 5
lakhs.

Functions of Commercial Bank

1. Primary functions
 Accepting Deposits: The primary function for which the commercial banks were established is to
accept deposits from the general public, who possess surplus funds and are willing to deposit
them so as to earn interest on it.
 There are various
products offered by the bank to the customers for the deposit of their money, which includes
savings account, current account, fixed deposit and recurring deposit.
 Advancing Loans: Next important function performed by the commercial bank is lending money
to the individuals and companies. The banks make loans to the customers in the form of term
loans, cash credit, overdraft and discounting of bills of exchange.

2. Secondary functions
 Agency Services: There are some facilities provided by the commercial banks in which they act as
an agent of the customers. Such services are:
 Collection and payment of rent, interest and dividend.
 Collection and payment of cheques and bills.
 Buying and selling securities.
 Payment of insurance premium and subscriptions.
 General Utility Services: Commercial banks provide general utility services to the customers and
charges a fee for the same. It covers services like:
 Safekeeping of valuables, documents etc, in locker or vault.
 ATM card, credit card and debit card facility.
 Issue of demand draft, pay order and traveller’s cheque.
 Internet and mobile banking
 Sale of application forms of competitive exams.
 Transfer of funds: Banks assist in the transfer of funds from one person to another or from one
place to another through its credit instruments.
 Credit Creation: The commercial banks are authorized to create credit, by granting more loans
than the amounts deposited by the customers.
A commercial bank offers an array of facilities such as internet banking, mobile banking,
ATM facility, credit card facility, NEFT, RTGS and so forth for which it charges a definite
sum as a fee for providing these facilities.

Cooperative Banking in India: History,

Structure, Importance and
Weaknesses
Meaning of Cooperative Bank:
Cooperative bank is an institution established on the cooperative basis and
dealing in ordinary banking business. Like other banks, the cooperative banks are
founded by collecting funds through shares, accept deposits and grant loans.
The cooperative banks, however, differ from joint stock banks in the
following manner:
ADVERTISEMENTS:

(i) Cooperative banks issue shares of unlimited liability, while the joint stock
banks issue shares of limited liability.
(ii) In a cooperative bank, one shareholder has one vote whatever the number of
shares he may hold. In a joint stock bank, the voting right of a shareholder is
determined by the number of shares he possesses.
(iii) Cooperative banks are generally concerned with the rural credit and provide
financial assistance for agricultural and rural activities. Joint stock companies are
primarily concerned with the credit requirements of trade and industry.
(iv) Cooperative banking in India is federal in structure. Primary credit societies
are at the lowest rung. Then, there are central cooperative banks at the district
level and state cooperative banks at the state level. Joint stock banks do not have
such a federal structure.
ADVERTISEMENTS:

(v) Cooperative credit societies are located in the villages spread over entire
country. Joint stock banks and their branches mainly concentrate in the urban
areas, particularly in the big cities
History of Cooperative Banking in India:
Cooperative movement in India was started primarily for dealing with the
problem of rural credit. The history of Indian cooperative banking started with
the passing of Cooperative Societies Act in 1904. The objective of this Act was to
establish cooperative credit societies “to encourage thrift, self-help and
cooperation among agriculturists, artisans and persons of limited means.”
Many cooperative credit societies were set up under this Act. The Cooperative
Societies Act, 1912 recognised the need for establishing new organisations for
supervision, auditing and supply of cooperative credit. These organisations were-
(a) A union, consisting of primary societies; (b) the central banks; and (c)
provincial banks.
Although beginning has been made in the direction of establishing cooperative
societies and extending cooperative credit, but the progress remained
unsatisfactory in the pre-independence period. Even after being in operation for
half a century, the cooperative credit formed only 3.1 per cent of the total rural
credit in 1951-52.
Structure of Cooperative Banking:
ADVERTISEMENTS:

There are different types of cooperative credit institutions working in India.

These institutions can be classified into two broad categories- agricultural and
non-agricultural. Agricultural credit institutions dominate the entire cooperative
credit structure.
Agricultural credit institutions are further divided into short-term agricultural
credit institutions and long-term agricultural credit institutions.
The short-term agricultural credit institutions which cater to the short-term
financial needs of agriculturists have three-tier federal structure- (a) at the apex,
there is the state cooperative bank in each state; (b) at the district level, there are
central cooperative banks; (c) at the village level, there are primary agricultural
credit societies.
Long-term agricultural credit is provided by the land development banks. The
whole structure of cooperative credit institutions is shown in the chart given.

Short-Term Rural Cooperative Credit Structure:

In rural India, there exists a 3-tier short-term rural cooperative structure. Tier-I
includes state cooperative banks (SCBs) at the state level; Tier-II includes central
cooperative banks (CCBs) at the district level; and Tier- III includes primary
agricultural credit societies (PACSs).
In 19 states, there exists a 3-tier short-term cooperative credit structure,
comprising SCBs, CCBs and PACSs. And in 12 states, there exists a 2-tier short-
term cooperative structure. In the north-eastern states, including Sikkim, the
structure is 2-tier, comprising only SCBs and PACSs.
As on March 31, 2013, the number of SCBs was 31, of CCBs was 370 and of PACSs
was 92432. As on March 31, 2012, the loans advanced by SCBs were Rs. 75600
crore, by CCBs were Rs. 14400 crore and by PACSs were Rs. 91200 crore.
1. State Cooperative Banks (SCBs):
Functions and Organisation:
State cooperative banks are the apex institutions in the three-tier cooperative
credit structure, operating at the state level. Every state has a state cooperative
bank.
State cooperative banks occupy a unique position in the cooperative
credit structure because of their three important functions:
(a) They provide a link through which the Reserve Bank of India provides credit
to the cooperatives and thus participates in the rural finance,
(b) They function as balancing centers for the central cooperative banks by
making available the surplus funds of some central cooperative banks. The
central cooperative banks are not permitted to borrow or lend among themselves,
(c) They finance, control and supervise the central cooperative banks, and,
through them, the primary credit societies.
Capital:
State cooperative banks obtain their working capital from own funds,
deposits, borrowings and other sources:
(i) Own funds include share capital and various types of reserves. Major portion
of the share capital is raised from member cooperative societies and the central
cooperative banks, and the rest is contributed by the state government. Individual
contribution to the share capital is very small;
(ii) The main source of deposits is also the cooperative societies and central
cooperative banks. The remaining deposits come from individuals, local bodies
and others.
ADVERTISEMENTS:

(iii) Borrowings of the state cooperative banks are mainly from the Reserve Bank
and the remaining from state governments and others.
Loans and Advances:
State cooperative banks are mainly interested in providing loans and advances to
the cooperative societies. More than 98 per cent loans are granted to these
societies of which about 75 per cent are for the short-period. Mostly the loans are
given for agricultural purposes.
The number of state cooperative banks rose from 15 in 1950-51 to 21 in 1960-61
and to 28 in 1991-92. The loans advanced by these banks increased from Rs. 42
crore in 1950-51 to Rs. 260 crore in 1960-61, and further to Rs. 7685 crore in
1991-92.
2. Central Cooperative Banks (CCBs):
Functions and Organisation:
Central cooperative banks are in the middle of the three-tier cooperative credit
structure.
Central cooperative banks are of two types:
(a) There can be cooperative banking unions whose membership is open only to
cooperative societies. Such cooperative banking unions exist in Haryana, Punjab,
Rajasthan, Orissa and Kerala.
(b) There can be mixed central cooperative banks whose membership is open to
both individuals and cooperative societies. The central cooperative banks in the
remaining states are of this type. The main function of the central cooperative
banks is to provide loans to the primary cooperative societies. However, some
loans are also given to individuals and others.
Capital:
The central cooperative banks raise their working capital from own funds,
deposits, borrowings and other sources. In the own funds, the major portion
consists of share capital contributed by cooperative societies and the state
government, and the rest is made up of reserves.
Deposits largely come from individuals and cooperative societies. Some deposits
are received from local bodies and others. Deposit mobilisation by the central
cooperative banks varies from state to state.
For example, it is much higher in Gujarat, Punjab, Maharashtra, and Himachal
Pradesh, but very low in Assam, Bihar, West Bengal and Orissa. Borrowings are
mostly from the Reserve Bank and apex banks.
Loans and Advances:
The number of central cooperative banks in 1991-92 was 361 and the total
amount of loans advanced by them in 1991-92 stood at Rs. 14226 crore. About 98
per cent loans are received by the cooperative societies and about 75 per cent
loans are short-term. Mostly the loans are given for agricultural purpose.
About 80 per cent loans given to the cooperative societies are unsecure and the
remaining loans are given against the securities such as merchandise, agricultural
produce, immovable property, government and other securities etc.
Problem of Overdues:
The most distressing feature of the functioning of the central cooperative banks is
heavy and increasing overdue loans. In 1997-98, the percentage of overdues to
demand at the central cooperative level was 34.
According to the Review of the Cooperative Movement in India, 1974-
76, by the Reserve Bank of India, the main causes of these overdues
are:
(a) Natural calamities such as floods, draughts, etc., affecting the repaying
capacity of the borrowers;
(b) Inadequate and inefficient supervision exercised by the banks;
(c) The poor quality and management of societies and banks;
(d) Absence of linking of credit with marketing;
(e) Reluctance to coercive measures; and
(f) Where coercive measures were taken, the inability of the machinery to
promptly execute the decrees.
For the rehabilitation of the weak Central cooperative banks, the Central Sector
Plan Scheme has been formulated under which semi financial help is given to
write off the bad debts, losses and irrecoverable overdues against small and
marginal farmers.
3. Primary Agricultural Credit Societies (PACSs):
Functions and Organisation:
Primary agricultural credit society forms the base in the three-tier cooperative
credit structure. It is a village-level institution which directly deals with the rural
people. It encourages savings among the agriculturists, accepts deposits from
them, gives loans to the needy borrowers and collects repayments.
It serves as the last link between the ultimate borrowers, i.e., the rural people, on
the one hand, and the higher agencies, i.e., Central cooperative bank, state
cooperative bank, and the Reserve Bank of India, on the other hand.
A primary agricultural credit society may be started with 10 or more persons of a
village. The membership fee is nominal so that even the poorest agriculturist can
become a member.
The members of the society have unlimited liability which means that each
member undertakes full responsibility of the entire loss of the society in case of its
failure. The management of the society is under the control of an elected body.
Capital:
The working capital of the primary credit societies comes from their own funds,
deposits, borrowings and other sources. Own funds comprise of share capital,
membership fee and reserve funds. Deposits are received from both members and
non- members. Borrowings are mainly from central cooperative banks.
In fact, the borrowings form the chief source of working capital of the societies.
Normally, people do not deposit their savings with the cooperative societies
because of poverty, low saving habits, and non-availability of better assets to the
savers in term of rate of return and riskiness from these societies.
Coverage:
In 1999-2000 there were 88 thousand primary agricultural societies covering
more than 96 per cent rural areas. The membership of these societies was 8.68
crore. During the past few decades, the Reserve Bank in collaboration with State
governments, has been taking various measures to reorganise the viable primary
credit societies and to amalgamate non-viable societies with large-sized
multipurpose societies.
This work of reorganisation of primary societies into strong and viable units has
been completed in almost all the states except Gujrat, Maharashtra, and Jammu
and Kashmir. It is because of reorganisation that the number of primary societies
which increased from 105 thousand in 1950-51 to 212 thousand in 1960- 61,
declined to 92 thousand in 1999-2000.
Loans Advanced:
The loans advanced by the primary credit societies have been Showing 3
Continuously increasing trend. They rose from Rs. 23 crore in 1950-51 to Rs. 202
crore in 1960-61 and further to Rs. 13600 crore in 1999-2000.
Only the members of the societies are entitled to get loans from them. Most of the
loans are short-term loans and are for agricultural purposes. Low interest rates
are charged on the loans.
The societies are expected to increase amounts of loans to the weaker sections of
the rural community, particularly the small and marginal farmers. There,
however, exists a serious problem of overdue loans of the societies which have
increased from Rs. 6 crores in 1950-51 to Rs. 44 crore in 1960-61 and to Rs. 2875
crore in 1991-92.
Land Development Banks (LDBs) or Cooperative Agricultural and
Rural Development Banks (CARDBs):
Besides short-term credit, the agriculturists also need long-term credit for
making permanent improvements in land, for repaying old debts, for purchasing
agricultural machinery and other implements. Traditionally, the long-term
requirements of agriculturists were mainly met by money lenders and some other
agencies. But this source of credit was found defective and has been responsible
for the exploitation of farmers.
Cooperative banks and commercial banks by their very nature are not in a
position to provide long-term loans because their deposits are mainly demand
(short-term) deposits. Thus, there was a great need for a specialised institution
for supplying long-term credit to agriculturists. The establishment of land
development banks now known as cooperative and rural development banks
(CARDBs) is an effort in this direction.
Structure:
The land development banks are registered as cooperative societies, but with
limited liability.
These banks have two-tier structure:
(a) At the state level, there are state or central land development banks, now
known as state cooperative agricultural and rural development banks (SCARDBs)
generally one for each state. They were previously known as central land
mortgage banks,
(b) At the local level, there are branches of the state land development banks or
SCARDBs and primary land development banks now known as primary
cooperative agricultural and rural development banks (PCARDBs).
In some states, there are no primary land development banks, but the branches of
the state land development bank. In Madhya Pradesh, the state cooperative bank
itself functions as the state land development bank. In other states like Andhra
Pradesh, Kerala and Maharashtra, there are more than one state land
development banks.
Similarly, the primary land development banks also vary organisationally in
different states. At the national level, the land development banks have also
formed a union, called All-India Land Development Banks’ Union.
Capital:
Land development banks raise their funds from share capital, reserves, deposits,
loans and advances, and debentures. Debentures form the biggest source of
finance. The debentures are issued by the state land development banks.
They carry fixed interest, have maturity varying from 20 to 25 years, and are
guaranteed by the state government. These debentures are subscribed by the co-
operative banks, commercial banks, the State Bank of India and the Reserve Bank
of India.
Besides the ordinary debentures, the land development banks also float rural
debentures for the period upto 7 years. These debentures are subscribed by
farmers, panchayats, and the Reserve Bank. The Reserve Bank substantially
contributes to the finance of land development banks by extending funds to the
state governments for contributing to the share capital of these banks and by
subscribing to ordinary and rural debentures.
Growth:
In India, the first cooperative land mortgage bank was organised in Jhang in
Punjab in 1920.But the effective beginning was made in Madras with the
establishment of a central land development bank in 1929. Later on other states
also established such institutions.
The number of state cooperative agricultural and rural development banks
(SCARDBs) which was 5 in 1950-51, rose to 20 in 2013. The number of primary
cooperative agricultural and rural development banks (PCARDBs) was 697 in
2013.
Loans and Advances:
The land development banks or SCARDBs provide long-term loans to the
agriculturists- (a) for redemption of old debt, (b) for improvement of land and
methods of cultivation, (c) purchasing costly machinery, and (d) in special cases,
for purchasing land. These banks grant loans against the mortgage of land and
the period of loan varies from 15 to 30 years.
In 1999-2000, the loans sanctioned by these banks were Rs.2520 crore and the
amount of loans outstanding was Rs. 11670 crore. The amount of loans
outstanding at the end-March 2012 was Rs. 19400 crore by SCARDBs and
Rs.12000 crore by PCARDBs.
Defects of Land Development Banks:
Although numerically the land development banks have grown over the years,
they have not been able to make much progress in providing long-term finance to
the farmer.
The following are the factors responsible for the unsatisfactory
performance of land development banks:
i. Uneven Growth:
There has been uneven growth of land development banks. These have shown
some progress in the states like Andhra Pradesh, Tamil Nadu, Karnataka,
Maharashtra, Gujrat. Other states have made very little progress. About half of
the states have no land development bank.
ii. Problem of Overdues:
The major problem faced by the land development banks is the existence of heavy
overdues. Moreover, the overdues are continuously rising over the years. In 1991-
92, the percentage of the overdues 6f the land development banks has been put
between 42 to 44 per cent.
Faulty loaning policies, inadequate supervision, over-utilisation of loans,
ineffective measures for recovery, willful defaulters, etc. are the main causes of
unsatisfactory level of overdues. In view of the seriousness of the problem, the
state governments have been advised to draw up and implement time-bound
programmes for special recovery drives.
iii. Lack of Trained Staff:
In spite of quantitative growth of the land development banks, they have not
shown much qualitative improvements in the field of granting loans largely due to
inadequate technical and supervisory staff. Necessary changes in the legislation of
cooperative institutions are also required if the lending activities are to be
diversified for non-traditional developmental purposes and on the basis of non-
landed security.
iv. Other Defects:
Other defects of the land development banks can be summarised
below:
(a) These banks charge very high interest rates on the loans provided by them.
(b) There is much delay and red-tapism in the granting of loans,
(c) Second loan is not advanced unless the first is not repaid.
(d) Installments and the period of loans are not fixed on the basis of the repaying
capacity of the borrowers.
(e) The procedure of receiving a loan from these banks is so complicated that the
agriculturist is forced to seek help from the money lender,
(f) Weaker sections of the rural society such as landless labourers, village artisans
and marginal farmers, are generally unable to secure loans from these banks for
their productive activities simply because they do not have land or adequate
security to offer against loans.
(g) Mostly loans are given for the repayment of old loans and for development
purposes.
v. Report of Rural Credit Survey:
The Report of the Committee of Direction of All-India Rural Credit
Survey has pointed out the unsatisfactory performance of the land
mortgage banks (now called the land development banks) in the
following manner:
(a) These banks raise inadequate funds in a manner ill-rated to demand and
usually lend them in a manner uncoordinated with development;
(b) They act as if prior debts and not production had claim on its attention; and
(c) They reach only the large cultivator and reach him late.
Evaluation of Cooperative Banking:
Progress of Cooperative Credit:
As a result of effective steps taken by the government and the Reserve Bank of
India, the cooperative banking system in India made tremendous progress after
independence. The cooperative credit which was only 3.1 per cent of the total
rural credit in 1951-52, rose to 15.5% in 1961-62 and to 22.7 per cent in 1970-71.
The total amount of short-term credit granted by the cooperatives increased from
Rs. 23 crore in 1951 -52 to Rs. 203 crore in 1961-62 and further to Rs. 1425 crore
in 1979-80. Thus, during the period of about two decades (i.e., 1960-61 to 1979-
80), the short-term and medium-term loans increased by more than seven times.
Table 1 shows that cooperative credit increased significantly from Rs. 3874 crore
in 1985-86 to Rs. 10479 crore in 1995-96, and further to Rs. 24296 crore in 2002-
03. Short-term cooperative credit increased from Rs. 2787 crore in 1985-86 to Rs.
8331 crore in 1995-96 and to Rs. 20247 crore in 2002-03. Medium-term and
long-term cooperative loans increased from Rs. 1087 crore in 1985-86 to Rs. 2148
crore in 1995-96 and to Rs. 4049 crore in 2002-03.

Table-2 shows that during 10th Five Year Plan (2002-03 to 2006-07),
agricultural credit from cooperative banks increased from Rs. 23716 crore (34%)
to Rs. 33174 crore (22%). In 2009-10, it was Rs. 32925 crore (20%).
Importance of Cooperative Banks:
The cooperative banking system has to play a critical role in promoting rural
finance and is specially suited to Indian conditions.
Various advantages of cooperative credit institutions are given below:
I. Alternative Credit Source:
The main objective of cooperative credit movement is to provide an effective
alternative to the traditional defective credit system of the village money lender.
The cooperative banks tend to protect the rural population from the clutches of
money lenders. The money lenders have so far dominated the rural areas and
have been exploiting the poor people by charging very high rates of interest and
manipulating accounts.
II. Cheap Rural Credit:
Cooperative credit system has cheapened the rural credit both directly
as well as indirectly:
(a) Directly, because the cooperative societies charge comparatively low interest
rates, and
(b) Indirectly, because the presence of cooperative societies as an alternative
agency has broken money lender’s monopoly, thereby enforcing him to reduce the
rate of interest.
III. Productive Borrowing:
An important benefit of cooperative credit system is to bring a change in the
nature of loans. Previously the cultivators used to borrow for consumption and
other unproductive purposes. But, now, they mostly borrow for productive
purposes. Cooperative societies discourage unproductive borrowing.
IV. Encouragement to Saving and Investment:
Cooperative credit movement has encouraged saving and investment by
developing the habits of thrift among the agriculturists. Instead of hoarding
money the rural people tend to deposit their savings in the cooperative or other
banking institutions.
V. Improvement in Farming Methods:
Cooperative societies have also greatly helped in the introduction of better
agricultural methods. Cooperative credit is available for purchasing improved
seeds, chemical fertilizers, modern implements, etc. The marketing and
processing societies have helped the members to purchase their inputs cheaply
and sell their produce at good prices.
VI. Role of Cooperative Banks before 1969:
Till the nationalisation of major commercial banks in 1969, cooperative societies
were practically the only institutional sources of rural credit. Commercial banks
and other financial institutions hardly provided any credit for agricultural and
other rural activities. Cooperative credit tothe agriculturists as a percentage of
total agricultural credit increased from 3.1 per cent in 1951-52 to 15.5 per cent in
1961-62 and further to 22.7 per cent in 1970-71.
On the other hand, the agricultural credit provided by the commercial banks as a
percentage of total agricultural credit remained almost negligible and fell from
0.9 percent in 1951-52 to 0.6 percent in 1961-62 and then rose to 4 per cent in
1970-71.
VII. Role of Cooperative Banks after 1969:
After the nationalisation of commercial banks in 1969, the government has
adopted a multi-agency approach. Under this approach, both cooperative banks
and commercial banks (including regional rural banks) are being developed to
finance the rural sector.
But, this new approach also recognised the prime role to be played by
the cooperative credit institutions in financing rural areas because of
the following reasons:
(a) Co-operative credit societies are best suited to the socio-economic conditions
of the Indian villages.
(b) A vast network of the cooperative credit societies has been built over the years
throughout the length and breadth of the country. This network can neither be
duplicated nor be surpassed easily.
(c) The cooperative institutions have developed intimate knowledge of the local
conditions and problems of rural areas.
VIII. Suitable Federal Structure of Cooperative Banking System:
Cooperative banking system has a federal structure with- (a) primary agricultural
credit societies at the village level, (b) higher financing agencies in the form of
central cooperative and state cooperative banks, (c) land development banks for
providing long- term credit for agriculture. Such a banking structure is essential
and particularly suited for effectively meeting the financial requirements of the
vast rural areas of the country.
Considering the great importance of cooperative banks, particularly in the rural
areas, it is not surprising that every committee or commission, that has examined
the working of the cooperative banking system in India, has expressed the
common view that “cooperation remains the best hope of rural India.”
Weaknesses of Cooperative Banking:
Various committees, commissions and individual studies that have reviewed the
working of the cooperative banking system in India have pointed out a number of
weaknesses of the system and have made suggestions to improve the system.
Major weaknesses are given below:
I. General Weaknesses of Primary Credit Societies:
Organisational and financial limitations of the primary credit societies
considerably reduce their ability to provide adequate credit to the rural
population.
The All India Rural Credit Review Committee pointed out the
following weaknesses of the primary credit societies:
(a) Cooperative credit still constitutes a small proportion of the total borrowings
of the farmers,
(b) Needs of tenants and small farmers are not fully met.
(c) More primary credit societies are financially weak and are unable to meet the
production-oriented credit needs,
(d) Overdues are increasing alarmingly at all levels,
(e) Primary credit societies have not been able to provide adequate and timely
credit to the borrowing farmers.
II. Inadequate Coverage:
Despite the fact that the cooperatives have now covered almost all the rural areas
of the country, its rural household membership is only about 45 per cent. Thus,
55 per cent of rural households are still not covered under the cooperative credit
system.
In fact, the borrowing membership of the primary credit societies is significantly
low and is restricted to a few states like Maharashtra, Gujrat, Punjab, Haryana,
Tamil Nadu and to relatively rich land owners.
Criteria of determining borrowing membership include:
(a) Borrowing members as a proportion of rural households,
(b) The average amount of loan issued per borrowing member, and
(c) The proportion of loans going to weaker sections.
The banking Commission 1972 has brought out the following reasons
for the low borrowing membership cooperative societies:
(a) Inability of the people to provide the prescribed security;
(b) Lack of up-to-date land records;
(c) Ineligibility of certain purposes for loans;
(d) Inadequacy of prescribed credit limits;
(e) Onerous conditions prescribed for loans such as share capital contribution at
10 or 20 per cent of loans outstanding and compulsory saving deposits; and
(f) Default of members to repay loans.
III. Inefficient Societies:
In spite of the fact that the primary agricultural credit societies in most of the
states have been reorganised into viable units, their loaning business has not
improved. As the Seventh Plan has observed that out of 94089 primary
agricultural credit societies in the country in 1982-83, only 66000 societies had
full time paid secretaries. About 34000 societies were running at loss.
IV. Problem of Overdues:
A serious problem of the cooperative credit is the overdue loans of the cooperative
institutions which have been continuously increasing over the years. In 1991-92,
percentage of overdues to demand at the level of land development banks was 57,
at the level of central cooperative banks was 41 and at the level of primary
agricultural credit societies was 39.
The overdues in the short-term credit structure are most alarming in North-
Eastern States. In the long-term loaning sector, the problem of overdues has
almost crippled the land development banks in 9 states, viz., Maharashtra,
Gujarat, Madhya Pradesh, Bihar, Karnataka, Assam, West Bengal, Orissa and
Tamil Nadu.
Large amounts of overdues restrict the recycling of the funds and adversely affect
the lending and borrowing capacity of the cooperative societies.
The Banking Commission 1972 pointed out the following reasons for
the overdue loans:
(a) Indifferent management or mismanagement of primary societies;
(b) Unsound lending policies resulting in over-lending or lending unrelated to
actual needs, diversions of loans for other purposes;
(c) Vested interests and group politics in societies and willful defaulters;
(d) Inadequate supervision over the use of loans and poor recovery efforts;
(e) Lack of adequate control of central cooperative banks over primary societies;
(f) Lack of proper links between credit and marketing institutions;
(g) Failure to take quick action against willful defaulters; and
(h) Uncertain agricultural prices.
V. Regional Disparities:
There have been large regional disparities in the distribution of cooperative
credit. According to the Seventh Plan, the eight states of Andhra Pradesh,
Gujarat, Haryana, Kerala, Madhya Pradesh, Maharashtra, Punjab and Rajasthan
account for about 80 per cent of the total credit disbursed. The per hectare short-
term credit disbursed varied from Rs. 4 in Assam to Rs. 718 in Kerala.
VI. Benefits to Big Land Owners:
Most of the benefits from the cooperatives have been covered by the big land
owners because of their strong socio-economic position. For instance, in 1984-85
the farmers having holdings less than two hectares got only 38.8 per cent of the
total loans granted by the primary agricultural credit societies, whereas the land
owners with holdings of more than 2 hectare received 55 per cent. The share of
the poorest rural population (i.e. tenants, share croppers and landless labours)
was only 6.2 per cent.
VII. Lack of Other Facilities:
Besides the provision of adequate and timely credit, the small and marginal
farmers also need other facilities in the form of supply of inputs (i.e., better seeds,
fertilisers, pesticides, etc), extension and marketing services.
These facilities will enable them to utilise the borrowed credit in a proper way.
Therefore, the credit societies should be reorganised into multi-purposes
cooperatives.
Reserve Bank and Cooperative Banking:
Strengthening the cooperative credit movement has been the Reserve Bank of
India’s special responsibility ever since its establishment in 1935.
The following are the various measures undertaken by the Reserve
Bank to develop cooperative banking system and to promote
cooperative finance in the country:
1. Agricultural Credit Department:
The Reserve Bank has a separate Agricultural Credit Department
whose functions are:
(i) To maintain an expert staff to study all questions of agricultural credit and be
available for consolation by the central and state governments, state cooperative
banks and other banking organisations; and
(ii) To coordinate the operations of the Reserve Bank in connection with
agricultural credit and relations with the state cooperative banks and other
institutions engaged in the business of agricultural credit.
2. All-India Rural Credit Survey:
The Reserve Bank’s real role in the cooperative credit movement started with the
appointment of All-India Rural Credit Survey Committee in 1951. The objective of
this Committee was to study the problems of rural credit and explore possibilities
of expanding agricultural credit through cooperative credit system.
The committee submitted its report in December 1954 which highlighted the vital
importance of cooperative rural credit.
The Committee found that while private credit agencies, i.e., money lenders and
traders supply 70 per cent of the rural credit, the cooperative societies provided
only 3 per cent of the total borrowed amount.
The Committee observed that the rural credit in India fell short of the right
quantity, was not of right type, did not serve the right purpose, and often fail to go
to the right people. Regarding the future of cooperative credit movement the
committee said, “cooperation had failed, but cooperation must succeed.”
3. Integrated Scheme of Rural Credit:
For the success of cooperative credit movement, the Survey Committee suggested
an integrated scheme of rural credit based on the following fundamental
principles- (a) state partnership in cooperative credit institutions; (b) full
coordination between credit and other agricultural activities, particularly,
marketing and processing; and (c) administration through adequately trained
and efficient personnel, responsive to the needs of the rural population.
4. Provision of Finance:
In pursuance of the recommendations of the Survey Committee and the later
committees like the Committee on Cooperative Credit (1960), the Reserve Bank
has activity helped the cooperative system to expand rural credit. The Reserve
Bank does not provide finance directly to the agriculturists, but only through
cooperative sector.
The Reserve Bank provides financial assistance for meeting short-term, medium-
term and long-term rural needs.
The needs are explained as under:
(i) Short-Term Finance:
The Reserve Bank provides short-term finance to the state cooperative banks in
two ways- (a) through loans and advances; (b) through rediscounting facility. The
financial assistance is given for seasonal agricultural operations and for
marketing of crops.
In 1950-51, the Reserve Bank sanctioned short- term credit of Rs. 7.6 crore. This
amount increased to Rs. 147 crore in 1960-61 and to Rs. 1090 crore in 1981-82.
(ii) Medium-Term Finance:
The Reserve Bank provides medium-term loans to state cooperative banks
generally for 3 to 5 years. These loans are provided for- (a) land improvements
like bunding, digging of wells and water channels; (b) repair of wells and other
irrigational schemes; (c) purchase of livestock, implements and machinery; (d)
construction of farm houses and cattle sheds.
The Reserve Bank also provides medium-term loans in scarcity affected areas.
Over the years, the amount of medium- term loans sanctioned by the Reserve
Bank has considerably increased from Rs. 27 lakh in 1954-55 to Rs. 24 crore in
1970-71 and to Rs. 110 crore in 1981-82.
(iii) Long-Term Finance:
The Reserve Bank provides long-term financial assistance for a maximum period
of 20 years for agriculture in there ways- (a) It subscribes a portion of debentures
issued by the land development banks. (b) It grants long term loans to such
banks, (c) It grants loans to state governments for subscribing to the share capital
of cooperative credit institutions. The total long- term loans sanctioned by the
Reserve Bank were Rs. 212 crore in 1981-82.
5. Setting Up of Funds:
To meet its financial obligations, the Reserve Bank set up two national funds in
1956, i.e., the National Agricultural Credit (Long-Term Operations) Funds, and
the National Agricultural Credit (Stabilisation) Fund.
The Purpose of the Long-Term Operations Funds was- (a) to make long- term
loans available to state governments to enable them to subscribe the share capital
of cooperative credit institutions; (b) to make medium-term loans to state
cooperative banks for agricultural purposes; (c) to make long-term loans to the
central land mortgage banks against the guarantee of the state government; and
(d) to purchase debentures of central land mortgage banks against the guarantee
of state government. The Stabilisation Fund helps the state cooperative banks to
convert their short-term loans into medium-term loans in cases of draught,
famine or other calamities.
6. Strengthening of Cooperative Banking Structure:
With a view to strengthen cooperative banking structure and promote
cooperative credit, the Reserve Bank undertakes the following
measures:
(i) It pays special attention towards rehabilitating and revitalising the weaker
cooperative units.
(ii) It makes arrangements for maintaining the flow of cooperative credit by
involving commercial banks to finance the primary agricultural societies.
(iii) It makes efforts in improving the lending policies and operational efficiency
of cooperative credit institutions.
(iv) It provides financial accommodation to cooperative credit institutions.
(v) It conducts special training courses at the Cooperative Bankers’ Training
Colleges for the personnel of state, central and urban banks.

Microfinance: What It Is and Why It

Matters
As someone who is interested in starting a business, you need resources and
capital. So what do you do? If you are like most Americans, you head to your bank
and inquire about a loan or seek out investors. While you may successfully get a
traditional loan, if you are considered low-income, the odds are stacked against you.
That's where microfinancing comes in. Microfinancing has been defined as a
provision of financial services that's available to low-income people. This type of loan
helps aspiring entrepreneurs generate income, build assets, manage risks and meet
their household needs, according to Western Union.
"The end goal of microfinance is to have its users outgrow these smaller loans and
become ready for a traditional bank loan," said Yuliya Tarsava, co-founder and COO
of CNote.
History of microfinance

According to MicroWorld, microfinance has been around for centuries in some form
or another, and even longer in Asia as a form of informal lending. What we know as
microfinance today was born sometime in the '70s in the country of Bangladesh.

"In the midst of a famine, Dr. Muhammad Yunus, professor of economics at the
University of Chittagong, was becoming disillusioned with the abstract theories of
economics that failed to explain why so many poor people were starving in
Bangladesh," MicroWorld reads. Thus the $27 loan was born as a practical solution.

In the Bangladesh village of Jobra, the professor discovered that a group of 42

females made bamboo stools but did not have the money to purchase the raw
materials for the stools. As a result, the women fell into a cycle of debt among the
local community's traders. The traders would lend the women the funds they needed
with one stipulation: They would sell the stools at a price just barely higher than what
the raw materials cost. The $27 came from the entire borrowing needs of the 42
women combined. Yunus lent them his own money, allowed them to sell their
stools and got them out of their debt cycle.

Microfinancing evolved with Joseph Blatchford, a former head of the Peace Corps
and a UC Berkeley law student. Blatchford founded the nonprofit Accion as a
volunteer project in 1961. In 1973, his organization began offering small loans to
entrepreneurs in Brazil to see if a one-time influx of money could help lift them out of
poverty. The operation was a success: 885 loans helped create or stabilize 1,386
new jobs. Accion expanded the model to 14 other Latin American countries over the
next decade.

Microfinance: What It is and How It Works

Microfinance is a very popular term in today’s financial market scenario. As the name suggests,
microfinance refers to microcredit or micro-loan. Microfinance refers to a banking or financial service
that is offered by banks or other financial institutions to individuals who belong to the low-income or
underprivileged sections of the society. Microfinance can be in the form of loans, insurance, and
savings deposits.

It is very helpful to small-sized enterprise owners as well as entrepreneurs with low capital. There are
many people across the world, especially in India, who do not have access to proper financial
assistance. They live in rural areas as well as in urban areas of India and do not have sufficient
knowledge and access to take help from conventional sources of finance such as banks and
investors.

Microfinancing is a great way to help poor individuals to be financially independent. They can use
these funds offered by banks at very low rates of interest to start their own small venture or to make
their other dreams come true. Many of the underprivileged people in the nation do not have any idea
about saving money or managing their finances. When they acquire microfinance from a reliable
institution, they will get exposure to managing money on their own and also about utilising funds in a
sensible manner.

Microfinance is also offered to people who are interested in purchasing equipment or vehicles of high
value that are required for carrying out their business activities. These can be tractors for agriculture,
machines for manufacturing textiles, trucks for transportation of the goods created by the small
entrepreneurs, etc.

What is Microfinancing
Microfinancing is typically defined as the process of providing loans, credit, savings, and other
necessary financial services and products to individuals who are extremely poor to get access to the
regular sources of finance such as banks or other financial institutions.

Microfinance is provided to the underprivileged people with the belief that charity or philanthropy is not
the solution to poverty.

How does Microfinance Work in India?

Both banks and non-banking financial corporations (NBFCs) offer microfinance in India. There are
also microfinance institutions in the country that are exclusively dedicated to offering microfinance to
people. Microfinance institutions aim at getting people out of poverty and improving poor people’s
 financial conditions. Microfinance institutions target poor people who are unemployed, who are or
want to be entrepreneurs, and who are into farming.

Microfinance is usually procured by loan applicants through 3 modules and they include:

 Through banks, non-banking financial corporations, and microfinance institutions.

 By establishing good relations with banks or other financial institutions.
 By getting together as a group with a common goal of obtaining finance to create and develop new
small business ventures or to make a living.

List of Microfinance Institutions in India

In our country, there are a number of institutions that offer microfinance exclusively. We will take a
look at only a few select microfinance institutions in the country:

Annapurna Microfinance Pvt Ltd

BSS Microfinance Pvt Ltd

Disha Microfin Pvt Ltd

Fusion Microfinance Pvt Ltd

Arohan Financial Services Pvt Ltd

Cashpor Micro Credit

Grama Vidiyal Micro Finance Ltd

EMFIL

Equitas Microfinance Pvt Ltd

Madura Micro Finance Ltd

Satin Creditcare Network Ltd

S.M.I.L.E Microfinance Ltd

Grameen Financial Services Pvt Ltd

Janalakshmi Financial Services Pvt Ltd

SKS Microfinance Ltd

ASA International India Pvt Ltd

Sonata Finance Pvt Ltd

SKDRDP

RGVN (North East) Microfinance Ltd

Swadhaar FinServe Pvt Ltd

Belstar Investment & Finance Pvt Ltd

Suryoday Micro Finance Pvt Ltd

SV Creditline Pvt Ltd

Future Financial Services Ltd

Ujjivan Financial Services Pvt Ltd

Utkarsh Micro Finance Pvt Ltd

Adhikar Microfinance Pvt Ltd

Uttrayan Financial Services Pvt Ltd

Chaitanya India Fin Credit Pvt Ltd

ICNW Ltd

Growing Opportunity Finance Pvt Ltd

M Power Micro Finance Pvt Ltd

Rashtriya Seva Samithi

IDF Financial Services Pvt Ltd

Mahasemam Trust

Pahal Financial Services Pvt Ltd

Humana People to People India

Sahara Utsarga Welfare Society

Margdarshak Financial Services Ltd

Saija Finance Pvt Ltd

Samhita Development Network

Vedika Credit Capital Ltd

Sahayog Microfinance Ltd

Shikhar Microfinance Pvt Ltd

YVU Financial Services Pvt Ltd

Sanghamitra Rural Financial Services

Village Financial Services Pvt Ltd

Sarala Women Welfare Society

The Need for Microfinance in India

When an individual belonging to an underprivileged section of the society borrows microfinance from
a bank or an NBFC, he or she can make use of the funds for being financially independent. It can help
the borrower to be involved in a variety of activities that he or she could not have done without the
microfinancing.

Many poor adults in the country may not have had sufficient funds during the early stages of their
lives to be educated. Hence, they tend to miss out on the various employment options that are offered
to educated people. Therefore, many of them remain unemployed.

There is another category of poor adults who are not educated, but are involved in unskilled labour.
Unskilled labour refers to working in the segment that requires limited skills and that offers low wages
to the labourers. Unskilled labourers have limited qualification such as high school or diploma or no
qualification. Unskilled labour can include construction work, domestic help, security work, laundry,
etc.

There is also a category of individuals who live in rural areas and semi-urban areas who are
dedicated to farming. They are agriculturists and many of them earn very low incomes. Many of these
farmers do not earn enough money for the hard work they put in. They do not have adequate funds to
buy a land for sowing crops. They have to rely on rich landlords for renting land and they are forced to
pay the little money that they make, to the landlords.

There are also many people who are originally from rural India who move to urban areas for
alternative sources of employment apart from agriculture. They get into fields such as cooking,
construction, restaurants, housekeeping, etc. and earn low incomes.

Financial Struggles of the Poor People in India

All the above-mentioned low-income individuals struggle to meet even the basic necessities to lead a
life. They have very limited funds to get access to food, clothing, shelter, and proper healthcare
facilities. Many of them are unable to send their children to school even for basic education.

Many of these people also cannot open bank accounts or apply for traditional loan options as they
generally do not meet the minimum eligibility criteria. Banks have specific eligibility criteria where loan
applicants or prospective depositors need to meet minimum income, age, and employment
requirements. They also need to furnish relevant documents as proofs of identity that are issued by
the central government. Many of these underprivileged people may not have any identity proof, which
is again due to lack of access or lack of knowledge regarding the importance of government-
sanctioned documents. This is where microfinance comes into the picture.

Microcredit or microfinance is offered to people keeping in mind about these above-mentioned

requirements for regular bank loans. You can acquire small or micro loans at economical interest
rates. Microfinance institutions chiefly work to help people who cannot acquire loans from normal
banks. Hence, they make sure that loans are provided to the applicants at very low rates. They
ensure that microfinance loan expenses are very minimal.

The purpose of microfinance is to assist low-income people who have the enthusiasm to make their
lives better. It provides the right amount of capital to low-income people to start a new small business
activity or to finance their child’s education or to buy a small piece of land for carrying out agricultural
 operations. Microfinance not only supports an individual in starting something new to earn better, it
also helps in sustaining their income to have a decent standard of living throughout their life.

Features of Microfinance
 Microfinance is typically offered to anyone who does not have a stable source of income due to
unemployment. It is also given to those who are involved in contract labour or who work part-time.
 It is also given to anyone who does not have a proper credit history that can be verified. Lack of
credit history will be mostly due to lack of access to acquire credit.
 There are also some applicants who may have a poor credit history due to high debts. They may
have entered into debt situations due to shortage of funds to repay. They may also have got into
debt troubles due to scams planned by unregistered moneylenders who tend to take advantage of
poor people since they do not have much financial knowledge.
 Microfinance typically does not require loan applicants to submit any collateral while applying for the
loan. These loans are usually unsecured in nature. Even if a microfinance institution does ask for a
collateral, they are very reasonable. They understand the financial condition of the applicant.
 Microfinance is also offered to people living below poverty line (BPL) since they do not have access
to other forms of financing.
 Microfinancing promotes simplified and small savings among poor people. It encourages them to
build their funds step-by-step.
 Microfinancing offers repeat loans to applicants. This helps borrowers repay their loan promptly as
the repayment tenure is very short. Once the small loan is repaid on time, the applicants will receive
their next loan. A repeat loan is always offered to someone who has already borrowed and shown
their capability in repaying it on time.
 Microfinance also intends to assist to individuals in securing good medical treatment when they
have health issues.
 Generally, microfinance institutions approach clients instead of waiting for clients to approach them.
They want impoverished people to be aware that there are inexpensive forms of financing.
 Microfinance institutions have easy and quick loan application processes.
 The interest rate for microfinance is very low.
 When a micro loan is offered, the lender does not ask the applicant for the purpose of lending. The
loan can be utilised for any purpose.
 Some microfinance options also come with micro insurance. Micro insurance is offered as it helps
the borrower in protecting his or her credit extensively. The micro insurance facility is very
reasonably priced.
 Microfinance aims at developing financial sustainability among economically downtrodden people.
 Microfinance helps in creating more and more jobs. It enables uneducated people to be involved in
some source of employment instead of staying idle.
 Microfinance institutions aim to eliminate interest rate ceilings as they believe that these ceilings
can restrict poor people from securing finance.
 Microfinance focuses on offering financial transparency by offering loans to individuals without any
hidden costs or fees or charges.
 Microfinance believes that poor people need a broad set of financial services apart from just loans.
It also holds that these financial services should be simplified, easily accessible, economical, and
flexible in nature. These services include cash transfer facilities, savings schemes with minimal or
zero deposit, and micro insurance.

Microfinance for Farmers

There are exclusive microfinance loans that are provided to marginal farmers who need funds for
enhancing their productivity of crops. This can be done when they invest in superior quality fertilisers,
excellent farming tools, quality check processes, marketing of their crops, packaging of their output,
transportation of their output, storage of their output in safe and hygienic warehouses, and proper
sales techniques in order to secure the profits that they are entitled to after putting in so much effort
for several months.
 Many farmers in India do not have sufficient funds or knowledge to invest in these aspects of farming.
Microfinance loans aim to guide farmers by providing them with accurate information and funds
required to enhance their output.

Microfinance Options for Women

There are many households that have irresponsible male members who do not contribute towards
saving money for the family. They tend to use money senselessly on things that are absolutely not
required. Many of them spend money on alcohol, gambling, tobacco, etc. without keeping in mind
about other expenditures. In such households, the female members are more responsible with
money. They are very careful with the little money that they earn and spend it very judiciously. They
make sure that the money is not within the reach of the men of the house.

Keeping this in mind, there are many banks, NBFCs, and microfinance institutions that extend
microfinance exclusively to women in India. These women borrowers treat microfinance as their
saviour and utilise the funds very sensibly.

These microfinance options for women also help in empowering women. There are many households
where the men do not permit women to handle money. They expect women to only take care of
domestic chores. However, the truth is that many women in several households have proved to be
more financially responsible when compared to men. They do not waste money on unnecessary
purposes.

Women also make sure that their children attend school sincerely without dropping out of school.
When these women take microfinance for their various needs, they will ensure that the funds are
utilised for a good purpose. They will ensure that their kids go to school, and this, in turn, will help
brighten the future of the society.

One thing is for sure that women will repay their micro finance loans on time. Each installment of the
loan will be paid promptly without any delay. This is a great relief for microfinance lenders.
Microfinance loans can be repaid through equated monthly installments (EMIs) promptly. Moreover,
women will make well-planned decisions for the household.

There are many self-help groups in Indian rural places that are made by women for women. Only
women manage these groups and help each other in starting new low-cost business ventures such as
handicraft ventures, horticultural ventures, artistry, pickle business ventures, paintings, trinket making
activities, and many other business activities that they are good at doing. Since many of them are
naturally talented at developing these creations at low costs, they can produce them on a large scale
and sell them on various platforms and make profits gradually. The capital for these small business
ventures can be generated from microfinance options. The borrower can repay the funds on a
monthly basis through installments.

Most importantly, microfinance helps in job creation for women. In most regions of the country,
women are forced to be unemployed and are not allowed to step out of their homes. They are
restricted to the limits of their house. With the generation of microfinance, women are given an
opportunity to showcase their entrepreneurial skills and management abilities. Microfinance also
brings women together and encourages them to work as a team to achieve the ultimate goal of being
independent. They do not have to rely on men for money or for other aspects. They also do not have
to wait for the approval of the male member in the house.

Objectives and Goals of Microfinance

 Microfinance primarily works towards making the disadvantaged population self-determined without
having to depend on their relatives or friends for funds.
 It aims to bring a financial change among the poor people with the help of a community-based
approach.
 It intends to organise and conduct simple training programmes for unemployed people so that they
have some means of livelihood.
 Microfinance also intends to assist disabled people who are economically underprivileged. It aims to
help them find some source of employment or artistry so that they can fend for themselves.
 Microfinance aims to help women of poor families. Institutions that offer microfinance believe that
women are more responsible with money and hence, they have exclusive microfinance loan options
specially designed for women borrowers.
 Microfinance intends to bring gender equality by encouraging women to equally take part in
household decision making, financial decision making, and also earn money independently by
engaging in any form of employment.
 It intends to enhance operations and activities at the grass root level.
 Microfinance lays emphasis on optimum utilisation of local resources available in nearby areas and
villages in order to minimise transportation costs for bringing resources, etc.
 Microfinance aims to raise the wages of the underprivileged people so that their lives can be
improved at least a little.
 Microfinance aims at attaining socio-economic development at the most basic level of the society.
 It serves as a great instrument to eradicate poverty.
 It aims to offer loans, accounts, and other financial services to people without asking them for
collaterals such as a mortgage or any immovable property or guarantors.

Origin of Microfinance in India

Microfinance has been quite a popular and effective mode of financing in the Indian subcontinent.
From an early period, people in India used to be involved in lending and credit operations through
individual money lending, chit funds, and other indigenous financial institutions. All these modes
practiced the system of microfinance very successfully.

The modern and systematic method of offering microfinance or microcredit to individuals started in the
1970s in India.

It chiefly originated when the Grameen Bank was started by Professor Mohammed Yunus in the year
1976 in Bangladesh. It was a pilot project of having a unique lending system where micro loans are
offered to the disadvantaged sections of the society, especially the rural poor. This programme was
launched to introduce the concept of financial services to the rural poor who never had access to any
form of credit.

This iconic event led to the conversion of the project into an autonomous bank. This was done
through a government legislation and it came to be known as Grameen Bank. The bank has assisted
several poor people in both Bangladesh and India to be financially secure and to improve their
financial conditions. This even resulted in the creation of a ‘Grameen model’ which is used by many
financial institutions and banks to offer affordable loans to the poor.

There was also Self-Employed Women's Association (SEWA) that was started by Ela Bhatt. This
organisation was unique in its own way. It was an all-women’s bank. It is the first microfinance bank in
the country. It was set up in Ahmedabad, Gujarat in the year 1972. It was set up to help women of
low-income groups to earn the rights that they are entitled to. It works towards making women
independent by offering them the right funds at the right time to help them be self-employed. The
institution also offers first-class training to women to help them specialise in handicrafts and other
forms of artistry.

India also saw the establishment of National Bank for Agriculture and Rural Development (NABARD)
which is exclusively committed to offering inexpensive modes of credit and bank accounts to the
people living in rural areas. These people are mainly engaged in agriculture and other artistry
activities in the country. The bank observed many unique banking models in order to offer high-quality
and affordable financial solutions to the unbanked people. The bank also focused on including women
by encouraging them to open bank accounts in their names and taking small loans to meet their
requirements. The bank also promoted rural people to be involved in alternative activities apart from
agriculture in order to earn additional income.

The Regional Rural Banks (RRBs) were launched in 1975-76. These banks were established to have
banking operations in the rural areas and semi-urban areas of the various states of the country. Some
of the regional rural banks are also set up in urban areas where they offer banking services to the
poor people of the society.

There is also the Micro Finance Institution (MFI) that was set up in India in the year 1974. The
operations of the institution started to pick up only in the 1990s.

All these institutions had a common objective and that was to provide financial assistance to the
unbanked people of the society. They worked on setting up many bank branches in the most remote
areas of the country. They mainly focussed on empowering the disadvantaged sections of the society.

Until the banks in India were nationalised in the year 1969, co-operative banks were the only banks
that provided small loans to the economically underprivileged sections of the society. Small borrowers
did not have any other source of financial assistance. Loan applicants had to furnish some form of
security to the bank those days. They also had to make arrangements for a guarantor in order to
apply for a loan. The chief objective of banking was profit, which is still prevalent in today’s
commercial banks. Institutions offering microfinance started to emerge and began to change this
profit-oriented banking scenario. Nationalisation of banks also changed the old banking setup and
started to build branches in different rural parts of the nation.

Microfinance institutions also enhanced the condition of self-help groups. More and more self-help
groups were created by impoverished people with the objective of making them financially self-
sufficient. With these groups, the members did not have to go begging rich moneylender who mainly
lent money solely to make profits. They also did not have to depend on others to get any form of
employment. They created their own small venture by coming together by honing their skills.

Different Microfinance Models in India

India has a number of institutions that offer microfinance exclusively. Each institution uses a particular
model or a blend of different models in order to provide microfinance to applicants. These
microfinance institutions have embraced both conventional and advanced ideas of lending in order to
distribute credit evenly in the society without uneven accumulation of credit among the rich people.
There are many microfinance models in the country and this could be because of the high number of
social and cultural groups, the large geographical size of the nation, the presence of multiple
economic classes, and a solid existence of non-governmental organisations that are dedicated to
uplifting the socio-economic condition of the disadvantaged people of the country.

The main six categories of microfinance models that are followed in India include:

1. Self-help group model

A self-help group (SHG) is described as a group of 5 to 20 individuals who belong to the low-income
class. Each group member typically contributes funds from their own savings and then this money is
pooled in together. These funds are then utilised to support their common goal of improving their
lifestyles and to make themselves financially secure.

They can use this money to obtain training to create superior-quality products. They receive training
not only to make products, they also get trained on how to market, promote, and sell their products.
Many of the poor people are not aware of how to reach out to customers. Some of them may not
know how to assess their creation and fix an appropriate price for their product. Hence, many of them
may fail to make profits when they sell products without proper knowledge. Being a part of a self-help
group will give them proper awareness about how to make a product, price it, package it, promote it,
market it, and sell it to the end-customer efficiently.

In the self-help group model for microfinance, the members of the group are encouraged to meet on a
regular basis to discuss their savings, new developments, and credit operations. The members can
also plan future activities for achieving their big goals step by step.

2. Grameen model
The Grameen model to distribute microfinance originated in Bangladesh. After seeing the success of
the model in Bangladesh, many institutions in India started to adopt it by making some adjustments. A
few of the institutions that acquired the principles of the Grameen model are CASHPOR Financial and
Technical Services Limited, SHARE Microfinance Limited, Activists for Social Alternatives (ASA).

This particular model believes in providing a mandatory training course to the group members for at
least 7 days. The model will offer microfinance to an applicant without asking for any collateral at low
costs. The loan application process has minimum or zero paperwork and is processed very quickly
keeping in mind the urgency for funds.

Some groups that apply the Grameen model have a Group Recognition Test (GRT) that refers to a
screening process to divide group members into serious and non-serious groups. Every member must
compulsorily save some money every week. This model is very particular about group discipline. This
is generally achieved with the help of peer pressure. Each group member motivates the other to be
very careful with the money that they borrow from their lender. Under this model, a loan typically
ranges from Rs.4,000 to Rs.10,000.

3. Co-operative credit union model

These organisations apply the co-operative model to offer microfinance in rural areas. The
Cooperative Development Forum (CDF), Hyderabad has applied the co-operative credit union model
successfully by giving primary importance to savings. The main entities in the CDF are women’s or
men’s thrift co-operatives (WTCs and MTCs). They have small groups of individuals wherein each
group has a particular leader who heads group meetings, accumulates the savings of each group
member, and looks into the repayment of loans. The group leader is responsible for making sure all
small loans are repaid promptly by each member.

The Cooperative Development Forum (CDF), Hyderabad began functioning with units of small size.
Soon, they started to create larger units in order to increase the impact. The CDF encourages
members to focus more on their thrift cooperatives instead of the group goals. Each group’s size can
differ. This will depend on the group leader’s ability and the leader will be appointed according to the
votes of group members.

4. Federated self-help groups (SHGs) or SHG Federation

model
A normal self-help group (SHG) is typically consistent of a few members with the aim of making each
member self-sufficient with adequate funds and high-quality equipment to produce first-class output. It
is usually small in size. Due to the success of these groups, there was a need for a large-scale self-
help group. This led to the establishment of federated self-help groups. A federated self-help group
refers to a large scale self-help group with a large number of members. It is a federation of multiple
self-help groups. A federation of self-help groups will have around 1000 to 2000 members whereas a
single self-help group will have only up to 20 members.
A federated self-help group model has a very interesting arrangement where there are 3 levels. The
main and basic level is the self-help group. The middle level in this arrangement is a cluster. The
highest unit in this arrangement is a top body that indicates the complete self-help group.

Since a federated self-help group is big in nature, at the cluster level, 2 members of every self-help
group will serve as representatives of that particular group. These representatives will be required to
get together on a frequent basis in order to update statuses of the group. They will need to discuss
funds, utilisation of funds, production, changes in plans and schedules, etc. This cluster level is also
responsible for providing details and updates about the entire self-help group to the top body. If there
are any updates from the top body or apex body, then the cluster will communicate it to the group.

The cluster level serves as a form of intermediary between the whole group and the apex body.
Leaders of these clusters are required to have excellent monitoring and team building skills. They
need to check the status of the group’s operations on a regular basis. The daily and weekly
productivity of each team will be checked and feedback and support will be provided by the cluster
leaders to the group members. This cluster level in the federated self-help group model helps in
making the entire system decentralised.

Decentralisation is very effective and helpful as each member is responsible for his or her duties.
Also, there is no sense of unfair hierarchy in the system. Each person is given an opportunity to
showcase his or her skills. Moreover, every member has the right to offer ideas for the development of
his or her self-help group. The microfinance funds allocated for such a model will help in the
distribution of funds in an even manner. There will be no scope for misappropriation or misuse of
funds. Each member will make sure that the money is used for the overall development of the self-
help group.

The apex body or the executive body in a federated self-help group has an important responsibility of
being the intermediary between the entire self-help group and the non-government organisation
(NGO) or any other organisation that is committed to assisting the group in carrying out its activities.
This apex body will have around 10 to 15 members.

The best part about federations of self-help groups is that these groups also help certain NGOs as
there are many NGOs in our country that have fewer funds and resources but that aim at reaching out
to the less fortunate masses of the society. These federations of self-help groups assist these NGOs
to bring a change to the society effectively even though they do not have adequate resources.

Some of the organisations in the nation that apply the federated self-help group model include
Chaitanya, PRADAN, Dhan Foundation, SEWA, and lots more. These federated self-help groups
have the competency to handle the constraints experienced by single self-help groups. Most of these
federations are incorporated under the Societies Registration Act.

These federated self-help groups enable members to apply for bigger loan amounts. Moreover, these
groups assist members to save more money efficiently. Due to the large scale at which these groups
function, they have the ability to offer additional financial services to members such as micro
insurance.

Micro insurance for microfinance is extremely necessary and helpful. It protects the borrower’s funds
against damage, loss, or any other troubles. When there is micro insurance, the borrower need not
worry about its security. When one takes a loan, especially a micro loan, he or she will need to be
very careful and ensure that it is safe and secure. One needs to understand that a micro loan is
offered to the less fortunate sections of the society. In such a case, when the funds are stolen or lost
or misplaced, it is very tough for the borrower to get a loan again. He or she will also have difficulty in
recovering the lost funds.

With a micro insurance policy which is offered at very low premium rates, the borrower can have a
peace of mind without worrying about the safety of the funds. Even if something unfortunate happens
with the microfinance borrowed from a federation of self-help groups, then this micro insurance cover
will take care of everything. The unforeseen losses and costs will be compensated and reimbursed by
the micro insurance policy at an affordable price.

A federation of self-help groups also takes care of something very important, which is the prevention
of idle funds. Many small self-help groups sometimes face the issue of having too many idle funds or
even insufficient amount of funds. With a federated self-help group, there is no scope for the
formation of idle funds. They use well-planned techniques to direct the flow of money accurately.
When there is a proper flow of funds, there will not be any chance for the creation of idle funds. These
federations always work to make sure that the demand for micro loans is lesser than the actual supply
of funds that is obtainable. In single self-help groups, demand for credit is more when compared to
the availability of funds. A federation of self-help groups works towards maximising the distribution of
local capital in order to gain maximum returns on this capital.
DIWAKAR EDUCATION HUB

UNIT-10 MCQ
UGC-NET MANAGEMENT

DIWAKAR EDUCTION HUB

5/2/2019