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“Self realization and self initiative are the two most powerful
weapons to wash poverty out from the world” – Chanakya
World’s Greatest Ancient Economic and Political Scholar
This is quoted by Rimjhim Mousami Das’s “Micro-finance through SHGs: A Boon for the Rural Poor”
from S.B. Verma and Yaswant Tukaram Pawar, (Ed) Rural Empowerment through Self Help Groups, Non
Governmental Organizations and Panchayati Raj Institutions, New Delhi: Deep and Deep Publication,
2005. p.16.
1
. S.B. Verma and Y.T. Pawar, 2005. p.99.
2
. Verma, S.B. and Pawar. Y.T. 2005, p. x.
1
Microfinance institutions are highly encouraging. Microfinance
through SHG has become a ladder for the poor to bring them up not
only economically but also socially, mentally and attitudinally 3. Initially,
SHGs and microfinance, as an instrument for social and economic
empowerment, are established by the non governmental
organizations. In the era of 21st century, NGOs are transforming from
non-profit to profit making business model NGOs. Especially, the
success formula of microfinance non profit model is learned from the
PRODEM - Bolivia and Grameen Bank – Bangladesh. It is proved that
committed for the social development NGOs can develop the society
through providing finance accessibility to the poor based on self help
model. Many NGOs (non-government organizations) in India came
forward to promote micro-finance. At present more than 1000 NGOs
are implementing micro-finance projects in India.
Microfinance Institutions:
3
. Ibid, p.16.
2
SKS India - Swayam Krishi Sangam
Streedhan - Banking with Rural Women
Working Women's Forum, Madras, India
3
credit for income generating activities (in some cases accompanied by
forced savings schemes) targeting very poor (often women) borrowers.
4
donors, the Grameen Bank was founded in 1983 and now serves more
than 4 million borrowers. The initial success of Grameen Bank also
stimulated the establishment of several other giant microfinance
institutions like BRAC, ASA, Proshika, etc.
Concept of Micro-Finance
5
are two main systems of micro credit4. One is formal financial
institutions, banks and co-operatives, which provide micro-credit to the
poor people under different schemes for livelihood support or helping
them to start micro-enterprises. The other is informal system
comprising traditional moneylenders, pawnbrokers and trade specific
lenders. Both the systems have their own positive and negative
aspects.
Micro-credit:
Micro-savings:
SHGs micro savings are called as thrift. The thrift is the basic
element for the success of microfinance. Thrift or small savings from
borrowers’ own resources.
4
. Chauhan, Brij Raj (1990). Rural – Urban Articulations, Etawah: A. C. Brothers. Chippa, M.L. (1987).
Commercial Banking Development in India: A Study in Regional Disparity. Jaipur: Printwell Publishers. p.
50-51.
6
2. It is essentially for promoting self-employment; the opportunities
of wage employment are limited in developing countries - micro
finance increases the productivity of self-employment in the
informal sector of the economy - generally used for (a) direct
income generation (b) rearrangement of assets and liabilities for
the household to participate in future opportunities and (c)
consumption smoothing.
3. It is not just a financing system, but a tool for social change,
specially for women
4. Micro credit is aimed at the poorest; micro-finance lending
technology needs to mimic the informal lenders rather than the
formal sector lending.
It has to:
7
them credit-worthy and feel that the recovery rate is unsatisfactory.
But this may not necessarily be true.
8
NABARD’s pilot scheme, microfinance to cure the illness of rural
poverty gained visibility ion the India development landscape5.
5
. S.B. Verma and Y.T. Pawar, 2005. p.100.
9
2. Caja los Andes in Bolivia offers four loan repayment options that
fit the cash flow of various agricultural activities, including an end-of-
term payment for both principal and interest that fits single crop
activities, and unequal payments at irregular intervals for farmers that
have planted several crops with different harvesting periods. Flexibility
is also provided in loan disbursements, and farmers can receive the
sanctioned loan amount in as many as three installments.
10
portion of the remittance in an interest-bearing voluntary savings
account6.
6
. WOCCU: A Technical Guide to Rural- Finance Exploring Products. WOCCU Technical Guide # 3,
December 2003.
7
. CGAP it innovation series: Credit Scoring.
8
. Nthenya Mule, Susan Johnson, Robert Hickson. Wambui Mwangi. The Managed ASCA Model:
Innovation in Kenya's Microfinance Industry. Micro-Save Africa. 2001.
11
automatic teller machines (ATMs) in the factories to offer a recurring
savings product, along with education on personal finance9.
9
. CGAP it innovation series
10
. Anita Campion and John Owens, MABS: A Sustainable Approach to Rural Microfinance,
Microbanking Bulletin, July 2003.
11
. Rural financial services: Implementing the bank's strategy to reach the rural poor (Work in Progress).
Rural Private Sector, Markets, Finance and Infrastructure Thematic Group. Rural Sector Board, The World
Bank. Washington, D.C. March 2003.
12
to two days. Expenses for paperwork dropped by 60% and data entry
expenses dropped by 50%12.
12
. CGAP IT Innovation Series. Washington, D.C.: CGAP, October 2003.
13
. Rural financial services: Implementing the bank's strategy to reach the rural poor (Work in Progress).
Rural Private Sector, Markets, Finance and Infrastructure Thematic Group. Rural Sector Board, The World
Bank. Washington, D.C. March 2003.
13
premium is added on the loan rate. PROAGRO pays 100% of the loan
loss if the crop fails14.
14
. WOCCU: A Technical Guide to Rural- Finance Exploring Products. WOCCU Technical Guide # 3,
December 2003.
15
. Pearce, Douglas. "Buyer and Supplier Credit to Farmers: Do Donors Have a Role to Play?" prepared
for Paving the Way Forward for Rural Finance: An International Conference on Best Practices, held June
2-4, 2003.
16
. Source: CGAP Case Studies In Donor Good Practices No. 8. Donors as Silent Partners in MFI Product
Development: Micro Save-Africa and Equity Building Society in Kenya. July 2003.
14
microfinance. At the global microfinance scenario, most of the
institutions are providing loans for the purpose of agriculture and allied
services, micro enterprises and other rural based micro economic
activities.
15
financing in urban areas of Mexico. Micro-Credit Summit (2-4 February,
1997) held at Washington D.C. was organized to launch a global
movement to reach 100 million of the world’s poorest families,
especially the women of those families, with credit for self-
employment, by the year 2005.
16
It was not until the mid-1990s that the term "micro credit" began
to be replaced by a new term that included not only credit, but also
savings and other financial services. "Microfinance" emerged as the
term of choice to refer to a range of financial services to the poor, that
included not only credit, but also savings and other services such as
insurance and money transfers.
In nutshell, one can say that RFIs do not fulfill the credit needs of
the farmers, rural producers and the rural poor in general, resulting in
non-institutional sources of credit. The indirect reason responsible for
the growth of non-institutional sources of credit was also the economic
weakness of the Jajmani System*. The non-institutional sources of
credit would include big farmers, big farmer-cum-money-lenders,
17
commission agents, friends/ relatives, moneylenders, traders, village
shopkeepers and others. The All India Rural Credit Survey Committee,
appointed by the RBI in 1951 under the Chairmanship of Gorwala,
undertook a comprehensive survey of rural credit and submitted its
report in August 1954. The survey revealed that shares of institutional
and non-institutional sources of rural credit were 7.3 per cent and 92.7
per cent respectively.
18
The Profile of Microfinance in India
19
• High transaction costs
• Unfavourable policies like caps on interest rates which effectively
limits the viability of serving the poor.
• While MFIs have shown that serving the poor is not an unviable
proposition there are issues that have constrained MFIs while
scaling up. These include
• Lack of an appropriate legal vehicle
• Limited access to equity
• Difficulty in accessing low cost on-lending funds (as of now they are
unable to offer savings services in a legitimate manner.
• Limited access to Capacity Building support which is an important
variable in terms of quality of the portfolio, MIS, and the
sustainability of operations.
• About 56 % of the poor still borrow from informal sources.
• 70 % of the rural poor do not have a deposit account
• 87 % have no access to credit from formal sources.
• Less than 15 % of the households have any kind of insurance.
• Negligible numbers have access to health insurance (0.4 %) and
crop insurance (0.2 %).
• NABARD’s bank linkage program has cumulatively reached a total of
9.4 lakh SHGs with about 1.4 crore households.
Related Issues
• Designing financially sustainable models
• Aim for community participation & ownership
• Increase outreach and scale up operations
• Demonstrate that banking with the poor is viable
• Build professional systems and processes.
• Ensure transparency and enhance credibility through disclosures.
• Provide support for capacity building initiatives.
20
Opportunities for Micro-Finance Sector in India
21
non-farm employment, based on the analysis of the data from the
quinquennial rounds of the National Sample Survey during the 1970s
and 1980s, reveals that the share of rural area in total employment
has declined from around 82 per cent in 1977-78 to 78 per cent in
1987-88; that the share of the rural nonagricultural employment has
increased from around 14 per cent to 17 per cent in total employment;
and from 17 per cent to 22 per cent in rural employment.
22
There is a need to match the decline in agriculture sector with
the gain in non-farm activities, to absorb the surplus labour from
agriculture. Eighth Five-Year Plan document (Government of India
1992: 122) states that: "In the long run, however, it must be
recognized that agriculture and other land-based activities, ever with a
reasonably high rate and possible diversification of growth, will not be
able to provide employment to all the rural workers at adequate levels
of incomes.
23
the terms of credit provided to both segments by the informal sector,
which is losing share to both the formal and (semi-formal) MFI sector17.
24
farm sector is generally financed from own resources and
supplemented by loans from friends and relatives. The time taken for
getting a loan sanctioned by a bank for the rural non-farm sector can
very from two months to 18 months. Some moneylenders do provide
bridge loans to those rural borrowers who have been sanctioned bank
loans but have yet to receive the funds.”
21
. Government of India, Seventh Five Year Plan (Vol. I): Perspective, Objectives, Strategy, Macro-
dimensions and Resources and (Vol. II): Sectoral-Programmes of Development. New Delhi: Planning
Commission.
25
collateral, coverage and organisational/ legal structure. These
strategies can be classified into four broad categories, namely, SHG
promotion, MFI, micro-enterprise development and social development.
In all this NGO gets some financial support in terms of grant from
Apex Financial Institutions (AFIs) like NABARD and RMK (Rashtriya
Mahila Kosh). The examples of such NGOs who are following SHG
promotion approach are: MYRADA in Karnataka, SHARE in Andhra
Pradesh, RDO (Rural Development Organisation) in Manipur, PREM
(People’s Right and Environment Movement) in Orissa & Andhra
Pradesh, YCO (Youth Charitable Organisation) in Andhra Pradesh,
Anarde (Acil Navsarjan Rural Development Foundation) in Gujarat,
PRADAN (Professional Assistance for Development Action) &
RUDSOVAT (Rural Development Society for Vocational Training) in
Rajasthan and ADITHI in Bihar.
26
people/ SHGs/ Federations/ smaller NGOs. These MFIs stimulate the
credit demand of the poor people. They also provide technical support
for the beneficiaries to ensure proper utilization of loans and
repayment. At the same time they meet their cost of funds, cost of
credit management and cost of default through the spread of interest
and generate surplus for the viable operation of micro-finance.
The examples of such MFIs are Sewa Bank & FWWB in Gujarat,
BASIX in Andhra Pradesh and RGVN (Rashtriya Grameen Vikas Nidhi) in
north-eastern states, Orissa and Bihar. 8.3 Micro-Enterprise
Development Strategy Entrepreneurship is one of the most important
inputs in the economic development of a country and of the regions
within the country. Economic growth and industrialization are the by-
products of entrepreneurship.
22
. Desai, Vasant. Entrepreneurial Development (Vol. I): Principle, Programmes and Polices. Bombay:
Himalaya Publishing House. 1991.
27
NGOs are actively involving in microfinance to make successful
and effective in terms of identification of place or location, pre-
promotional activities, selection of potential entrepreneurs,
entrepreneurial training, monitoring and follow-up mechanism. NGOs
are playing important role as catalyst in helping the rural unemployed
persons to acquire training through MEDPs (Micro-Enterprise
Development Programmes) so that they can become self-employed by
starting their enterprises in RNFS. Moreover, they can also become job
providers instead of job seekers.
28
Growth trends in the SHGs Bank Linkage Programme
Source: NABARD annual reports and data sheet for 2005-06published in Prabhu Ghate, Microfinance in
India: A state of the sector Report 2006, New Delhi, Microfinance India, p.28.
29
Government. For the NGOs and Government it can be a process of
gradual withdrawal and for people, decrease dependency on the NGOs
and Government. Such projects have micro-finance as a major
component coupled with social service delivery.
30
Achievements under SHG – NABARD linkage scheme
Bank
Exposure to
ICICI Bank 31
The important names among them are HUDCO, NBCFDC
(National Backward Classes Finance Development Corporation),
NMFDC (National Minorities Finance Development Corporation),
National Handicrafts Development Corporation (NHDC), OXFAM (Oxford
Committee for Famine & Relief), NOVIP (Dutch International
Development Agency), GTZ (Gesellschaftfur Tecnische
Zusammenarbeit), CIDA (Canadian International Development Agency),
ActionAid, CARE India, International Fund for Agriculture Development
(IFAD), UNDP, UNIFEM (United Nations Development Fund for Women),
British Department of Foreign and International Development (DFID)
and Consultative Group to Assist the Poorest (CGAP).
32
Commercial
of s
Models of Micro Finance
• Grameen bank
• Spandana
• Grameen koota
• Swayam krishi sangam
• Danda credit society
Grameen Bank
33
As of July, 2004, it has 3.7 million borrowers, 96 percent of whom
are women. With 1267 branches, GB provides services in 46,000
villages, covering more than 68 percent of the total villages in
Bangladesh.
Interest R
General features of Grameen credit are :
a. It promotes credit as a human right
b. Its mission is to help the poor families to help themselves to
Product
overcome poverty. It is targeted to the poor, particularly poor
women.
c. Most distinctive feature of Grameen credit is that it is not
based on any collateral, or legally enforceable contracts. It is based
on "trust", not on legal procedures and system.
d. It is offered for creating self-employment for income-
consumption
e.
Savings:
generating activities and housing for the poor, as opposed to
FixedDeposit :
creditworthy". As a result it rejected the basic methodology of the
34
conventional banking and created its own methodology.
f. It provides service at the door-step of the poor based on the
principle that the people should not go to the bank, bank should go
to the people.
g. In order to obtain loans a borrower must join a group of
borrowers.
h. Loans can be received in a continuous sequence. New loan
becomes available to a borrower if her previous loan is repaid.
i. All loans are to be paid back in installments (weekly, or bi-
weekly).
j. Simultaneously more than one loan can be received by a
borrower.
k. It comes with both obligatory and voluntary savings
programmes for the borrowers.
l. Grameen credit's thumb-rule is to keep the interest rate as
close to the market rate, prevailing in the commercial banking
sector, as possible, without sacrificing sustain-ability. Reaching the
poor is its non-negotiable mission. Reaching sustainability is a
directional goal. It must reach sustainability as soon as possible, so
that it can expand its outreach without fund constraints.
35
Sav
SPANDANA
Institution's Mission
Description
Spandana envisions itself as a financially self sustainable Micro
Finance Institution with a diversified ownership. It is committed to
strengthening significantly the socio-econmic status of poor women
in Rural and Urban areas by providing technical and financial services
on a continued basis for establishing their identity and self-image
PersonalSavings(open
Background and Main Challenges
164.97)
transformation into a regulated Company. Spandana has
outperfromed the most performing organisations by setting up trends
with high level of efficiency, productivity and thereby profitability
levels. Thus the biggest challenge lies in retaining these levels in the
pace of increasing competition.
•
Products
Loans
GrameenPensionSavin
36
Specialsavings(GBMe
• Voluntary Savings
• Insurance
ICICI Bank, SIDBI, Indian Overseas Bank, HDFC Bank, IDBI Bank, ABN
AMRO Bank, ING Vysys Bank, HDFC, FWWB, UTI Bank
37
RASHTRIYA MAHILA KOSH - Its Profile, Aims & Objectives,
Roles
It has been felt for some time in India that the credit needs of
poor women, particularly in the unorganized sector, have not been
adequately addressed by the formal financial institutions in the
country. The vast gap between demand for and supply of credit to this
sector established the need for a National Credit Fund for Women.
38
• To cooperate with and secure the cooperation of the Government of
India, State Governments, Union Territory administrations, credit
institutions, industrial and commercial organizations, NGOs and
others in promoting the objectives of the Kosh.
• To disseminate information and experience among all these above
agencies in the Government and non-government sectors in the
area of microfinance for poor women.
• To receive grants, donations, loans, etc., for the furtherance of the
aims and objectives of the Kosh.
The office of the Kosh is situated in New Delhi. The Kosh does not
have any branch offices. The Executive Director is the chief executive
officer of the Kosh. The Executive Director functions under the overall
supervision, direction and control of the Governing Board. The
Governing Board comprises 16 members consisting of senior officers of
the Government of India and State Governments, specialists and
representatives of NGOs active in the field of microfinance for women.
The Governing Board is chaired by the Minister in charge of the
Department of Women & Child Development in the Government of
India. The General Body of the Kosh consists of all members of the
Board, institutional members and individual members.
39
It develops the supply side of the micro finance market by
offering institution building support to new and existing-but-
inexperienced IMOs by structures of incentives, transfers of
technology, training of staff and other non-financial services -
• To fund VOs and CBOs already working with self help groups to
extend their reach to new areas and improve the quality of existing
groups
• To extend training support to potential VOs and registered CBOs
who are desirous of working in the area of micro finance and self
help groups.
• To identify and support VOs and registered CBOs having
outstanding experience in formation of SHGs and micro finance who
40
would act as resource centers. The unit cost for the promotion of
group is worked out to a maximum of Rs.9, 000/- per group, which
includes expenditure for a 3-year project cycle.
• To fund Rs.10, 000/- per SHG without interest, where bank linkages
are not available as revolving fund.
• to finance up to Rs.2.00 lakhs as bridge funds for a federation of
over 100 active SHGs
Introduction
Vision
Our Mission
41
• To mobilize resources to provide financial and support services
to the poor, particularly women, for viable productive income
generation enterprises enabling them to reduce their poverty
Objectives
MFI loansou
institu
Loan Proposals and their Processing
Apexfinancing
In the first step, every member who intends to access credit from the
company has to complete the compulsory group training programme
and Group institutionsand
Recognition Test organized by the company.
programme is conducted by the Field Credit Assistant (FCA) or a
This
comercial banks
designated staff member, authorised by SML.
SIDBI 42
Primary data is collected in a prescribed format from borrower/member
to comply with the KYC (Know your Customer) norms.
FCA should verify the loan application and completely fill the following
information:
• Date of application
• Borrower identification particulars
• Loan product details
• Loan Amount
• Need for Loan
• Applicable interest rates
• Term of the Loan
• Repayment particulars
• Acceptance by the borrower’s family member / the relevant SHG
members
Authorized staff of SML should verify the Loan application along with all
securities, sureties and approvals, which is applicable as per the
applicable policy of the company.
• Demand promissory Note
• Surety or guarantee
43
• SHG members/Group acceptance
• Family members’ acceptance
• Acceptance of the terms and conditions by the borrower/member for
rate of interest, processing charges if any and repayment terms
The Company keeps all the documents in the safe custody in the
respective premises by the authorized persons. Loan passbook has to
be given to every borrower/member for each loan. The loan passbook
contains the repayment schedule, effective interest rate and other
processing charges etc. The company gives prior notice of any change
in the interest rate and other charges to the borrower / member.
Mi
The Role of NGOs
Income ch 44
Non-Government Organizations (NGOs) have emerged as an
integral part of the institutional structure for addressing poverty as
well as rural development, gender equality, environmental
conservation, disaster management, human rights and other social
issues.
In order to meet the need for a one-stop service to the NGOs, the
Government created the NGO Affairs Bureau in 1990. Located in the
Prime Minister’s Secretariat, the Bureau enables the NGOs to obtain
their registration clearance, approval and permission through a single
agency of the Government within a specified time frame. The aim of
the Bureau is to ensure quality performance of the NGO sector and its
accountability to the state.
45
civil society. The GNCC works as an advisory council toward resolving
issues arising out of Government-NGO interaction and collaboration.
Concept of SHG:
46
Self – Help Group (SHG) is a small voluntary association of poor
people, preferably from the same socioeconomic background. They
come together for the purpose of solving their common problems
through self-help and mutual help. The SHG promotes small savings
among its members. The savings are kept with a bank. This common
fund is in the name of the SHG. Usually, the number of members in
one SHG does not exceed twenty.
47
The following are the major essential features to be kept in mind
for successful functioning of SHG’s.
48
from the policy and regulatory point of view. The sector has also
opened scope for research, training and consultancy. In a holistic
perspective micro-finance is a process of social intermediation and
building social capital.
23
. Elaine, Edgcomb & Barton, Laura “Social Intermediation and Microfinance Programmes: A Literature
Review”, USA: Micro-Enterprises Best Practices. The SEEP Network. 1998.
24
. S.B. Verma and Y.T. Pawar, 2005. p.101.
49
50