Micro Finance

TITLE OF THE PAPER: MICRO FINANCE-ROLE OF SELF-HELP GROUPS IN CAPITAL FORMATION AREA OF PRESENTATION:

FINANCIAL MANAGEMENT NAME OF THE INSTITUTE: A.J.INSTITUTE OF MANAGEMENT (AJIM) {TRASFORMATIONAL INSTITUTE FOR MANAGERIAL EXCELLENCE (TIME)} KOTTARA-CHOWKI BYPASS ROAD, ASKOKNAGAR POST MANGALORE-575006

EMAIL ID: [email protected] AUTHORS NAME: BHARATH.P PHONE NUMBER: +919739459820

ABSTRACT A.J.INSTITUTE OF MANAGEMENT

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Although the word finance is in the term microfinance, and the core elements of Micro finance are those of the finance discipline, microfinance has yet to break into the Main stream or entrepreneurial finance literature. The purpose of this article is to introduce the finance academic community to the discipline of microfinance and microfinance institutions (MFIs). We provide a comprehensive review of over 350 articles and address the issues of MFI sustainability, products and services, management practices, clientele targeting, regulation and policy, and impact assessment. KEY WORDS: Micro finance institutions (MFIs), Self Help Groups (SHGs)

TABLE OF CONTENTS A.J.INSTITUTE OF MANAGEMENT

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CHAPTER I: INTRODUCTION………………………………………………………….4 1.1 DEFINITION……………………………………………………………4 1.2 STRATEGIC POLICY INITIATIVES………………………………….5 1.3 ACTIVITIES IN MICRO FINANCE…………………...........................5

CHAPTER II: REVIEW OF LITERATURE……………………………………………..6 CHAPTER III: MICRO FINANCE IN INDIA…………………………….......................7 CHAPTER IV: SELF HELP GROUPS…………………………………….......................8 4.1 HOW SELF GROUPS WORK……………………………...................8 4.2 SOURCES OF CAPITAL AND LINKS BETWEEN SHG’S BANKS.9 4.3 SHG’S LINKAGE MODEL………………………………………….11 CHAPTER V: MICRO FINANCE MODELS……………………………………….12-14 CHAPTER VI: CONCLUSION…………………………………………………………15 BIBLIOGRAPHY………………………………………………………………………..16

CHAPTER I: INTRODUCTION A.J.INSTITUTE OF MANAGEMENT

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Microfinance is defined as any activity that includes the provision of financial services such as credit, savings, and insurance to low income individuals which fall just above the nationally defined poverty line, and poor individuals which fall below that poverty line, with the goal of creating social value. The creation of social value includes poverty alleviation and the broader impact of improving livelihood opportunities through the provision of capital for micro enterprise, and insurance and savings for risk mitigation and consumption smoothing. A large variety of actors provide microfinance in India, using a range of microfinance delivery methods. Since the founding of the Grameen Bank in Bangladesh, various actors have endeavored to provide access to financial services to the poor in creative ways. Governments have piloted national programs, NGOs have undertaken the activity of raising donor funds for on-lending, and some banks have partnered with public organizations or made small inroads themselves in providing such services.The range of activities undertaken in microfinance include group lending, individual lending, the provision of savings and insurance, capacity building, and agricultural business development services. Whatever the form of activity however, the overarching goal that unifies all actors in the provision of microfinance is the creation of social value. 1.1 Microfinance Definition In India, Microfinance has been defined by “The National Microfinance Taskforce, 1999” as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards

1.2 Strategic Policy Initiatives Some of the most recent strategic policy initiatives in the area of Microfinance taken by the government and regulatory bodies in India are: A.J.INSTITUTE OF MANAGEMENT

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 Working group on credit to the poor through SHGs, NGOs, NABARD, 1995  The National Microfinance Taskforce, 1999  Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002  Microfinance Development and Equity Fund, NABARD, 2005  Working group on Financing NBFCs by Banks- RBI

1.3 Activities in Microfinance Microcredit: It is a small amount of money loaned to a client by a bank or other institution. Microcredit can be offered, often without collateral, to an individual or through group lending. Micro savings: These are deposit services that allow one to save small amounts of money for future use. Often without minimum balance requirements, these savings accounts allow households to save in order to meet unexpected expenses and plan for future expenses. Micro insurance: It is a system by which people, businesses and other organizations make a payment to share risk. Access to insurance enables entrepreneurs to concentrate more on developing their businesses while mitigating other risks affecting property, health or the ability to work. Remittances: Compared with other sources of capital that can fluctuate depending on the political or economic climate, remittances are a relatively steady source of funds.

CHAPTER II: REVIEW OF LITERATURE: Microcredit and microfinance are relatively new terms in the field of development, first coming to prominence in the 1970s, according to Robinson (2001) and Otero (1999). Prior to then, from the 1950s through to the 1970s, the provision of financial services by donors or governments was A.J.INSTITUTE OF MANAGEMENT

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mainly in the form of subsidized rural credit programmers. These often resulted in high loan defaults, high lose and an inability to reach poor rural households (Robinson, 2001). Robinson states that the 1980s represented a turning point in the history of microfinance in that MFIs such as Grameen Bank and BRI2 began to show that they could provide small loans and savings services profitably on a large scale. They received no continuing subsidies, were commercially funded and fully sustainable, and could attain wide outreach to clients (Robinson, 2001). It was also at this time that the term “microcredit” came to prominence in development (MIX3, 2005). The difference between microcredit and the subsidized rural credit programmes of the 1950s and 1960s was that microcredit insisted on repayment, on charging interest rates that covered the cost of credit delivery and by focusing on clients who were dependent on the informal sector for credit (ibid.). It was now clear for the first time that microcredit could provide large-scale outreach profitably.

Chapter III: Microfinance in India

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At present lending to the economically active poor both rural and urban is pegged at around Rs 7000 crores in the Indian banks’ credit outstanding. As against this, according to even the most conservative estimates, the total demand for credit requirements for this part of Indian society is somewhere around Rs 2,00,000 crores. Deprived of the basic banking facilities, the rural and semi urban Indian masses are still relying on informal financing intermediaries like money lenders, family members, friends etc.

Distribution of Indebted Rural Households: Agency wise

Credit Agency

Percentage of Rural Households

Government Cooperative Societies Commercial banks and RRBs Insurance Provident Fund Other Institutional Sources All Institutional Agencies Landlord Agricultural Moneylenders Professional Moneylenders Relatives and Friends Others All Non Institutional Agencies

6.1 21.6 33.7 0.3 0.7 1.6 64.0 4.0 7.0 10.5 5.5 9.0 36.0

IS MICROFINANCE CREATING FINANCIAL CAPITAL? The most common product of microfinance is microcredit: a small loan that provides people With the means to invest in an income-generating activity13, and thereby might increase their Financial capital. Hulme and Mosley give limited evidence that microfinance increases Income. Yet, it also shows that the impact highly depends on the level of income. Specifically, the poorest borrowers do not seem to benefit from a significant income increase14. By contrast, Khandker15 finds that access to microfinance contributes Significantly to poverty reduction and that this is especially true for poor women. Not only Participants seem to benefit, but the whole local community. Armendariz and Morduch16 A.J.INSTITUTE OF MANAGEMENT

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Show that measuring the impact of microfinance on poverty is not straightforward. A lot of Factors should be taken into account and it is particularly difficult to isolate the effect of Microcredit. It has been conclude that no consensus has been found yet. In addition, the effectiveness of increasing financial capital through microcredit depends on The interest rates microfinance institutions charge. Specifically, if the interest rates are high, The net capital accumulation accrues to the lender rather than the borrower. The topic of Interest rates has become highly controversial in microfinance, because it raises some Difficult ethical questions about making profits on the back of the poor.

Chapter IV: Self Help Groups (SHGs) Self- help groups (SHGs) play today a major role in poverty alleviation in rural India. A growing number of poor people (mostly women) in various parts of India are members of SHGs and actively engage in savings and credit (S/C), as well as in other activities (income generation, natural resources management, literacy, child care and nutrition, etc.). The S/C focus in the SHG is the most prominent element and offers a chance to create some control over capital, albeit in very small amounts. The SHG system has proven to be very relevant and effective in offering women the possibility to break gradually away from exploitation and isolation.

4.1 How self-help groups work A.J.INSTITUTE OF MANAGEMENT

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NABARD (1997) defines SHGs as "small, economically homogenous affinity groups of rural poor, voluntarily formed to save and mutually contribute to a common fund to be lent to its members as per the group members' decision". Most SHGs in India have 10 to 25 members, who can be either only men, or only women, or only youth, or a mix of these. As women's SHGs or sangha have been promoted by a wide range of government and non- governmental agencies, they now make up 90% of all SHGs. The rules and regulations of SHGs vary according to the preferences of the members and those facilitating their formation. A common characteristic of the groups is that they meet regularly (typically once per week or once per fortnight) to collect the savings from members, decide to which member to give a loan, discuss joint activities (such as training, running of a communal business, etc.), and to mitigate any conflicts that might arise. Most SHGs have an elected chairperson, a deputy, a treasurer, and sometimes other office holders. Most SHGs start without any external financial capital by saving regular contributions by the members. These contributions can be very small (e.g. 10 Rs per week). After a period of consistent savings (e.g. 6 months to one year) the SHGs start to give loans from savings in the form of small internal loans for micro enterprise activities and consumption. Only those SHGs that have utilized their own funds well are assisted with external funds through linkages with banks and other financial intermediaries.

4.2 Sources of capital and links between SHGs and Banks SHGs can only fulfill a role in the rural economy if group members have access to financial capital and markets for their products and services. While the groups initially generate their own savings through thrift (whereby thrift implies savings created by postponing almost necessary consumption, while savings imply the existence of surplus wealth), their aim is often to link up with financial institutions in order to obtain further loans for investments in rural enterprises. NGOs and banks are giving loans to SHGs either as "matching loans" (whereas the loan amount is proportionate to the group's savings) or as fixed amounts, depending on the group's record of repayment, recommendations by group facilitators, collaterals provided, etc.

4.3 SHGs-Bank Linkage Model A.J.INSTITUTE OF MANAGEMENT

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NABARD is presently operating three models of linkage of banks with SHGs and NGOs: Model – 1: In this model, the bank itself acts as a Self Help Group Promoting Institution (SHPI). It takes initiatives in forming the groups, nurtures them over a period of time and then provides credit to them after satisfying itself about their maturity to absorb credit. About 16% of SHGs and 13% of loan amounts are using this model (as of March 2002). Model – 2: In this model, groups are formed by NGOs (in most of the cases) or by government agencies. The groups are nurtured and trained by these agencies...This model has also been popular and more acceptable to banks, as some of the difficult functions of social dynamics are externalized. About 75% of SHGs and 78% of loan amounts are using this model. Model – 3: Due to various reasons, banks in some areas are not in a position to even finance SHGs promoted and nurtured by other agencies. In such cases, the NGOs act as both facilitators and micro- finance intermediaries. First, they promote the groups, nurture and train them and then approach banks for bulk loans for on-lending to the SHGs. About 9% of SHGs and 13% of loan amounts are using this model.

Rate of Interest under SHG - Banks Linkage programme Particulars Existing rate of Interest p.a

Revised rate % p.a

NABARD to Banks Refinance 6.5%

6.5 %

Banks to SHG 12% Banks to NGOs 10.5% No of participating Bank 202

No of NGO participating 550

Bank loan release (Rs in Millions) 570

NABARD Refinance 520

Loan per family 1,019 (release Rs in Millions)

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Comparative Analysis of Micro-finance Services offered to the poor

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Source: R. Arunachalam - Alternative Technologies in the Indian Micro- finance Industry

Chapter V: Micro Finance Models A.J.INSTITUTE OF MANAGEMENT

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1. Micro 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. While there is no published data on private MFIs operating in the country, the number of MFIs is estimated to be around 800. Legal Forms of MFIs in India Types of MFIs 1. Not for Profit MFIs

Estimated Legal Acts under which Registered Number* 400 to 500 Societies Registration Act, 1860 or similar Provincial Acts Indian Trust Act, 1882

a.) NGO - MFIs b.) Non-profit Companies 10 2. Mutual Benefit MFIs 200 to 250 a.) Mutually Aided Cooperative Societies (MACS) and similarly set up institutions 3. For Profit MFIs 6 a.) Non-Banking Financial Companies (NBFCs) Total

Section 25 of the Companies Act, 1956 Mutually Aided Cooperative Societies Act enacted by State Government

Indian Companies Act, 1956 Reserve Bank of India Act, 1934

700 - 800

Source: NABARD website

2. Bank Partnership Model

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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.

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.

4. Service Company Model On paper, the model is similar to the partnership model: the MFI originates the loans and the bank books them. But in 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. (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.

CHAPTER VI: CONCLUSION A.J.INSTITUTE OF MANAGEMENT

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

Underlying Belief of Self Help Groups.............. “Give a man a fish and you feed him a day but teach him how to fish and you feed him a lifetime” Many little things done in many little places, by many little people, will change the face of the world. - An old Chinese saying

BIBLIOGRAPHY

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1. Bansal, Hema, 2003, “SHG-Bank Linkage Program in Indian: An Overview”, Journal of

Microfinance, Vol. 5, Number 1. 2. Anil K Khandelwal, “Microfinance Development Strategy for India”, Economic and Political Weekly, March 31, 2007 3. Nachiket Mor, Bindu Ananth, “Inclusive Financial Systems- Some Design Principles and a case study”, Economic and Political Weekly, March 31, 2007 4. Vikram Akula, “Business Basics at the Base of the Pyramid”, Harvard Business Review, June, 2008 5. Seibel, H.D. & Parhusip, U (1990) Financial Innovations for microenterprises – linking

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