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Micro Finance and NGOs

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					                        Micro Finance and NGOs

        “Self realization and self initiative are the two most powerful
weapons to wash poverty out from the world” – Chanakya
         World’s Greatest Ancient Economic and Political Scholar


        Non-Governmental Organizations and voluntary action have been
part of the historical legacy1. In the context of contemporary social
empowerment, self realization and self initiative is the base for the
formation of self help groups. This is the logic motivated NGOs to form
SHGs in rural areas to empower them through developing their inherent
skills. Thus, SHG movement among the rural poor in different parts of
the country is emerging as a very reliable and efficient mode for
technology        transfer2.       Chanakya‘s          philosophical        statement         has
transformed into the SHGs with the help of NGOs and their efforts.
Microfinance is the tool to empower the rural poor and also tool against
human deprivation. Microfinance is motivating sustainable development
through the supportive NGOs.


        As a responsible welfare state in the democratic systems, it can be
also say that the growth of micro-finance in India has been in response
to the failure of institutional initiatives of rural credit system and
involvement of informal credit system. Rural credits especially rural
cooperatives. This is led to establishment of microfinance institutions
under the guidelines of NABARD.




   This is quoted by Rimjhim Mousami Das’s “Micro-finance through SHGs: A Boon for the Rural Poor”
from S.B. Verma and Yaswant Tukaram Pawar, (Ed) Rural Empowerment through Self Help Groups, Non
Governmental Organizations and Panchayati Raj Institutions, New Delhi: Deep and Deep Publication,
2005. p.16.
1
  . S.B. Verma and Y.T. Pawar, 2005. p.99.
2
  . Verma, S.B. and Pawar. Y.T. 2005, p. x.


                                                                                                 1
            Microfinance institutions are highly encouraging. Microfinance
through SHG has become a ladder for the poor to bring them up not only
economically but also socially, mentally and attitudinally3. Initially,
SHGs and microfinance, as an instrument for social and economic
empowerment, are established by the non governmental organizations. In
the era of 21st century, NGOs are transforming from non-profit to profit
making business model NGOs. Especially, the success formula of
microfinance non profit model is learned from the PRODEM - Bolivia and
Grameen Bank – Bangladesh. It is proved that committed for the social
development NGOs can develop the society through providing finance
accessibility to the poor based on self help model. Many NGOs (non-
government organizations) in India came forward to promote micro-
finance. At present more than 1000 NGOs are implementing micro-
finance projects in India.


            Some of them are leading MFIs (micro-finance institutions) playing
the role of social intermediation and building better society in rural
areas. These MFIs have adopted different strategies of people‘s livelihood
through micro-finance delivery.


Microfinance Institutions:

            The following are the some of leading microfinance institutions in
India working in the sector.
           Association for Sarva Seva Farms (ASSEFA)
           Mitrabharati - The Indian microfinance   Information Hub Mysore
            Resettlement and Development Agency (MYRADA)
           SADHAN - The Association of Community Development Finance
            Institutions
           SEWA: Self-help Women's Association

3
    . Ibid, p. 16.


                                                                             2
        SKS India - Swayam Krishi Sangam
        Streedhan - Banking with Rural Women
        Working Women's Forum, Madras, India
The goals are

        Eradicate Extreme Poverty & Hunger.
        Achieve Universal Education.
        Promote Gender Equality & Women‘s Empowerment.
        Reduce Child Mortality
        Combat Diseases
        Developing Entrepreneurial Spirit

         Between the 1950s and 1970s, governments and donors focused
on providing agricultural credit to small and marginal farmers, in hopes
of raising productivity and incomes. These efforts to expand access to
agricultural credit emphasized supply-led government interventions in
the form of targeted credit through state-owned development finance
institutions, or farmers' cooperatives in some cases, that received
concessional loans and on-lent to customers at below-market interest
rates.    These   subsidized   schemes   were   rarely   successful.   Rural
development banks suffered massive erosion of their capital base due to
subsidized lending rates and poor repayment discipline and the funds
did not always reach the poor, often ending up concentrated in the
hands of better-off farmers.

         Meanwhile, starting in the 1970s, experimental programs in
Bangladesh, Brazil, and a few other countries extended tiny loans to
groups of poor women to invest in micro-businesses. This type of micro
enterprise credit was based on solidarity group lending in which every
member of a group guaranteed the repayment of all members. These
"micro enterprise lending" programs had an almost exclusive focus on



                                                                           3
credit for income generating activities (in some cases accompanied by
forced savings schemes) targeting very poor (often women) borrowers.

• ACCION International, it is a Latin America‘s one of the prime
microfinance institution working with the poor. In an early pioneer,
ACCION was founded by a law student, Joseph Blatchford, to address
poverty in Latin America's cities. Begun as a student-run volunteer effort
in the shantytowns of Caracas with $90,000 raised from private
companies,    ACCION      today   is   one   of   the   premier   microfinance
organizations in the world, with a network of lending partners that spans
Latin America, the United States and Africa.

• SEWA Bank. In 1972 the Self Employed Women's Association (SEWA)
was registered as a trade union in Gujarat (India), with the main
objective of "strengthening its members' bargaining power to improve
income, employment and access to social security." In 1973, to address
their lack of access to financial services, the members of SEWA decided
to found "a bank of their own". Four thousand women contributed share
capital to establish the Mahila SEWA Co-operative Bank. Since then it
has been providing banking services to poor, illiterate, self-employed
women and has become a viable financial venture with today around
30,000 active clients.

•   Grameen    Bank.     In   Bangladesh,    Professor   Muhammad      Yunus
addressed the banking problem faced by the poor through a programme
of action-research. With his graduate students in Chittagong University
in 1976, he designed an experimental credit programme to serve them. It
spread rapidly to hundreds of villages. Through a special relationship
with rural banks, he disbursed and recovered thousands of loans, but
the bankers refused to take over the project at the end of the pilot phase.
They feared it was too expensive and risky in spite of his success.
Eventually, through the support of donors, the Grameen Bank was


                                                                             4
founded in 1983 and now serves more than 4 million borrowers. The
initial success of Grameen Bank also stimulated the establishment of
several other giant microfinance institutions like BRAC, ASA, Proshika,
etc.

       Through the 1980s, the policy of targeted, subsidized rural credit
came under a slow but increasing attack as evidence mounted of the
disappointing performance of directed credit programs, especially poor
loan recovery, high administrative costs, agricultural development bank
insolvency, and accrual of a disproportionate share of the benefits of
subsidized credit to larger farmers.

       The   basic   tenets   underlying   the   traditional   directed   credit
approach were debunked and supplanted by a new school of thought
called the "financial systems approach", which viewed credit not as a
productive input necessary for agricultural development but as just one
type of financial service that should be freely priced to guarantee its
permanent supply and eliminate rationing. The financial systems school
held that the emphasis on interest rate ceilings and credit subsidies
retarded the development of financial intermediaries, discouraged
intermediation between savers and investors, and benefited larger scale
producers more than small scale, low-income producers.

Concept of Micro-Finance


       Before we understand the concept of micro-finance, it would be
worthwhile to understand the term micro-credit as the two terms are
closely related to each other. Poor people need micro credit for various
and different purposes. It may be to meet the major household expenses;
emergency needs or even basic livelihood support. There are two main




                                                                              5
systems of micro credit4. One is formal financial institutions, banks and
co-operatives, which provide micro-credit to the poor people under
different schemes for livelihood support or helping them to start micro-
enterprises.         The     other     is    informal system            comprising        traditional
moneylenders, pawnbrokers and trade specific lenders. Both the systems
have their own positive and negative aspects.

Concept and Features of Micro-Finance

           Micro-finance, as is being practiced by the National Credit Fund
for Women or the Rashtriya Mahila Kosh (RMK), could be defined as a set
of services comprising the following activities:

Micro-credit:


           Here, the following activities can be activated such as Small loans;
primarily for income generation activities, but also for consumption and
contingency needs.


Micro-savings:


           SHGs micro savings are called as thrift. The thrift is the basic
element for the success of microfinance. Thrift or small savings from
borrowers‘ own resources.

The main features of the micro-finance

      1. It is a tool for empowerment of the poorest women.



4
    . Chauhan, Brij Raj (1990). Rural – Urban Articulations, Etawah: A. C. Brothers. Chippa, M.L. (1987).
Commercial Banking Development in India: A Study in Regional Disparity. Jaipur: Printwell Publishers. p.
50-51.



                                                                                                       6
   2. It is essentially for promoting self-employment; the opportunities of
      wage employment are limited in developing countries - micro
      finance increases the productivity of self-employment in the
      informal sector of the economy - generally used for (a) direct
      income generation (b) rearrangement of assets and liabilities for
      the household to participate in future opportunities and (c)
      consumption smoothing.
   3. It is not just a financing system, but a tool for social change,
      specially for women
   4. Micro credit is aimed at the poorest; micro-finance lending
      technology needs to mimic the informal lenders rather than the
      formal sector lending.

It has to:

   a) Provide for seasonality

   (b) Allow repayment flexibility

   (c) Eschew bureaucratic and legal formalities

   (d) Fix a ceiling on loan sizes.

      The positive aspects of formal financial system are that under this
system, micro-credit is available at low rate of interest with easy and
periodical repayments and moratorium period. The most important
aspect of this type of credit is that it is available for income generating
activities. But at the same time micro-credit from formal financial system
is not easily available. The system requires collateral or security. It has
complex legal and operational procedures, involving lot of paper work.
Since the process of credit disbursement is time consuming, many times
credit is not available in time. Finally, there is a stigma attached to the
poor people so that the bankers do not think them credit-worthy and feel


                                                                          7
that the recovery rate is unsatisfactory. But this may not necessarily be
true.


        The positive aspects of informal system of micro-credit are that the
credit disbursement is easy and relatively quick. No collateral is required
and there is least paper work. Credit can be given for any activity,
especially for consumption and emergency purposes. Credit is generally
given for non-productive purposes as well. But at the same time there is
very high interest rate in informal micro-credit system. Exploitation is
also attached with this system. Moneylender takes repayment at one
time only. Based on these two systems of micro-credit, we can define
―micro-credit as the provision wherein debtor takes money either from
formal or informal sources of credit on unilaterally decided terms by the
creditor‖. If we combine together positive aspects of both the systems
like, low rate of interest, easy and periodical repayments with
moratorium period, credit for income generating activities, easy process
of disbursement, no collateral or security and less paper work etc., we
come closer to understanding the concept of micro-finance. The ‗Task
Force on Supportive Policy and Regulatory Framework for Micro-Finance‘
constituted by NABARD (National Bank for Agriculture & Rural
Development) defines ―micro-finance as the provision of thrift, saving,
credit and financial services and products of very small amounts to the
poor in rural, semi-urban and urban areas for enabling them to raise
their income levels and improve their standard of living‖.


        The emergence of microfinance‘s prime objective is to bridge the
gap between demand and supply of funds in the lower rungs of the rural
economy, the formal sector took the initiative to develop a supplementary
credit delivery mechanism by encouraging institutional arrangements
outside the financial system with the launching of NABARD‘s pilot



                                                                          8
scheme, microfinance to cure the illness of rural poverty gained visibility
ion the India development landscape5.


           Services of micro-finance are being provided by various MFIs. In
India, the Task Force mentioned above, has classified these MFIs under
three categories as mentioned below: 3 Not-for-Profit MFIs: These include
Societies registered under Societies Registration Act 1860 or similar
State Acts, Public Trusts registered under the Indian Trust Act 1882 and
Non- Profit Companies registered under Section 25 of the Companies Act
1956. Mutual Benefit MFIs: Such as State Credit Co-operatives, National
Credit Co-operatives and Mutually Aided Co-operative Societies (MACS).
For-Profit MFIs: Bodies like Non-Banking Financial Companies (NBFCs)
registered under the Companies Act 1956 and Banks which provide
micro finance along with their other usual banking services could be
termed as micro-finance service providers of this type.

Examples of Recent Innovations in World’s Financial Services for
the Poor:

1. CCACN (Central de Cooperativas de Ahorroy Crédito Financieras
de Nicaragua) is marketing its "Agriculture Salary" savings product
to farmers. The goal of the product is to smooth the flow of income from
the proceeds of an annual or semi-annual harvest. Each credit union
works with its farmers to identify their individual expenses and
determine a monthly "salary" (portion of harvest proceeds on deposit
combined with an above-market interest rate) to be withdrawn from the
credit union. In its infancy stage, the credit unions have noted an
interest from agriculture-based clients in such a savings management
program.


5
    . S.B. Verma and Y.T. Pawar, 2005. p.100.



                                                                          9
2. Caja los Andes in Bolivia offers four loan repayment options that fit
the cash flow of various agricultural activities, including an end-of-term
payment for both principal and interest that fits single crop activities,
and unequal payments at irregular intervals for farmers that have
planted several crops with different harvesting periods. Flexibility is also
provided in loan disbursements, and farmers can receive the sanctioned
loan amount in as many as three installments.

3. PRODEM in Bolivia has introduced a combination of biometric
fingerprint and Smart Cards to deliver financial services to its clients.
Biometric technology measures an individual's unique physical or
behavioral characteristics, such as fingerprints, facial characteristics,
voice pattern, and gait, to recognize and confirm identity. Although the
technology is still new, growing awareness of the importance of data
security is increasing adoption steadily. Prodem's fingerprint verification
has reduced fraud, error, and repudiation of transactions. Staff had not
had to deal with forgotten PIN numbers or unauthorized use of cards and
accounts so they have more time to provide personal service and advice
to clients.

4. International Remittance Network (IRnet): In late 1999, WOCCU, in
partnership with Vigo, a money transfer firm, launched IRnet. As of June
2003, 173 credit unions in Central America offer IRnet, expanding the
possibilities for sending remittances through 800 US credit union points
of service. The Central American credit unions distribute remittances
primarily to rural clients. The distributing credit unions help to integrate
remittance recipients into the formal financial sector through trained
staff who cross-sell services. When a non-member enters a credit union
to pick up a remittance, a staff person encourages this person to become




                                                                         10
a credit union member and save a portion of the remittance in an
interest-bearing voluntary savings account6.

5. Unibanka (Latvia): Prior to introducing credit scoring, Unibanka, a
commercial bank, viewed microfinance loans as too costly to deliver.
With the assistance of Bannock Consulting, Unibanka instituted a
credit-scoring system based on qualitative client data because sufficient
quantitative data was not available to develop a statistical model7.

6. Managed ASCAs: A number of local organisations in the Nyeri District
of Kenya provide management services to group-based loan funds. The
groups operate as Accumulating Savings and Credit Associations
(ASCAs)          and       receive      management        services      provided   by   ASCA
Management Agencies (AMAs). The AMA model serves a wider client base
than the mainstream donor funded MFIs who tend to focus their
attention on micro and small entrepreneurs. The clientele of AMAs are
also drawn from other socio-economic strata, including salaried workers
such as nurses, teachers and civil servants as well as subsistence and
semi-commercial farmers. Hence their reach into the rural areas is much
greater than the MFIs8.

7. ICICI Bank (India): Two state banks in India (Corporation and
Canara) partnered with an NGO to provide salaried low-income workers
with access to savings. The project uses the already established



6
    . WOCCU: A Technical Guide to Rural- Finance Exploring Products. WOCCU Technical Guide # 3,
December 2003.

7
    . CGAP it innovation series: Credit Scoring.

8
    . Nthenya Mule, Susan Johnson, Robert Hickson. Wambui Mwangi. The Managed ASCA Model:
Innovation in Kenya's Microfinance Industry. Micro-Save Africa. 2001.




                                                                                            11
automatic teller machines (ATMs) in the factories to offer a recurring
savings product, along with education on personal finance9.

8. Microenterprise Access to Banking Services (MABS) in the
Philippines nurtures the expanded use of the credit bureau by rural
banks, which was started in 2001 to minimize client over indebtedness
and        defaults.       MABS        has     helped       to    integrate      the     rural     banks'
microenterprise loan clients into an existing national credit bureau, by
creating an e-mail encryption program that allows rural banks to share
information electronically at a low cost10.

9. The National Microfinance Bank in Tanzania (NMB) was created to
retain the extensive rural branch network of the National Bank of
Commerce (NBC) when it was privatized in 1997. The key to making it
commercially viable has been rigorous control of costs through drastic
simplification of the business model and tight managerial oversight. Key
initiatives have been correct pricing of products, particularly payments
and remittance services, which had traditionally been cross-subsidized
by other product lines, and the development of microfinance products,
mainly small (average US $400) individual loans11.

10. ADOPEM (Dominican Republic) thoroughly evaluated its PDA
(Personal           Digital       Assistants)         program         and      recorded         dramatic
improvements. Client retention improved significantly, and the number


9
    . CGAP it innovation series

10
      . Anita Campion and John Owens, MABS: A Sustainable Approach to Rural Microfinance,
Microbanking Bulletin, July 2003.

11
     . Rural financial services: Implementing the bank's strategy to reach the rural poor (Work in Progress).
Rural Private Sector, Markets, Finance and Infrastructure Thematic Group. Rural Sector Board, The World
Bank. Washington, D.C. March 2003.




                                                                                                          12
of days between application and disbursement dropped from five days to
two days. Expenses for paperwork dropped by 60% and data entry
expenses dropped by 50%12.

11 The international NGO Technoserve has developed an inventory
credit scheme in Ghana that enables farmers' groups to obtain higher
value for their crops by providing post-harvest credit through linkage
with a rural financial institution. Instead of selling their entire crop at
harvest - when prices are lowest - in order to meet cash needs, small-
scale farmers in the scheme store their crop in a cooperatively-managed
warehouse and receive a loan of about 75-80% of the value of the stored
crop, which serves as collateral. This loan permits them to clear their
accumulated debts and satisfy immediate cash requirements. Then,
when prices have risen in the off-season, the farmers either sell the
stored crop or redeem it for home consumption13.

12.       Savings-based,            Agriculture-oriented              Rural      Credit       Unions        -
SICREDI - Brazil specializes in agricultural lending, primarily for the
production of rice, wheat, beef, fodder, fish, vegetables and for
agricultural equipment. Loan approvals are based upon the members'
savings history and credit record, with the size limited to 50 percent of
production costs and dependent upon the potential return of crop sale at
harvest as well as household income and debt obligations. The borrower
makes monthly interest payments and then a balloon payment of the
principal at harvest time. In addition, SICREDI participates in the



12
     . CGAP IT Innovation Series. Washington, D.C.: CGAP, October 2003.

13
     . Rural financial services: Implementing the bank's strategy to reach the rural poor (Work in Progress).
Rural Private Sector, Markets, Finance and Infrastructure Thematic Group. Rural Sector Board, The World
Bank. Washington, D.C. March 2003.




                                                                                                          13
PROAGRO national crop insurance, for which a premium is added on the
loan rate. PROAGRO pays 100% of the loan loss if the crop fails14.

13. Producer Associations as Clients of a Financial Institution: GAPI
and CLUSA in Mozambique: GAPI offers investment and working capital
loans to fora (federations of associations) of small farmers and small and
micro-enterprises. Loans are secured through a solidarity group-like
guarantee between the participating fora. Each forum on-lends to its
member associations, who collect the produce from their individual
members and other area farmers and deliver it to the forum in return for
the loan. About 80% of the profits from the sale of produce are handed
back to the associations - the remaining 20% of the profits are kept by
the forum as interest payments15.

14. Equity Building Society (EBS) in Kenya has emerged as one of
Kenya's leading microfinance institutions, with over 155,000 savings
clients and 41,000 borrowers. Once insolvent, EBS transformed itself
into a profitable financial-service provider by rigorously focusing on the
needs of its clients - in particular, by developing a wide range of market-
based financial products and services, including a mobile banking
service16.




14
     . WOCCU: A Technical Guide to Rural- Finance Exploring Products. WOCCU Technical Guide # 3,
December 2003.

15
     . Pearce, Douglas. "Buyer and Supplier Credit to Farmers: Do Donors Have a Role to Play?" prepared
for Paving the Way Forward for Rural Finance: An International Conference on Best Practices, held June
2-4, 2003.

16
     . Source: CGAP Case Studies In Donor Good Practices No. 8. Donors as Silent Partners in MFI Product
Development: Micro Save-Africa and Equity Building Society in Kenya. July 2003.




                                                                                                     14
      The above mentioned experiences shows that effective functioning
with focus group oriented will success in the area of microfinance. At the
global microfinance scenario, most of the institutions are providing loans
for the purpose of agriculture and allied services, micro enterprises and
other rural based micro economic activities.

Growth of Micro-Finance Sector at Global Level


      Let us look at the historical account of the emergence and growth
of micro finance sector at the global level. The Grameen Bank,
Bangladesh, was started as an experiment in 1976 and accorded a
special banking charter in 1983. In 1981 NDF (National Development
Foundation), Jamaica, was started with support of Pan American
Development Foundation. In 1983 ADEMI (Association for Development
of Micro Enterprises) was established in Dominican Republic, Santo
Domingo with support from ACCION, an International Agency. In 1984
BRI (Bank Rakayat Indonesia) started micro-finance in Indonesia. In
1984, K-REP (Kenya Rural Enterprise Programme) was set up by USAID
(United States Agency for International Development) to develop credit
programmes for micro-enterprises through NGOs intermediation. In 1986
ACEP (Agence de Credit Pour ‗L Enterprise Privee) was established in
Senegal with the support of USAID.


      In 1986, PRODEM (Foundation for the Promotion and Development
of Micro Enterprises) which was established by USAID and ACCION
International in Bolivia, started micro finance. Later on it was converted
into a bank called Bancosol (Banco Solidario) in 1992. In 1987 IDH
(Instituto de Desarrollo Hondurando) was started in Honduras with the
support of Opportunity International. In 1992, BANPECO (Banco
Nacional del Pequeno Comercio) that is, National Bank for Small Traders
was renamed as BNCI (Banco Nacional de Comercio Interior), that is


                                                                       15
National Bank for Domestic Commerce and started micro-financing in
urban areas of Mexico. Micro-Credit Summit (2-4 February, 1997) held at
Washington D.C. was organized to launch a global movement to reach
100 million of the world‘s poorest families, especially the women of those
families, with credit for self-employment, by the year 2005.

         Meanwhile, micro credit programs throughout the world improved
upon the original methodologies and defied conventional wisdom about
financing the poor. First, they showed that poor people, especially
women, had excellent repayment rates among the better programs, rates
that were better than the formal financial sectors of most developing
countries. Second, the poor were willing and able to pay interest rates
that allowed microfinance institutions (MFIs) to cover their costs. 1990s
These two features - high repayment and cost-recovery interest rates -
permitted some MFIs to achieve long-term sustainability and reach large
numbers of clients.

         Another flagship of the microfinance movement is the village
banking unit system of the Bank Rakyat Indonesia (BRI), the largest
microfinance institution in developing countries. This state-owned bank
serves about 22 million micro savers with autonomously managed micro
banks. The micro banks of BRI are the product of a successful
transformation by the state of a state-owned agricultural bank during
the mid-1980s.

         The 1990s saw growing enthusiasm for promoting microfinance as
a strategy for poverty alleviation. The microfinance sector blossomed in
many countries, leading to multiple financial services firms serving the
needs of micro entrepreneurs and poor households. These gains,
however, tended to concentrate in urban and densely populated rural
areas.



                                                                       16
      It was not until the mid-1990s that the term "micro credit" began
to be replaced by a new term that included not only credit, but also
savings and other financial services. "Microfinance" emerged as the term
of choice to refer to a range of financial services to the poor, that
included not only credit, but also savings and other services such as
insurance and money transfers.

      Today, practitioners and donors are increasingly focusing on
expanded financial services to the poor in frontier markets and on the
integration of microfinance in financial systems development. The recent
introduction by some donors of the financial systems approach in
microfinance - which emphasizes favorable policy environment and
institution-building   -   has   improved    the   overall   effectiveness   of
microfinance interventions. But numerous challenges remain, especially
in rural and agricultural finance and other frontier markets.

      Today, the microfinance industry and the greater development
community share the view that permanent poverty reduction requires
addressing the multiple dimensions of poverty. For the international
community, this means reaching specific Millennium Development Goals
(MDGs) in education, women's empowerment, and health, among others.
For microfinance, this means viewing microfinance as an essential
element in any country's financial system.

Non-Institutional or Informal Sources of Micro-Credit in India


      In nutshell, one can say that RFIs do not fulfill the credit needs of
the farmers, rural producers and the rural poor in general, resulting in
non-institutional sources of credit. The indirect reason responsible for
the growth of non-institutional sources of credit was also the economic
weakness of the Jajmani System*. The non-institutional sources of credit
would include big farmers, big farmer-cum-money-lenders, commission


                                                                             17
agents, friends/ relatives, moneylenders, traders, village shopkeepers
and others. The All India Rural Credit Survey Committee, appointed by
the RBI in 1951 under the Chairmanship of Gorwala, undertook a
comprehensive survey of rural credit and submitted its report in August
1954. The survey revealed that shares of institutional and non-
institutional sources of rural credit were 7.3 per cent and 92.7 per cent
respectively.


       At present about two-third of the credit need in rural areas is met
out by informal sources. But the moneylenders have yet to disappear.
Though they charge very high rate of interest, varied between 36 per cent
to 30.00 per cent per annum. The is also need to sensitize the issue of
informal rural banks that they provide timely and adequate credit to the
rural poor without much paperwork and for any purpose, especially for
meeting consumption and other social needs. But physical, economic
and social exploitation of the poor people is attached with this system.


       In brief analysis micro finance chronology can be evaluated by the
following steps:


•   Microfinance has been in practice for ages (though informally).
•   Legal framework for establishing the co-operative movement set up in
    1904.
•   Reserve Bank of India Act, 1934 provided for the establishment of the
    Agricultural Credit Department.
•   Nationalisation of banks in 1969
•   Regional Rural Banks created in 1975.
•   NABARD established as an apex agency for rural finance in 1982.
•   Passing of Mutually Aided Co-op. Act in AP in 1995.




                                                                           18
The Profile of Microfinance in India


       The profile of micro finance in India at present can be traced out in
terms of poverty, it is estimated that 350 million people live Below
Poverty Line and this translates to approximately 75 million households
with annual credit demand by the poor in the country is estimated to be
about Rs. 60,000 crores.


The following are some of important components of microfinance:


•   Cumulative disbursements under all microfinance programmes is
    only about Rs. 5000 crores.(Mar. 04)
•   Total outstanding of all microfinance initiatives in India estimated to
    be Rs. 1600 crores. (March 04)
•   Only about 5 % of rural poor have access to microfinance.
•   Though a cumulative of about 20 million families have accessed
    microfinance to the extent of Rs. 5000 crores, the total outstanding is
    estimated to be only about Rs. 1600 crores. The active borrowers are
    estimated to have a per capita outstanding of only Rs. 2500.
•   While 10 % lending to weaker sections is required for commercial
    banks, they neither have the network for lending and supervision on a
    large scale nor the confidence to offer term loans to big MFIs.
•   The non poor comprise of 29 % of the outreach.


The Status of Microfinance


•   Considerable gap between demand and supply for all financial
    services
•   Majority of poor are excluded from financial services. This is due to,
    inter-alia, the following reasons



                                                                         19
•   Bankers feel that it is fraught with risks and uncertainties.
•   High transaction costs
•   Unfavourable policies like caps on interest rates which effectively
    limits the viability of serving the poor.
•   While MFIs have shown that serving the poor is not an unviable
    proposition there are issues that have constrained MFIs while scaling
    up. These include
•   Lack of an appropriate legal vehicle
•   Limited access to equity
•   Difficulty in accessing low cost on-lending funds (as of now they are
    unable to offer savings services in a legitimate manner.
•   Limited access to Capacity Building support which is an important
    variable in terms of quality of the portfolio, MIS, and the sustainability
    of operations.
•   About 56 % of the poor still borrow from informal sources.
•   70 % of the rural poor do not have a deposit account
•   87 % have no access to credit from formal sources.
•   Less than 15 % of the households have any kind of insurance.
•   Negligible numbers have access to health insurance (0.4 %) and crop
    insurance (0.2 %).
•   NABARD‘s bank linkage program has cumulatively reached a total of
    9.4 lakh SHGs with about 1.4 crore households.


Related Issues
•   Designing financially sustainable models
•   Aim for community participation & ownership
•   Increase outreach and scale up operations
•   Demonstrate that banking with the poor is viable
•   Build professional systems and processes.
•   Ensure transparency and enhance credibility through disclosures.


                                                                           20
•   Provide support for capacity building initiatives.




Opportunities for Micro-Finance Sector in India


       Keeping in view of above mentioned issues relating to how and why
the rural informal credit system is strengthened, NGOs are need to
sensitize the state institutions and NGOs it self has to take initiatives for
the rural banking in micro rural credit system. Moreover, rural
population is a major population segment in India.


       According to the 2001 Census of India 2001, 72.22 percent of the
total population is rural and dependent on agriculture and allied
activities for their livelihood. Due to the failure of agricultural reforms
and not adopting a farmer-oriented agricultural policy, growth rate of
employment in agriculture sector has declined from 2.32 per cent in
1972-73 to 1.2 per cent in 1983 to 0.65 per cent in 1985. Agriculture
contributed only 31.7 percent to GDP in 1993-94 down from 56.5 per
cent in 1951. But this is not the complete picture of the rural economy.
The rural economy has a strong base for employment generation.


       Rural economy still accounts nearly 40 per cent of India‘s GDP
including 10 per cent of RNFS. Share of exports in GDP has increased
from 6.2 per cent in 1991-92 to 9.2 per cent in 1994-95. Major
contribution to exports comes from the agricultural and allied sectors
such as handloom, power loom, gem and jewellery, handicrafts, carpets,
leather and mineral products, all of which have at least one primary
rural production base.




                                                                          21
      The rural market share of both consumer durable and non-durable
products exceeds 40- 50 per cent for most items and is growing every
year. Papola (1991) while analysing the trends in rural non-farm
employment, based on the analysis of the data from the quinquennial
rounds of the National Sample Survey during the 1970s and 1980s,
reveals that the share of rural area in total employment has declined
from around 82 per cent in 1977-78 to 78 per cent in 1987-88; that the
share of the rural nonagricultural employment has increased from
around 14 per cent to 17 per cent in total employment; and from 17 per
cent to 22 per cent in rural employment.


      Employment in the * W H. Wiser in his study of Karimpur village of
United Provinces of India during 1930s found that Jajmani System is an
example of solidarity in inter-caste relationships, but at the same time it
does not represent symmetrical interrelationship for the members of
different castes involved in the system. He found that the system has
economic weakness.


      Rural non-agricultural activities have thus been growing much
more rapidly than the overall employment, agricultural employment and
also urban employment. In fact, the non-agricultural rural employment
has grown at an average rate of about 5 per cent during the ten-year
period 1977-78 to 1987-88. Consequently, there has been a shift from
agriculture in which employment has grown at a rate of only 0.74 per
cent, to the non-agricultural activities.


      It is because of decrease in self-employment and regular wages/
salaried employment in agriculture and increase in employment in non-
agricultural sector. Micro-enterprises established in RNFS contribute
about 40 per cent of the gross industrial turnover and 34 per cent of



                                                                        22
total exports. RNFS is the potential sector for employment generation
through establishment of micro-enterprises.


      There is a need to match the decline in agriculture sector with the
gain in non-farm activities, to absorb the surplus labour from
agriculture. Eighth Five-Year Plan document (Government of India 1992:
122) states that: "In the long run, however, it must be recognized that
agriculture and other land-based activities, ever with a reasonably high
rate and possible diversification of growth, will not be able to provide
employment to all the rural workers at adequate levels of incomes.


      Indian microfinance continued growing rapidly towards the main
objective of financial inclusion, extending outreach to a growing share of
poor households, and to the approximately 80 percent of the population
which has yet to be reached directly by the banks. The larger of the two
main models, the Self-Help Group (SHG) Bank Linkage Programme
(SBLP) covered about 143 million poor households in March 2006 and
provided indirect access to the banking system to another 14 million,
including the "borderline poor".


      Although firm estimates are lacking, the other, Microfinance
Institution (MFI) model served 7.3 million households, of which 3.2
million were poor. Even allowing for a degree of overlap of borrowers from
both models, the total number of poor households being reached was
roughly a fifth of all poor households, as well as a smaller share of the
larger number of non-poor households who have yet to be reached by the
formal financial sector.


      Apart from providing financial services to both these segments of
the population, there is widespread evidence that much stronger
competition provided to the informal sector has significantly improved

                                                                       23
the terms of credit provided to both segments by the informal sector,
which is losing share to both the formal and (semi-formal) MFI sector17.

SHG Bank Linkage Programme

        Of the two major models of microfinance in India, the SHG Bank
Linkage Programme (SBLP) is by far the dominant model in terms of
number of borrowers and loans outstanding18. The cumulative number of
SHGs linked has grown almost tenfold in the last five years, to achieve
an outreach of about 31 million families through women's membership
in about 2.2 million SHGs by March 2006. Not all SHGs are currently
"linked" in the sense of having loans outstanding to the banks or
federations, and only an estimated half of their members are poor.
However, this still means about 14 million poor households have been
reached so far. Moreover the entire membership is saving regularly, and
has access to a ready source of small emergency and consumption loans
in the form of loans extended out of the group's own funds19.


NGOs Involvement in Micro-Finance and Strategies of People’s
Livelihood


        However, there is no smooth flow of funds from any sources to
provide loans to the rural poor for establishing their micro enterprises in
the RNFS. Karmakar20 laments that: ―Moneylenders rarely provide credit
for    capital     assets       acquisition.        They      concentrate         on     lending       for
consumption needs and social/ medical contingencies while trader
lenders provide working capital. Thus, venture capital for the rural non-

17
   . Prabhu Ghate, Microfinance in India: A state of the sector Report 2006, New Delhi, Microfinance India,
p.11.
18
   . Ibid. p. 27.
19
   . Ibid,
20
    . Karmakar, K.G. (1999). Rural Credit and Self-Help Groups: Micro-finance Needs and Concepts in
India. New Delhi: Sage Publications, p 164.


                                                                                                        24
farm sector is generally financed from own resources and supplemented
by loans from friends and relatives. The time taken for getting a loan
sanctioned by a bank for the rural non-farm sector can very from two
months to 18 months. Some moneylenders do provide bridge loans to
those rural borrowers who have been sanctioned bank loans but have yet
to receive the funds.‖


          Based on the observations of the failure of development policy and
administration, with a weak role played by the State in supporting the
institutions of development, Shah (1996) emphasized the importance of
developing NGOs as change agents. Government of India21 also realized
its failure in properly implementing development projects and decided to
involve       NGOs       during      the    Seventh       Five-Year      Plan,     in    executing
development projects.


          The NGO‘s strength lies in target group approach, flexibility,
experimentation, innovation, grassroots presence and motivation. By
learning from the example of Grameen Bank, Bangladesh, many NGOs in
India, came forward to provide financial services to the rural poor and
RNFS enterprises. For NGOs, it is also a shift in approach from
development to empowerment wherein they can plan their withdrawal
strategy        from     service     delivery     projects     and     think     of     their   own
sustainability by providing financial services. At present there are almost
600 NGOs involved in micro-finance delivery systems in India. These
NGOs have adopted different strategies of promoting people‘s livelihood
through micro-finance. These strategies are based on their clientele,
approach, focus area, interest rate, savings linkages, collateral, coverage

21
     . Government of India, Seventh Five Year Plan (Vol. I): Perspective, Objectives, Strategy, Macro-
dimensions and Resources and (Vol. II): Sectoral-Programmes of Development. New Delhi: Planning
Commission.




                                                                                                   25
and organisational/ legal structure. These strategies can be classified
into four broad categories, namely, SHG promotion, MFI, micro-
enterprise development and social development.


      The SHG promotion approach is based on the premise that the
NGO promotes SHGs and provides them services as financial advisor.
This ultimately leads to build the capacity of SHGs in terms of savings
mobilization, linking them with banks and providing technical support in
starting viable micro enterprises by the members of SHGs members. In
this approach NGO basically is a mediating contact between SHGs and
banks. NGO also examines creditworthiness of the SHGs so that bank
can lend money to the SHGs.


      In all this NGO gets some financial support in terms of grant from
Apex Financial Institutions (AFIs) like NABARD and RMK (Rashtriya
Mahila Kosh). The examples of such NGOs who are following SHG
promotion approach are: MYRADA in Karnataka, SHARE in Andhra
Pradesh, RDO (Rural Development Organisation) in Manipur, PREM
(People‘s Right and Environment Movement) in Orissa & Andhra
Pradesh, YCO (Youth Charitable Organisation) in Andhra Pradesh,
Anarde (Acil Navsarjan Rural Development Foundation) in Gujarat,
PRADAN (Professional Assistance for Development Action) & RUDSOVAT
(Rural Development Society for Vocational Training) in Rajasthan and
ADITHI in Bihar.


Micro-Finance Institution Strategy


      The approach of promoting MFIs is based on the premise that AFIs
like SIDBI (Small Industries Development Bank of India), RMK and other
donor agencies provide bulk lending, soft loan and some grant to such
NGOs which can act as MFIs by on-lending the money to the poor

                                                                      26
people/ SHGs/ Federations/ smaller NGOs. These MFIs stimulate the
credit demand of the poor people. They also provide technical support for
the beneficiaries to ensure proper utilization of loans and repayment. At
the same time they meet their cost of funds, cost of credit management
and cost of default through the spread of interest and generate surplus
for the viable operation of micro-finance.


          The examples of such MFIs are Sewa Bank & FWWB in Gujarat,
BASIX in Andhra Pradesh and RGVN (Rashtriya Grameen Vikas Nidhi) in
north-eastern           states,      Orissa       and     Bihar.       8.3     Micro-Enterprise
Development Strategy Entrepreneurship is one of the most important
inputs in the economic development of a country and of the regions
within the country. Economic growth and industrialization are the by-
products of entrepreneurship.


          It is a breeding ground for the development of small-scale
enterprises. The term EDP (Entrepreneurship Development Programme)
means a programme of entrepreneurship development designed to help a
person in strengthening his/ her entrepreneurial motive and in acquiring
skills and capabilities necessary for playing his/her entrepreneurial role
effectively. It inculcates entrepreneurial traits into a person and develops
his/her personnel, financial, technical, managerial and marketing skills.
There are number of programmes which are aimed at providing
informational or managerial inputs required by a new entrepreneur.
However, a programme not touching upon entrepreneurial motivation
and behaviour cannot be called an EDP22.




22
     . Desai, Vasant. Entrepreneurial Development (Vol. I): Principle, Programmes and Polices. Bombay:
Himalaya Publishing House. 1991.




                                                                                                   27
      NGOs are actively involving in microfinance to make successful
and effective in terms of identification of place or location, pre-
promotional     activities,   selection   of    potential      entrepreneurs,
entrepreneurial training, monitoring and follow-up mechanism. NGOs
are playing important role as catalyst in helping the rural unemployed
persons    to   acquire   training   through   MEDPs        (Micro-Enterprise
Development Programmes) so that they can become self-employed by
starting their enterprises in RNFS. Moreover, they can also become job
providers instead of job seekers.


      Thus, institutionalization of MEDPs through NGOs can be an
alternative approach of rural development in India. The success of any
MEDP in terms of starting the enterprises by the trainees trained under
it depends mainly upon the availability of loan. Micro-finance sector can
provide help to solve this problem. Micro-finance for micro-enterprise
development is a proper approach in India.


      Some of the NGOs in India have adopted the approach of micro-
enterprise development through micro-finance. The examples are CDF
(Co-operative Development Foundation) in Andhra Pradesh, LHWRF
(Lupin Human Welfare Research Foundation) in Rajasthan, UPLDC
(Uttar Pradesh Land Development Corporation) in Uttar Pradesh and
Group     Enterprise   Development   Project   of   EDI     (Entrepreneurship
Development Institute of India) in Nagaland.




                                                                           28
Growth trends in the SHGs Bank Linkage Programme




Source: NABARD annual reports and data sheet for 2005-06published in Prabhu Ghate, Microfinance in
India: A state of the sector Report 2006, New Delhi, Microfinance India, p.28.


Social Development Strategy
         The social development approach of micro-finance is based on the
premise that people should earn money by investing in viable micro-
enterprises. They should earn profit from their enterprises. Major share
of the profit should be reinvested in enterprises for their growth. The
other share of the profit should be spent on social development that is,
health, education, housing, sanitation etc.


         By earning profit from the viable micro-enterprises, people will
increase their paying ability for services delivered to them under different
social    development          projects      run     by    NGO       and     States/      Central



                                                                                                     29
Government. For the NGOs and Government it can be a process of
gradual withdrawal and for people, decrease dependency on the NGOs
and Government. Such projects have micro-finance as a major
component coupled with social service delivery.


      These projects have demonstrably positive effects. The examples of
such projects are Indo- Canada Agriculture Extension Project in Uttar
Pradesh, IFFDC (Indian Farm & Forestry Development Corporation)
project of farm and forestry development in Uttar Pradesh and
Rajasthan, ICDS (Integrated Child Development Services) project of RASS
(Rayalseema Sewa Samiti) in Andhra Pradesh and Conversion of ICDS
project into Indira Mahila Yojana.


Role of Financial Institutions in Micro-Finance


      Especially during 1991-92, NABARD launched projects to provide
micro credits to SHGs by bank linkages. In the same way, NGOs also
have done excellent work in the areas of microfinance. tSince the
emergence of micro-finance sector in India, role of AFIs has become
significant. NABARD initiated the process of micro-finance in India
through linkage programme of SHGs under Automatic Refinance
Scheme. SIDBI is second important player in microfinance, providing
bulk lending to MFIs. RMK is the third player providing loans to NGOs
for on lending to the women SHGs. These are the three major AFIs in
India. Each has a different approach in micro-finance sector.




                                                                      30
      Achievements under SHG – NABARD linkage scheme


      YEAR                Amoun        Groups
                          t            (in lakhs)
                          (Rs. in
                       Crores)
      1998-1999           41.90        0.12
      1999-2000           88.63        0.44
      2000-2001           173.38       1.03
      2001-2002           255.00       0.75


      While NABARD‘s emphasis is entirely on SHGs linkage programme
by mobilizing their own savings also, SIDBI is focusing on building and
creating larger MFIs and RMK is lending money to smaller NGOs as well.
Taking into consideration the growth and potential of micro-finance
sector in India, other organizations and international agencies have also
made their entry in the micro-finance sector by providing loans and
grants to NGOs for different income generating projects as well as for
incorporating micro-finance component in the service delivery projects of
social development.
Exposure to Commercial Banks as on March 2006




                                                                       31
      Bank                     No. of MFIs Loan O/s.
                                           March
       Exposure to Commercial Banks as on Rs. Crores
                        2006
      ICICI Bank                                100           2350 *

      HDFC Bank                                                250

      UTI Bank                                   40            103

      ABN AMRO Bank                              19             87

      ING Vysya Bank                             19             61

      Standard Chartered Bank                    12             50

      HSBC                                       8              15

      Rishikulya Grameen Bank, Ganjam            3              6

      Some Public Sector banks                   9              10

      Total                                                   1991 **



      The important names among them are HUDCO, NBCFDC (National
Backward Classes Finance Development Corporation), NMFDC (National
Minorities Finance Development Corporation), National Handicrafts
Development Corporation (NHDC), OXFAM (Oxford Committee for
Famine & Relief), NOVIP (Dutch International Development Agency), GTZ
(Gesellschaftfur     Tecnische      Zusammenarbeit),   CIDA    (Canadian
International Development Agency), ActionAid, CARE India, International
Fund for Agriculture Development (IFAD), UNDP, UNIFEM (United
Nations Development Fund for Women), British Department of Foreign
and International Development (DFID) and Consultative Group to Assist
the Poorest (CGAP).


      It is seen as an important phenomenon in the process of
development, especially in context of globalisation and liberalisation
wherein subsidy and grant based programmes / schemes are losing their
importance. Micro-finance sector is seen as the best option based on
saving mobilisation of the poor people and credit linkages. In India, many
AFIs have come forward to lend money to the MFIs. MFIs of different
nature (NGO registered under Societies Registration Act, Trusts under
Public Trust Act, Co-operatives under Co-operative Act, NBFCs under


                                                                        32
Company Act and LABs under Banking Act etc.) have also come up with
different strategies of promoting people‘s livelihood.


Microfinance Support Institutions in the Formal Sector


        The following are the major support institutions in India.

       National Bank for Agriculture and Rural Development
       Rashtriya Mahila Kosh
       SIDBI - Small Industries Development Bank of India
       Tamil Nadu Women's' Development Corporation


        Commercial banks exposure to Microfinance
             of selected banks, March 2006




Models of Micro Finance


        There are different models followed by the different microfinance
institutions in India. The following are the some of established
microfinance and their activities in microfinance can be seen here.


   Grameen bank
   Spandana



                                                                       33
    Grameen koota
    Swayam krishi sangam
    Danda credit society

    Grameen Bank

        Grameen Bank (GB) has reversed conventional banking practice by
    removing the need for collateral and created a banking system based on
    mutual trust, accountability, participation and creativity. GB provides
    credit to the poorest of the poor in rural Bangladesh, without any
    collateral. Professor Muhammad Yunus, the founder of "Grameen
    Bank"


       As of July, 2004, it has 3.7 million borrowers, 96 percent of whom
    are women. With 1267 branches, GB provides services in 46,000
    villages, covering more than 68 percent of the total villages in
    Bangladesh.



        Interest Rate of Grameen Bank Savings
                        Schemes
     Product                                        Interest Rate
     Savings :                                                  8.5%
     Fixed Deposit :                                      8.45-9.50%
     Double in Seven Years :                                   10.40%
     Fixed Deposit (5 years) with  monthly                     10.04%
     income :
     Fixed Deposit (10 years) with monthly                     10.67%
     income :
     Grameen Pension Savings (Five                                10%
           Years) :
     Grameen Pension Savings (Ten                                 12%
           Years) :




General features of Grameen credit are :
    a. It promotes credit as a human right
    b. Its mission is to help the poor families to help themselves to


                                                                        34
   overcome poverty. It is targeted to the poor, particularly poor
   women.
c. Most distinctive feature of Grameen credit is that it is not based
   on any collateral, or legally enforceable contracts. It is based on
   "trust", not on legal procedures and system.
d. It is offered for creating self-employment for income-generating
   activities and housing for the poor, as opposed to consumption
e. It was initiated as a challenge to the conventional banking which
   rejected the poor by classifying them to be "not creditworthy". As
   a result it rejected the basic methodology of the conventional
   banking and created its own methodology.
f. It provides service at the door-step of the poor based on the
   principle that the people should not go to the bank, bank should
   go to the people.
g. In order to obtain loans a borrower must join a group of
   borrowers.
h. Loans can be received in a continuous sequence. New loan
   becomes available to a borrower if her previous loan is repaid.
i. All loans are to be paid back in installments (weekly, or bi-
   weekly).
j. Simultaneously more than one loan can be received by a
   borrower.
k. It comes with both obligatory and voluntary savings programmes
   for the borrowers.
l. Grameen credit's thumb-rule is to keep the interest rate as close
   to the market rate, prevailing in the commercial banking sector,
   as possible, without sacrificing sustain-ability. Reaching the
   poor is its non-negotiable mission. Reaching sustainability is a
   directional goal. It must reach sustainability as soon as possible,
   so that it can expand its outreach without fund constraints.



                                                                         35
         Grameen credit gives high priority on building social capital. It is
 promoted through formation of groups and centres, developing
 leadership quality through annual election of group and centre leaders
 electing board members when the institution is owned by the borrowers

               Savings Products with Balance :
                        October,2006
  Description                                                Balance (In Million)
 Personal Savings (open to all)                              TK.     11,211.70      (US$
         164.97)
 Grameen Pension Savings (GPS)– (GB Mem.& Staff)            TK. 11,113.50 (US$ 163.53)
 Special savings (GB Members)                               TK. 2,565.10 (US$ 37.74)
 Loan Insurance Savings Fund (GB Mem & Staff)              TK.3,591.30 (US$ (52.84)
 Double in 7 years-Term Deposit (open to all)              TK. 6,653.20 (US$ 97.90)
 Fixed Deposit (open to all)                               TK. 698.80 (US$ 10.28)
 Fixed Deposit with Monthly Income (open to all)          TK. 1,742.30 (US$ 25.64)
 Other Fund (GB Members & others)                         TK. 2,744.70 (US$ 40.39)
 Total                                                   TK. 40,320.50 (US$ 593.30)




SPANDANA
 Institution's Mission
 Spandana envisions itself as a financially self sustainable Micro
 Finance Institution with a diversified ownership. It is committed to
 strengthening significantly the socio-econmic status of poor women in
 Rural and Urban areas by providing technical and financial services on
 a continued basis for establishing their identity and self-image

 Background and Main Challenges

         There are two important challeges ahead. Spandana at present is a
 non      profit   making         society   and    has   initiated    the    process       of
 transformation into a regulated Company. Spandana has outperfromed
 the most performing organisations by setting up trends with high level
 of efficiency, productivity and thereby profitability levels. Thus the



                                                                                           36
    biggest challenge lies in retaining these levels in the pace of increasing
    competition.

    Products
     Loans
     Voluntary Savings
     Insurance

    Main Funding Sources
     Grants
     Loans
     Savings

    Largest funder for Micro Finance

    The following institutions are the important funders:

    ICICI Bank, SIDBI, Indian Overseas Bank, HDFC Bank, IDBI Bank,
    ABN AMRO Bank, ING Vysys Bank, HDFC, FWWB, UTI Bank

Swayam Krishi Sangam

        Swayam Krishi Sangam (self-cultivation society) is an initiative in
rural India to empower the poorest of the poor to become self-reliant. In
June 1998, SKS began operating its main activity, microfinance, which
follows the Grameen Bank model by seeking to eradicate poverty by
providing small loans for income generating activities through a process of
collective peer lending.

        SKS established its first women‘s banking sangams (centers) in the
Narayankhed region. As of July 2005, SKS Microfinance has grown to
include 32 branches in Six Districts of Telangana and serves over 100,000
clients.   Swayam     Krishi   Sangam    began   its   education   activities    by



                                                                            37
implementing a Preschool (Balwadi) Program in February 2001 in one of the
poorest parts of India—the Narayankhed region of Medak district in Andhra
Pradesh.




RASHTRIYA MAHILA KOSH - Its Profile, Aims & Objectives, Roles

       It has been felt for some time in India that the credit needs of poor
women, particularly in the unorganized sector, have not been adequately
addressed by the formal financial institutions in the country. The vast
gap between demand for and supply of credit to this sector established
the need for a National Credit Fund for Women.

The National Credit Fund for Women or the Rashtriya Mahila Kosh
(RMK) was set up in March 1993 as an independent registered society by
the Department of Women & Child Development in Government of India‘s
Ministry of Human Resource Development with an initial corpus of Rs.
310,000,000 - not to replace the banking sector but to fill the gap
between what the banking sector offers and what the poor need.

Its main objectives are:

•   To provide or promote the provision of micro-credit to poor women for
    income generation activities or for asset creation.
•   To adopt a quasi-informal delivery system, which is client friendly,
    uses   simple    and     minimal   procedures,   disburses   quickly   and
    repeatedly, has flexibility of approach, links thrift and savings with
    credit and has low transaction costs both for the borrower and for the
    lender.
•   To demonstrate and replicate participatory approaches in the
    organization of women‘s groups for thrift and savings and effective
    utilization of credit.


                                                                            38
•   To use the group concept and the provision of credit as an instrument
    of women‘s empowerment, socio-economic change and development.
•   To cooperate with and secure the cooperation of the Government of
    India, State Governments, Union Territory administrations, credit
    institutions, industrial and commercial organizations, NGOs and
    others in promoting the objectives of the Kosh.
•   To disseminate information and experience among all these above
    agencies in the Government and non-government sectors in the area
    of microfinance for poor women.
•   To receive grants, donations, loans, etc., for the furtherance of the
    aims and objectives of the Kosh.

       The office of the Kosh is situated in New Delhi. The Kosh does not
have any branch offices. The Executive Director is the chief executive
officer of the Kosh. The Executive Director functions under the overall
supervision, direction and control of the Governing Board. The Governing
Board comprises 16 members consisting of senior officers of the
Government     of   India   and   State   Governments,   specialists   and
representatives of NGOs active in the field of microfinance for women.
The Governing Board is chaired by the Minister in charge of the
Department of Women & Child Development in the Government of India.
The General Body of the Kosh consists of all members of the Board,
institutional members and individual members.

RMK- Main Roles:

Wholesaling Role - It acts as a wholesaling apex organization for
channelising funds from government and donors to retailing intermediate
microfinance organizations (IMOs). [The Kosh has so far received only a
one-time grant from government and has not needed to raise funds from
any other sources].



                                                                        39
Market Development Role -

      It develops the supply side of the micro finance market by offering
      institution building support to new and existing-but-inexperienced
      IMOs by structures of incentives, transfers of technology, training
      of staff and other non-financial services -

      [The Kosh realizes that it can play a value adding wholesaling role
      only when a sufficiently large and well established micro finance
      sector already exists - this depends on the number of IMOs and
      the sustainability of IMOs - subsidized institution building
      increases the equity of any IMO as much as grants do - large and
      premature disbursement of funds to the IMO can reduce the
      effectiveness of any institution building effort.

Micro finance programmes of CAPART

      The Council for Advancement of People‘s Action and Rural
Technology (CAPART) is set up by the Ministry of Rural Development,
Government of India, to fund voluntary organizations and community
based organizations engaged in serving rural areas. CAPART occupies a
significant space in shaping the development innovations of NGOs and
catalyzing development initiatives to reach the poor.

The main objective of the scheme is:

• To fund VOs and CBOs already working with self help groups to
    extend their reach to new areas and improve the quality of existing
    groups
•   To extend training support to potential VOs and registered CBOs who
    are desirous of working in the area of micro finance and self help
    groups.




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•     To identify and support VOs and registered CBOs having outstanding
     experience in formation of SHGs and micro finance who would act as
     resource centers. The unit cost for the promotion of group is worked
     out to a maximum of Rs.9, 000/- per group, which includes
     expenditure for a 3-year project cycle.
•     To fund Rs.10, 000/- per SHG without interest, where bank linkages
     are not available as revolving fund.
•     to finance up to Rs.2.00 lakhs as bridge funds for a federation of over
     100 active SHGs

SHARE Micro Finance Limited

    Introduction

    SML started operations in 1989 as a not-for-profit society. It was the
    first MFI in India to obtain a NBFC (non-deposit accepting) license and
    also the first Indian MFI to carry out a microfinance securitization
    transaction.

    SML has employed a for-profit approach to create social returns by
    channeling funds from development institutions and commercial banks
    as collateral-free loans to Joint Liability Groups (JLGs). JLGs are the
    central element of the Grameen lending methodology adopted by SML.

    Vision

    To improve the quality of life of the poor by providing access to financial
    and support services add to be a viable financial institution developing
    sustainable communities.

    Our Mission




                                                                            41
  • To mobilize resources to provide financial and support services to
        the poor, particularly women, for viable productive income
        generation enterprises enabling them to reduce their poverty

 Objectives

  •     To provide financial services predominantly to poor women.
  •     To    create   opportunities           for     self-   employment          for   the
        underprivileged.
  •     To train rural poor in simple skills and enable them to utilize the
        available resources and contribute to employment and income
        generation in rural areas.


   MFI loans outstanding to the apex funding
       institutions and banks (Rs crores)
  Apex financing                Outstanding loans              Outstanding loans
  institutions and              to partners in March             to partners in
  comercial banks               2005*                             March 2006
SIDBI                                                              329


FWWB                                                                67


RMK                        37


RGVN                       6


Commercial banks                                           2,000 (approximately)




Loan Proposals and their Processing

In the first step, every member who intends to access credit from the
company has to complete the compulsory group training programme and
Group Recognition Test organized by the company. This programme is
conducted by the Field Credit Assistant (FCA) or a designated staff
member, authorised by SML.




                                                                                          42
Primary data is collected in a prescribed format from borrower/member
to comply with the KYC (Know your Customer) norms.

FCA should verify the loan application and completely fill the following
information:
• Date of application
• Borrower identification particulars
• Loan product details
• Loan Amount
• Need for Loan
• Applicable interest rates
• Term of the Loan
• Repayment particulars
• Acceptance by the borrower‘s family member / the relevant SHG
members

The expected date of loan disbursement should be mentioned on the loan
application form and to be intimated to the borrower / member.

Loan appraisal and Terms & conditions

FCA or designated staff of the Company should convey to the
borrower/member the amount of loan sanctioned along with the terms
and conditions including the annualized rate of interest and method of
repayment of the loan.

Disbursement procedure of loans

Authorized staff of SML should verify the Loan application along with all
securities, sureties and approvals, which is applicable as per the
applicable policy of the company.
• Demand promissory Note
• Surety or guarantee


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• SHG members/Group acceptance
• Family members‘ acceptance
• Acceptance of the terms and conditions by the borrower/member for
rate of interest, processing charges if any and repayment terms

Documentation for Hypothecation or charge creation or any security or
surety/guarantee
•                   The                     acceptance                    letter
•   Letter   of   confirmation    of     deposit    of    security    documents


The Company keeps all the documents in the safe custody in the
respective premises by the authorized persons. Loan passbook has to be
given to every borrower/member for each loan. The loan passbook
contains the repayment schedule, effective interest rate and other
processing charges etc. The company gives prior notice of any change in
the interest rate and other charges to the borrower / member.

      The company takes a decision whether to recall / accelerate the
payment or performance under the loan agreement / Promissory Note as
agreed with the borrower/member under intimation.


                   Microfinance and Enterprises

             Income change across sector for clients from
                   enterprises with credit support
             Enterprises    No.        Increase   Decrease No change

         Total              1,555        76%        08%         17%

         Agriculture        168          55%        23%         22%

         Animal husbandry   282          72%        07%         21%

         Non Farm           1,105        80%        05%         15%




The Role of NGOs




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      Non-Government Organizations (NGOs) have emerged as an
integral part of the institutional structure for addressing poverty as well
as rural development, gender equality, environmental conservation,
disaster management, human rights and other social issues.


The NGOs, in order to support social and economic empowerment of the
poor, have vastly widened their activities to include group formation,
micro credit, formal and non-formal education, training, health and
nutrition, family planning and welfare, agriculture and related activities,
water supply and sanitation, human rights and advocacy, legal aid and
other areas.


These organizations mostly follow the target-group strategy under which
the poor with similar socioeconomic interests are organized into groups
to achieve their objectives.


Co-ordinating the role of NGOs


      In order to meet the need for a one-stop service to the NGOs, the
Government created the NGO Affairs Bureau in 1990. Located in the
Prime Minister‘s Secretariat, the Bureau enables the NGOs to obtain
their registration clearance, approval and permission through a single
agency of the Government within a specified time frame. The aim of the
Bureau is to ensure quality performance of the NGO sector and its
accountability to the state.


      With a view to providing a regular forum of dialogue between the
Government and the NGOs for increased mutual understanding and
cooperation, the Government-NGO Consultative Council (GNCC) has
been formed with representatives from the Government, NGOs and the



                                                                        45
civil society. The GNCC works as an advisory council toward resolving
issues arising out of Government-NGO interaction and collaboration.




Empowerment of Women through DWCRA / SHG Approach
 Self-help Groups:
  •   SHG is a group of rural poor who have volunteered to organise
      themselves into a group for eradication of poverty of the members
  •   The members of SHG save regularly and convert their savings into
      a common fund known as Group Corpus
  •   The group agrees to use this common fund and such       other funds
      that they may receive as a group through a common management
  •   ―A small, economically homogeneous and affinity group of
      rural/urban poor, voluntarily formed to save and contribute to a
      common fund to be lent to its members as per the groups decision
      and for working together for social and economic uplift of Their
      families and community
  •   Self-help group (SHG) or a ‗sangha‘ is a     voluntary association of
      people, which functions democratically and accountably, to
      achieve the collective goals of the group.
  •   Organizing disabled persons into ‗sanghas‘        unites and makes
      them visible in the larger community.
  •   Members can support one another by sharing        information on the
      availability of services and   resources, help to make decisions on
      individual matters, help one another and so on.


 Concept of SHG:




                                                                         46
      Self – Help Group (SHG) is a small voluntary association of poor
 people, preferably from the same socioeconomic background. They
 come together for the purpose of solving their common problems
 through self-help and mutual help. The SHG promotes small savings
 among its members. The savings are kept with a bank. This common
 fund is in the name of the SHG. Usually, the number of members in
 one SHG does not exceed twenty.


 The concept of SHG is based on the following principles:
  •   Self-help supplemented with mutual help can be a powerful vehicle
      for the poor in their socioeconomic development;
  •   Participative financial services management is more responsive
      and efficient;
  •   Poor need not only credit support, but also savings and other
      services;
  •   Poor can save and are bankable and SHGs as clients, result in
      wider out reach, lower transaction cost and much lower risk costs
      for the banks;
  •   Creation of a common fund by contributing small savings on a
      regular basis;
  •   Flexible democratic system of working;
  •   Loaning is done mainly on trust with a bare documentation and
      without any security;
  •   Amounts loaned are small, frequent and for short duration;
  •   Defaults are rare mainly due to group pressure; and
  •   Periodic meetings non-traditional savings.


Essential Features of SHGs:




                                                                     47
  The following are the major essential features to be kept in mind for
successful functioning of SHG‘s.

  •   Group members come together voluntarily.
  •   Basis of coming together is mutual help.
  •   Homogenous group.
  •   Regular interaction among group members
  •   Group independently takes decision and manages its activities.
  •   Basis of people coming together is affinity.
  •   All group members' participation is the process.
  •   Cooperation       and   discussion   are   the   cornerstone   of   its
      functioning group maintains its own accounts


 SHG's – ROLE OF NGOs
  • NGOs play the crucial role of facilitators in group formation and
      development
  • Quality of group can be influenced by the capacity of facilitator
      i.e., NGO
  • NGOs also help in training and capacity building of facilitators
      being used by DRDAs
  • DRDAs         may    support   NGOs    or    Network   of   Community
      Coordinators who are engaged in the task of initiating and
      sustaining the group development process
  • Community Coordinator take up the responsibility of managing
      10-15 SHGs in a cluster consisting of 4-5 villages with in a
      radius of 4-5Kms.


      The poor people, on whose shoulders the success of sector is
depending, are also participating in the growth of              this sector.
Government is also interested and is closely monitoring the sector from


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the policy and regulatory point of view. The sector has also opened scope
for research, training and consultancy. In a holistic perspective micro-
finance is a process of social intermediation and building social capital.


           Process of Social intermediation is an investment that is made for
development of both human resources and institutional capital to make
marginalized groups self-reliant in preparing them to engage in formal
financial intermediation. According to Elaine and Barton23, social
intermediation is a financial intermediation with a capacity building
component, aimed at those sectors of society that lack access to credit
and savings facilities. It can be understood by transformation of
beneficiaries into clients or customers and creation of local institutions
that bridge the gap between the formal financial institutions and
marginalized groups. The concept of social capital is the key theoretical
element in social intermediation, derived from the anthropological and
sociological literature.


           It is quite fact that the involvement of banks with grass root
NGOs/SHGs also improves their appreciation of the problems of the poor
in accessing formal credit and brings about change in their outlook,
responsiveness and perception. NGO as financial intermediation, the
success of microfinance is seen in the rural areas. NGOs can be expected
to fast internalize the culture and practice associated with efficient
conduct of the business of microfinance. The rise of NGOs doing
business in microfinance has opened the floodgates of aid in at least in
rural India24.



23
     . Elaine, Edgcomb & Barton, Laura “Social Intermediation and Microfinance Programmes: A Literature
Review”, USA: Micro-Enterprises Best Practices. The SEEP Network. 1998.
24
     . S.B. Verma and Y.T. Pawar, 2005. p.101.



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