International journal of advances in engineering and management (IJAEM)

Volume 3, issue 6 June 2021, pp: 1538-1554 [Link] ISSN: 2395-5252

Microfinance and Its Models: A Model to Eradicate

Poverty and Its Analysis
M. Saptarshi, Amulya Manohar, Sejal Bhurat,M Jayadatta S
Assistant Professor K.L. E’s Institute of Management Studies & Research, BVB Campus, Vidyanagar, Hubli.
Karnataka - 580 031
MBA Student K.L. E’s Institute of Management Studies & Research BVB Campus, Vidyanagar, Hubli,
Karnataka – 580 031
MBA Student K.L. E’s Institute of Management Studies & Research BVB Campus, Vidyanagar, Hubli,
Karnataka – 580 031
Assistant Professor K.L. E’s Institute of Management Studies & Research, BVB Campus, Vidyanagar, Hubli.
Karnataka - 580 031

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Submitted: 01-06-2021 Revised: 14-06-2021 Accepted: 16-06-2021
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ABSTRACT :“Microfinance is not simply well as rationalizing their branch network in rural
banking; it is a development tool. It has been areas. While rural poor access to credit has
estimated that there are 500 million economically decreased in the post-reform period, the policy
active poor people in the world operating advice is to replace the gap with microcredit. The
microenterprises and small business” (Joann government is working hard to revive the economy;
ledgerwood, 1998). This paper highlights the however, in order to move forward, it must take
microfinance and direct towards the position of into account the existing microfinance sector and
microfinance in India.“Traditionally, people have related institutions.
saved with and taken small loans from individuals Suggestions: Field supervision of these loans
and groups within the context of self-help to start should be implemented, and microfinance
businesses or farming ventures. Majority of poor institutions should assess the ground realities and
are excluded from financial services” (Vivek operational effectiveness of such lending.
Kumar Tripathi, 2014).Microfinance is a Microfinance should now focus on underserved
programme that assists and supports the poor in and underserved areas, with incentives granted to
obtaining loans and repaying their obligations, microfinance institutions. Savings, self-help,
allowing them to preserve their social and education, and training, rather than only lending,
economic standing in the country. Microfinance is should be encouraged by regulations.
the provision of financial services to self-employed Key Words: Microfinance, Microcredit, Non-
people who are low-income, poor, or very poor. Government Organization, Poverty, Self-Help
Objectives of the study: The present study intends Group, Women Empowerment, performance
to know how microfinance as a financial sector has benchmark
emerged in the rural areas of India. The paper
intends to scrutinise the pros and cons of various OVERVIEW OF MICROFINANCE:
models of microfinance. Efforts have been made to Microfinance is a set of financial services
structure the SWOT analysis of the same sector and accessible to small-scale business owners who lack
then conclude whether India needs more of such collateral, lack access to banking services, and
microfinance institution. would not otherwise qualify for a traditional bank
Research Methodology: The research loan. It comprises loans, savings, and insurance.
methodology adopted here is based on secondary These help the poor people to start up and grow
data. The information is taken from prominent their businesses. Microcredit or microloans are
journals, websites, and textbook. generally given to do different businesses related to
Findings:Indian rural finance sector is at fishing, carpentry, transportation, food products in
crossroads today. Following the financial sector developing countries. “The amount of loan is less
reforms with its emphasis on profitability as the and do insist that the loan is repaid within 6 months
key performance benchmark, banks are to 1 year”, (Saptarshi M and Prashant P).
increasingly shying away from rural lending as

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 International journal of advances in engineering and management (IJAEM)
Volume 3, issue 6 June 2021, pp: 1538-1554 [Link] ISSN: 2395-5252

I. INTRODUCTION: (SGSY).SGSY's mission is to continue providing

Microfinance in India: A Quick Overview subsidised loans to the poor through the banking
The post-nationalization period in the sector in order to generate self-employment
banking sector, circa 1969, witnessed a substantial through a self-help group method, and the
amount of resources being earmarked towards programme has developed to tremendous
meeting the credit needs of the poor. “With the proportions. Microfinance has recently received a
recognition of the Nobel Peace Prize in 2006, lot of attention from all over the world as a
Muhammad Yunus‟s vision of extending credit to successful instrument for poverty reduction. Self-
the poor has reached a global level”, (Rajdeep Help Groups and Microfinance Institutions (MFIs)
Sengupta and Craig P. Aubuchon, 2008),The bank are the two most common types of microfinance
nationalisation policy had numerous goals, one of today.
which was to broaden the reach of financial
services to underserved groups. The financial NEED OF MICROFINANCE
network underwent an expansion phase unlike any 1. Provide training to underprivileged people for
other in the world as a result of this strategy. Credit their basic needs.
came to be seen as a panacea for many of the 2. Empowering women and to encourage them to
problems that plagued the poor. “Only by become social entrepreneurs.
achieving a high degree of sustainability has 3. To strengthen self-help groups so that
microfinance gained access to funding they need economic transformation happens
over time to serve significant numbers of their 4. Special programs for underprivileged people in
poverty level clients. This image reveals that there society.
is in fact only one objective outrage. Sustainability 5. Maximum usage of local resources for the
is but the means to achieve it,” (Rhyne E, development and livelihood for the people.
1998).While the goals were admirable and much
progress was made, credit to the poor, particularly EVOLUTION OF THE CONCEPT OF
impoverished women, remained limited. This MICROFIANCE
resulted in institution-led initiatives aimed at The concept of microfinance can be traced
bringing together the existing capabilities of rural for decades; it is Bangladeshi national Dr.
banking infrastructure and leveraging them to Muhammad Yunus who is known as front runner
better serve the poor. The National Bank for of microfinance. In 1970 when Dr. Yunus was
Agriculture and Rural Development (NABARD), working at Chittagong University he was moved by
which was tasked with developing appropriate the level of poverty of basket weaves. Then he
policies for rural credit, providing technical experimented by offering small amount of loans to
assistance-backed liquidity support to banks, these women. Yunus worked on this aim for more
supervising rural credit institutions, and other than ten years before establishing the Grameen
development initiatives, was the first to do so. Bank in 1983 to help the impoverished. More over
The Integrated Rural Development 8 million borrowers in around 81,000 villages are
Initiative (IRDP), a significant poverty reduction served by the Grameen Bank's 2,500 branches now.
credit scheme initiated by the Indian government in Grameen Bank claims that its clientele, 97 percent
the early 1980s, provided poor people with of whom are women, repay loans in excess of 97
federally loans through banks. In this context, there percent of the time, a percentage that is higher than
was a need for alternative policies, processes, and any other banking system. Yunus and Grameen
procedures, along with savings and loan products, Bank shared the Nobel Peace Prize in 2006 for
other supplementary services, and new delivery their efforts and achievements in the field of
mechanisms, to address the needs of the poorest, microcredit and microfinance.
especially the women who make up these Despite the fact that middle and higher
households. As a result, rather than focusing on class farmers benefited from increased agricultural
microcredit, the focus was on enhancing output through heavy use of inputs, the given credit
impoverished people's access to microfinance. In model failed in the 1960s and 1970s. Rapid
response to the poor's demand for microfinance, the disbursement of funds with greater political
government and non-governmental organisations emphasis, failure to collect loans due to a lack of
(NGOs) have supported a range of microfinance proper institutional arrangements, and clients'
initiatives throughout the last 25 years. In 1999, the attitude toward loans as grant money were the main
Government of India consolidated several lending reasons for state failure of credit provision, and in
schemes, streamlined them, and established the the 1990s Microfinance began to develop as an
Swaranjayanti Gram SwarazagarYojana [Link] microfinance industry's goal in the

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 International journal of advances in engineering and management (IJAEM)
Volume 3, issue 6 June 2021, pp: 1538-1554 [Link] ISSN: 2395-5252

2000s was to meet unmet demand on a much People have traditionally saved and
greater scale and contribute to poverty reduction. borrowed small amounts of money from
The World Bank has called South Asia the “Cradle individuals and groups in the context of self-help in
of Microfinance”. “Instead of focusing on order to launch companies or farming activities.
becoming self-sufficient, Schreiner (2002, p. 82) The following stages are discussed in detail: The
argues for more quantitative evaluation of MFIs”. development of the microfinance sector can be
divided into four stages:
The Evolution of Microfinance around the
World

Image 1: Evolution of Microfinance in India

Phase 1: The cooperative movement is the first in rural credit delivery, with NABARD launching
phase (1900-1960) during this time, credit the Self Help Group (SHG) Bank Linkage
cooperatives served as vehicles for extending Programme (SBLP), which aims to connect
government-sponsored discounted loans to villages. informal women's organisations to formal banks.
Phase 2: Social banking was subsidised from the The programme helped expand banking system
1960s until the 1990s. In response to the failure of outreach to previously unreached populations and
cooperatives, the government took steps such as shift the bank's attitude toward low-income
nationalising banks, expanding rural branch households from "beneficiaries" to "clients." As a
networks, establishing Regional Rural Banks result, credit was extended at market rates
(RRBs), and establishing apex institutions like the throughout this timeframe. The approach piqued
National Bank for Agriculture and Rural the attention of newly growing Microfinance
Development (NABARD) and the Small Scale Institutions (MFIs), the majority of whom are non-
Industries Development Bank of India (SIDBI), profits, to partner with NABARD under this
among them, the launch of a government- programme. The early 1990s macroeconomic crisis
sponsored Integrated Rural Development Program ushered in a new generation of private sector banks
(IRDP). While these actions enabled the reach of a that would go on to become major players in the
vast population, the period was marked by microfinance sector a decade later.
widespread credit abuse, leading to an Phase 4: Microfinance's Inclusion: The New
unfavourable view of micro borrowers among Millennium's First Decade Rural markets have
bankers, further limiting low-income people's arisen as new growth drivers for MFIs and banks
access to banking services. following the reforms, with the latter investing in
Phase 3: NGOMFI expansion and the SHG-Bank the area not only as part of their corporate social
connection programme (1990–2000) the failure of responsibility but also as a new business line.
subsidised social banking sparked a paradigm shift

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 International journal of advances in engineering and management (IJAEM)
Volume 3, issue 6 June 2021, pp: 1538-1554 [Link] ISSN: 2395-5252

GROWTH OF MICROFINANCE

Image 2: Growth of Microfinance

Since independence, the Indian political empowerment, financial inclusion imparts

government has placed a high priority on providing formal identity and provides access to the payment
financial services to the poor and underserved. In system and to saving safety net like deposit
1969, commercial banks were nationalised, and insurance. Hence financial inclusion is considered
they were required to lend 40% of their loans to the to be critical for achieving inclusive growth” (U
priority sector at a discounted [Link] goal was to Thorat, 2007). In India, private institutions that
provide resources to assist the impoverished in primarily provide microfinance services are known
starting their own microbusiness in order to achieve as Micro Finance Institutions (MFIs).
self-sufficiency. In 1980, the Indian government
launched a very successful programme called the DEVELOPMENT OF MICROFINANCE
Integrated Rural Development Programme (IRDP) The government started focusing on
to augment the efforts of micro credit. These financial development and credit planning. As a
supply-side initiatives, on the other hand, were result, banks began to disseminate advances to
largely ineffective. The difficulty with IRDP was agricultural and small-scale businesses in rural
that it was designed with a significant amount of areas. The goal was to use credit distribution to
subsidies, which led to widespread fraud and effect financial and social transformation.
mismanagement of finances. As a result, a solid Microfinance institutions (MFIs) became well-
and promising initiative that once claimed to be known in India after two decades in the 1990s, as
"the world's largest microfinance programme" was the economy expanded and became more focused.
thwarted by bad implementation and political The National Bank for Agriculture and Rural
meddling. Development (NABARD) launched a programme
The first microfinance effort in India was in 1992 to support and encourage the disbursement
launched in 1974 by Shri Mahila SEWA (Self of advances to self-help organisations. Rashtriya
Employed Women's Association) Sahakari Bank in Mahila (RMK or the National Loans Fund for
Ahmadabad, Gujarat, with the goal of providing Women) was established after a year in 1993 to
financial services to poor women working in the redistribute credit from NGOs to independently
unorganised sector. In India, initially many NGO employed women in the unorganised sector.
microfinance institutions (MFIs) were funded by Different microfinance institutions (MFIs) in India
donor support in the form of revolving funds and founded SaDhan, the Association of Community
operating grants. However, it was only after the Development Finance Institutions, in 1998. Rivalry
National Bank for Agriculture and Rural has grown in the financial sector, particularly
Development (NABARD) intervened in the field of among public sector banks.
microcredit in 1992 that the microfinance Whatever the case may be, the legislature
movement in India gained traction. For our has relaxed some banking laws in the hopes of
country's economic progress, the Reserve Bank of increasing the number of rural family units.
India has called for financial inclusion of the Because many banks do not perceive rural
majority of the population. Financial services at a populations to be profitable, they only issue loan
reasonable cost Poor people's livelihood when the government requests it. It is extremely
opportunities are widened through credit and difficult for the poor to obtain loans from banks
insurance, in particular. “Apart from social and due to their lack of collateral and inability to obtain
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 International journal of advances in engineering and management (IJAEM)
Volume 3, issue 6 June 2021, pp: 1538-1554 [Link] ISSN: 2395-5252

adequate finances, as they typically obtain cash based regulation to replace the current structure of
from moneylenders and shops (informal institution-based regulation, bringing all
finance).Because poor people do not have microfinance lenders onto the same playing field.
permanent jobs, their pay is intermittent and In addition, the RBI's current restrictions limit
inconsistent, and banks have no certainty that they single micro borrowers to a borrowing limit of Rs
will be able to return their loans. Furthermore, 1.25 lakh. A maximum of two NBFC-MFIs can
"distance, lack of knowledge, and borrowers' lend to a single borrower, according to the
diverse histories," as well as the recurrence of high regulator. Banks, on the other hand, are allowed to
operating costs, make it difficult and unappealing lend to the same borrower indefinitely creating an
for banks to lend to country poor groups. Banks uneven playing field. Further “We have brought
also believe that government regulations and these issues to the notice of the regulator several
controls make it difficult to provide credit to the times,” said P Satish, executive director of
poor. The shared responsibility that the entire microfinance industry body Sa-Dhan.
group bears for the advances granted to individual
borrowers is a major component of this joint risk At the end of September 2020, the microfinance
bunch loaning arrangement. industry had served 5.71 crore borrowers through
10.50 crore loan accounts, with a total loan
IMPORTANCE OF MICROFINANCE portfolio of Rs 2, 31,778 crores. Banks maintain
In 2004-2005, the Planning Commission the largest portion of the microfinance portfolio,
estimated that 27.5 percent of India's population accounting for 40.71 percent of overall micro-
was living below the poverty level. Around 75% of credit with a total loan outstanding of Rs 94,355
India's poor live in rural areas, with the vast crore. With a loan portfolio of Rs 69,933 crore,
majority of them being landless workers, daily NBFC-MFIs are the second largest supplier,
bread earners, and families who are self-employed. accounting for 30.17 percent of the entire industry
India has one of the world's highest rates of portfolio.
poverty, with a widening divide between the rich
and the poor. Indians have a fascinating cultural, Policy to set up social microfinance institution in
political, and economic past that has influenced the works: Gadkari.
poverty and gender inequality in the country. New Delhi: Nitin Gadkari, the Union
Following India's independence from the United minister for micro, small and medium enterprises
Kingdom in 1945, a new democratic government (MSMEs), said the government is working on a
was formed with the goal of giving equal rights, strategy to establish a social microfinance
freedom, opportunities, and financial stability. institution to help micro and small businesses. “For
Because Indians require opportunities the very poor, microfinance becomes a liquidity
such as financial possessions and the ability to find tool that helps smooth their consumption patterns
work, they are trapped in an endless cycle with no and to reduce their level of vulnerability” (Jennefer
open doors for individuals to elevate themselves Sebstad and Monique Cohen).
out of poverty. Microcredit has been used as a The minister also stated that think tanks
method by governments in developing countries, should research ground-level challenges on a
international funding organisations, and sector- and industry-by-sector basis so that new
philanthropist offices since the 1950s, with the policies may be formed based on their
purpose of assisting the needy. The Indian recommendations. He asked industry groups to
government began administering advances to work together to reduce the country's import bill
families in rural zones who worked in the and create jobs by boosting manufacturing and
agricultural sector, as well as city-staying families, production in the country.
in the 1950s and 1960s, in collaboration with the
Indian banking system, to enhance financial MODELS OF MICROFINANCE
development throughout India. The following are 15 models that are
currently being adopted by microfinance
RBI REGULATIONS organisations around the world. Associations, bank
Kolkata: The Reserve Bank of India said guarantees, community banking, cooperatives,
that it would simplify regulations for banks and credit unions, Grameen, group, individual,
microfinance institutions in order to improve last- intermediates, NGOs, peer pressure, ROSCAs,
mile credit delivery and promote consumer small business, and village banking models are
protection. While the RBI did not provide any only a few examples.
additional details, industry leaders expect activity-

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Volume 3, issue 6 June 2021, pp: 1538-1554 [Link] ISSN: 2395-5252

Many of these models are "formalised" People who do not have access to conventional
versions of previously unregulated financial banks or who have a low income and cannot pay
systems. Informal banking systems have a long significant collaterals typically use these.
history that predates modern banking institutions.

Microfinance models across the world

COUNTRY MODELS
India SHG Model, Joint Liability Group Model
Bangladesh Grameen Bank Model
Indonesia Individual Lending Model
Philippines ROSCAs
Kenya, Indonesia The Group Model
Bolivia, Thailand Village banking Model
Srilanka Credit Unions and Cooperatives
Source: Textbook

1. ASSOCIATIONS MODEL organisations, and other mass, community-based

The target community forms an organisations, and NGOs, etc., which are mainly
'association' through which microfinance and other external organisations.
operations are launched. Savings is one of these
activities. Youth and women can form associations 2. BANK GUARENTEES MODEL
or groups around political, religious, and cultural A bank guarantee is used to acquire a loan
themes, as well as support structures for from a commercial bank, as the name implies. This
microenterprises and other work-related issues. In assurance can be obtained from an external source,
some countries, an 'association' can be a legal such as a donor or a government agency, or it can
entity with benefits such as fee collecting, be obtained internally using member savings. The
insurance, tax exemptions, and other safeguards. loans collected can be given to an individual or a
On the one hand, there is a distinction established self-formed group. A capital guarantee programme
between associations, community groups, people's is a type of bank guarantee. Guaranteed funds can
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be utilised for a variety of things, such as loan Director and Chairperson are
repayment and insurance claims. Several elected.”(Saptarshi M and Prashant P, YEAR?)
international and UN agencies have been working
on developing international guarantee funds that 5. CREDIT UNIONS MODEL
banks and NGOs can join to lend or start A credit union is a member-owned and
microcredit programmes. operated financial cooperative. It is operated by
3. COMMUNITY BANKING MODEL and made up of members of a specific group or
The Community Banking concept takes organisation who have agreed to pool their funds
the entire community as a single unit and builds and offer loans to one another at reasonable rates of
semi-formal or formal institutions to disburse interest. Members have a shared link, such as
microfinance. Such institutions are frequently working for the same company, belonging to the
founded with the assistance of NGOs and other same church, labour union, social fraternity, or
organisations, which also teach community living/working in the same neighbourhood. A
members in the community bank's numerous credit union's membership is open to everyone who
financial activities. Savings components and other wants to be a part of the organisation, regardless of
revenue-generating projects may be included in the race, religion, colour, or creed. A credit union is a
structure of these institutions. Community banks non-profit financial cooperative that is
are frequently part of larger community democratically run. Each is owned and
development programmes that employ financial administered by its members, who have a say in
incentives to motivate people to take action. It has who the directors and committee representatives
a lot in common with the village banking paradigm. are elected.

4. COOPERATIVES MODEL 6. GRAMEEN MODEL

A co-operative is an autonomous group of The Grameen model emerged from the
people who have come together voluntarily to poor-focussed grassroots institution, Grameen
achieve their common economic, social, and Bank, started by Prof. Mohammed Yunus in
cultural needs and objectives through a Bangladesh. It essentially adopts the following
democratically governed and collectively owned methodology:
business. The mandate of certain cooperatives A bank unit is set up with a Field Manager
includes member-financing and savings operations. and a number of bank workers, covering an area of
“Taking into consideration the growth and potential about 15 to 22 villages. The manager and workers
of microfinance sector in India , other organisation start by visiting villages to familiarize themselves
ad international agencies have also made their with the local milieu in which they will be
entries in the sector by providing loans and grants operating and identify prospective clientele, as well
to NGO‟s for different income generating projects as explain the purpose, functions, and mode of
as well as for incorporating microfinance in the operation of the bank to the local population.
service delivery projects of social Groups of five prospective borrowers are formed;
development”(Nair and Tara, 2000). “Co-operative in the first stage, only two of them are eligible for,
banks have been late entrants to micro-finance and receive, a loan. The group is observed for a
through SHGs. The performance of co-operative month to see if the members are conforming to
banks has to a large extent been influenced by the rules of the bank.
state government policies” (Joy, Deshmukh, and Only if the first two borrowers repay the
Murthy, Ranjani 2007). principal plus interest over a period of fifty weeks
The model‟s unique features are as follows: do other members of the group become eligible
 “It consists of around 250 to 300 people. themselves for a loan. Because of these restrictions,
 It started with smaller groups but slowly and there is substantial group pressure to keep
gradually became bigger group. individual records clear. In this sense, collective
 The group is divided into smaller groups and responsibility of the group serves as collateral on
each group has a leader who is an elected the loan.
member.
 The leader of the group has to keep the track Features of Grameen Bank:
records of savings, credit and loan creation and  High Recovery rate
scrutiny of repayment of loans.  Women empowerment
 The primary cooperatives constitute the Gen-  Low Transaction Cost
eral body and adopt a uniform set of laws. The  No collaterals

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 Repayment of Loans quicker and in smaller jointly liable to repay the loan when one of the
amounts group's members defaults on the repayments.
 Bank goes to customers.
 Less formalities 8. INDIVIDUAL MODEL
 5 members as Team This is a straightforward credit lending
 Training given for 7 days which is compul- model where micro loans are given directly to the
sory. borrower. It does not include the formation of
 8 groups to form a centre. groups or generating peer pressures to ensure
repayment. The individual model is, in many cases,
 Bank official meets centre once a week.
a part of a larger 'credit plus' programme, where
 Discipline and dedication is encouraged.
other socio-economic services such as skill
 Loan generally varies from Rs. 4000 to Rs. development, education, and other outreach
10,000. Loan amount increases every year by services are provided. “While the individual
Rs. 1000.
banking model is suited to lending to enterprises,
 Benefit of timely payment is to repeat loans the group model is best suited to lending to pre-
and continuing access for the credit. micro enterprises and micro enterprises” (Vikas
Batra and Sumanjeet, 2011).
7. GROUP MODEL
The Group Model's basic philosophy lies 9. INTERMEDIARIES MODEL
in the fact that shortcomings and weaknesses at the Intermediary model of credit lending
individual level are overcome by the collective positions a 'go-between' organization between the
responsibility and security afforded by the lenders and borrowers. The intermediary plays a
formation of a group of such individuals. The critical role of generating credit awareness and
collective coming together of individual members education among the borrowers including, in some
is used for a number of purposes: educating and cases, starting savings programmes. These
awareness building, collective bargaining power, activities are geared towards raising the 'credit
peer pressure etc. The Group model is closely worthiness' of the borrowers to a level sufficient
related to, and has inspired, many other lending enough to make them attractive to the lenders. The
models. These include Grameen, community links developed by the intermediaries could cover
banking, village banking, self-help, solidarity, peer funding, programme links, training and education,
pressure etc. “Apart from the SHG-bank linkage and research. Such activities can take place at
programme, many NGOs are using a variety of various levels from international and national to
delivery mechanisms (including adaptations of regional, local, and individual levels.
Bangladesh Grameen Bank) for providing micro Intermediaries could be individual lenders, NGOs,
credits services with financial support from microenterprise/microcredit programmes, and
external donors and other apex institutions, commercial banks (for government financed
including the Rashtriya Mahila Kosh (RMK) set up programmes). Lenders could be government
by the Government and the SIDBI Foundation for agencies, commercial banks, international donors,
micro credit set up by a sister apex development etc. Most models mentioned here invariably have
institution”(Misra and Indira 2003). some form of organizational or operational
One example of the Group Model is "Joint intermediary - dealing directly with microcredit, or
Liability". When a group takes out a loan, they are non-financial services. It is also called the
'partnership' model.

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10. NGO MODEL

Image 3: NGO‟s contribution in India.

In the realm of microcredit, non- • Raising awareness about the importance of

governmental organisations (NGOs) have emerged environmental protection
as a major stakeholder. In many dimensions, they • Most importantly, fostering a gender-equal
have performed as a middleman. Microcredit environment.
programmes have been started and participated in
by NGOs. This includes raising community 11. PEER PRESSURE MODEL
understanding of the necessity of microcredit, as Peer pressure relies on moral and other
well as partnering with national and international connections between borrowers and project
funding [Link]'ve created information and participants to guarantee that microcredit
tools to help communities and microcredit programmes are completed and reimbursed. Peers
organisations track progress and spot best practises. could be other members of a borrowers group (in
They've also developed opportunities for people to which the other members do not receive loans
learn about microcredit's principles and practises. unless the original borrowers in the group
Publications, workshops and seminars, as well as repay).Hence pressure is put on the initial members
training programmes, fall under this category.“Not to repay); community leaders usually identified,
surprisingly, philanthropy is not a requirement of nurtured, and trained by external NGOs; NGOs
microfinance- not all MFIs are non-profit themselves and their field officers; banks etc.
organizations. While MFIs such as Banco Sol of Frequent visits to the defaulter, community
Bolivia operate with the intent to return a profit, meetings where they are recognised and asked to
other MFIs like the Grameen Bank charge below- comply, and other forms of 'pressure' can be used.
market rates to promote social equity”. To ensure repayment among its loan groups, the
(Armendáriz de Aghion, Beatriz and Morduch, Grameen model heavily relies on peer pressure.
Jonathon.)
 The NGOs work on: 12. ROSCA MODEL
• Providing Basic Education ROSCAs, or Rotating Savings and Credit
• Promoting a feeling of Health and Hygiene in Associations, are simply a group of people who
addition to developing saving and credit assemble together and make regular cyclical
facilities. contributions to a common fund, which is
• Encourage couples to start a family. subsequently handed as a lump amount to one
member each cycle. A group of 12 people, for

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example, might give Rs. 100 (US$33) per month market environment, have traditionally been the
for a [Link] Rs. 1,200 collected each month is focus of policies. Finance, notably microcredit, has
given to one member. Thus, a member will 'lend' always been a significant component that has been
money to other members through his regular introduced as a sort of common denominator.
monthly contributions. When it is his turn to Microcredit has been provided to SMEs directly, or
receive the lump sum money (i.e., 'borrow' from as a part of a larger enterprise development
the group), he pays it back in regular/further programme, along with other inputs.
monthly contributions. The lump payment is
distributed by consensus, lottery, auction, or other Features
agreed-upon mechanisms.  Self-dependence between poorer sections of
the society
13. SMALL BUSINESS MODEL  Leadership qualities generated within the
“The prevailing vision of the 'informal community.
sector' is one of survival, low productivity and very  Creation of Savings, credit and loan is being
little value added. But this has been changing, as created.
more and more importance is placed on small and  Training to the members by the members
medium enterprises (SMEs) - for generating  NGO trying to spread SHG model for educat-
employment, for increasing income and providing ing and networking.
services which are lacking”(Srinivas, 2021).Direct  Group members are generally of the same so-
interventions in the form of supporting systems cial strata.
such as training, technical advice, management
 This is driven by women and women empow-
principles, and so on, as well as indirect erment.
interventions in the form of an enabling policy and

14. THE SHG MODEL

Image 4: Growth of SHG‟s in India

Structure of SHG The setting of terms and conditions and accounting

A savings and credit organisation (SHG) of the loan are done in the group by designated
is a group of roughly 10 to 20 people, often members.
women, from a similar social class and region who SHG Federation
come together to join a savings and credit SHGs have also federated into larger
organisation. They pooled their financial resources organisations, as previously indicated. A Cluster /
to provide their members with small interest- VO typically consists of 15 to 50 SHGs, with one
bearing loans. This technique instils a value system or two representatives from each SHG. Several
that prioritises saving over spending. “Many clusters or VOs come together to form an apex
believe that savings mobilized from local body or a SHG Federation, depending on
depositors will ultimately be the largest source of [Link] Andhra Pradesh, the Village
capital for microfinance. Foreign capital provides Organizations, SHG Clusters and SHG Federations
22 percent of funding for the „Top 100‟ MFIs, but are registered under the Mutually Aided Co-
savings is the first source of capital, representing operative Society (MACS) Act 1995. Inter-group
41 percent of all assets in 2005”, (Reddy 2007). borrowings, exchange of ideas, cost sharing, and
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discussion of common interests occur at the cluster are around 94000 Co-operative outlets, 14000 RRB
and federation levels. Various subcommittees branches, and 33,000 suburban commercial bank
usually deal with a variety of concerns, such as branches. (Financial Services for Low Income
debt collections, accounting, and social issues. Families: An Appraisal, by Sanjay Sinha 2003)
Financing the SHGs They finance the SHGs directly or route their funds
Various financial institutions cater to the through a Microfinance Institution set up by an
financial needs of SHGs, including Commercial NGO (NGOMFI) or Non-Banking Financial
Banks, Co-operative Banks, Co-operative Credit Companies (NBFC).
Societies, and Regional Rural Banks (RRB). There

15. VILLAGE BANKING MODELS

Image 5: Indian banking revolution has left its villagers behind.

Village banks are credit and savings emancipation of women. It has been observed that
cooperatives that serve their local communities. gender equality is a necessary condition for
They are often made up of 25 to 50 low-income economic development. The World Bank reports
people who want to improve their life through self- that societies that discriminate on the basis of
[Link] village bank's initial loan capital gender are in greater poverty, have slower
may originate from outside sources, but the economic growth, weaker governance, and lower
members manage the bank: they choose their own living standards. (World Bank. Engendering
members, elect their own executives, write their Development: Through Gender Equality in Rights,
own bylaws, distribute loans to individuals, and Resources,)
collect payments and [Link] loans are • Ability to save and access loans.
secured by moral collateral, which is the pledge • Opportunity to undertake an economic activity.
that the collective would stand behind each • Mobility-Opportunity to visit nearby towns.
individual loan. The Community Banking and • Awareness- local issues, MFI procedures,
Group models are closely related to the Village banking transactions
Banking model. FINCA has widely embraced and • Skills for income generation
implemented this model. • Decision making within the household.
• Group mobilization in support of individual
Women’s Indicators of Empowerment through clients- action on social issues
Microfinance • Role in community development activities
In India and other Asian countries, the Source: Impact Assessment, Frances Sinha (2003)
majority of SHGs consist of women because, in
these countries, Self-Employment through MFIs REVIVAL:Does India really need a new
Microfinance was perceived as a powerful tool for microfinance institution?

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Union Minister for Micro, Small & socioeconomic position, can be put to little
Medium Enterprises and Road Transport & effective use in resource-poor and isolated
Highways Nitin Gadkari said the government is locations. Credit flow must follow public
working on the idea of a social microfinance infrastructure improvements and the provision of
institution to help people run small shops and forward and backward economic links in such
businesses while speaking at a recent virtual places. Homogenization of service delivery without
MSME conclave organised by the FICCI fully taking into account situational context and
Karnataka State Council. When he emphasised that client needs will continue to have limited impact.
handloom, handicrafts, khadi, and agro-based
sectors should be fostered, he was expressing a KEY MARKET SEGMENTS:
positive sentiment, especially in the 115 By Service Type
aspirational districts. The government is working  Group and Individual Micro Credit
hard to revitalise the economy; but, in order to  Leasing
move forward, it must take into account the  Micro investment Funds
existing microfinance sector and allied  Insurance
organisations.  Savings and Checking Accounts
ROAD AHEAD By Providers
Today, the Indian rural finance sector  Banks
stands at a fork in the road. Banks are increasingly  Non-banks
shying away from rural lending and reducing their
By Region
branch network in rural regions as a result of
 North America
financial sector reforms that emphasise profitability
as the major performance standard.“Burgess &  Europe
Pande (ibid) have brought out this fact in their  Asia-Pacific
study by stating that while between 1977 and 1990  LAMEA
(pre reform period) more bank branches were
opened in financially less developed areas, the SWOT ANALYSIS
pattern was reversed in post reform period”. While Strengths
rural poor access to credit has decreased in the  Providing impoverished and unreached
post-reform period, the policy advice is to replace individuals with savings and credit
the gap with microcredit. Impact evaluation is an opportunities
important aspect of the triangle of criteria that must  Reducing poor people's reliance on informal
be considered while judging microfinance money lenders and non-institutional sources of
[Link] impact evaluation into income
the SHG-Bank linkage programme will necessitate  Providing employment and income through
additional time and resources, as well as conflict microenterprises
with the current emphasis on numerical growth.  Improving rural economic productivity by
The realisation of a significant trade-off between facilitating access to capital
long-term economic impact and exponential growth  Savings mobilisation and capacity building for
necessitates bold public policy decisions. In line women's empowerment.
with the program's flexible approach, the SHG  Strengthening SHGs or community groups to
Bank linkage programme currently has no defined address their problems and promoting
social or economic standards for inclusion of leadership qualities among the members.
members into credit-linked groups. The inclusion Weaknesses
of the program's core poor, who have limited  Disparities in credit disbursement across the
expertise with economic activities, also limits country by region
capital's productive [Link] of credit  High administrative costs and interest rates
demand based on economic and social status is key  Multiple lending and over indebtedness
to optimum utilization of scarce resources.  People's financial illiteracy
Robinson (2001) “is probably right in observing  There is no suitable regulatory authority or
that commercial microfinance is not meant for core legal structure in place to oversee the
poor or destitute but is rather aimed at operations of MFIs.
economically active poor. He opines that this  Pricing that is not transparent.
segment should not be the target market for
Opportunities
financial sector but of state poverty and welfare
programmes”.Furthermore, credit, regardless of

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 In India, a large number of individuals and It has been noted that the MFI‟s
areas remain untouched. • Various regions concentrated more over the rural areas when
remain untouched. compared to urban locations. Out of more than 800
 Support for the scheme from the government MFI‟s a very smaller number of institutions are
and banks focusing on the urban poor. However, considering
 The range of services available can be the population the urban poor is quite large and it is
expanded to include financial, non-financial, increasing rapidly. In such situations, the MFI‟s
and other services. have to give equal importance for the urban poor as
 Members can be encouraged to invest in asset the need for financial assistance is more required in
creation, diversify their careers, and increase urban for various employment activities.
their risk tolerance. 4. Debt Management
Threats Clients are not educated to know how to
 Cutthroat competitions among MFIs manage their debt which they owe to MFI. It is
 MFIs vested interests like to grab the market observed that about 70% of the clients lack in
led to non-required lending even. education and hence they fall apart from managing
the loan provided to them. This issue is also
 Loans for initiatives that are either unprofitable
or impossible. considered as a crucial part for the organisations to
digest because if the client is not able to pay back
 Multiple loans to the same borrower resulted
loan, then no doubt that the MFI‟s are going to
in loan non-recovery.
decline from the growth and expansion.
 No use of SHGs peer pressure group for
5. Low education and language barrier
repayment
As discussed earlier, the level of education
of clients is low and also language is also
PROBLEMS/ISSUES FACED considered as a major issue in the MFI‟s because
“In India, so many microfinance lending about 70% of clients are from rural areas, the
institutions are working. Some are in a very good
communication (verbal and written) with clients is
condition in terms of lending, training to their an issue that creates a problem in growth and
customers for saving and small level expansion of the MFI‟s. This issue has made the
entrepreneurship. Some are in a bad condition and
MFI‟s employees a very hard task to make their
struggling for their existence” (Saptarshi M and
clients understand the policy, regulations, etc.
Prashant P)
6. Geographical factors
1. Low Outreach In India Around 60% of the MFI‟s agree that, it is
MFI outreach is very low as it is only 8%
really difficult to communicate with the clients who
as compared to 85% in Bangladesh. As per the
belong to far-flung areas due to no or fewer
data, it has been observed that MF programmes infrastructures in rural areas which have made
focus or emphasize more attention towards women. the11 MFI‟s unreachable or not possible to tap the
It has also been observed that women are better
many rural areas. Hence, again it is an issue for the
clients for the MFI‟s as they tend to save money
MFI‟s in development of the organization.
more than men, they borrow smaller amount of “The Krishna crisis - A frenzy of lending
loan and their repayment performance is way better (by MFIs, and by banks to MFIs) was already
than men. These characteristics of women have
underway when a first stark warning came in 2006
made the MFI‟s to extend their support towards from the Krishna District. After a popular
women by catering the service they need. Women
demonstration by borrowers demanding back their
may be better clients for MFI‟s however the men as
house title deeds, which had been seized as
clients cannot be ignored.
collateral, turned violent and, consequently, more
2. High interest rates than 50 MFI offices of Spandana Sphoorty and
MFI‟s are charging higher interest rates SHARE Microfin were temporarily closed by the
which has made the poor unable to pay the debt. As
government, the government of AP ordered an
the MFI‟s are private entities and they do not
inquiry into allegations of MFIs pushing reportedly
receive any subsidies from the government for their up to 200 borrowers into committing suicide.
lending activities and that is why they need to
Repayment rates went down to between 10% and
cover the operational costs from the borrowers by
20% for several months in the district” (Ghate,
offering the higher rates because at the end the
2006, pp. 61–66, 2007a; Sharma, 2006).
question is about the financial sustainability of
institution.
Significant challenges faced:
3. Negligence of urban poor

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“Poor people do not live in a static The Reserve Bank of India (RBI) is the
environment of poverty. Many millions of people country's most important microfinance regulator.
get out of poverty by successfully embracing new However, the RBI favours commercial and
farming technologies, investing in new business established banks over microfinance institutions.
opportunities, or by locating new jobs. At the same Microfinance institutions' needs and structures are
time, large numbers of people fall back into vastly different from those of other typical lending
poverty due to financial setbacks, health problems, [Link] occasional and exceptional
and other shocks” ([Link] Kumar Dey,2015). regulatory reforms, the Microfinance sector
1. Over-Indebtedness appears to be battling to stay afloat.
Over-indebtedness provides a serious 7. Choice of Appropriate Model
impediment to the microfinance sector's expansion The Self-Help Group (SHG) or Joint
because it deals with neglected parts of Indian Liability Group (JLG) lending models are used by
society who want to enhance their standard of the majority of Indian MFIs. They seldom choose a
living. The most major challenges that stress the model based on scientific evidence. Regardless of
microfinance business in India are the growing the scenario, most MFIs chose models at random.
trend of multiple borrowing by clients and In the end, the model decision has an impact on the
ineffective risk [Link] microfinance MFI organization's long-term viability.
sector gives loans without collateral, which
increases the risk of bad debts.
2. Higher Interest Rates in Comparison to Mainstream
Banks MEASURES TO OVERCOME
When compared to commercial banks in India, CHALLENGES:
MFIs' financial success is modest. The centuries-old 1. Proper Regulation
banking system has a deep foundation in Indian soil and is When the microfinance was in its nascent
steadily developing to meet modern needs. When stage and individual institutions were free to bring
compared to commercial banks, most microfinance in innovative operational models, the need for a
institutions charge a fairly high rate of interest (12-30%). (8- regulatory environment was not a big concern.
12 %). However, as the sector completes almost two
3. Widespread Dependence on Indian Banking System decades of age with a high growth trajectory, an
Because most microfinance organisations enabling regulatory environment is needed that
are registered as non-profits, they depend on protects interest of stakeholders as well as
financial institutions such as commercial banks for promotes growth.
stable funding to carry out their lending activities. 2. Field Supervision
The majority of these commercial banks are private In addition to proper regulation of the
entities with higher interest [Link] MFIs are microfinance sector, field visits can be adopted as a
incompetent lending partners due to their heavy medium for monitoring the conditions on ground
reliance on banks. and initiating corrective action if needed. This will
4. Inadequate Investment Validation also encourage MFIs to abide by proper code of
Investment valuation is a critical capacity for an conduct and work more efficiently.
MFI's smooth operation. Because the marketplaces in 3. Encourage Rural Penetration
which MFIs operate are still growing, market activity is It has been seen that instead of reducing
often limited. As an outcome, MFI finds it difficult to the initial cost, MFIs are opening their branches in
obtain market data for valuation reasons. places which already have a few MFIs operating.
5. Lack of Enough Awareness of Financial Services in Encouraging MFIs for opening new branches in
the Economy areas of low microfinance penetration by providing
India, a developing country in the making, financial assistance will increase the outreach of
has a low literacy rate that is even lower in rural the microfinance in the state and check multiple
areas. A significant chunk of India's populace is lending and increase rural penetration of
unaware of basic financial principles. The general microfinance in the state.
public is mostly unaware of the financial services 4. Complete Range of Products
provided by the microfinance [Link] rural MFIs should provide complete range of
population's lack of understanding is a major products including credit, savings, remittance,
barrier to them being able to retrieve easy credit financial advice and also non-financial services like
from MFIs to meet their funding requirements. training and support. As MFIs are acting as a
6. Regulatory Issues substitute to banks in areas where people do not
have access to banks, providing a complete range

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of products will enable the poor to avail all surance, self-help, education, and training and
services. finally credit should be introduced, and MFIs
5. Transparency of Interest Rates should now come out of merely tapping saving
As it has been observed that, MFIs are and providing credit facilities to poor.
employing different patterns of charging interest
rates and a few are also charging additional charges CONCLUSION:
and interest free deposits. All this make the pricing Microfinance has come of age in India. It
very confusing and hence the borrower feels must be understood that microfinance in itself is no
incompetent in terms of bargaining power. magic bullet – not for poverty eradication, liveli-
6. Technology to Reduce Operating Cost hood creation, empowerment of women or the
MFIs should use new technologies and IT poor, financial inclusion, or economic equality. But
tools & applications to reduce their operating costs. it can be developed as a powerful tool for reaching
Microfinance institutions should be encouraged to the poor and unprivileged people by providing a
adopt cost-cutting measures to reduce their whole range of services from financial to non-
operating costs. Also, initiatives like development financial to them as well as creating employment
of common MIS and other software for all MFIs opportunities, reducing gender and geographical
can be taken to make the operation more disparities by overcoming its weaknesses through
transparent and efficient. the suggestions as given above. Though some ef-
7. Alternative sources of Fund forts have been done recently to strengthen and
In absence of adequate funds, the growth regulating the microfinance sector as enactment of
and the reach of MFIs become restricted and to Microfinance Regulation Bill by government of
overcome this problem. MFIs should look for other Andhra Pradesh after getting complaints of anoma-
sources for funding their loan portfolio. Various lies and suicide of women due to torture of MFIs,
alternative sources of fund for the MFIs may be by acceptance of Malegam Committee Recommenda-
getting converted to for-profit company i.e., NBFC, tions by RBI and implementation of sector specific
Portfolio Buyout, and Securitization of Loans etc. regulation by Reserve Bank of India and most re-
Recommendations based on the study: cently release of draft microfinance institution De-
Based on above SWOT analysis some velopment and Regulation Bill, 2011. But much
recommendations are given below to overcome has to done to make this sector a powerful tool of
weaknesses of Microfinance sector inclusive growth and sustainable development of
 “Microfinance sector should be regulated by Indian economy. The interest rates are on a higher
the government and regulation has to be tem- side which is a concern that should be monitored
pered by a sensible institution like Reserve by the government. The level of competition makes
Bank of India (RBI)”(Dimple Vij, 2013) the way for better growth in this industry. Im-
 There should be field supervision of these provements happening to the infrastructural devel-
loans and micro finance institutions should opment and governance. The market potentiality of
check ground realities and the operational effi- growth exists and depends on region based equal-
ciency of such lending. ity. It is high time to do so if we implement above
 Microfinance now should focus on untapped recommendations our microfinance sector can be
and lean regions and incentives should be of- made more efficient and more inclusive.
fered to microfinance institutions. “Lessons of
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 International journal of advances in engineering and management (IJAEM)
Volume 3, issue 6 June 2021, pp: 1538-1554 [Link] ISSN: 2395-5252

2019. Published by Enas Publications.

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