PROJECT REPORT ON

A STUDY ON ROLE OF MICRO FINANCE IN INDIA

submitted to SGGSW University, Fatehgarh Sahib

in partial fulfilment of the requirements of the degree of

MASTERS OF COMMERCE

Session 2020-2021

UNDER THE GUIDANCE OF

Prof Rajwinder Kaur

SUBMITTED BY

SEEMA RANI

Roll No. 19192102

MCOM 4TH SEMESTER

SRI GURU GRANTH SAHIB WORLD UNIVERSITY

DECLARATION

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I hereby declare that the dissertation entitled “THE ROLE OF MICROFINANCE IN
INDIAN ?” submitted at is outcome of my own work carried out under the supervision of
Prof. Rajwinder Kaur. I further declare that the best of my knowledge the dissertation does
not contain any part of work, which has not been submitted for the award of any degree either
in this University or any other institutions without proper citations.

Seema Rani

19192102

Sri Guru Granth Sahib world University

Fathegarh sahib

Date

ACKNOWLEDGEMENT

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I am immensely thankful and grateful to Prof. Rajwinder Kaur, my dissertation supervisor for
helping, inspiring, motivating me all throughout this work. I am also thankful to him for
being so supportive throughout this journey.

Finally, I must express my very profound gratitude to my parents for providing me with
unfailing support and continuous encouragement throughout my years of study and through
the process of researching and writing this dissertation. This accomplishment would not have
been possible without them. I would like to thank my friends for their supports while
preparing this dissertation. I would also like to give special thanks to all the academic as well
as non-academic staff members of Sri Guru Granth Sahib World University, Fathegarh Sahib
who have always been very supporting and encouraging during the journey of my research
work.

Seema Rani

19192102

Table of Content

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Chapters Particulars Page no.
Chapter-1 Introduction
Chapter-2 Review of literature
Chapter-3 Research Methodology
3.1 Scope and need
3.2 Objectives
3.3 Research methodology
3.4 Research design
Chapter-4 Data Analysis and Interpretation
Chapter-5 Findings and Suggestions
5.1 Findings
5.2 Suggestions
Conclusion
- Bibliography
-

CHAPTER-1

INTRODUCTION

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Microfinance, also called microcredit, is a type of banking service provided to unemployed or
low-income individuals or groups who otherwise would have no other access to financial
services.

While institutions participating in the area of microfinance most often provide lending—
microloans can range from as small as $100 to as large as $25,000—many banks offer
additional services such as checking and savings accounts as well as micro-
insurance products, and some even provide financial and business education. The goal of
microfinance is to ultimately give impoverished people an opportunity to become self-
sufficient.

1.1 Meaning
Capital markets, insurance sector and non- banking financial companies (NBFCs) makes up
the financial sector of a country. Institutions which are involved with money are included in
the financial service sector of financial industry. These institutions include business providing
money management, insurance sector, issuance of securities, tradingservices and lending and
investing activities.’ Banks, Credit card issuers, Insurance companies, Investment bankers,
Securities traders, Financial planners, Security exchanges, pension funds, mutual funds and
other smaller financial entities are some of the institutions which are part of this sector. In
India, commercial banks constitute the largest part of the financial sector as it covers sixty-
four percent of the total asset in the financial sector. The Government of India has introduced
several reforms to liberalise, regulate and enhance this industry. The Government and
Reserve Bank of India (RBI have taken various measures to facilitate easy access to finance
for Micro, Small and Medium Enterprises (MSMEs). These measures include launching
Credit Guarantee Fund Scheme for Micro and Small Enterprises, issuing guideline to banks
regarding collateral requirements and setting up a Micro Units Development and Refinance
Agency (MUDRA). With a combined push by both government and private sector, India is
undoubtedly one of the world's most vibrant capital markets. In 2017, a new portal named
'Undynamic Mitra’ has been launched by the Small Industries Development Bank of India
(SIDBD with the aim of improving credit availability to Micro, Small and Medium
Enterprises’ (MSMEs) in the country. India has scored a perfect 10 in protecting
shareholders’ rights on the back of reforms implemented by Securities and Exchange Board
of India (SEBD."°

1.2 Definition
“Microfinance refers to the provision of small scale financial services including microcredit,
savings, payment services, micro insurance and other services to the rural and urban poor
clients who don't have access to the banking services on sustainable basis”! The definition
given by the Asian Development Bank (ADB) states that, “microfinance is a provision which
pertains to a broad range of financial services such as deposit, loans, payment services,
money transfers and insurance to the poor and low-income households and their micro-
enterprises””. The World Bank in its definition of microfinance has highlighted a link

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between microfinance and development. Microfinance refers to the provision of financial
services to low-income clients, including the self-employed. Microfinance is not simply
banking, it is a development tool. Microfinance involves a wide range of activities such as
giving small loans, providing micro insurance and giving financial and business education to
the poor people and they also indulge in providing vocational training to the poor people who
can learn through these programs so that they can earn their living and can subsequently
become self- sufficient and can further help in the development.”

1.3 Historical development of Micro Finance

The history of microfinance can be traced back to the Starr-Bowkett Society. Further in 18"
and the 19" century. Jonathan Swift inspired the Irish Loan Funds which was also a type of
microfinance.’ These Irish loans were interest free loans and also sometimes in the form of
charities also. The Individualist anarchist, Lysander Spooner in the mid of the 19" century
wrote about the advantages of the microfinance and the benefits derived from small loans by
the poor people.The first cooperative lending bank was opened in Germany in the 19"
Century to support the poor farmers. It was founded by Friedrich Wilhelm Raiffeisen . In
Latin America and Asia microfinance started as an experiment. In 1950, Commila Model was
used by Akhtar Hameed Khan in East of Pakistan, according to this model loans were given
through community-based initiatives.’ This project was not a success because of the over
involvement of the Government of Pakistan and also because of the hierarchies which was
made within the group. Microfinance gained popularity in 1976, when on the outskirts of
Chittagong University campus in the village of Jobra, in Bangladesh, Muhammad Yunus
started the Grameen Bank.* After seeing the success of the Grameen Bank in Bangladesh
many other microfinance institution have come up and have helped the low income group of
the society and they have also come up with many other strategies which includes providing
collateral free loans to poor people, especially in rural areas, at full-cost interest rates and
these loans are repayable in frequent instalments and all the borrowers are arranged into
different groups. In 1983, this institution became a bank. In the year 2006, Nobel Peace Prize
was given to Mohd. Yunus and Grameen Bank for their efforts, loans without financial
security were an idea which was not thought upon and worked before him but he transformed
his dream into reality and helped people throughout the world.? Mohd.

Yunus once also said that, “Maybe our great-grandchildren will go to museums to see what
poverty was like”.

1.4 Purpose of Microfinance Institutions

Traditionally, when a person wants to start a business venture, they go to a bank for a loan.
But what should a budding entrepreneur do if he is too poor to obtain finance to start a
profitable business? The answer lies in a relatively new branch of financial services called
microfinance. Its purpose is to provide basic financial services such as loans, savings and
insurance to underprivileged people. A microfinance institution (MFI) is simply one that
offers such services to the poor; according to the Consultative Group to Assist the Poor
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(CGAP), it can be a credit union, commercial bank, financial non- governmental
organization, or a credit cooperative.

 Provide Access to Funds: -

Typically, the poor acquire financial services like loans through informal relationships.
These loans, however, come at a high cost per dollar loaned and can be unreliable.
Furthermore, banks have not traditionally viewed poor people as viable clients and often
will reject them due to unstable credit or employment history and lack of collateral. MFIs
dismiss such requirements and provide small loans at high interest rates, thus providing
MFIs the funds they need to continue operation.

 Encourage Entrepreneurship and Self-Sufficiency:-

Underprivileged people may have potentially profitable business ideas, but they cannot
put them into action because they lack sufficient capital for start-up costs. Microcredit
loans give clients just enough money to get their idea off the ground so they can begin
turning a profit. They can then pay off their micro-loan and continue to gain income from
their venture indefinitely.

 Empower Women: -

Women make up a large proportion of microfinance beneficiaries. Traditionally, women

(especially those in underdeveloped countries) have been unable to readily participate in
economic activity. Microfinance provides women

with the financial backing they need to start business ventures and actively participate in
the economy. It gives them confidence, improves their status and makes them more active
in decision-making, thus encouraging gender equality. According to CGAP, long-
standing MFIs even report a decline in violence towards women since the inception of
microfinance.

 Community-Wide Benefits: -

Generally speaking, microfinance institutions seek to reduce poverty worldwide. As they

obtain funds and services from MFIs, recipients gain enormous financial benefits which
trickle down to others in their families and communities. New business ventures can
provide jobs, thereby increasing income among community members and improving their
overall well-being. Microfinance services gives hope to people who previously had little
or no opportunity to be self-sufficient.

1.5 Goals/Objectives of Microfinance

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 The microfinance sector consistently focuses on understanding the needs of the poor and
on devising better ways of delivering services in line with their requirements, developing
the most efficient and effective mechanisms to deliver finance to the poor. Continuous
efforts towards automation of operations are steady improving in efficiency. The
automated systems have also helped accelerate the growth rate of the microfinance sector.
The goal for MFIs should be:

* To improve the quality of life of the poor by providing access to financial and support
services;

* To be a viable financial institution developing sustainable communities;

* To mobilize resources in order to provide financial and support services to the poor,
particularly women, for viable productive income generation enterprises enabling them to
reduce their poverty;

* Learn and evaluate what helps people to move out of poverty faster;

* To create opportunities for self- employment for the underprivileged;

* To train rural poor in simple skills and enable them to utilize the available resources and
contribute to employment and income generation in rural areas.

1.6 Financial Resources of Micro Finance Institutions

 Savings and deposits

Internationally micro saving products, also known as retail deposits, offered by MFIs
serve as a low-cost source of funding and are a common practice in countries like the
Philippines, Uganda, Pakistan, Peru and Kenya. Most governments only allow
microfinance banks to offer micro saving products and prohibit other MFIs from raising
deposits. The potential pitfall of these deposit products is that MFIs may fail to provide
instantaneous liquidity. In India, the SHG model is primarily built up on mobilisation of
savings. SHG members borrow funds from banks against these deposits.

 Individual philanthropic sources and social investors

Non-profit investors, such as individuals interested purely in the social impact of

microfinance, often lend their own money to MFIs through online platforms,
internationally the most famous of which are Kiva and Micro Place. Similarly, high net
worth individuals who are interested in philanthropy often give away great sums of
money to MFIs, in acts known as ‘venture philanthropy’. Social investors are individuals
or institutions (high net worth, foundations, endowments, and retirement plans) which
choose to apply non-financial characteristics to their investment decision making. These

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non-financial characteristics are often related to the investors’ value system or social
mission, and may include concern for environmental protection, social and economic
development of the poor, education and health, as priorities. For example, in India Rang
De, an MFI raises money from social investors. Commercial institutions also participate
in such social investment. For example, Citibank provides charitable contributions to
three local MFIs in Haiti to help restore the country’s microfinance industry which has
suffered severe challenges in the aftermath of the 2010 earthquake.’

 Soft loans and grants

Concessionary or soft loans (low cost debt) or grants are another source of funds from
socially responsible investors, which include national and regional development banks,
international NGOs, non-profit corporations, charitable trusts, or funds held by donor and
development agencies, such as the Grameen Trust, Swedish International Development
Agency (SIDA), United States Agency for International Development(USAID), United
Nations Capital Development Fund (UNCDF), the Asian Development Bank (ADB), the
World Bank, the Bill and Melinda Gates Foundation, Ford Foundation, the International
Monetary Fund (IMF), ACCION and CARE. Some development agencies only interact
with governments, but their funds can be accessed either directly or indirectly by MFIs.

 Investment funds

Internationally there are many investment funds that specialise in microfinance and this
proves to be a good source and are also deploying their structuring and fund-management
skills to offer investment products that appeal to a broad range of investor risk profiles
and social motivations.

 Microfinance investment vehicles

Microfinance investment vehicles (MIVs) are private entities which act as intermediaries
between investors and microfinance institutions. MIVs may be self-managed, managed by
an investment management firm, or by trustees. They may receive investments through
the issuance of shares, units, bonds or other financial instruments. Depending on the type
of MIV, these investments may then be provided to MFIs as debt, equity, or guarantees.
MIVs make use of different currencies as well, since they are located all over the world.
While some MIVs are primarily profit seeking, others additionally combine the objective
of social impact. This diversity among MIVs makes it possible for many different types
of investors to get involved in the microfinance sector. These have the capacity to
conduct the specialised due diligence and monitoring required for sound investing in this
niche market, and fund investing confers the added benefit of diversification across many
MFIs, countries and currencies. The International Association of Microfinance Investors

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(AMFI) estimates that as of April 2009 there are 104 MIVs with a total of $6.1 billion in
assets under management. In the Indian context, such potential has not been captured so
far. The RBI Report (2011) suggests that to meet the funding requirements of the sector,
a “domestic social capital fund’ may be established. This fund will be targeted towards
‘social investors ‘who are willing to accept ‘muted’ returns, say, 10%—12%. This fund
could then invest in MFIs which satisfy social performance norms laid down by the fund
and are measured in accordance with internationally recognised measurement tools.

 Non-convertible debentures

In an attempt to create new avenues to raise funds, non-convertible debentures (NCDs)

were issued by MFIs. The country’s first ever NCD issue that was listed on the stock
exchange was by SKS Microfinance. It had raised Rs. 750 million at a coupon rate of
10% in May 2009, which was soon followed by another issue of SKS and Grameen
Koota. MFIs have increasingly tapped the NCD route to create a diversified lender base.

 Bank loans

In the Indian context, commercial banks lend to MFIs and SHGs. Commercial banks in
India have to meet the mandatory requirement of lending 40% of their advances to the
priority sector. Thus, banks are a major source of finance to MFIs and their interest rate is
12-14%. Both short-term loans and long-term debt can be acquired from commercial
banks. The Small Industries Development Bank of India, an apex financial institution for
promotion, financing and development of small-scale industries in India, has launched a
major project — the SIDBI Foundation for Micro Credit (SFMC) — to facilitate the
accelerated and orderly growth of the microfinance sector in India. SFMC is emerging as
the apex wholesaler for microfinance in India providing a complete range of financial and
non-financial services such as loan funds, grant support, equity and institution building
support to the MFIs. SIDBI also provides equity capital to eligible institutions to meet the
capital adequacy requirements and to raise debt funds. Keeping in tune with the sectoral
requirements, SIDBI has also introduced quasi-equity products viz, optionally convertible
preference share capital, optionally convertible debt and optionally convertible
subordinate debt for new generation MFIs which are generally in the pre-break-even stage
requiring special dispensation for capital support by way of a mix of Tier I and Tiern II
capital. The Transformation Loan (TL) product is envisaged as a quasi-equity type
support to partner MFIs that are in the process of transforming their existing structure into
a more formal and regulated set-up for exclusively handling microfinance operations in a
focused manner. Being quasi-equity in nature, the TL helps MFIs not only in enhancing
their equity base but also in leveraging loan funds and expanding their microcredit
operations on a sustainable basis. The product has the feature of conversion into equity
after a specified period of time, subject to the MFI attaining certain structural, operational
and financial benchmarks. This non-interest-bearing support facilitates the young but well
performing MFIs in making long term institutional investments and acts as a constant
incentive to MFIs to transform themselves into formal and regulated entities.’
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  Private equity

The private equity market is an important source of funds for start-ups, private middle-
market companies and firms in financial distress. The huge demand for credit among the
poor has become an attractive investment avenue for private equity and venture capital
investors. These investors normally look for innovative and technology-oriented ventures
where a conventional source of funding is difficult. Sequoia Capital India was the first
traditional venture capital (VC) firm to invest in the space with 11.5 million USD in SKS
Microfinance in 2007. The International Finance Corporation (IFC), the investment arm
of the World Bank, has invested 300,000 USD in Utkarsh Microfinance Private Limited,
a microfinance start-up providing loans in northern India. The amounts raised through
private equity deals are showing an increasing trend indicating that microfinance is a high
return investment avenue. With India being a very attractive market in this field, many
private equity firms have started investing here.

 Equity from capital market sources

MFIs have also started accessing resources through the capital market. Internationally a
few microfinance institutions such as Bank Rakyat at Indonesia (BRI), BRAC Bank in
Bangladesh, Banco Compartamos in Mexico and Equity Bank in Kenya have raised
equity capital through public issue. The four institutions are well known throughout the
microfinance industry for their exceptional growth, robust financial performance and
ability to expand their outreach to the working poor. They are now listed on national
stock exchanges and, in two cases, have sold internationally’. The initial public offerings
(IPOs) and listings have allowed the four institutions to tap into the mainstream investor
community and take advantage of myriad new opportunities. This has also signalled to
capital markets that the microfinance sector is a potential source of profitable investment.
Raising capital through public issue has increased liquidity for investors by creating
opportunities for equity investors to exit, especially those who contribute as private equity
and seed capital. This has made microfinance an attractive investment avenue for private
investors. In the Indian context, the SKS IPO is a milestone event. The Hyderabad based
SKS Microfinance floated its first public offering of equity and mobilised 358 million
USD, priced at 1.6 billion USD. The shares which were oversubscribed 13.7 times
(primarily by institutional investment interest) fixed the price per share at Rs 985
reflecting a valuation of 98 times the face value of shares. Overall, the valuation accorded
a book value to market value ratio of six times. Microfinance has got the attention of the
capital market and around six other MFIs are aspiring to enter the equity market with
their own share floats.

 Assignment and securitisation

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The rapid growth in the microfinance sector, especially of NBFC-MFIs has led to the
search for innovative financial sources to meet the financial requirements of the sector.
The need for securitisation is common to all financial intermediaries, but when it comes
to microfinance, the growing asset size (which is the very essence of microfinance
economics) puts pressure on the balance sheet. Hence, off-balance sheet methods of
funding, or any devices other than plain balance sheet borrowing are needed to sustain the
growth rate.” Three forms of structured financial products have gained significance; these
are: bilateral loan assignments, securitisation and collateralised debt obligations (CDOs).
In the case of assignment, the loan pool receivables are directly assigned to the assignee
or the purchaser, usually a bank. These deals are also rated but no specific instrument like
pass-through certificate (PTC) is issued. Banks often prefer this route as the loans need
not be marked-to-market (as they are on the banking books), whereas the securities
against those loan pools (as in the case of securitisation), if issued by the same seller will
have to be marked-to-market (as they are securities and hence will be on the bank’s
trading books). Besides this, banks will be able to pick and choose the loans that qualify
for priority sector lending norms, and hence such transactions fit exactly into them
objective. So, banks usually go in for bilateral assignment during the fag-end of the
financial year, based on their requirement for such loan pools. Further, most banks also
offer competitive rates if they are keen to have such loans on their books. Securitisation
typically involves the conversion of assets which have predictable future cash flows (for
example, a pool of microloans) into standardised, tradable securities. The securitisation
process allows MFIs to pool the receivables from loans and sell the same to third parties
like banks, mutual funds and insurance companies. This is an opportunity for MFIs to
increase their funding sources. The primary objective of securitisation is to obtain
financing for a company’s ongoing business needs. A properly structured financial asset
securitisation also can permit a company to obtain a lower cost of financing compared to
secured or even unsecured debt. Securitisation allows the originator to remove the asset
and all corresponding risks associated with it completely from its balance sheet. It also
reduces the need to hold capital against the asset. The broad structure of transactions (as
in the case of securitisation) — including bankruptcy remoteness, limited recourse to
originator, performance of servicing function by the originator, and permissible
commingling of pool collections with servicer’s own funds — are common to both
assignment and securitisation.

1.7 Dominant Models of Microfinance in India

 SHG-Bank Linkage Model:

This model involves Self Help Groups (SHGs) which are financed directly by the
Commercial Banks (Public Sector and Private Sector), Regional Rural Banks (RRBs) or
Co-operative Banks. Microfinance programmes focus on organisation at the grassroots
level through a process of social mobilisation that enables the poor to build Self Help
Groups (SHGs) amongst themselves, consisting of 10-20 persons. They participate fully
and directly and take decisions independently in such organisations. These groups are
formed, developed and strengthened to evolve into self-managed people's organisations

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which provide internal loans to its members from the group corpus. The group corpus is
supplemented with Revolving Fund sanctioned as cash credit limit by the banks.

 MFI-Bank Linkage Model:

This model covers financing of Micro finance Institutions (MFIs) by banking agencies for
on-lending to SHGs and other small borrowers covered under microfinance sector. MFIs
combine flexibility, sensitivity and responsiveness of the informal credit system with
technical & administrative capabilities and financial resources of the formal financial
sector which rely heavily on collective strength and closeness of social groups for
effective social mobilisation to enable financial empowerment. MFIs have adapted
themselves to circle around the shortcomings of traditional financial organisations, by
forming a partnership between socially focussed NGOs, which invest in human and social
capital at the grass roots, and economically sensitive banking institutions, experienced in
mobilising funds for graduating and enabling rural communities. MFIs enable
commercial banks to overcome the formal requirements of paper-work to support
transaction costs, information asymmetries and risk, making lending to the poor a
commercially attractive proposition. The role of the MFIs therefore is to act as the
guarantor to the bank, to support the credit worthiness of the poor.

 Grameen Model-

Grameen Model was pioneered by DR Mohammed Yunus of Grameen Bank of

Bangladesh. It is perhaps the most well-known and widely practiced model in the world.
In Grameen Model the groups are formed voluntarily consisting of five borrowers each.
The lending is made first to two, then to the next two and then to the fifth. These groups
of five meet together weekly, with seven other groups, so that bank staff meets with forty
clients at a time. While the loans are made to the individuals, all in the group are held
responsible for loan repayment. According to the rules, if one member ever defaults, all in
the group are denied subsequent loans.

 Co-operative model:

A co-operative is an organization owned by the members who use its services. This
model works on the principle that every community has enough human and financial
resources to manage their own financial institutions. The members who own it are the
members who use its services and can come from different sections of same community
like agriculture, retail etc. Example is Sahavikasa or Co-operative Development
Foundation (CDF). It helps in assisting rural women and men in the areas of operation in
forming and developing self-sustainable co-operatives. It also provides education and
training to the co-operators from its work area.

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1.8 The Role of Government in Boosting Micro Finance Institutions

After 1990, India economy has become an open economy and thereby it has attracted
many foreign investors and global corporations to invest in India. All this have made
India as a hub of investment and have put Indian economy at the forefront of world trade
and industry. But even after such transformation in the economy, many people are still
unaffected because of these changes and are still living in poverty. Thus, the idea behind
Microfinance is to provide financial services to the low-income proletariat who
traditionally lack access to banking and other monetary services.

During the last two decades, substantial work has been done in developing and
experimenting with different concepts and approaches to reach financial services to the
poor, by the Government, Non-Governmental Organisations (NGOs) and banking
institutions in various parts of the country. Microfinance refers to small scale financial
services, both credit & savings, that are extended to the poor in both rural and urban
areas. It refers to economic services which mitigate vulnerability to economic shocks,
promotes savings and supports self- empowerment. Microfinance encompasses a variety
of financial instruments. The only common factor amongst the available services is the
low amount of capital involved. Most Microfinance programs provide multiple services
like lending, savings, life insurance, crop insurance etc.

Such financial services are important for the uplift of the economically weak sections of
the society who are not able to avail financial services from the traditional sector. The
lack of access to credit for the poor can be attributed to practical difficulties arising from
the discrepancy between the mode of operation followed by financial institutions and the
economic characteristics and financing needs of low-income households. Microfinance
based credit delivery mechanism ensures viable financial services to address issues like
actualizing equitable gains from development activities on a sustained basis, and plays a
vital role in fighting poverty NABARD has taken the lead in promoting microfinance in
India. Its Self-Help Group- External website that opens in a new window (SHG) model
has created opportunities for commercial banks to lend to the poor. It has been
encouraging voluntary agencies, bankers, socially spirited individuals, other formal and
informal entities and also government functionaries to promote and nurture SHGs &
Microfinance Institutions (MFIs)).

Due to the Government's active promotion & special schemes, Commercial banks have
actively started lending capital to SHGs & MFIs, which then further lend to their
members overcoming the information asymmetries that the bank would normally have
faced. Thus, engaging a dormant source of financing for the needy, as in lending to the
poor, banks face high risks and transaction costs, while the lack of borrower information
and of collateral make it unattractive for the formal financial sector to lend to the very
poor.

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Microfinance institutions are a big stake holder in the Indian economy hence they are
need to be encouraged by the Government. Further the microfinance institutions provide
loans on fair terms and without collateral hence it is preferred by the people belonging to
the low-income group as it frees them from the vicious cycle of debt in which they get
trapped because of the informal lending (especially moneylenders), microfinance also
need support and encouragement from the Government as it requires less documentation
Than the commercial banks and are also easily associable.

 NABARD-

NABARD is a development bank which facilitates credit flow for promotion and
development of agriculture, small-scale industries, cottage and village industries,
handicrafts and other rural crafts. Its Financial Inclusion Department (FID) is the nodal
agency which oversees the Financial Inclusion Fund (FIF) and Financial Inclusion
Technology Fund (FITF) which promote microfinance initiatives.

 Rastriya Mahila Kosh-

The National Credit Fund for Women or the Rastriya Mahila Kosh (RMK) has a large
number of grant and subsidy-based poverty alleviation programs comprising micro-credit
& micro-savings schemes with a focus on poor women across the country. RMK takes
active initiatives in channelising funds, market development social advocacy.

 Small Industries Development Bank of India (SIDBI) -

SIDBI's Foundation for Micro Credit is the apex wholesaler for micro finance in India. It
provides a range of financial and non-financial services such as loan funds, grant support,
equity and institution building support to the retailing Micro Finance Institutions (MFIs)
including two-tier MFIs so as to facilitate their development into financially sustainable
entities, besides developing a network of service providers for the sector

 National Handicapped Finance and Development Corporation (NHFDC)’ -

It has been set up to promote economic and development activities undertaken by Persons
with Disabilities. The Corporation assists them by providing loans for self-employment
and other economic ventures. The majority of disabled population is constantly in need of
small loans for sustaining their existing employment, for generation of further
employment as also for meeting varied personal and social needs. The poorest among the
poor need loans of very small amount but their requirement is quick delivery of loan at
their doorsteps. Traditionally, private money lenders have been playing this role but their
intention has been to exploit the poor instead of helping them and this rather worsened
plight of the poor. Over a period of time, the significance of provision of credit as an

15
instrument of socio-economic change and development is being realised and many
international and national organisations including the nationalised banks have come up to
provide soft loans to the poor in order to free them from the clutches of private money
lenders. However, the task is gigantic and a wide gap persists in meeting the credit needs
of the poor.

1.9 Commercial Banks and Microfinance Institutions

Commercial banks can engage in microfinance in many different ways, ranging from
direct relations with borrowers to a more indirect participation through the raising of
capital. Commercial banks play vital role in microfinance through following ways--

 Direct Lending:

Commercial banks can lend to entrepreneurs directly. This sort of participation of

commercial banks are entirely targeted to serve the microfinance sector. The pioneer in
this field is the Grameen Bank founded by Muhammad Yunus in 1976, with the sole goal
of helping the impoverished through the provision of small loans to a group of borrowers.
Group lending includes providing a loan to every borrower of the group. However, new
loans are not approved to borrowers if any borrower defaults his existing loan. The
process of group lending entails an accountability on borrowers to repay their loan in
more discipline way.

 Partnership with Microfinance Institution:

Commercial banks create partnership with microfinance institutions. Banks lend to MIs in
the form of retail and wholesale banking. However, MFIs are involved in collection,
monitoring Ruth Goodwin Groen, The Role of Commercial Banks in Microfinance: Asia-
Pacific Region: A Report for the Foundation for Development Cooperation, Foundation
for Development Cooperation, 1998. and origination of loan. MFIs enjoy lots of benefits
by doing tie up with banks. As the higher amount of capital can increase the size of the
loan, banks have greater reach through their geographical expansion. Furthermore, the
bank’s personnel can also provide mentoring to MFIs in terms of improving the
operational efficiencies of the organization and making it aware of standardized
international practices in the world of finances if the bank has reached such a standard.
One such example is the case of ICICI Bank in India which is working in partnership with
microfinance institutions.

 Microfinance Subsidiary:

Banks can also choose their microfinance operations through the creation of a new
subsidiaries. Such kind of branches assist banks in mitigating the risk levels involved
16
 while lending to the poor. From the borrower’s perspective, specialized microfinance
services provided by banks may create higher trust among borrowers and shows the
commitment of bank in poverty reduction.

 Securitization:

Last but not the least, commercial banks play vital role in microfinance by raising funds
in international as well as domestic market for the several lending operations of MFIs.

1.10 Challenges faced by the Microfinance Institutions in Obtaining the

Funds
One of the main economic issue which exist in every developing country is poverty. One
of the main reasons behind the problem poverty is income distribution. In India also
income distribution is very uneven which leads to increase in poverty with every passing
day. Despite of significant progress made by the service and manufacturing sector the
agricultural sector still plays a very important role in the Indian economy. 50% of the
Indian population depend on agriculture and allied activities and approximately 69% of
India’s population is in rural areas.' Microfinance majorly focuses on financial inclusion
of this sector of the Indian society as people falling under this sector are comparatively
more backward and poorer. The initiative of NABARD in linking the traditional banking
system with the Self- Help Groups has helped micro finance institutions in achieving its
goals. But still there are many challenges faced by these institutions. They face challenges
with regard to structural, operational and financial processes. Major challenges faced by
Indian microfinance industry the people who take help of these institutions generally
belong to the marginalized section of the society hence over-indebtedness, high interest
rates, and excessive dependence on the banking system, illiteracy and lack of awareness
about the products.

 Over-indebtedness due to multiple borrowings and inefficient risk

management

Microfinance institutions (MFD provide financial services to the poorer section of the
society in order to improve their standard of living. Therefore, over-indebtedness is major
issue. Lack of risk management framework and multiple borrowings by most clients led
to micro-finance crisis in India in 2008. In some cases, it has been seen that there is no
apex control over the MFIs’ is also a reason. This sector gives loans without collateral
which increases security the risk of bad debts. Moreover, the fast-paced growth of the
sector has not been met with proper infrastructure planning. This kind of problems has

17
been reported in states like Andhra Pradesh, Karnataka, and Madhya Pradesh. Over
indebtedness is a cause of concern for MFIs’ as it negatively affects their portfolio. It also
makes them vulnerable to credit risk and increases the cost of monitoring.

 High rates of interest as compared to mainstream banks

MFIs’ when compared to commercial banks do not enjoy the same rate of financial
success. One of the reasons is that while banking system is centuries old, micro finance is
only a few decades old in India’. MFIs’ charge a very high rate of interest (12-30%) as
compared to commercial banks (8-12%). Recently, the RBI (India’s regulatory bank)
announced the removal of upper limit of 26% interest on MFI loans (ET, 2014). This has
benefited the industry’s players but left the customers in a worse situation than before.
Due to the issues of over-indebtedness caused by the charging of high interest rate, rate of
suicide of farmers increased in states like Andhra Pradesh and Maharashtra.

 Over-dependence on banking system for funding

Majority of the MFIs’ in India are registered as Non- Governmental Organizations

(NGOs). They are dependent on financial institutions such as commercial banks for
stabilised funding for their own lending activities. Around 80% of their funds come from
banks. Most of these are private banks which charge a high rate of interest and also the
term of loans is of shorter period. Most of the times, banks lend to micro lending firms in
order to meet their so-called priority sector loan targets. The over dependence of Indian
microfinance industry on banks makes them incompetent and less reactive towards
dealing with default and delinquencies.

 Lack of awareness of financial services

Like all other developing and underdeveloped countries, the literacy rate in India is very
low and the rate is much lower in the rural areas. Nearly 76% of India’s adult population
does not understand basic financial concepts. Lack of awareness of financial services
provided by the Indian microfinance industry is a challenge for both, customer and
MFIs’. This factor not only causes hindrance for villagers to join hands with MFIs to
meet their financial needs but also makes them financially excluded. MFIs are faced with
the task of educating the people and establish trust before selling their product. Micro
finance institutions struggle to make their business more financially viable due to this
lack of awareness.

 Problem in identification of appropriate model

In India, most of the MFIs’ follow Self-Help Group model(SHG model) or Joint Liability
Group model (JLG model). The problem is that most of the time, selection of model is not

18
scientific in nature. The models are selected randomly, not according to the situation and
also the decision of selection is irreversible in nature. So, it affects the sustainability of
the organisation in the long-run and also increases the risk of borrowings for the poorer
section beyond they can bear. This is also one of the main reasons of crisis of
microlending in the state of Andhra Pradesh. It has been repeatedly stressed that the
industry needs to undergo business process reengineering to effectively reach out to the
under-financed.

1.11 Micro finance and its effect in poverty

Microfinance is an effective tool for poverty eradication this was underlined by Mohd.
Yunus also, he also once remarked that, “Maybe our great-grandchildren will go to
museums to see what poverty was like”. This remark shows his confidence in the
technique of microfinance in poverty elevation. This technique is considered as very
effective for poverty alleviation and is also effective in imparting various information
which relates to education, sanitation, health, legal rights and other information which
proves to be helpful in improving the standard of living of the poor people. Many
microfinance programs have also targeted the women who live in house in the society as
they are one of the most vulnerable section of the society. These women are financially
weak as they have no assets or any kind of financial security of their own. Studies have
proved that these techniques have improved the condition of the women by giving them
opportunity of self- employment which in turn provides financial, social security and also
helps women in gaining self- confidence and helps in improving their status in the
society.

Microfinance also saves people from the exploitation of the moneylenders who charge
exorbitant rate of interest while providing the loans to the poor people and this
exploitation and makes the poor poorer and later this turn into a vicious cycle. Hence
majorly low-income people of the society are benefitted from microfinance schemes and
these schemes helps them in engaging in micro and small enterprises. “Effective
collateral substitute for short- term and working capital loans to micro- entrepreneurs is
provided by micro finance institutions.

19
 CHAPTER-2

REVIEW OF LITERATURE
Microfinance is “the provision of financial services to low-income poor and very poor self-
employed people”. These financial services °generally include savings and credit but can also
include other financial services such as insurance and payment services. Therefore,
microfinance involves the provision of financial services such as savings, loans and insurance
to poor people living in both urban and rural settings who are unable to obtain such services
from the formal financial sector the microfinance industry’s objective is to satisfy the unmet
demand on a much larger scale, and to play a role in reducing poverty. While much progress
has been made in developing a viable, commercial microfinance sector in the last few
decades, several issues remain that need to be addressed before the industry will be able to
satisfy massive worldwide demand’. With increasing assistance from the World Bank and
other donors, microfinance is emerging as an instrument for reducing poverty and improving
the poor's access to financial services in low-income countries. Providing the poor with
access to financial services is one of many ways to help increase their incomes and
productivity. In many countries, however, traditional financial institutions have failed to
provide this service. Microcredit and cooperative programs fill this gap. They provide credit
through social mechanisms such as group-based lending to reach the poor and other clients,
including women, who lack access to formal financial institutions. Their purpose is to help
the poor become self-employed and thus escape poverty. This book examines the experiences
of the Grameen Bank, the Bangladesh Rural Advancement Committee, and the Bangladesh
Rural Development Board's Rural Development Project-12, in order to quantify the potential
and limitations of microcredit programs as an instrument for reducing poverty and delivering
financial services to the poor.

20
According to $.L.Shetty, has talked about the factual profiles of prevalent microcredit
programs in India and goes far beyond the review of literature on the concept, country
models, and history of the movement. Have also given the up-to-date review of the regulatory
measures and their nuances, as well as a detailed review of evaluation and impact studies. It
also dwells on the limitations of the microfinance movement to satisfy the credit needs of the
vast informal-sector enterprises and discusses the new initiatives that the authorities have
taken under the broad theme of "financial inclusion.” Keeping the broader objective of
distributional goals embedded in the microfinance movement, this record attempts an
assessment of the wider challenges faced by the financial system by providing suggestions
for reaching out to the small and informal sectors on a more effective scale.” It is also of
much relevant that the access of these fundamental services provided by the microfinance
institutions should reach to all people in developing countries as it will help in acceleration of
economic development of countries.

Devi S. Kavitha (2014) has reviewed on the topic‘ ‘Micro Finance and Women
Empowerment’ ’this topic in this article is the presentation in a succinct and applicative
manner of several decision-making processes’’. Microfinance gained impetus primarily
because it promised the social and economic uplift of women in developing countries across
Asia, Latin America, and Africa. Countries in these regions have patriarchal societies that
harbor gender-biased traditions preventing the liberation of women. The ability to generate
and control their own income can further empower poor women. Research shows that credit
extended to women has a significant impact on their families' quality of life. Of these
methods’ microfinance providers tend to involve the husbands of their female clients when
talking business, because his support if vital. Additionally, any plan to fight poverty cannot
solely focus on one gender and circumstances therefore; many microfinance programs serve
men as well. Magali J. John (2014) has done their research in the topic‘ ‘The Influence of
Leadership, Corporate Governance and Regulations on Credit Risk Management: The Study
of Rural SACCOS from Tanzania’ ’The study investigated quantitively and descriptively the
influence of leadership, corporate governance and regulations on credit risk management in
rural SACCOS. This study finds that good leadership, corporate governance and regulations
are essential for effective credit risk management in rural SACCOS. The study further
revealed that 65%, 54%, 46%, 38% and 98% of rural SACCOS affirmed the presence of good
re-elected leaders, effectiveness in loans collection, presence of creativity and innovating
among leaders, annually audited reports and the presence but not printed and distributed to
members of their by-laws respectively. This paper describes the rural SACCOS should
practice the Good leadership, governance and should abide by their by-laws in order to have
the effective credit risks management. Government should regulate the rural SACCOS very
stringently and the political interference should be avoided.

Ugiagbe Ernest Osas(2014) has done his research in the topic‘ ‘A Survey of the Perception of
the Services of Microfinance Institutions by the Female Service Users in Benin City, South-
South, Nigeria’ ’and has reviewed this paper to investigate the struggles of managerial
identity in relation to the process of becoming/being the perceptions of the services of the

21
micro finance Institutions by the women service users, and how the services of micro
Institutions affect businesses of the beneficiaries of the micro credit loans. Management tends
to be based on the idea that management concerns the acquisition of the female participants,
and senior management personnel of the micro credit institutions were interviewed. The
cluster and simple random sampling were used to select the participants for the study the poor
services and attitude of officials of micro finance institutions and other Problems like the
regressive tax regimes, harsh economic climate and patriarchy are negatively affecting the
business ventures of the loan beneficiaries and by implication the goals of poverty reduction
via micro credit scheme. The leaders of registered unions were the informant.

CHAPTER-3S

OBJECTIVE AND RESEARCH METHODOLOGY

3.1 NEED

The need of microfinance arises because the rural India requires sources of finance for
poverty alleviation, procurement of agricultural and farms input. Micro finance is a program
to support the poor rural people to pay its debt and maintain social and economic status in the
villages. As we know that India is agriculture-based economy so microfinance may be a tool
to empower the farmers and rural peoples to make agriculture profitable. So, the researchers

22
are interested to find out the scopes of microfinance in rural India. This report is highlighting
a picture rural India as a profitable segment for microfinance institutions

SCOPE

1. The provision of a revolving line of credit to support rural microenterprises and

agricultural activities,

2. Institutional strengthening of the executing and implementing agencies for Project

implementation, and Group formation and strengthening of sub-borrowers and beneficiaries.
The activities financed were: I. Agriculture, including livestock, vegetable production, and
marketing. Manufacturing, including agricultural tools and equipment, food processing, and
handicrafts; andic. Services, including retail shops and numerous trading activities.

3.2 OBJECTIVES

1. Study the challenges faced by them in obtaining the funds.

2.. Understanding the role of Government in boosting Micro finance institutions.

3. Study the relationship between Commercial banks and microfinance institutions

3.3 Research Methodology

Researcher has applied doctrinal method of research while conducting this research. This
Research is based on the secondary data which includes books, journals, articles, internet
sources, etc.

Research

Research is an organized set of activities to study and develop a model or

procedure/technique to find the results of a realistic problem supported by literature and data
such that its objectives are optimized and further make recommendations/interferences for
implementations. Redman and Mory define research as “a systematized effort to gain new
knowledge”. Research is an academic activity and as such the term should be used in a
technical sense. According to Clifford Woody research comprises defining and redefining
problems, formulation hypothesis or suggested solutions; collecting, organizing and
evaluating data; making deductions and reaching conclusions; and at last, carefully testing the

23
conclusions to determine whether they fit the formulating hypothesis. Research methodology
are system of models, procedures and techniques used to find the results of research problem

3.4 Research Design

Research design is the blueprint for conducting research aimed at answering the research
question. It ensures that the study is relevant to the problem by guiding the researcher on
major research issues such as data collection techniques, sampling procedure, monetary costs
and time required for the study and techniques used for data analysis. They have classified
research design into several categories based on eight different descriptors. According to the
frame work, this study follows a formal research design where the objective is to answer the
research question and testing of hypothesis. In terms of control of other variables, research
design follows an ex post facto design where in the researcher’s ability to manipulate the
variables is limited. In terms of purpose, it is more of a causal study, wherein the objective is
to explain the relationship between variables. Data were collected at once to represent a
snapshot, and hence on time dimension, the research design is considered to be of cross-
sectional nature.

3.4 Source of Data

The secondary data of the study is collected through external sources the relevant secondary
data was collected through journals, magazines, newspapers, research articles, published
information and details from websites of the financial companies taken for study.

CHAPTER-4

DATA ANALYSIS AND INTERPRETATION

Data Analysis: It is a process of inspecting, cleansing, transforming and modelling data with
the goal of discovering useful information, informing conclusions and supporting decision
making. This form of analysis is just one of the many steps that must be completed when
conducting a research experiment. There are many methods which are used for data analysis
such as data mining, text analytic, business intelligence and data visualizations. (Data
analysis)

24
According to Shamoo and Resnik (2003) various analytic procedures “provide a way of
drawing inductive inferences from data and distinguishing the signal (the phenomenon
of interest) from the noise (statistical fluctuations) present in the data.”

Data Interpretation: After collecting and analysing the data, the researcher has to
accomplish the task of drawing inferences followed by report writing. It should be done very
carefully otherwise mis conclusions may be drawn and the whole purpose of doing research
may get vitiated. It is only through interpretation that the researcher can expose relations and
processes that underlie his findings.

The task of interpretation has two major aspects viz.

1) The effort to establish continuity in research through unlinking the results of a given
study with those of other, and
2) The establishment of explaflat concepts.” In one sense, interpretation is concerned with
relationships within the collected data, partially overlapping analysis.

Interpretation also extends beyond the data of the study to inch the results of other research,
theory and hypothesis.” Thus, it is the device through which the factors that seem to explain
what has been observed by researcher in the course of the study can be better understood and
it also provides a theoretical conception which can serve as a guide for further researchers.

25
Table 1 No. of MFIs in India States/UTs and No. of Districts with MFI Operation- Year 2017

Name of the No. of MFIs No. of districts of No. of Branches

States /UTs operating in the state the state where MFIs
(including those operate
having Head
Quarters outside)
Andaman Nicobar 2 1 1
Islands
Andhra Pradesh 3 12 66
Arunachal Pradesh 4 4 11
Assam 21 28 344
Bihar 33 37 692
Chandigarh 3 1 4
Chhattisgarh 20 22 306
Delhi 10 6 33
Goa 4 2 10
Gujarat 18 24 257
Haryana 17 19 190
Himachal Pradesh 4 4 9
Jammu & Kashmir 1 1 1
Jharkhand 20 24 263
Karnataka 23 30 1218
Kerala 16 12 261
Madhya Pradesh 34 48 907
Maharashtra 41 36 808
Manipur 5 10 38
Meghalaya 8 5 18
Mizoram 4 8 26
Nagaland 3 2 3
Odisha 28 30 744
Puducherry 27 2 10
Punjab 10 22 173
Rajasthan 22 29 352
Sikkim 2 3 8
Tamil Nadu 35 34 1152
Telangana 5 6 11
Tripura 9 6 39
Uttarakhand 20 6 117
Uttar Pradesh 28 68 1067
West Bengal 41 21 1097
Total 563 10233

Table 2 No. of MFIs in India States/UTs and No. of Districts with MFI Operation Year 2015

26
 Name of the No. of MFIs No. of districts of No. of Branches
States /UTs operating in the state the state where MFIs
(including those operate
having Head
Quarters outside)
Andaman Nicobar 1 1 1
Islands
Andhra Pradesh 10 13 776
Arunachal Pradesh 3 7 11
Assam 19 24 552
Bihar 28 38 915
Chandigarh 1 1 2
Chhattisgarh 17 16 248
Delhi 13 7 70
Goa 4 2 7
Gujarat 22 23 386
Haryana 13 19 129
Himachal Pradesh 4 4 6
Jammu & Kashmir 1 1 1
Jharkhand 19 23 231
Karnataka 29 30 1185
Kerala 13 14 220
Madhya Pradesh 37 48 870
Maharashtra 37 35 980
Manipur 8 9 45
Meghalaya 7 6 26
Mizoram 4 8 34
Nagaland 2 4 2
Odisha 26 30 742
Puducherry 11 3 17
Punjab 7 17 93
Rajasthan 21 33 287
Sikkim 3 3 10
Tamil Nadu 34 32 1377
Tripura 9 6 39
Uttarakhand 13 10 95
Uttar Pradesh 23 70 1063
West Bengal 35 20 1740
Total 586 12221

In India, mutual fund institutions have been merging their operation to manage with the effect
of change taking place in the sector. In 2014-15, MFIs have increased their branches, posting
a minor growth of 4.57%. In 2016-17, total branch set-up of the Mutual fund institutions
excluding six Small Finance Bank (SFBs) was 10233.DOI:10.24105/gjiss.7.2.1804 24 In
2015-16, 6 MFIs (Equitas, Ujjivan, ESAF, Suryoday, Utkarsh, and Janalakshmi) graduated to

27
SFBs covered 1978 branches out of Total branch network of 11664. Number wise branch
network in 2016-17 has declined to 10233 from 11644 but actually there is a growth of 6%
(factoring in 6 SFBs’ exit as MFIs).The difference between the Table No. 1 and 2 shows that
the MFIs institution state branch‘s up and downs in India.

Table No.3:-MFI Branch Network- Yearly Trend and Category-wise Breakup

Chart Title

13562
12221
11459 11687 11644
10697
10233
8852

2011 2012 2013 2014 2015 2016 2017 nbfc/nbfc-mfi

Column3 Column1 Column2

Above table revealed the distribution of branches among different categories of MFIs as of
March 2017 which showed that NBFCs (NBFC/NBFC-MFI) had the lion’s share of 8852
(87%) branches. It also shows the ups and downs in MFI Branch network in 2011 to 2017. In
India, year 2011 has the highest branch as compared to year 2017.

Microfinance and other loans available in India: The casual sources, which the
overviewed individuals portrayed upon, were basically proficient lenders. There were
likewise individuals that arranged advances from relatives and a companion, which has
uncovered by most prime level reviews, is a harmless source of finance that is drawn on by
any person in the midst of need. These advances are typically interest free. In any case, the
credits from moneylenders are advances taken regularly at overwhelming rates of interest

Table No. 3– No. of loans of SHG members, by sources other than SHGs

Source No of loans Percentage of loans

Bank 10 10.8
Professional moneylenders 39 41.9
Relatives and friends 25 26.9
Other sources 19 20.4
Total 93 100.0

28
Table No 3 demonstrates that we get a genuinely comparative table of the prevalence of
casual sources in common, moneylenders specifically. It has been found that of the aggregate
number of rustic family units in the State, 68% have taken as a minimum one loan from the
casual sources, and out of these, 53% have taken advances from proficient loan providers.
Further, just 14.4 for each penny of the rustic family units in the State revealed no less than
one advance from commercial banks. Clearly, there was more noteworthy reliance on casual
sources, especially moneylenders in India. The premium cost of micro finance was high as
uncovered by the review and was in truth as good as to the rates charged by moneylenders.
More than 75% of the SHGs reviewed charged rates in the scope of 24% to 36% per annum.
Percentage of household reporting at least one loan outstanding, by source

Source India
Formal sources 50.7
Government 3.0
Cooperatives 26.1
Commercial banks 21.6
Other sources 2.6
Informal Sources 58.3
Landlord 1.4
Agriculture moneylender 12.3
Professional moneylender 26.9
Trader 3.3
Relatives and friends 14.1
Others 3.9
Note: The figures may not add up to 100 as there are households that have taken loans from
more than one source.

Chapter -5

Finding and suggestions

5.1 Findings
 Financial illiteracy:

29
One the major challenge in India towards the growth of the microfinance sector i.e. illiteracy
of the people. This makes it difficult in creating awareness of microfinance and even more
difficult to serve them as microfinance clients.

 Lack of information:

There are various sources of credit information in India, but none of these focuses on small,
rural borrowers. Credit information on such borrowers is difficult to obtain because the
majority of the rural poor rely on moneylenders and other informal lenders, and it is not in the
interest of such lenders to pass on a borrower’s good credit repayment record to other
providers of finance.

 Inability to generate funds:

MFIs have inability to raise sufficient fund in the microfinance sector which is again an
important concerning challenge. Through NBFCs are able to raise funds through private
equity investment because of the for profit motive, such MFIs are restricted from taking
public deposits

 Heavy dependence on banks & FIS:

MIFs are dependent on borrowing from banks & FIS. For most of the MFI’s funding sources
are restricted to private banks & apex MFI’s. In these available bank’s funds are typically
short term i.e., maximum 2 years period. Also, there is a tendency among some lending banks
to sanction and disburse loans to MFI,s around the end of the accounting year in pursuit of
their targets.

 Weak governance:

Many MFIs are not willing to convert to a corporate structure; hence they trend to remain
closed to transparency and improved governance, thus unable to attract capital. MFI’s also
facing a challenge to strike a balance between social and business goals. Managements need
to adapt business models based on changing scenarios & increased transparency; this will
enable attracting capital infusion and private equity funds.

 Interest Rate:

MFIs are charging very high interest rates, which the poor find difficult to pay. MFIs are
private institutions and therefore require being economically sustainable. They do not get any
subsidized credit for their lending activities and that is why they need to recover their
operational costs from borrowers

 Regional Imbalances:

There is unequal geographical growth of Microfinance institutions and SHGs in India. About
60% of the total SHG credit linkages in the country are concentrated in the Southern States.
However, in States which have a larger share of the poor, the coverage is comparatively low.

30
Main reason for this is the state government support, NGO concentration and public
awareness

5.2 Suggestions
Although the microfinance sector is plagued by a number of problems but there is a way out
for the problems faced by this sector. Improvements are required from the side of
government, Microfinance institutions and individual clients. Some of the suggestions are:

1. The concept of Micro Finance is still new in India. Not many people are aware the Micro
Finance Industry. So apart from Government programmers, we the people should stand and
create the awareness about the Micro Finance.

2. Microfinance programmes and group formation should be handled by trained personnel in

a professional manner.

3. Leading banks and industry developments must be taken into consideration for district-
wise and block-wise economic opportunities and resource mapping.

4. There are many people who are still below the poverty line, so there is a huge demand for
MFIs in India with proper rules and regulations.

5. There is huge demand and supply gap, in money demand by the poor and supply by the
MFIs. So there need to be an activate participation by the Pt. Sector in this Industry.

6. One strict recommendation is that there should not over involvement of the Government in
MFIs, because it will stymie the growth and prevent the others MFIs to enter

31
 CONCLUSION
Microfinance tries to overcome the short comings and failures of the existing financial
institutions and development programs by providing adequate and hassle-free finance to the
needy and also acts as gap filler in the formal institutional network for providing small
finance to poor people. The strength and sustainability of the Indian microfinance business
model lies in the fact that it is serving a large unmet need for financial inclusion. The large
size of the currently unbanked population in India and diversity of geography means that the
microfinance sector has great potential for continued high growth. The scale of the Indian
MFI industry has exceeded 20 million clients, other consumer product and service providers
are beginning to attach greater value to the microfinance distribution network. This industry
is in its initial stage and its development could take many forms, but we expect growth,
innovation and financial performance from this industry. Scope of this industry is too vast in
such a country like India.

As future demand of microfinance will increase and increase demand will increase the
growth rate of Indian economy. By the research of the Govt. reports Indian growth rate will
be in the double digit in near future. And the poverty line will shift upward. This sector also
helps in increasing the per capita income. Microfinance projects should not be designed to
target the ultra-poor. Additional debt may make their lives worse, not better; the study
emphasizes. In fact, most microfinance projects have rather restrictive qualifiers, either
deepening inequality within a household, or requiring them to have an operating business to
be eligible. Unless criteria and terms are changed to target specifically the poorest of the
poor, microfinance projects are still somewhat close to traditional credit products in the
ability to facilitate inclusion and alleviate poverty.’ Even if projects are starting out with the
goal to assist the poorest of the poor, absence of clear socio-economic definitions and
inability to assess the target audience (which is mostly in rural areas) across pre-defined
criteria pushes projects towards the enterprising poor — households with operating
businesses.

Eventually it would be ideal to improve the creditworthiness of the poor and to make them
more bankable to financial institutions and allow them to meet the criteria for long- term
credit from the formal sector. Microfinance institutions have a lot to contribute to this by
building financial discipline and educating borrowers about compensation requirements.
There is also some increase in income levels and household assets in real terms among the
clients

Apart from all the achievements in this sector still there is a need of a realistic rate of interest
is vital for every microfinance institution. Increase of awareness among the masses is also
needed and for this a focused advertisement program can be launched and awareness can also
be created by educating the people and this can be done by a combined initiative of the
government and the NGOs. Further the Government should also focus on monitoring closely
to ensure disbursement of loans and grants to entrepreneurs.

32
Microfinance has been a major success & is growing fast across the country. It has proved to
be a powerful tool in initiating a cyclical process of growth and development. The general
recovery rates for all services have been very high for all MFIs. Although there are some
shortcomings which this sector faces, MFIs still undercut the local moneylenders by a large
margin. Microfinance has helped in providing social and economic empowerment, it cannot
eradicate poverty by itself. Good governance, security, health, education and financial
inclusion all work hand-in-hand at poverty alleviation.

33
 BIBLIOGRAPHY
 Aidan Hollis & Arthur Sweetman, Complementarity, Competition and
Institutional Development: The Irish Loan Funds Through Three Centuries
(1997).
 Beatriz Armendariz, The Economics of Microfinance (2005).
 Brigit Helms, Access for all: Building Inclusive Financial Systems. ( DAT)
( 2006).
 Colin Kirkpatrick & et al, Handbook on Development Policy and Management
(2002).
 Joanna Ledgerwood, Microfinance Handbook: An Institutional and Financial
Perspective.
 Fighting Poverty with Microcredit: Experience in Bangladesh - SHAHIDUR
AUTOR KHANDKER, Shahidur R. Khandker, Oxford University Press, 1998.
 Milford Bateman, Why doesn't Microfinance Work? (2010).
 S.L. Shetty, Microfinance in India- Issues, Problems and Prospects: A Critical
Review of Literature (2012).
 Srinivasan, Microfinance India: State of the Sector Report (2010).
 Todd A. Watkins, Introduction to Microfinance (WORLD SCIENTIFIC).
 The New World of Microenterprise Finance: Building Healthy Financial
Institutions for the Poor (Kumarian Press Library of Management for
Development) by Maria Otero, Elisabeth Rhyne.
 The Microfinance Revolution: Sustainable Finance for the Poor: Marguerite
Robinson
 growth-of-micro-finance-in-india-a-descriptive-study.pdf

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