Management Thesis-1 On

Management Thesis-1 ON “A study on Microfinance: An Initiative to Promote Social Welfare in Akola dist. With special reference to SBI”

SUBMITED TO

Mrs. Smita Kulkarni (FACULTY GUIDE) INC AKOLA

SUBMITED BY:

Amol S Chincholkar INC AKOLA 0801211081

1

Management Thesis-1 ON “A study on Microfinance: An Initiative to Promote Social Welfare in Akola dist. With special reference to SBI”

Submitted By

Amol S Chincholkar (0801211081) MBA SEM III (2008-2010) ICFAI NATIONAL COLLEGE AKOLA A report submitted in partial fulfillment of the requirement of MBA Program (2008-2010) ICFAI NATIONAL COLLEGE

2

CERTIFICATE

This is to certify that the Management Thesis-I titled “A study on Microfinance: An Initiative to Promote Social Welfare in Akola dist. With special reference to SBI” submitted by Amol S Chincholkar. Enroll No: 0801211081 during Semester-III of the PG Program (Class of 2010) embodies original work done by him.

Signature of the Faculty Supervisor

Signature of the Princapal

Name: - Mrs. Smita Kulkarni

Mr. Rajendra Dongre

Designation: - Faculty Guide

INC Akola

Center: INC – Akola

DECLARATION

3

I hereby declare that this project work entitled “A study on Microfinance: An Initiative to Promote Social Welfare in Akola dist. With special reference to SBI” is my work, carried out under the guidance of my faculty guide Mrs. Smita Kulkarni. This report neither full nor in part has ever been submitted for award of any other degree of either this university or any other university.

Amol S Chincholkar (0801211081)

ACKNOWLEDGEMENTS 4

At the outset, I would like to thanks to State Bank of India for giving me the approval to do this project in the organization. I am grateful to Mr. P.S.Bahirseth Akola (ADB) Branch Manager State Bank of India, and Mr. Washekar in Akola Panchyat Samity for the moral support, encouragement and generous assistance. I especially thanks to my faculty guide Mrs. Smita Kulkarni and Mrs. Usha Wankhade and Principal Mr. Rajendra Dongre, for coordinating the project work and giving me the guidance. This project would not have been possible without their help. A heartfelt thanks to the many respondents surveyed whose ideas, critical insights and suggestions have been invaluable in the preparation of this report. Last but by no means the least I would like to convey my special thanks to all the faculty members of ICFAI NATIONAL COLLEGE, Akola for giving me the opportunity to work on this project and for providing us the computer lab and library facilities. Amol S Chincholkar (0801211081)

Index Chapters

Page No. 5

I Cover Page………………………………………………...…………1&2 II Certificate……………………………………………...……...….……..3 III Declaration……………………………………………..……......…….4 IV Acknowledgement……………………………………...……...….…..5 Chapter-1: Introduction………………………………………..…......….9 1.1 Introduction about topic…………………..…………..……....…10 1.2 Objectives ………………………………...…………………...….11 1.3 Limitations ……………………………………….……....……....12 1.4 Research Methodology………………………...………….….…..13 Chapter-2: Industry Profile……………………………………….…....14 2.1

History of Banking in India ………………………...….…..

…...15 2.2

History of State Bank of India ……………..………..……..

…..18 2.3

Introduction of State Bank of India (SBI). .….…….……….....21 2.4

List of Banks in India …………………..………….…..………

24 2.5 Current Indian Banking Scenario ………………………….…..26 Chapter-3: Microfinance ………………………………………………33 3.1 Introduction of Microfinance …………………….…..…………34 3.2 Definition of Microfinance ……………………………….…......35 3.3 History of Microfinance ……………………………...….….…..37 6

3.4 Weaknesses and Strength of Microfinance ……….…...............39 3.5 Working Method for Microfinance Institutions ………..….......40 3.6 Products of Microfinance ……………………………..…..……42 3.7 Introduction of SHG…………………………….….….……..…..46 3.8 Activities of the SHG……………………………….....…............49 3.9 Objectives of SHG……………………………….………...........50 Chapter-4: Microfinance Model……………………..………………....51 Micro finance Institutions (MFIs) …………….………..

4.1

……….52 4.2

Bank Partnership model ………………………………..………

52 4.3

Banking correspondents …………………………………..……

53 4.4

Service Company Model …………………………………..

…...53 Chapter-5: Role of Financial Institution ……………………………...54 Chapter-6: Impact of microfinance……………………………….…...63 6.1

Impact studies of microfinance on income …………………….…64

6.2

Impact studies of microfinance on expenditure ……………...…..66

6.3

Impact studies of microfinance on wealth ……………...….....….67

6.4

Impact studies of microfinance on educational status ..……..…..68

6.5

Impact studies of microfinance on health …………...……….…..68 7

6.6

Impact studies of microfinance on empowerment ...……..…...…69

Chapter-7: Literature Review………………………….………….…...70 Chapter-8: Marketing of Microfinance Products….…………………79 Contract Farming and Credit Bundling ……………….

8.1

………..80 8.2

Agree Service Centre- Rabo India ……….……………..…….

…80 8.3

Non Traditional markets ……………………………….….……

80 8.4

Apani Mandi

…………………………………………….

………81

Chapter-9: Data Analysis………………………………………………82 Chapter- 10 Findings…………………………………………………..86 CONCLUSIN……….…………………………………………………..89 ABBREVIATIONS……………………………………………………..90 REFERENCES………………………………………………….……..91 APPENDIX……………………………………………………….…….92

8

9

Chapter-1: INTRODUCTION 1.1 Introduction about Topic

10

My title of Management thesis is “A study on Microfinance: An Initiative to Promote Social Welfare in Akola dist. With special reference to SBI” In this thesis I will take customers Preference towards Microfinance with special reference to State Bank of India, ADB Jathar Peth Branch, and Akola. This study also helps to understand the current situation and impact of Microfinance in Akola Dist. And the feature of the poverty. The Microfinance in India has tremendous growth in last few years and offers differentiated products for different segments of the society. A lot of people are living under poverty, but with microfinance they have the chance to lift themselves out of poverty. Microfinance provides financial resources like loans, savings, insurances and business training to help people build businesses Now days advertising are playing the important role towards the awareness of the Microfinance in the society. Study conduct about what are the strategy are use by Banking or Financial Institutions and also the local advertising to attract the customer towards using the Products of Microfinance it also study about the new strategies implemented by the Financial Institutions. Study is conducting with the help of Mr. P.S.Bahirseth ADB Jathar Peth Branch Manager Akola. And special guidance from Mrs. Smita Kulkarni and Mrs. Usha Wankhade both are the Faculty member of ICFAI NATIONAL COLLEGE, Akola. Both are guiding me on present scenario of Microfinance in India.

1.2 Objectives

11

 To Study the Microfinance & its Support to the Small Scale Business.

 To study the importance of Microfinance in Social Welfare.

 To study the Microfinance Model & Schemes offered in Nationalized Bank.

1.3 Limitations

There are some limitations to complete the above project.

12

 Rules & Regulation of State Bank of India for Primary Data  Less Availability of Secondary data.

 Limited time Period.

1.4

Research Methodology

Sample Size: - 100 1) Defining objectives 2) Developing action plan. 13

3) Collection of data. 4) Analysis of data. 1) Defining objectives:Objectives of this thesis are to find out for the social welfare with Small Scale Business & with Special reference to Nationalized Bank. 2) Developing action plan:Data for the analysis will be collected by meeting target customer face to face by using Questionnaire 3) Collection of data : All the data will collect with the help of Primary Data and Secondary Data. 

Primary Data:Primary data is collected with the help of prepared Questionnaire by getting it filled by people in face to face interview.



Secondary Data:-

Secondary data is collected from following sources.  Internet  Journals  Magazines  Books 4) Analysis of data:The collected data will be evaluated to come on the conclusion.

14

Chapter-2: Industry Profile

15

Introduction of Sector 2.1 HISTORY OF BANKING IN INDIA Banking – Definition: Section 5 (b) of Banking Regulation Act 1949 “Accepting for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise” Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization

of

14

major

private

banks

of

India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a pizza. Money has become the order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till

16

today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: •

Early phase from 1786 to 1969 of Indian Banks

•

Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of Indian Financial & Banking

•

Sector Reforms after 1991. To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III. Phase

I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which

started

as

private

shareholders

banks,

mostly

Europeans

shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of

Mysore

were

set

up.

Reserve

Bank

of

India

came

in

1935.

During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority.

During those day’s public has lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided by the Postal 17

department was comparatively safer. Moreover, funds were largely given to traders. Phase

II

Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the

country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalized. Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: •

1949: Enactment of Banking Regulation Act.

•

1955: Nationalization of State Bank of India.

•

1959: Nationalization of SBI subsidiaries.

•

1961: Insurance cover extended to deposits.

•

1969: Nationalization of 14 major banks.

•

1971: Creation of credit guarantee corporation.

•

1975: Creation of regional rural banks.

•

1980: Nationalization of seven banks with deposits over 200 crore.

2.2 History of State Bank of India 18

Shri Arun Kumar Purwar is Chairman, State Bank of India. He has more than three decades of experience in banking having Successfully handled significant Assignments. His earlier stint sat the bank Included; Deputy Managing Director and Chief Credit Officer of the bank responsible For streamlining the working of the credit Process of the bank; chief executive officer Of the Tokyo branch. He is also the chairman of the associate banks of SBI.

State Bank of India (SBI) is India’s largest and oldest bank.

 Measured by the number of branch offices and employees, SBI is the largest bank in the world outside China.  State Bank of India is originated as “Bank of Calcutta” in 1806, more than 200 years ago. Received Charter and renamed as “Bank of Bengal” in 1809.  Bank of Bombay (1840) and Bank of Madras (1843) were established later.  These 3 banks were known as Presidency Banks and they were even allowed to issue currency notes.

19

 In 1811, Bank of Bengal decided to pay some forged notes because they felt a refusal to pay would be injurious to the acceptability bank notes. The culprits responsible for the forgeries went undetected for a long time.  ''This was the bank to do business with which would not violate its rules in the smallest particular for the Governor General himself" said Lord William Bentick Governor General (ruler of India) when his cheque was returned for a shortage of 4 annas (1/4th of One Rupee) in 1835 by the Bank.  The presidency Banks of Bengal, Bombay and Madras with their 70 branches were merged in 1921 to form the Imperial Bank of India.  The new bank took on the triple role of a commercial bank, a banker's bank (role of central bank) and a banker to the government.  The establishment of the Reserve Bank of India (RBI) as the central bank of the country ended the quasi-central banking role of the Imperial Bank and Imperial Bank started acting as RBI’s representative.  Imperial Bank was nationalised and State Bank of India was established under State Bank of India Act 1955 passed by the parliament with Sri John Mathai-the then Finance Minister of India as first Chairman.  Business Standard has Awarded ‘The Banker of the Year Award’ to Shri O P Bhatt chairman for his initiative to re-energise the Bank. June ‘08  State Bank of India Ranking in The Banker Top 1000 World Banks Improved to 57 from 70 as Compared to the Ranking of 2007, only Indian Bank among the Top 100 Banks in the World.

20

 CNN IBN Network 18 has selected Shri O P Bhatt Chairman SBI as Indian of the Year – Business 2007.  Ranked 8th in Top 10 Banks of Asia, only Indian bank to find a place in the Fortune Global 500 list -Up from 495 last year to 380 this year (+115 ), Seventh highest gainer.  Wall Street Journal Asia survey of top 5 companies In India In terms of financial reputation, 1st rank SBI.  SBI has bagged the awards for ‘Most Preferred Bank’ and ‘Most Preferred Brand for Home Loan’ of CNBC Consumer Awards, Sept.’08(third year in a row)  Winner of Readers Digest Trusted Brands Awards 2008 (Gold).  Awarded the ‘Bank of the Year 2008 –India’ by The Banker Magazine, London  SBI was the only Indian institution to figure in the top 100 rankings in "Brand Finance

Global Banking 500" list of Top Global Finance Brands (2009). Ranked 69th.

21

2.3 Introduction of State Bank of India (SBI) The evolution of State Bank of India can be traced back to the first decade of the 19th century. It began with the establishment of the Bank of Calcutta in Calcutta, on 2 June 1806. The bank was redesigned as the Bank of Bengal, three years later, on 2 January 1809. It was the first ever joint-stock bank of the British India, established under the sponsorship of the Government of Bengal. Subsequently, the Bank of Bombay (established on 15 April 1840) and the Bank of Madras (established on 1 July 1843) followed the Bank of Bengal. These three banks dominated the modern banking scenario in India, until when they were amalgamated

to

form

the

Imperial

Bank

of

India,

on

27

January

1921.

An important turning point in the history of State Bank of India is the launch of the first Five Year Plan of independent India, in 1951. The Plan aimed at serving the Indian economy in general and the rural sector of the country, in particular. Until the Plan, the commercial banks of the country, including the Imperial Bank of India, confined their services to the urban sector. Moreover, they were not equipped to respond to the growing needs of the economic revival taking shape in the rural areas of the country. Therefore, in order to serve the economy as a whole and rural sector in particular, the All India Rural Credit Survey Committee recommended the formation of a state-partnered

and

state-sponsored

bank.

The All India Rural Credit Survey Committee proposed the take over of the Imperial Bank of India, and integrating with it, the former state-owned or state-associate banks. Subsequently, an Act was passed in the Parliament of India in May 1955. As a result, SBI was established on 1 July 1955. This resulted in making the State Bank of India more powerful, because as much as a quarter of the resources of the Indian banking system were controlled directly by the State. Later on, the SB I (Subsidiary Banks) Act was passed in 1959. The Act enabled the State Bank of India to make the eight former State-associated banks as its subsidiaries. The State Bank of India emerged as a pacesetter, with its operations carried out by the 480 offices comprising branches, sub offices and three Local Head Offices, inherited from the Imperial Bank. Instead of serving as mere repositories of the community's savings and lending to creditworthy parties, the State Bank of India catered to the needs of the customers, 22

by banking purposefully. The bank served the heterogeneous financial needs of the planned economic

development.

Branches The corporate center of SBI is located in Mumbai. In order to cater to different functions, there are several other establishments in and outside Mumbai, apart from the corporate center. The bank boasts of having as many as 14 local head offices and 57 Zonal Offices, located at major cities throughout India. It is recorded that SBI has about 10000 branches, well

networked

to

cater

to

its

customers

throughout

ATM

India. Services

SBI provides easy access to money to its customers through more than 8500 ATMs in India. The Bank also facilitates the free transaction of money at the ATMs of State Bank Group, which includes the ATMs of State Bank of India as well as the Associate Banks – State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, etc. You may also transact money through SBI Commercial and International Bank Ltd by using the State Bank ATM-cum-Debit

(Cash

Plus)

card.

Subsidiaries The State Bank Group includes a network of eight banking subsidiaries and several nonbanking subsidiaries. Through the establishments, it offers various services including merchant banking services, fund management, factoring services, primary dealership in government

securities,

credit

cards

The eight banking subsidiaries are: 

State Bank of Bikaner and Jaipur (SBBJ)



State Bank of Hyderabad (SBH)



State Bank of India (SBI)



State Bank of Indore (SBIR)



State Bank of Mysore (SBM)



State Bank of Patiala (SBP)



State Bank of Saurashtra (SBS)



State Bank of Travancore (SBT)

23

and

insurance.

Products and Services Personal Banking 

SBI Term Deposits SBI Loan For Pensioners



SBI Recurring Deposits Loan Against Mortgage Of Property



SBI Housing Loan Against Shares & Debentures



SBI Car Loan Rent Plus Scheme



SBI Educational Loan Medi-Plus Scheme

Other Services 

Agriculture/Rural Banking

 NRI Services 

ATM Services



Demat Services



Corporate Banking



Internet Banking



Mobile Banking



International Banking



Safe Deposit Locker



RBIEFT



E-Pay



E-Rail



SBI Vishwa Yatra Foreign Travel Card



Broking Services



Gift Cheques

24

2.4 List of Nationalized Banks in India 

Allahabad Bank

Andhra Bank



Bank of Baroda

Bank of India



Bank of Maharashtra

Canara Bank



Central Bank of India

Corporation Bank



Dena Bank

Indian Bank



Indian Overseas Bank

Oriental

Bank

of

Commerce 

Punjab and Sind Bank

Punjab National Bank



State Bank of Bikaner

State Bank of Hyderabad



State Bank of Mysore

State Bank of Patiala



State Bank of Saurashtra

State Bank of Travancore



Syndicate Bank

The State Bank of India



The State Bank of Indore

Uco Bank



Union Bank of India

United Bank of India



Vijaya Bank

25

Private Banks of India 

Bank of Punjab

Bank of Rajasthan



Catholic Syrian Bank

Centurion Bank



City Union Bank

Development Credit



Dhanalakshmi Bank

Federal Bank



HDFC Bank

ICICI Bank



IDBI Bank

Indusind Bank



ING Vyasya

Jammu and Kashmir



Karnataka Bank

Karur Vysya Bank



Laxmi Villas Bank

Nainital Bank Ltd



Sbi Commercial and International Bank Ltd

South Indian Bank



Tamilnad Mercantile Band Ltd

The Ratnakar Bank Ltd



United Western Bank

Uti Bank

Bank

Bank

Co-operative Banks 

The Akola Urbank Co-operative bank Limited, Akola.



The Akola Junta Co-operative bank, Akola.

Foreign Banks in India 26



ABN AMRO Bank

Abu Dhabi Commercial Bank



Bank of Ceylon

BNP Paribas Bank



Citi Bank

China Trust Commercial Bank



Deutsche Bank

HSBC Bank



JPMorgan Chase Bank

Standard Chartered Bank



Scotia Bank

Taib Bank

2.5 Current Indian Banking Scenario: Banking scenario has changed rapidly since 1990s. The decade of 90s has witnessed a sea change in the way banking is done in India. Technology has made tremendous impact in banking. 'Anywhere banking' and 'Anytime banking' have become a reality. Nationalized banks such as State Bank of India (SBI), though pygmies in the international banking market are banking behemoths of India. They have branches spread over the entire length and breadth of the country. SBI in particular is all-pervasive enjoying a sprawling network of 9000 branches. Its blue and white shingle is visible to the smallest hamlet. It has assets understood to be worth about Rs2,22,500 crore ($52 billion). SBI has a very conservative approach to accounting particularly when it comes to declaration of its assets. Probably modesty does not permit the bank to exhibit its strengths. In particular, it has real estate properties some of which are heritage sites all over the country. These are estimated to collectively command a value of Rs.30,000 crores. This, it is believed, does not get reflected in its book of accounts. SBI enjoys a monopoly of the government business. The Reserve Bank of India owns about 60% of the bank’s equity. To its credit, SBI mobilized $4.2 billion through the Resurgent India Bonds (RIB) issue in just 3 months down the post-Pokhran sanction period. This was the difficult time when the international credit rating agencies had downgraded the country. SBI, time and again, does a rescue act in the fore market to contain any volatility of the rupee.

27

SBI was formed under the SBI Act in 1955 with the takeover of Imperial Bank and amalgamation of Bank of Bengal, Bank of Bombay, and Bank of Madras. The government mopped up around 93% of the equity, leaving 7% to private ownership. By this act the equity of RBI cannot be diluted below 55%. SBI enjoys a pool of best managerial talent, assured government business, a countrywide network of branches and strong brand credibility in the Indian market. But, that numerous Uno position is sliding with the entry of sleeker private and foreign banks into the Indian Banking scene. The bank is continuously restructuring itself and for this, they even hire the services of foreign consultants but the pace has to be hastened. With the government offering an assured business, nationalized banks and State Bank of India in particular should not take a complacent view. They should evolve service-intensive products and make their employees customer-friendly. With competition from private and foreign banks knocking at the door, the banks should realize, size is no more an insurance against the onslaught of competition from sleek private and foreign banks. A revolutionary approach to privatize ownership is the need of the hour. Virtual Banking: SBI has yet to computerize its operations and network all its branches. The computers currently available serve only to relieve the burden of the clerical staff of maintaining manual ledgers and not to penetrate into areas of customer service. ATMs, Anytime-Anywhere, round the clock and telephone banking is still a far cry. These computers at the best remain only as desk ornaments. With the New Telecom Policy (NTP) almost in place, telecom sector will soon be revolutionized. E-commerce, telephone banking, consumer banking, Internet banking, insurance et al are waiting just around the corner. At least in major metros, virtual banking wills soon take-over from the brick-mortar banks. Privatization and Credit disbursement: Talks about privatization of the bank’s ownership have been initiated but the SBI act of 1955 does not permit RBI’s ownership to be diluted to below 55%. This act is outdated and needs to be re-addressed. However, efforts have been initiated by SBI to privatize its non – banking subsidiaries like SBI Caps, SBI Gilts, and SBI Funds Management, where SBI’s holding is 28

about 85% of the equity. But the pace has to be hastened so that investments thus released can migrate to more important areas like development of new technologies and products in customer service and service intensive areas. Privatization also helps to professionalize the banks’ day-to-day operation, which will allow the management more freedom in decision making during credit disbursement. To aid privatization and effect a better price realization, the bank is attempting to change – over its accounting and reporting procedures to comply with US – GAAP norms. This is a prerequisite for trying out the ADR route, as it is known that US market is by far the undisputed biggest market and can offer the best price. At the moment, the SBI stock is undervalued at Rs.240 whereas experts expect Rs.300 would be a more realistic value. Action on this front at blitzkrieg pace is the need of the hour. Manpower Retraining and not Retrenchment: As a hangover of the past socialistic mindset, all the nationalized banks have excess workforce. This is indeed a hot potato for the management of many enterprises and is therefore being handled with kid gloves. In India, it is everyone’s worry to look at business as a source of employment, while making money is secondary. In this ocean of manpower, every institution does have its share of highly skilled and talented manpower, which contribute to asset building. It is the semi skilled manpower having outdated skills, which form the excess baggage. All banks must invest in re-training the manpower so that they can migrate from the areas that will be vacated by computerization. The level of NonPerforming-Assets (NPAs) is still at very high levels and to start with, some of this excess manpower can cover areas of debt recovery. At the same time, one should also take note of the flight of talent from these nationalized banks to newly set-up private and foreign banks. And, it is these new banks’ top officials after migrating from the government banks are targeting at the top corporate clients and thus poaching into the corporate business, which has been the mainstay of the nationalized banks. This will soon become a problem of serious proportion unless the banks initiate steps to stem the flow. It is difficult, to exclusively address the problem of excess manpower by schemes such as voluntary retrenchment scheme (VRS) because while attempting to remove dead wood, talent also takes an exit. Many industries have faced this problem. Also it will be over simplicity to state that the salaries should be raised because that will only start a wage war. 29

Instead, the banks should involve the services of international consultants specialized in this field and take a holistic view of the problem. Retraining and Rationalization of manpower commands higher priority over Retrenchment of manpower.

New Products and New technologies: Nationalized banks have generally been preoccupied with treasury business. The new product areas that require greater penetration are personal banking, housing finance, consumer durable finance, auto-finance, internet banking, insurance, telephone banking et al. Development of these new areas call for heavy investments and this cash - flow can only generated by privatization. In addition, surplus manpower once retrained can be absorbed in the new ventures. All nationalized banks and SBI in particular has the advantage of vast network of branches and can therefore carry the new business to the remotest corner, but to make this presence felt the banks have to move at blitzkrieg pace. The bottom line is that, even when all political parties are committed to privatization, somehow there is no exhibition of pace. It is time to be taken in by a revolution called "Privatization of Ownership". Financial sector reforms were initiated as part of overall economic reforms in the country and wide ranging reforms covering industry, trade, taxation, external sector, banking and financial markets have been carried out since mid1991. A decade of economic and financial sector reforms has strengthened the fundamentals of the Indian economy and transformed the operating environment for banks and financial institutions in the country. The sustained and gradual pace of reforms has helped avoid any crisis and has actually fuelled growth. As pointed out in the RBI Annual Report 2001-02, GDP growth in the 10 years after reforms i.e. 1992-93 to 2001-02 averaged 6.0% against 5.8% recorded during 1980-81 to 1989-90 in the pre-reform period. The most significant achievement of the financial sector reforms has been the marked improvement in the financial health of 30

commercial banks in terms of capital adequacy, profitability and asset quality as also greater attention to risk management. Further, deregulation has opened up new opportunities for banks to increase revenues by diversifying into investment banking, insurance, credit cards, depository services, mortgage financing, securitization, etc. At the same time, liberalization has brought greater competition among banks, Both domestic and foreign, as well as competition from mutual funds, NBFCs, post office, etc. Post-WTO, competition will only get intensified, as large global players emerge on the scene. Increasing competition is squeezing profitability and forcing banks to work efficiently on shrinking spreads. Positive fallout of competition is the greater choice available to consumers, And the increased level of sophistication and technology in banks. As banks benchmark themselves against global standards, there has been a marked increase in disclosures and transparency in bank balance sheets as also greater focus on corporate governance.

Major Reform Initiatives Some of the major reform initiatives in the last decade that have changed the face of the Indian banking and financial sector are:  Interest rate deregulation. Interest rates on deposits and lending have been deregulated with banks enjoying greater freedom to determine their rates.  Adoption of prudential norms in terms of capital adequacy, asset classification, income recognition, provisioning, and exposure limits, investment fluctuation reserve, etc.  Reduction in pre-emotions – lowering of reserve requirements (SLR and CRR), thus releasing more lendable resources which banks can deploy profitably. Shri Arun Kumar Purwar is Chairman, State Bank of India. He has more than three decades of experience in banking having Successfully handled significant assignments. His earlier stints at the bank included; Deputy Managing Director and Chief Credit Officer of the bank responsible for streamlining the working of the credit process of the bank; chief executive officer of the Tokyo branch. He is also the chairman of the associate banks of SBI.  Government equity in banks has been reduced and strong banks have been allowed to access the capital market for raising additional capital. 31

 Banks now enjoy greater operational freedom in terms of opening and swapping of branches, and banks with a good track record of profitability have greater flexibility in recruitment.  New private sector banks have been set up and foreign banks permitted to expand their operations in India including through subsidiaries. Banks have also been allowed to set up Offshore Banking Units in Special Economic Zones.  New areas have been opened up for bank financing: insurance, credit cards, infrastructure financing, leasing, gold banking, besides of course investment banking, asset Management, factoring, etc.  New instruments have been introduced for greater flexibility and better risk management: e.g. interest rate swaps, forward rate agreements, cross currency forward contracts, forward cover to hedge inflows under foreign direct investment, liquidity adjustment facility for meeting day-to-day liquidity mismatch.  Several new institutions have been set up including the National Securities Depositories Ltd., Central Depositories Services Ltd., Clearing Corporation of India Ltd., Credit Information Bureau India Ltd.  Limits for investment in overseas markets by banks, mutual funds and corporate have

been liberalized. The overseas investment limit for corporate has been raised to 100% of Net worth and the ceiling of $100 million on prepayment of external commercial borrowings have been removed. MFs and corporate can now undertake FRAs with banks. Indians Allowed to maintain resident foreign currency (domestic) accounts. Full convertibility for deposit schemes of NRIs introduced.  Universal Banking has been introduced. With banks permitted to diversify into longterm finance and DFIs into working capital, guidelines have been put in place for the evolution of universal banks in an orderly fashion.  Technology infrastructure for the payments and settlement system in the country has been strengthened with electronic funds transfer, Centralized Funds Management System, Structured Financial Messaging Solution, Negotiated Dealing System and move towards Real Time Gross Settlement.  Adoption of global standards. Prudential norms for capital adequacy, asset classification, income recognition and provisioning are now close to global standards. RBI has Introduced Risk Based Supervision of banks (against the traditional 32

transaction based approach). Best international practices in accounting systems, corporate governance, payment and settlement systems, etc. are being adopted.  Credit delivery mechanism has been reinforced to increase the flow of credit to priority sectors through focus on micro credit and Self Help Groups. The definition of priority sector has been widened to include food processing and cold storage, software up to Rs 1 crore, housing above Rs 10 lakh, selected lending through NBFCs, etc.

 RBI guidelines have been issued for putting in place risk management systems in banks. Risk Management Committees in banks address credit risk, market risk and operational risk. Banks have specialized committees to measure and monitor various risks and have been upgrading their risk management skills and systems.  The limit for foreign direct investment in private banks has been increased from 49% to 74% and the 10% cap on voting rights has been removed. In addition, the limit for foreign institutional investment in private banks is 49%.  Wide ranging reforms have been carried out in the area of capital markets. Fresh investment in CPs, CDs are allowed only in dematerialized form. SEBI has reduced the settlement cycle from T+3 to T+2 from April 1, 2003 i.e. settlement of stock deals will be completed in two trading days after the trade is executed, taking the Indian stock trading system ahead of some of the developed equity markets. Stock exchanges will set up trade guarantee funds. Retail trading in Government securities has been introduced on NSE and BSE from January 16, 2003. A Serious Frauds Office is proposed to be set up. Fungibility of ADRs and GDRs allowed.

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Chapter-3: Microfinance 3.1Introduction of Microfinance A lot of people are living under poverty, but with microfinance they have the chance to lift themselves out of poverty. Microfinance provides financial resources like loans, savings, insurances and business training to help people build businesses.

Microfinance has a beguiling simplicity and a record of success not just in promoting financial resilience but in achieving other social objectives – reaching the excluded, empowering women and developing the capacity of small groups of people to take control of their own lives.

Contrary to a common impression poor people need and use a variety of financial services, including deposits, loans and other services. They use financial services for the same reasons as anyone else to seize business opportunities, improve their homes, deal with other large expenses, and cope with emergencies.

Microcredit belongs to the group of financial service innovations under the term of microfinance, other services according to microfinance is micro savings, money transfer vehicles and micro insurance. Microcredit is an innovation for the developing countries. Microcredit is a service for poor people that are unemployed, entrepreneurs or farms who are not bankable. By helping people with microcredit’s it gives them more available choices and opportunities with a reduced risk. It has successfully enabled poor people to start their own business generating or sustain an income and often begin to build up wealth and exit poverty

35

3.2 Definition of Microfinance “Microcredit, or microfinance, is banking the unbankables, bringing credit, savings and other essential financial services within the reach of. Millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. In general, banks are for people with money, not for people without.” (Girt van Maanen, Microcredit: Sound Business or Development Instrument, Oikocredit, 2004) “(Microcredit) is based on the premise that the poor have skills which remain unutilized or underutilized. It is definitely not the lack of skills which make poor people poor….charity is not the answer to poverty. It only helps poverty to continue. It creates dependency and takes away the individual’s initiative to break through the wall of poverty. Unleashing of energy and creativity in each human being is the answer to poverty.” (Muhammad Yunus, Expanding Microcredit Outreach to Reach the Millennium Development Goals, International Seminar on Attacking Poverty with Microcredit, Dhaka, Bangladesh, January, 2003) Microcredit belongs to the group of financial service innovations under the term of microfinance, other services according to microfinance is micro savings, money transfer vehicles and micro insurance. Microcredit is an innovation for the developing countries. Microcredit is a service for poor people that are unemployed, entrepreneurs or farms who are not bankable. The reason why they are not bankable is the lack of collateral, steady employment, income and a verifiable credit history, because of this reasons they can´t even meet the minimal qualifications for a ordinary credit. By helping people with microcredit’s it gives them more available choices and opportunities with a reduced risk. It has successfully enabled poor people to start their own business generating or sustain an income and often begin to build up wealth and exit poverty. Microcredit fits best to those with entrepreneurial capability and possibility. This translates to those poor who work in growing economies, and who can undertake activities that generate 36

weekly stable incomes. For those who don´t qualify because they are extreme poor like destitute and homeless almost every microcredit institution have special safety programs that offer basic subsistence and later endeavors to graduate this members in their microfinance program making ordinary microcredit’s available. Microcredit plays an important role in fighting the multi-dimensional aspects of poverty. Microfinance increases household income, which leads to attendant benefits such as increased food security, the building of assets, and an increased likelihood of educating one’s children. Microfinance is also a means for self-empowerment. It enables the poor to make changes when they increase income, become business owners and reduce their vulnerability to external shocks like illness, weather and more. Microcredit has widely been directed by the non-profit sector while commercial lenders require more conventional forms of collateral before making loans to microfinance institutions. But now it´s successfully growing bigger and getting more credibility in the traditional finance world. Due to that the traditional banking industry has begun to realize that this borrower fits more correctly in a category called prebankable. T he industry has realized that those who lack access to traditional formal financial institutions actually require and desire a variety of financial products. Nowadays the mainstream finance industry is counting the microcredit projects as a source of growth. Before almost everyone where neglecting the success of microcredit in the beginning of the 1970s when pilot projects such as ACCION where released until the United Nations declared 2005 the International Year of Microcredit. The most of the microcredit institutions and agencies allover the world focuses on women in developing countries. Observations and experience shows that women are a small credit risk, repaying their loans and tend more often to benefit the whole family. In another aspect it´s also seeing as a method giving the women more status in a social economic way and changing the current conservative relationship between gender and class when women are able to provide income to the household. Women are in most cases responsible for children, and in poor conditions it results in physical and social underdevelopment of their children. 1.2 billion People are living on less than a dollar a day. There are many reasons why women have become the primary target of microfinance services. A recent World Bank report confirms that societies that discriminate on the basis of gender pay the cost of greater

37

poverty, slower economic growth, weaker governance, and a lower living standard for all people. At a macro level, it is because 70 percent of the world’s poor are women. Women have a higher unemployment rate than men in virtually every country and make up the majority of the informal sector of most economies. They constitute the bulk of those who need microfinance services.

3.3

History of Microfinance

A lot of people are living under poverty, but with microfinance they have the chance to lift themselves out of poverty. Microfinance provides financial resources like loans, savings, insurances and business training to help people build businesses. Microfinance has a beguiling simplicity and a record of success not just in promoting financial resilience but in achieving other social objectives – reaching the excluded, empowering women and developing the capacity of small groups of people to take control of their own lives. Contrary to a common impression poor people need and use a variety of financial services, including deposits, loans and other services. They use financial services for the same reasons as anyone else to seize business opportunities, improve their homes, deal with other large expenses, and cope with emergencies. Microcredit belongs to the group of financial service innovations under the term of microfinance, other services according to microfinance is micro savings, money transfer vehicles and micro insurance. Microcredit is an innovation for the developing countries. Microcredit is a service for poor people that are unemployed, entrepreneurs or farms who are not bankable. By helping people with microcredit’s it gives them more available choices and opportunities with a reduced risk. It has successfully enabled poor people to start their own business generating or sustain an income and often begin to build up wealth and exit poverty

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Microfinance Inductor Structure

39

3.4 Weaknesses and Strength of Microfinance

Strength: The biggest strength is bringing financial services to poor people and making it financial sustainable by the economies of scale effect. In India the National Bank for Agriculture and Rural Development (NABARD) finances more than 500 banks that on lend funds to self help groups (SHG). SHGs comprise twenty or fewer members, of whom the majority is women from the poorest castes and tribes. Nearly 1.4 million SHGs comprising approximately 20 million women now borrow from banks, which make the Indian SHG-Bank Linkage model the largest microfinance program in the world. Similar programs are evolving in Africa and Southeast Asia with the assistance of organizations like Opportunity International, Catholic Relief Services, CARE, APMAS and Oxfam. Also helps in the development of an economy by giving everyday people the chance to establish a sustainable means of income. Eventual increases in disposable income will lead to economic development and growth.

Weakness: There´s not much research done on the actual effectiveness of microfinance as a tool for economic growth. Some argue that there´s too much focus on microfinance which will motivating less spending in other helping assistances as public health, welfare, and education. Some are doubting microfinance really has that impact on poverty as the practioners would submit. Other describes micro crediting as a privatization of public safety net programs. There´s also some microfinance institutions charging excessive interest rates. 40

Questions against the Grameen Bank were raised in a Wall Street Journal article. It was regarding the repayment rate, collection methods and questionable accounting practices. Studies of microcredit programs have found that women often act as collection agents for their husbands and sons, such that the men spend the money themselves while women are saddled with the credit risk. Some borrowers have become dependent on loans for household expenditures rather than capital investments. The key debate about microfinance is weather it should focus on improved welfare or financial sustainability. The two different approaches are usually named as “poverty lending” or “the welfares approach” and “the institutions approach” or “financial system approach”. The welfares approach could be for example supplying the customer with education and health wilts the institutionists focus only on the financial service. The reason for that is only with total focus on financial sustainability the huge demand can be met. MFIs with the welfares approach are for example the Grameen Bank and Women´s World Banking. Examples of institutionists are ACCION International and BRI Unit Desa.

3.5

Working Method for Microfinance Institutions

When choosing a village the MFI conduct a comprehensive survey to brief the potential for operations and the local conditions in a village. The MFI are evaluating some key factors like village population, degree of poverty, road accessibility, political stability and safety. When a village has been selected, the MFI introduces its mission, methodology and the services they are offering. After the informational presentation interested women are gathered in group formations. They have to be in the age between 18 and 59. The women put them self together in groups of five to serve as guarantors for each other. Earlier experience has shown that a group of five persons is small enough to create group pressure between the members, enforcing them to be loyal to each other. In case someone of the group members is not able to repay the loan the group is big enough to help with the payments. The company does not influence the 41

selection of group members nor the decision regarding the income generation activity nor the loan amount they intend to take. Group members must live close to each other and cannot be related to each other. If a borrower defaults on her loan, the entire group typically is penalized and sometimes barred altogether from taking further loans. This peer pressure encourages borrowers to be very selective about their peer group members and to repay loans in full and on time. Then the group training begins, usually as a five day program. The purpose is to educate the members in the procedures of the financial products, delivery methods, calculation of interest rates, business development skills and how to sign their names. The members are also taught in quality management, to identify an income generation activity, how to set prices and how to market. They field staff also build a culture of credit discipline and collective responsibility. The field staff makes sure the members qualifies for the program and collects data for future analysis. Within the village, a center is created collecting the groups. The center is responsible for the payments of all groups, enabling a dual liability system. When the village center is created the financial transactions can begin. The groups meet weekly in the village center where they can discuss new loan applications, loan utilization, and community issues. The field staff of the MFIs conducts the meetings with rigid discipline in order to sustain the credit discipline of the group. All financial transactions are conducted during the meetings. Microfinance is a relatively new segment of the market economy that is why institutions created in this segment have short experience in their activities, and their personnel is not sufficiently experienced and qualified. Taking this into consideration, staff of these institutes is recommended to follow the internationally recognized principles of microfinance: 

thorough examination of potential clients of the microfinance institution;



thorough estimation of business viability and also factors which can positively or negatively affect the results of work in specific conditions;



thorough registration of documents and contracts related to loan issuance and microfinance services providing;



keep in touch with client in combination with monitoring of the terms of paying a credit, interests payments and with the aim to find out potential and real problems; 42



setting of interest rates for microfinance services compatible with market ones;



quick reaction to any problems which can complicate the perspectives of getting of issued credit played back

3.6 Products of Microfinance MFIs also have big personnel and administration costs. Field staff managers must perform village surveys before entering a village, conduct interviews with potential borrowers, educate the borrowers in credit discipline, travel to the villages every week to collect interest and distribute loans and control that the loans are being used for the given purpose. The microcredit loan cycles are usually shorter than traditional commercial loans with terms from typically six months to a year with payments plus interest, played weekly. Shorter loan cycles and weekly payments help the borrowers stay current and not become surprised by large payments. Clearly the transaction-intense nature of weekly payment collections, often in rural areas, is more expensive than running a bank branch that provides large loans to economically secure borrowers in a metropolitan area. As a result, MFIs must charge interest rates that might sound high. In order to be able to lend out money, the microfinance institutions must in addition borrow from the traditional finance sector with commercial perspective. There´s always about 1-2% loss on loans due to people not paying back. To be able to expand business the MFIs must also make some profit, at least 1-2%. All in all it´s easier to understand why the MFIs charge their customer interest rates which in first sight might appear high. With a growing market, better economics of scale and increasing efficiency the cost will reduce and lower interest rates are able.

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For a financial institution to scale and remain sustainable, at a bare minimum it has to cover its costs. A large bank can charge lower rates in order to recoup its costs. Because of smaller loan size and more transactions, the MFI has to charge higher minimum rates. Data from the Micro Banking Bulletin reports that 63 of the world’s top MFIs had an average rate of return, after adjusting for inflation and after taking out subsidies programs, of about 2.5% of total assets. This lends to the hope that microfinance can be sufficiently attractive for investors, as well as the mainstream in the retail banking sector.

Typical microcredit products look like this (the numbers are only hypothetical): Product Income Generation

Purpose Income generation, asset

Terms Interest rate 50 weeks loan paid 12.5% (flat) 24%

Loan (IGL) Mid-Term Loan

development Same as IGL, available at

weekly (effective) 50 weeks loan paid 12.5% (flat) 24%

(MTL) Emergency Loan

middle (week 25) of IGL All emergencies such as

weekly 20 weeks loan

(effective) 0% Interest free

(EL)

health, funerals, 1-2 years loan

11% (flat) 23%

repaid monthly

(effective)

hospitalization Individual Loan (IL) Income generation, asset development

The Income Generating Loan is used for a variety of activities that generate income for their families. Clients submit a loan application and based on approval receive the loan after one week. Loans are paid in 50 equal, weekly installments. After completion of a loan cycle, the client can submit a loan application for a future loan. The approach with smaller short-term loan is to avoid long-term economic problems with bigger loans. The Mid Term Loan is available to clients after 25 weeks of repaying their IGL loan. A client is eligible for a MTL if the client has not taken the maximum amount of the IGL. The

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residual amount can be taken as a MTL. The terms and conditions of the MTL are otherwise exactly the same as IGL. The Emergency Loan is available to all clients over the course of a fiscal year. The loan is interest free and the amount and repayment terms are agreed upon by the MFI and the client on a case by case basis. The amount is small compared to the income generating products and is only given in times of dire need to meet expenses such as funerals, hospital admissions, prenatal care and other crisis situations. The Individual Loan is designed for clients and non clients that have specific needs beyond the group lending model. Loans are given to an individual outside of the group lending process. Amounts are typically higher than that of the income generating loan and repayments are less frequent. Applicants must complete a strict business appraisal process and have both collateral and a guarantor. Microfinance is not panacea from all troubles; this also means that not any poor person can obtain the loan. In particular, representatives of very poor population, lacking stable income, living by means of chance earnings, and particularly having debts (in relation to community facilities, relatives, friends, etc…) cannot be clients of microfinance, since in case of microcredit non-repayment they will have more debts, becoming poorer. For such people special programs of social assistance are needed, which are able to support main needs of people living in the poorest dwellings, lacking garments and food. There are some restrictions regarding what the money is used for. Usually micro credits can´t be used for the purposes like: •

Payments of other loans or other debts;

•

Production of tobacco and liquor;

•

Forming turnover capital of trade and intermediary business;

•

Organization or purchasing products for gambling or entertainment services for the population;

•

Establishing trading points;

•

Purchase of property that´s not used for business.

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In the microfinance sector there´s other services expanding as well. The poor need, like all of us, a secure place to save their money and access to insurance for their homes, businesses and health. Microfinance institutions are now innovating new products to help meet these needs, empowering the world’s poor to improve their own lives. Products common used in the microfinance sector today is: •

Micro savings – A possibility to save money without any minimum balance. Allows people to retain money for future use or for unexpected costs. In SHGs the members save small amounts of money, as little as a few rupees a month in a group fund. Members may borrow from the group fund for a variety of purposes ranging from household emergencies to school fees. As SHGs prove capable of managing their funds well, they may borrow from a local bank to invest in small business or farm activities. Banks typically lend up to four rupees for every rupee in the group fund;

•

Micro insurance – Gives the entrepreneurs the chance to focus more on their core business which drastically reduces the risk affecting their property, health or working possibilities. The is different types of insurance services like life insurance, property insurance, health insurance and disability insurance. The spectrum of services in this sphere is constantly expanded, as schemes and terms of providing insurance services are determined by each company individually.

•

Micro leasing – For entrepreneurs or small businesses who can´t afford buy at full cost they can instead lease equipment, agricultural machinery or vehicles. Often no limitations of minimum cost of the leased object.

•

Money transfer – A service for transferring money, mainly overseas to family or friends. Money transfers without opening current accounts are performed by a number of commercial banks through international money transfer systems such as Western Union, Money Gram, and Anelik. On the surface they may seem like small money transfers, but when one considers that such transactions take place millions of times around the world each week, the numbers start to become impressive. According to the World Bank, the annual global market for remittances - money 46

transferred home from migrant workers - is around 167 billion US dollars. The estimated total is closer to 230 billion dollars if one counts unregulated transactions. Remittances are also an important source of income for many developing countries including India, China and Mexico, all of which receive over 20 billion dollars each year in remittances from abroad.

3.7 Introduction of SHG

Self-help groups, also known as mutual help, mutual aid, or support groups, are groups of people who provide mutual support for each other. In a self-help group, the members share a common problem, often a common disease or addiction. Their mutual goal is to help each other to deal with, if possible to heal or to recover from, this problem. While Michael K. Bartalos (1992) has pointed out the contradictory nature of the terms “self-help” and “support,” the former U.S. surgeon general C. Everett Koop has said that self-help brings together two central but disparate themes of American culture, individualism and cooperation (“Sharing Solutions” 1992). In traditional society, family and friends provided social support. In modern industrial society, however, family and community ties are often disrupted due to mobility and other social changes. Thus, people often choose to join with others who share mutual interests and concerns. In 1992, almost one in three Americans reported involvement in a support group; more than half of these were Bible study groups (“According to a Gallup Poll” 1992). Of those not involved in a self-help group at the time, more than 10 percent reported past involvement, while another 10 percent desired future involvement. It has been estimated that there are at least 500,000 to 750,000 groups with 10 million to 15 million participants in the

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United States (Katz 1993) and that more than thirty self-help centers and information clearinghouses have been established (Borman 1992).

The concept of self-help group Experience in many countries demonstrates that poor women make investments wisely and earn returns (Human Resource Development, 1995). However, the flow of financial assistance to them was too marginal, if at all, to enable them to cross the poverty line. The need to create a grassroots organizational base to enable women to come together, to analyze their issues and problems themselves, and to fulfill their needs was strongly advocated. In fact, experience shows that some of the successful ‘group-based participatory programmers’ have made significant improvement in the conditions of living poor women. The concept of self-help groups gained significance, especially after 1976 when Prof. Mohammed Yunus of Bangladesh began experimenting with micro-credit and women SHGs. The strategy made a quiet revolution in Bangladesh in poverty eradication ‘by empowering the poor women’. SHGs are small informal associations created for the purpose of enabling members to reap economic benefit out of mutual help, solidarity, and joint responsibility. The benefits include mobilization of savings and credit facilities and pursuit of group enterprise activities. The group-based approach not only enables the poor to accumulate capital by way of small savings but also helps them to get access to formal credit facilities (Shylendra, 1998). These groups by way of joint liability enable the poor to overcome the problem of collateral security and thus free them from the clutches of moneylenders. The joint liability not only improves group members’ accessibility to credit, but also creates mechanisms like peer monitoring leading to better loan recoveries (Stieglitz, 1993). Besides, some of the basic characteristics of SHGs like small size of membership and homogeneity of composition bring about cohesiveness and effective participation of members in the functioning of the group (Fernandez, 1994). In general, SHGs created on the above lines of functioning have been able to reach the poor effectively, especially women and help them obtain easy access to facilities like savings and credit and empower them (National Bank, 1995). Studies reveal that certain elements become crucial or critical for the successful formation and functioning of the groups. These include voluntary nature of the group, small size and homogeneity of membership, transparent and participative decision-making and brisk use of funds for microenterprise creation. (Fernadez, 1994). Regular meeting of the members fosters meaningful relationship among them and issues other than thrift and credit, issues on gender and social 48

problems also get a platform for discussion. Empirical evidence has shown that women as a group are consistently better in promptness and reliability of repayment. Targeting women in these ‘male stream’ programmers has been a very effective method of ensuring that the benefits of increased income accrue to the general welfare of the family, and particularly of children. At the same time, women themselves benefit from the higher status they achieve when they are able to get new income (RESULTS, 1997) Self-help groups are comprised of people who share the same problem, life situation or Crisis. Members provide emotional support to one another; learn new ways to cope, discover strategies for improving their condition, and help others while helping themselves. People find in self help group’s individuals much like themselves who are able to share pragmatic, experience tested insights gained from first-hand experience with the same situation. Self-help groups are generally self-governed, cost-free and readily available for every Major disease listed by the World Health Organization (Gartner and Riessman, 1977),

For

emotional problems, physical disabilities, eating disorders, habits or addictions, Bereavement, parenting, and for family members of those experiencing illnesses or Difficulties. Self-help groups are increasingly being recognized as viable, efficient methods of Supplementing and extending the present health and mental health care system to the Point of being characterized as an "emerging social movement" (Borkman, 1990; Katz, 1981). Recent research conservatively estimates that 10 million Americans are Currently using self-help groups and that as many as 25 million have been involved in A group sometime in their life (Kessler, Mickelson, & Zhao, 1997). While the most well Known type of self-help group is Alcoholics Anonymous, there are over 500,000 Self-help groups in the United States (Jacobs & Goodman, 1989). Currently, the Network provides services to over 500 Wichita area support groups and an additional 1400 groups available in other Kansas communities to persons of all ages, ethnic Groups and income levels who are suffering from substance abuse, chronic physical And medical health problems, family problems, mental health concerns, and more. Numerous research studies have concluded that self-help groups are effective in Helping group members, both short term and long term. Self help groups have been chronic

Shown to improve health conditions and prevent problems associated with

Illness. Through a ten year longitudinal study involving 86 women randomly

assigned to Group support and standard treatment or the standard treatment only, Spiegel, Bloom, Kraemer and Gottheil (1989) found that offering long-term group support to women

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with Metastatic breast cancer significantly extended life. Women participating in the selfHelp groups not only had fewer mood swings, less phobia and reduced pain (Spiegel, Bloom & Yalom, 1981), but lived an average of 36.6 months compared to women in the Randomized control group who lived only 18.9 months.

3.8 THE ACTITVITIES OF THE SELF-HELP GROUP

The members of self-help groups often need information on precise issues. To answer your members’ questions and to make the group more interesting, a variety of activities are possible.

Discussions on specific themes When your members suggest discussing a specific them, be sure to consider it. If time doesn’t permit, take note of it and come back to it at the next meeting. In the event that your group is short of ideas, here is a list of possible themes: 

Self-esteem



Problem solving



Creativity



Nutrition and lifestyle



Relationship with family and friends



Social integration: work, studies, volunteering

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3.9 Objectives OF SHG



To sensitize women of target area for the need of SHG and its relevance in their empowerment process.



To create group feeling among women.



To enhance the confidence and capabilities of women.



To develop collective decision making among women.



To encourage habit of saving among women and facilitate the accumulation of their own capital resource base.



To motivate women taking up social responsibilities particularly related to women development.

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Chapter 4: Microfinance Model 4.1Micro finance Institutions (MFIs):

MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and cooperatives. They are provided financial support from external donors and apex institutions including the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-credit and NABARD and employ a variety of ways for credit delivery. Since 2000, commercial banks including Regional rural Banks have been providing funds to MFIs for on lending to poor clients. Though initially, only a handful of NGOs were “into” financial intermediation using a variety of delivery methods, their numbers have increased. Considerable today. While there is no published data on private MFIs operating in the country, the number of MFIs is estimated to be around 800.

4.2

Bank Partnership model:

This model is an innovative way of financing MFIs. The bank is the lender and the MFI acts as an agent for handling items of work relating to credit monitoring, supervision and recovery. In other words, the MFI acts as an agent and takes care of all relationships with the client, from first contact to final repayment. The model has the potential to significantly increase the amount of funding that MFIs can leverage on a relatively small equity base. A sub-variation of this model is where the MFI, as an MBFC holds the individual loans on its bolos for a while before securitizing them and selling them to the bank. Such refinancing through securitization enables the MFI enlarged funding access. If the MFI fulfils the “true sale” criteria, the exposure of the bank is treated as being to the individual borrower and the prudential exposure norms do not hen inhibit such funding of MFIs by commercial banks through the securitization structure.

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4.3

Banking correspondents:

The proposal of “banking correspondents’ could take this model a step further extending it to savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank. It would use the ability of the MFI to get close to poor clients while relying on the financial strength of the bank to safeguard the deposits. This regulation evolved at a time when there were genuine fears that fly-by-night agents purporting to act on behalf of banks in which the people have confidence could mobilize saving of gullible public and then vanish with them. It remains to be seen whether the mechanics of such relationship scan be worked out in a way that minimizes the risk of misuse. 4.4

Service Company Model:

Under this model, the bank forms its own MFI, perhaps as an MBFC, and then works hand in hand with that MFI to extend loans and other services. On paper, the model is similar to the partnership model: the MFI originates the loans and the bank bolos them. But I fact, this model has two very different and interesting operational features:

(a)

The MFI uses the branch network of the bank as its outlets to reach clients. This

allows the client to be reached at lower cost than in the case of a stand-alone MFI. In case of banks which have large branch networks, it also allows rapid scale up. In the service company model, the MFI works specifically for the bank and develops an intensive operational cooperation between them to their mutual advantage.

(b)

The Partnership Model uses both the financial and infrastructure strength of the

bank to create lower cost and faster growth. The Service company Model has the potential to take the burden of overseeing microfinance operations off the management of the bank and put it in the hands of MFI managers who are focused on microfinance to introduce additional products, such as individual loans for SHG graduates, remittances and so on without disrupting bank operations and provide amore advantageous cost structure for microfinance.

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55

Chapter-5: Role of Financial Institution Role, functions and Working Mechanism of Financial Institutions

ICICI Bank “ICICI Bank is one bank that has developed a very clear strategy to expand the provision of financial products and services to the poor in India as a profitable activity”

ICICI’s microfinance portfolio has been increasing at an impressive speed. From 10,000 microfinance clients in 2001, ICICI Bank is now (2007) lending to 1.8 million clients through its partner microfinance institutions, and its outstanding portfolio has increased from Rs. 0.20 billion (US$4.5 MILLIN) TO Rs. 9.98 billion (US$227 million). A few years ago, these clients had never been served by a formal lending instituting. There is an increasing shift in the microfinance sector from grant miner should be limited to the creation of facilitative infrastructure. “We need to stop sending government and funding agencies the signal that microfinance is not commercially viable system”, says Nachiket more, Executive Director of ICICI Bank. As a result of banks entering the game the sector has changed rapidly. “There is no dearth of funds today, as banks are looking into MFIs favorably, unlike a few years ago”, says Pandmaja Reddy, the CEO of one of IICI Bank’s major MFI partners, Spandana.

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Bank Led Model The bank led model was derived from the SHG-Bank linkage program of NABARD. Through this program, banks financed self Help Groups (SHGs) which has been promoted by NGOs and government agencies. ICICI Bank drew up aggressive plans to penetrate rural areas through its SHG program. However, rather than spending time in developing rural infrastructure of its own, in 2000, ICICI Bank announced merger of Bank of Madura (BoM), which had significant presence in the rural areas of South India, especially Tamil Nadu, with a customer base of 1.9 million 87 branches. Bank of Madura’s SHG development program was initiated in 1995. Through this program, it had formed, trained and initiated small groups of women to undertake financial activities like banking, saving a lending. By 2000, it had created around 1200 SHGs across Tamil Nadu and provided credit to them.

Partnership Model A model of microfinance has emerged in recent years in which a microfinance institution (MFI) borrows fro banks and on-lends to clients; few MFIs have been able to grow beyond a certain point. Under this model, MFIs are unable to provide risk capital in large quantities, which limits the advances fro banks. L in addition, the risk is being entirely borne y the MFI which limits its risk-taking. This model aimed at synergizing the comparative advantages and financial strength of the bank with social intermediation, mobilization power and infrastructure of MFIs and NGOs. Through this model, ICICI Bank could save on the initial costs of developing rural infrastructure and micro credit distribution channels and could take advantage of the expertise of these institutins in rual areas. Initially, ICICI Bank started off by lending to MFIs and NGOs in order to provide the necessary financial support to their activities. Later, ICICI Bank came up with a plan where the NGO/MFI continued t promotes their microfinance schemes; wile the bank met the financial requirements of the borrowers. 57

Other Microfinance Initiatives As a part of microfinance initiatives in the agriculture sector, ICICI Bank developed Farmer services enters (FSC). An FSC was managed buy an agricultural input supply company which supplied inputs like seeds and technical knowhow to the farmers. FSCs were also managed by an extension service organization which provided inputs, credit and technology or by an NGO that provided all the services that farmers needed for their agricultural needs. Working in close association with farmers, FSCs provided them with services like advice on seeds, sowing techniques, pest control, weed control, usage and dosage of herbicides, pesticides and fertilizers and other services associated with agriculture. The FSCs also provided crop-related information and services to farmers, apart from facilitation the sale of agricultural produce. The FSCs arranged to procure the produce through agents and sold it in organized agricultural markets thus getting better realization.

The Future

These agents contact several borrowers, thus expanding the reach of ICICI Bank at a low cost. Taking the FSC initiative further, ICICI Bank plans to provide farmers credit fro sugar companies, seed companies, dairy companies, NGOs, Micro-credit institutions and food processing. Sig HAS BEEN INBOLVED IN a PROJECT IN THE SOUTHERN STATE OF Tamil Nadu to find out how wireless technology can be applied in the development of low cost models of banking. Another plan to increase the reach in rural areas is to launch mobile ATM services. ICICI Bank branded trucks has started carrying ATMs through a number of villages.

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Some Articles of News Paper: 1. ICICI Bank to offer micro-finance to sex-workers Mumbai, March 14: In a novel way to help sex-workers to live more meaningfully, country’s largest private sector bank, ICICI Bank is planning to offer financial assistance to them though the micro-finance route.

For starters, the bank plans to launch the programmed in Kolkata by entering into a tie-up with Durbar Mahila Samwanaya samitee, an NGO working for the welfare of around 65,000 sex-workers in and around the city. Source: (Press Trust of India) Posted online: Wednesday, March 14, 2007 at 20:54 hours IST.

2.

ICICI Bank launches new initiative in micro-finance

ICICI Bank has taken a stake of under 20 percent in financial information Network and Operations Private Ltd (FINO), WHICH WAS LAUNCHED ON Thursday, July 13, 2001. FINO would provide technological solutions as well as services to finance providers to reach the understand in the country. ICICI Bank is the lead facilitator.

According to Mr. Nachiket Mor, Deputy Managing director, ICICI Bank, FINO IS AN INDEPENDENT ENTITY. “We would reduce our stake in the company when required,’ he said.

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ICICI

Bank

expects

to

target

200

micro-finance

institutions

(MFIs) by March 2007, he said, speaking on the sidelines of the press conference to launch FINO. At present, the bank has tie-ups with 100 MFIs. FINO is an initiative in the micro-finance sector. It would target 300-400 million people who do not have access to basic financial services, said Mr. Manish Khera, CE, and FINO. The company has an authorized capital of Rs. 50 crore. MFIs, NBFCs, RRBs, co-operative banks, etc. would directly or indirectly tie up with FINO TO USE ITS SERVICES, HE SAID. Fino WOULD CHARGE Rs.25-30 per account every year.

Core Banking Products

FINO has partnered with IBM and I-flex to offer core banking products. It would also provide credit bureau services, which includes individual customer credit rating and analytics based on transition history. It also launched biometric cards for customers, which would be a proof of identity and give collateral to them. The card would also offer multiple products including savings, loans, insurance, recurring deposits, fixed deposits and remittances. The company world as\also build-up customer database, thus bringing them into mainstream banking.

“There was a need for automated structured data system like FINO;” SAID Mr. Mor. “Essential pieces of infrastructure are missing in India. We lack credit-tracking mechanism; therefore there was a need for an intervention like FINO.”

The company expects to reach 25 million customers in five years and two million customers by the end of 2007.

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FINO aims bringing scale to “micro” business lading to lowering of costs for the local financial institutions (LFIs) and act as an internal technology department for he LFIs, said Mr. Khera. The company is working on providing technological solutions in insurance, \especially the health insurance sector to the under-privileged,” he said. It is interacting with Nabard, SIDBI and other banks to gie shape to what FINO does, said Mr. Kher.

3.

ICICI Bank’s thrust on micro-finance

CHENNAI,MARCH 9. ICICI Bank has entered into partnerships with various microfinance institutions (MFI) and non-government organizations (NGOs) to scale up its micro lending business. Addressing presspersons her, today, Nachiket Mor, executive director, ICICI bank, said, the partnership model would provide assured source of funding to NGOs and MFIs. The bank had extended advances to the tune of Rs. 150 croes as on February 29, the year, under this scheme, Mr. Mor said. The back had acquired a network of self-help groups (SHG) developed by the erstwhile Bank of Madura after its merger with ICICI Bank. Since then the SHG programmed had 61

grown substantially and 10,175 groups had been promoted reaching our to 2.03 lakh women spread across 2,398 villages, the Executive director said. One of the micro finance institutions, ‘Microcredit foundation of India’, established by K.M. Thiagarajan, former chairman of Bank of Madura inn 2002, had initiated a programmed for microcredit through self-help groups. ICICI Bank has entered into a memorandum of understanding with Microcredit foundation to outsource SHG development, maintenance of groups, credit linkage and recovery o flans.

Securitization Another way to enter into partnership with MFIs is to securitize microfinance portfolios. In 2004, the largest ever securitizing deal in microfinance was signed between ICICI Bank and SHARE Microfinance Ltd, a large MFI operating in rural areas of the state of Andra Pradesh. Technical assistance and the collateral deposit of US$325,000 (93% OF The guarantee required by ICICI) were supplied by Grameen foundation USA . Under this agreement, ICICI purchased a part of SHARE’s microfinance portfolio gains a consideration calculated by computing the Net present Value of receivables amounting to Rs. 215 million (US$ 4.9 million) at an agreed discount rater. The interest paid by SHARE is almost 4% less than the rate paid in commercial loans. Partial credit provision was provided by SHARE in the form of a guarantee amounting to0 8% of the receivables under the portfolio, by way of a lien on fixed deposit. This deal frees up equity capital, allowing SHARE to scale up its lending. L on the other had, it allows ICICI Bank to reach new markets. And by trading this high quality asset in capital markets, the bank can hedge its own risks.

Beyond Microcredit

Microfinance does not only mean microcredit, and ICICI does not limit itself to lending. ICICI’s social Initiative Group, along with the World bank and ICICI Lombard, the insurance company set up by ICICI and Canada Lombard have developed India’s first indexbased insurance product. This insurance policy compensates the insured against the 62

likelihood of diminished agricultural output/yield resulting from a shortfall in the anticipated normal rainfall within the district, subject to maximum of the sum insured. The insurance policy is linked to a rainfall index.

Technology

One of the main challenges to the growth of the microfinance sector is accessibility. The Indian context, in which 70% of the production lives in rural areas, requires new, inventive channels of delivery.

The use of technologies such as kiosks and smartcards will

considerably reduce transaction costs while improving access. The ICICI Bank technology team is developing a series of innovative products that can help reduce transaction costs considerable. For example, it is piloting the usage of smart cards with Sewa Bank in Ahmadabad. To maximize the benefits of these innovations, the development of a high quality shared banking technology platform which can be used by MFIs as well as by cooperatives banks and regional rural banks is needed ICICI is strongly encouraging such an effort to take place.

Wipro and Infosys, I-Flex, 3 InfoTech, some of the best Indian

information technology companies specialized in financial services, and others, are in the process of developing exactly such a platform. At a recent technology workshop at the Institute for Financial management research in Chennai, the ICICI Bank Alternate Channels team presented the benefits of investing in a common technology platform similar to those used in mainstream banking to some of the most promising MFIs.

The Center for Microfinance Research ICICI Bank has created the Centre for microfinance Research (CMFR) at the Institute for Financial Management Research (IFMR) in Chennai. Through research, research –based 63

advocacy, high level training and strategy building, it aims to systematically establish the links between increased access to financial services and the participation of poor people in the larger economy. The CMFR Research Unit supports initiatives aimed at understand fin and analyzing the following issues: impact of access to financial services; contract and product designs; constraints to household productivity; combination of microfinance and other development interventions; evidence of credit constraints; cost and profitability of microfinance organizations; impact of MFI policies and strategies; people’s behavior and psychology with respect to financial services; economies of micro-enterprises; and the effect of regulations.

Finally, the CMFR recognizes that while MFIs air to meet the crditneeds to poor households, there are other missing markets and constraints facing households, such as heal there, infrastructure, and give in knowledge. These have implications in rearms of the scale and profitability of client enterprises and efficiency of household budget allocation, which in turn impacts household will-being. The CMFR microfinance Strategy Unit will address these issues through a series of workshops which will bring together MFI practitioners and sectoral experts (in energy, water, roads, health, etc). The latter will bring to the table knowledge of best practices in their specific areas, and each consultation workshop will result in long-term collaboration between with MFIs for implementing specific pilots.

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CHAPTER 6: Impacts of Microfinance

65

Most existing studies on the impact of microfinance examine two sets of indicators – economic and social indicators – at different levels. Despite the variation In the methods used and the results of studies conducted in various countries, the main Impact of microfinance impact is on change in income, expenditure, assets, educational Status, health as well as gender empowerment. The studies that have examined the impact of microfinance on these indicators are discussed below.

Impact studies of microfinance on different economic and social indicators

6.1 Impact studies of microfinance on income

The effect on income has been analyzed at the individual, household and Enterprise levels. Hulme and Mosley (1996), conducted various studies on different Microfinance programs in numerous countries, and found strong evidence of the positive Relationship between access to a credit and the borrower’s level of income. The authors Indicated that the middle and upper poor received more benefits from income-generating Credit initiatives than the poorest. McKernan (2002), moreover, evaluated three Significant microcredit programs in Bangladesh and discovered that the profit for self-employed Activities of households can be increased by program participation. These 11 Economic indicators are normally measurements for microfinance impact as income, level and patterns of expenditure, consumption and assets. Social indicators to measure the impact of microfinance became Popular in the early 1980s as educational status, access to health services, nutritional levels, anthropometric Measures and contraceptive use, for example (Hulme, 2000). 12 Hulme (2000) identified levels of assessment in different units as individual, enterprise, household, community, institutional impacts and household economic portfolio such as households, enterprise, Individual and community. programs were also examined at the village-level impacts in the study of Khandker etal. (1998) which showed that they have positive impact on average households’ annual Income, especially in the rural non-farm 66

sector. Copes take et al. (2001), estimated the Effect of an urban credit programmed – a group-based microcredit programmed – in Zambia, And found that microcredit has a significant impact on the growth in enterprise profit and household income in case of the borrowers who have received a second loan. Sichanthongthip’s study (2004) also pointed to a positive impact of microcredit on the income level of individual borrowers. This can be seen from the higher monthly income earned after the member accessed credit, in the empirical study of Lao microfinance on Saithani case. Shaw (2000) studied two microfinance institutions (MFIs) in Southeastern Sri Lanka and showed that the less poor clients’ micro business that accessed loans from Microfinance programs could earn more income than those of the poor do. Mosley (2001) Evaluated the impact of loans provided by two urban and two rural MFIs on poverty in Bolivia. He found that the net impact of microfinance from all institutions, at the average Level, was positive in relation to borrowers’ income, even though that net impact for Poorer borrowers might be less than the net impact on richer borrowers. Copes take (2002) conducted the case study of the Zambian Copper belt, applying the village bank Model to investigate the effect on income distribution at the household and enterprise Levels. The study showed that the impact on income distribution depends on who obtains the loan, who move on to larger loans and who exits the program: group dynamics was also an important factor. As he discovered, “Some initial leveling up of business Incomes was found, but the more marked overall effect among borrowers was of income Polarization.” (Copestake, 2002: 743).

6.2 Impact studies of microfinance on expenditure Expenditure is another indicator to measure the impact of microfinance. Pitt and Khandker (1996 and 1998) estimated the effect of microcredit obtained by both males And females for 67

the Grameen Bank and two other group-based microcredit programs in Bangladesh on various indicators. They showed that the clients of the programs could gain from participating microfinance programs in many ways. It can be seen that income per capita consumption could be increased by accessing a loan from a microcredit Program such as the Grameen Bank. Khandker (2003) also conducted research on the Long-run impacts of microfinance on household consumption and poverty in Bangladesh by identifying types of impact in six household’s outcomes as outlined bellow:  Per capita total expenditure;  Per capita food expenditure;  Per capita non-food expenditure;  The incidence of moderate and extreme poverty;  Household non-land assets The author found that the microfinance effects of male borrowing were much weaker than the impact of female borrowing and there was decrease in return to borrowing all the time. Moreover, he noted that the impact on food expenditure was less pronounced than the one on non-food expenditure. Besides, he showed that the poorest gained benefits from microfinance and microfinance had a sustainable impact in terms of poverty reduction among program participants. In addition, the author discovered that there was spillover effect of microfinance to reduce poverty at the village level. In contrast, the impact was less noticeable in reducing moderate rather than extreme poverty. Murdoch (1998), however, argued that the eligible households that participated in these three Microfinance programs have strikingly less consumption levels than the eligible Households living in villages without the programs.

6.3 Impact studies of microfinance on wealth

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A further indicator of the impact microfinance is wealth. Montgomery et al (1996) examined the performance and impact of two microfinance programs in Bangladesh. They found that there were positive impacts of a microcredit program, such As the Bangladesh Rural Advancement Committee’s (BRAC’s) Rural Development Program (RDP), on both enterprise and household assets. Clearly, even though total value of household assets had a slight increase after the borrowers obtained last loans, there had Significant increase in the value of productive assets. Pitt and Khandker (1996 and 1998) also noted that the microcredit had a positive impact on women’s non-land assets. Mosley (2001) also pointed out that there was positive impact of microfinance on asset levels. He further stated that accumulation of asset and income status was generally highly correlated, which led to extreme correlation between income poverty and asset poverty. Coleman (1999) investigated the impact of a village bank on borrower welfare in Northeast Thailand. He found that there was a slight impact of program loans on clients’ Welfare. However, he discovered that the village bank had a positive and significant impact on the accumulation of women’s wealth, particularly landed wealth but this result included bias from measured impact (discussed in methodology below). In contrary to the Positive results, Mckernan (2002) found an inverse relationship between participation in Program and household assets. Mckernan also found that households with fewest assets benefit most from participating in a program.

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6.4 Impact studies of microfinance on educational status Many impact studies of microfinance have focused on educational status. Chowdhury and Bhuiya (2004), studied the impact of a microfinance program, BRAC Poverty alleviation program, in Bangladesh, and found that both member and nonmember Groups of BRAC had improved in educational performance. However, the BRAC member households benefited much more than poor non-member households. Furthermore, girls gained more than boys. Holvoet (2004) investigated the effects of Microfinance on childhood education by examining two microfinance programs in South India – one with direct bank-borrower credit and another one with group mediated credit. The author showed that loans to women, through women’s groups, had a significant Positive impact on schooling and literacy for girls, whereas it remained mainly Unchangeable in the case of boys. However, in case of direct individual bank-borrower Lending, there was no improvement in educational inputs and outputs for children. Pitt and Khandker (1996) found that a credit to the participants provided by a microfinance Institution like the Grameen Bank could grow school enrolment for children. They found, for example, that in case of the Grameen Bank and Bangladesh Rural Development Board’s (BRDB) Rural Development RD-12 program, credit lending to women had a significantly positive impact on schooling for boys (Pitt and Khandker, 1998).

6.5 Impact studies of microfinance on health Indicators related health issues are also applied as proxies to examine the impact of microfinance. Chowdhury and Bhuiya (2004) found that microfinance program, led to a good improvement in child survival and nutritional status. Pitt and Khandker (1996) also noted that there was a rise in contraceptive use and decrease in fertility in case of the participants obtaining a credit provided by the Grameen Bank. However, there was no evidence to prove that an increase in contraceptive use or a decrease in fertility resulted from the participation of women in group-based credit programs. But fertility reduction was observed and contraceptive use slightly increased in case of men’s participation (Pitt et al., 1999).

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6.6 Impact studies of microfinance on empowerment Microfinance also leads to the empowerment of women. Hashemi et al. (1996) studied two main microfinance programs in Bangladesh, the Grameen Bank and the Bangladesh Rural Advancement Committee (BRAC). They noted that the participation of the programs had important positive impacts on eight different dimensions of women’s Empowerment:  Mobility,  Economic security,  Ability to make small purchases,  Ability to make larger purchases,  Involvement in major household decisions,  Relative freedom from domination by the family (especially, women’s Ownership of productive assets),  Political and legal awareness,  Participation in public protest and political campaigning. In another study, Pitt and Khandker (1998) found that the behavior of poor households was significantly changed in case of women’s participation in the program credit, in Bangladesh. It, for example, could be seen that every 100 additional taka credit provided to women by the microcredit programs, namely the Grameen Bank, BRAC and BRDB, increased yearly expenditure for household consumption by 18 taka, whereas that provided to men from the same programs grew yearly household consumption Expenditure by 11 taka. However, there exists a counter argument that microcredit Programs inflicted extreme pressure on women by forcing them down to meet difficult loan repayment schedules (Goetz and Gupta, 1996). Besides the microfinance impact on the indicators mentioned above, one study Tried to examine how the savings group in Laos affects the behavior of member of a Village savings group. It showed that the behavior of the village savings group members was changed as a result of participating in a program. While previously savings were kept in the form of gold, livestock, jewelry, deposits in the bank and savings at home, members now saved in the savings group (Kyophilavong and Chaleunsinh, 2005). Different methodologies have been

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adopted to analyze the impact of microfinance Programs. These are discussed in the next section.

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Chapter-7: Literature Review Microfinance A Windows of Opportunities Microfinance provides an opportunity for the banks to reach rural poor in groups for extending various financial services and ensure financial inclusion. It should not be viewed as a government program by the banks, but as a desirable long-term strategy for growth. A Self-Help Group (SHG) is a socially and economically homogenous group of 10 to 15 people who voluntarily come together to achieve common goals. For he past fie decades offer independence, the State is the planner and the implementer of anti-poverty programs. Working of the political system and administrative machinery has been inadequate and the number of people below the poverty line has not been appreciably reduced. The focus has shifted to local participatory micro-development organizations known as SHG. In India, 22million SHGs were financed by the banks up to March 2006.a total of 165 million poor people have gained access to bank credit. More than 90%of the members involved are women. In Orissa, 1.8 lakh SHG had credit linkage with banks as on march 31, 2006 they had been financed about Rs.452cr.State Bank of India (SBI) has credit-linked about 11 lakh SHGs, most of them are women SHGs & provided an assistance of Rs.279cr.The institute of management & information science (IMIS), Bhubaneswar, has undertaken a survey of SHGs, incidentally, all women SHGs, in Puri District (Orissa)

Objectives: To study the changes that took place in the economic status of the SHG members after credit –linkage with the bank.  To examine the nature of the economic activities undertaken by the SHG before & after credit –linkage.  To examine the efficiency of credit provided by the bank.

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Methodology:The study is based on the primary data collected through a questionnaire. The questionnaire consists of different aspects.  General Information about SHG. Initial credit –linkage & subsequent repeat finance.  Management Aspects:-leadership, maintenance of books & accounts, grading of the financial group.  Economic Aspects: - income before & after linkage, size of the assets, economic activities undertaken, end use of loan.  Socio – political aspects: - social initiatives taken by SHGs, political consciousness awareness of group members.  SHG linkage with Non-Government organization (NGO), village panchayats ,etc  Future plan –Land –based activities & ancillary business like small business activities, miscellaneous works such as SBI recovery agent.  Response of other villages to the activities of SHG.

The Questionnaire is supply minted with door to door interview of member of SHG Random method is employed to conduct the survey in 52 SHG spread over five gram panchayats & national Advisory council & having 662 member.

Hypothesis –

 SHG has eliminated moneylenders & reduced the cost of debt which ranges from 60% to 100% per annum in the countryside. 74

 SHG has provided productive employment to hitherto unemployed women.  Co –operative –Synergy effect is evidenced.  NGO have development & government have provided adequate training to the members of the group.

Analysis & observations

Money lenders have been successfully eliminated by all the SHG as mentioned in the report .the member lend among them selves, the current rate of interest being 36 % per annum .institutions should not took at askance at this rate as this is basically market –based .one of the members of the SHG at Nauseas village commented: “we are grateful to the bank that the loan enables us to lend & borrow. The rate is immaterial; we are at least giving the interest to ourselves, not outsiders.”

Another SHG met a member medical expenses which would have required Outside borrowing. No major social functions like marriage or funeral rites were conducted in the houses of the members. Hence, they were not under the pressure of moneylenders.

Youth SHG

Keeping in view the unsatisfactory experience of banks, particularly in respect to selfemployment scheme for educated unemployed youth &Prime Minister Rozgar yojana loans which were literally taken as political grants by the beneficiaries, banks, encouraged women SHG. 75



Their individualistic orientation.



Search for a ‘secure’ job, preferably urban-oriented low-skilled job or desk- bound

job. 

Easy susceptibility to political designs &needs.

Participation in fairs /festivals:-

Most of the SHG which were surveyed expressed their interest in joining block level fair for selling their products. But very few had a chance to participate. Favoritism, including illegal gratification is the allegations made against some government agencies, particularly Orissa Rural Development & marketing Society (ORMAS). Wider participation will reduce favoritism, if any, on this score.

Group Dynamics:-

The group had a leader who had good interpersonal skill, information skills which included liaison with customers, bank & others who where outside organizations

 The following characteristics are delineated in SHG leaders in varying degrees.  Intelligent

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 Confident  Integrity  Sociable  Positive outlook  Good judgment  Willing to learn  Solves problems  Decisive  Determined  Communicate  Attentive  Includes not excludes  Courageous  Realistic

Training:-

Capacity –building training was organized by nabard, & also occasionally by bank like the SBI. This has to be done on a regular basis. Training that is providing by the government is inaugurate. Even central village level or block-level stair is not organized regularly. This is quite a lesson on disaster management. But a false step or non-cooperation among them would have resulted in breakdown of the group or economic / social ruin of that member. Marketing / leadership Training can be imparted through Reg. Regan’s, founders of action learning for managers, fundamental equation.

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L= P+Q +A+R Where L = Learning P = Program learning Q = Questioning A = Action R = Reflection The members will learn with & from one another, so also the NGO trainer. The inner experiential cycle would be as given below. Desire to change – Risk-taking (courage &responsibility) – Insight –Transformation.

Process Model:-

The process model of SHG is given below

1) Members of SHG 2) SHG as a group 3) Village community 4) The panchayats 5) Higher bodies-district state 78

6) NGO 7) SBI The intersection on the concentric circles represents the environments that get influenced by the SHG.

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Case Study:Self Help Group and Women Empowerment-A case Study of Swa- Shakti Project Author Supervisor Kavita Siradhna Dr.Bharti Sharma (Retd.) Department of Social Work Jamia Millia Islamia New Delhi.

A comparative study of member and non-member women along a set of six common agriculture including their greater control over the agricultural land. This along with lack Amava and Bachrawa. The study was also conducted at the level of the non-member amongst the member women and their relatively greater access to social, economic and any material differences along a set of common empowerment parameters amongst as a key programmatic strategy in various women development initiative. In order to at individual and community level; 3) to understand the effect of the programmed awareness of field functionary of partner NGO, Sarvodaya Ashram promoting SHG in being increasingly viewed as an instrument of women’s empowerment and incorporated contextual factors in terms of poor resource availability and development conditions also control over resources; 4) to find out if there has been a transformation of relations of credit activities have resulted in increasing women’s economic self-reliance thereby Development Association (IDA) and Govt. of India initiative on women empowerment . Empowerment indicators showed higher awareness on social issues and mobility in Rae Bareli district of Uttar Pradesh. The sample comprises of sixty-six member initiative of International Fund for Agricultural Development (IFAD), International interventions on the position of women members in their families; whether project It is believed that as women affinity groups SHG by mobilizing women around thrift and larger society 5) to suggest measures for making SHG an effective instrument of member and non-member women owing to participation in group processes.

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Gender members on property right, wife-beating, preference for male child, and male bias in members were also covered. Purposive and criteria sampling along with random methods have been used to enrich the qualitative study. The study has been conducted non-member women was drawn from non-project villages to understand if there were of education severely restricts women’s ability to be genuinely empowered. The of SHG s; 2) to understand how the group processes of SHG can impact empowerment participation has led to greater autonomy, decision-making power and their greater political resources. The SHG membership and access to credit has ensured amongst processes exhibited partly in terms of higher empowerment levels of its leaders. Lack of relying on the SHG model was conducted. Resulting in women’s increasingly greater control over other spheres of life. The SHG has role on credit related matter, education of children and family planning matter. The study sampling methods were used at various stages of sampling. Severely limits empowerment outcome. At the level of the group, participation in group showed the limited role of SHG in bringing about a change in the social structures of some women members the necessary confidence and assertiveness to play a proactive subordination between men and women, change in power relations at the level of the subordination including patriarchy. This is reflected in the perceptions of women the main objectives of the study have been 1) to understand the genesis of the formation the project district of Rae Barelli was studied. Families of thirty –four individual women the study addresses women empowerment through Self Help Group in the rural setting. The study adopts a mixed model approach to study the research problem. Quantitative understand how SHG empowers women a case study of SwaShakti Project a joint women drawn from ten Self Help Groups drawn from three blocks of Maharajganj, women, partner NGO and family member of individual member. A sample of sixty-six insurance of assets created through loan, lack of registration of assets in the name of women borrower, lack of male accountability, proxy loaning and autonomy in SHG functioning emerged as critical issues of concerns at the level of the group having implications for empowerment of its women members.

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Social Work Intervention strategies At the level of the group it is important to harness the strength of the collective to nurture the potential of its individual members. It is important to ensure participation of individual members in the group processes through measures such as periodic change in leadership, and democratic functioning. Compulsory insurance of assets created out of loan and its registration in the name of the women borrower, are measures that can have positive implications for empowerment of women members. Strategy for education of women, convergence with other development programmed and making women empowerment a part of the overall development paradigm are imperative to have any lasting empowerment outcome. It is important to utilize the SHG forum in enlightening the women in challenging the wider structures of women’s social and psychological subordination without which the role of SHG in women empowerment remains circumscribed

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Chapter-8: Marketing of Microfinance Products 8.1 Contract Farming and Credit Bundling Banks and financial institution have been partners in contract farming schemes, set up to enhance credit, basically, this is a double model. Under such an arrangement, crop loans can be extended under tie-up arrangements which corporate for production of high quality produce with stable marketing arrangement provided – and only, provided – the price setting mechanism for the farer is appropriate and fair.

8.2 Agree Service Centre- Rabo India Rabo India Finance Pvt Ltd. Has established agree-serviced centers I rural areas in cooperation with a number of agree-input and farm services companies.

The services

provided are similar to those I contract farming, but with additional flexibility and a wider range of products including inventory finance. Besides providing storage facilities, each centre rents out farm machinery, provides agricultural inputs and information to farmers, arranges credit, sells other services and provides a form for farmers arranges credit, sells other services and provides a forum for framers to market their products.

8.3

Non Traditional markets Similarly, Mother Dairy Foods Processing, a wholly owned subsidiary of National

Dairy Development Board (NDDB) has established auctions markets for horticulture producers in Bangalore. The operations and maintenance of the market is done by NDDB. The project with an outlay of Rs. 15 lakh covers 200 horticultural farmers associations with 50,000 grower members for wholesale marketing. Their produce is planned with production and supply assurance and provides both growers and buyers a common platform to negotiate better rates.

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8.4

Apani Mandi Another innovation is that of the Punjab Mumbai Board, which has experimented

with a ‘farmers’ market to provide small farmers located in proximity to urban areas, direct access to consumers by eliminating of middlemen.

This experiment known as “Apani

Mandi” belongs to both farmers and consumers, who mutual help each other. Under this arrangement a sum of /rs. 5.2 laks is spent for providing plastic crates to 1000 farmers. Each farmer gets 5 crates at a subsidized rate. At the mandi site, the Board provides basic infrastructure facilities. At the farm level, extension services of different agencies are pooled in. These include imp juts subsidies, better quality seeds and loans from Bank. Apni Mandi scheme provides self-employment to producers and has eliminated social inhibitions among them regarding the retail sale of their produces.

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Chapter 9:- Data Analysis

The completion of this Management Thesis required all the Primary Data has collected from the personal interview of Mr. Washekar in Akola Panchayat Samity. Total 178 Villages comes under Akola Panchayat Samity to handle or spread the SHGs activities. According to that villages total 110 Grampanchyat also comes under the Akola Panchayat Samity. Total 59,230 families out of those 28,475 families come under BPL (Below Poverty Line). From the Government side Swarna Jayanti Gram Swa rojgar yojana this is the main scheme offered by the Government. The origin of the Microfinance mainly for the BPL and secondly APL (Below Poverty Line and Above Poverty Line)

Financial Institutions Micro Finance Institution i.e. DRD (Dist. Rural Development Agency).

In Akola

Dist. to handle the all Self Help Group activities the Microfinance Institutions DRD are separately for one Dist. This is situated in Ramdas Peth, Akola. There is one link of source of finance to provide to the end user. First the member has to open an A/C in any bank in group of Nationalized Banks Co-operative Banks and Gramin Banks. Then they have to make case in Akola Panchayat samity of their document and their program that they are actually are going to do, then from the Akola Panchayat Samity the case send to the DRD office to sanction the amount for their business, then after the sanction of amount the cheque of their lone is again send to the particular mention bank to distribute to the group for their activities. The maximum limit of lone to sanction them is between 2,50,000 to 3,00,000. This all the lone activities are sanction only on the basis of their record and performance. So according to this way the process of sanction the lone is conducted by the Government.

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SHG (Self Help Group)

The purpose of forming SHGs is to make financial services available to those who are otherwise likely to be bypassed by the formal banking system. This reduces the dependence of the members of the group thus formed on moneylenders who generally charge exorbitant rates of interest. The SHGs provide the members, in particular women, with a launch pad to gain confidence, skills and power to promote their interests. By making credit available, it provides opportunities to people belonging to the weaker sections to start income generating activities and empower themselves by improving their economic status.

Mahila Bachat Gats:Mahila Bachat Gats steps were taken to finance women who intend to

support their

families or want to be independent earners. The concept of micro credit is based on extension of small loans as working capital to these women who lack right resource and direction, are not eligible for conventional bank loans for self-employment, thereby utilizing their potential.

SOURCE OF FUNDS AND EXTERNAL BORROWINGS FOR THE SHGS The SHGs use their own funds for internal lending among their members and generally charge interest at the rate of 1 - 2 per cent per month on these lending. These rates are still lower than that charged by moneylenders. Apart from this, some SHGs (e.g. SHGs consisting of members only from SC/ST families, with all members from BPL families) also get subsidies from the government depending on their loan repayment pattern, and these additional amounts of money due to the subsidies also get added to the SHG funds.

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Training: To make or prepare the one small group of 10 to 15 members there is one comity from the Government to train those members for SHG or Mahila Bachat Gats. Following are the three types of training to those people that are. •

Basic Orientation Program for 2 Days

•

Technical Training for 3 Days

•

Business Training for 7 Days

 Basic Orientation Program for 2 Days:Basic Orientation program only for the 2 days because in this program the members are trained to make a group of for SHG and know about the activities of the group that they will going to do.

 Technical Training for 3 Days:The second important training to the group is Technical Training for 3 days in that the members are trained about the technical activities among the group like that opening the A/C in Bans for their transactions and handling the all documentation activities. In this training the group have to select one business that they are actually will going to do as a SHG. 

Business Training for 7 Days:-

This is the most important training for the member because in this trainer taught them about detail of their selected business like how to do, how to improve, how to co-ordinate to each other, how to get profit and how to expansion their business.

 Scheme: •

Government provides SUBSIDY Rs. 1, 00,000 to 1, 25,000 according to member of group for BPL but no SUBSIDY for APL.

•

Also the rate of interest i.e. up to 7% for three year.

•

Training center at the door step.

 Banks: •

Co-operative Banks

•

Nationalized Banks 89

•

Gramin Banks

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CHAPTER- 10 FINDINGS Followings are the major findings on the completion of the Management Thesis.

 Net household income:I

Implementation of SHG significantly contributed to the increase of net household

incomes. The analysis of net household income has the significant contribution in the growth National Income.

 Consumption expenditure pattern:The SHG has influenced the consumption pattern of member households. The average annual growth rate of consumption expenditure on food items is increase.

 Changes in savings:The average level of savings per household increased significantly after joining or doing activities in SHG or Bachat Gats. Total savings, which includes financial and physical savings.

 Self-confidence:Questions related to the self-confidence of women were asked, such as, travelling alone to the nearest town/district, going alone to hospitals, handling certain amount of money and addressing a forum. The share of women members reporting significant improvement in their self-confidence level for all indicators has gone up in the SHG period.

 Positive Behavioral changes:In behavioral changes, the study found that more than 70 per cent of women respondents reported improvement, or even significant enhancement, in their ability to face problems; women reported that they could handle problems related to health, resolving family disputes. On the question of control over use of money, women reported significant improvement in the acquisition of consumer durable assets during work with SHG period. Similarly, more

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than 50 per cent women reported an increase in control over use of money on buying of physical assets, and also they manage their expenditure on family/social functions and expenditure on children’s education.

Qualitative Findings During the collection of Primary Data the special finding is 50 to 60 % families of the list of BPL are not come under the list of BPL. According to the rules and regulation of the government the family’s annual income should be the less of Rs. 15,000/- but not more than that, if the annual income of any family is Rs. 15,001 or more than that then that family comes under APL (Above Poverty Line) and the MICROFINANCE not provide any subsidy to APL. And during the survey I found that maximum family’s annual income is more than Rs. 15,001/-. So here I can say that if the management of Government is efficient then the ratio of BPL will decrease up to maximum level.

Problems

Before 1995 the Government has gone through big problem related to recovery of their lone, the reason behind that at that time in a group maximum male was there. Male usually was doing the more embezzlement and they was not doing any business and that time recovery was only 20 to 30 % but after the experiment of 4 year on Mahila Bachat Gats every thing is going to increasing rapidly even recovery is near to 95% of the total amount of lone. So then Government has decided on giving them subsidy on interest rate also i.e. 7%.

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CONCLUSION The objective of this research has completed by the researcher and the researcher has collected data from different sources. During this completion researcher has study the micro study of

MICROFINACE and their INSTITUTIONS.

The MICROFINANCE has

originally origin for the BPL (Below Poverty Line) and secondly for the APL (Above Poverty Line) and for the small Scale Business. Microfinance provides different types of lone to different business with different subsidies. The innovations in Microfinance sector has made a dramatic change in the supply of credit to the neediest, neglected sector by formal financial institutions. The most important innovation that has come up is that societal upliftment and social development is no longer grant based. People have realized that the formal credit is more important and yielding than grants. The most important impact of this innovation is the development of confidence among poor and their realization to grow according to their own plan rather than the grant/assistance provider. For the social welfare with small scale business the MICROFINANCE as like as BOON. In the form of SHG (Self Help Group) there is a small group of female of 10 to 15 members, with the help of small group for development of whole society MICROFINANCE provide different lone facilities. So that the contribution of Microfinance is very much important. With the help of different institution MICROFINANCE conduct their activities towards the completion of their objectives. Like DRD (Dist. Rural Development Agency) Akola Dist. Akola Panchayat Samity, and Co-operative bank, Nationalized Banks and Gramin Banks. With the help of them Government provide to them different scheme like subsidy up to 1,00,000 to 1,25,000 for the lone amount of 2,50,000 to 3,00,000 for the period of 3 years. And government also provides the subsidy in the rate of interest of that lone up to 7% on the basis of their performance. 93

Apart from all the above, Govt. believe in providing good scheme & services to convert BPL into APLwhich is a key factor for increase Par Capita Income.

Abbreviations

DRD

:

Department for International Development

MFI

:

Microfinance Institution

NABARD :

National Bank of Agriculture & Rural Development

NGO

:

Non-Government Organization

RRB

:

Regional Rural Banks

SIDBI

:

Small Industry Development Bank of India

SHG

:

Self Help Group

SHPI

:

Self-Help Promotion Institution

SGSY

:

Swaran jayanti Gram Swarazagar Yojana

IRDP

:

Integrated Rural Development Program

NB

:

Nationalized Bank

CO-B

:

Co-Operative Bank

GB

:

Gramin Bank

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References Secondary Data: 

Books: Microfinance, Challenges and Opportunities edited by S. Rajagopalan

 Internet: http://www.pdfcoke.com/doc/11946430/Report-on-Micro-Finance http://www.microfinanceinfo.com/history-of-microfinance http://www.microfinanceinfo.com/the-definition-of-microfinance http://www.microfinanceinfo.com/weaknesses-and-strengths http://www.microfinanceinfo.com/working-method-for-microfinance-institutions http://www.microfinanceinfo.com/microfinance-products http://www.info2india.com/finance/banks/nationalised-banks/index.html

 Primary Data: •

Personally visited to the Akola Panchyat Samity and data collected through the interview of Mr. Washekar.

•

Also I visited at the Umri Grampanchayat for the list of BPL families.

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Appendix

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