A PROJECT REPORT

ON

“SCOPE OF MICROFINANCE AT INDIAN CONTENT”

SIDDHANT RAJESH MISHRA

SAP ID: 77122725661

Under the Esteemed Guidance of

Lecturer of Business Management

Project Report Submitted in Partial fulfillment for the Award of Degree

Master of Business Administration

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 ABSTRACT

Microfinance is gaining steam and has the potential to become a

significant factor in India. The paradigm of the self-help group, often
known as a SHG, in which banks lend money to groups of people,
mostly low-income women, without requiring collateral has become an
established component of rural banking. The current condition of self-
help group (SHG) microfinance in India is examined in this research.
SHG-based microfinance, nurtured and assisted by NGOs, has become
an important alternative to traditional lending in terms of reaching the
poor without incurring a fortune in operating and monitoring costs. This
is because traditionally loss-making rural banks have shifted their
portfolio away from the rural poor in the post-reform period. Both the
government and NABARD have acknowledged this fact, and as a result,
they have placed an emphasis on the SHG method, as well as working
with NGOs in their respective programs. Over the course of time, more
than a half million SHGs have been connected to banks. However, just a
few states, the majority of which are located in Southern India, are
responsible for more than three-fourths of this statistic, with Andhra
Pradesh being the uncontested leader. Despite the remarkable numbers,
microfinance in India is still too tiny to produce a huge influence on
alleviating poverty at this time. However, if pursued with skill and
opportunity development of the poor, it offers the potential to transform
the socioeconomic face of India's impoverished population.

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 ACKNOWLEDGEMENT

It is not often that one is presented with the chance to express gratitude
to those individuals who were crucial in the growth of one's work, who
assisted in one's development in a newly developing sector, and who
inspired one towards the many facets of the same.

I would want to express my inexhaustible gratitude to "GOD," the

Almighty, the Merciful, and the Compassionate, who blessed me with the
strength and vitality necessary to accomplish the work at hand.

I would need more and more appreciation in order to explain the many
ways in which I am obliged to my parents, who always stood by me
throughout the times when I was put through tests and trials. I would
need more and more acknowledgement to show how much I appreciate
them. Their selfless benefits, sacrifices, and acts of love and inspiration
cannot be repaid in material or immaterial form, nor can they be
matched in terms of one's knowledge or feelings.

SIDDHANT RAJESH MISHRA.

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TABLE OF CONTENTS

INTRODUCTION……….……………………………………5

MFIS CAN TAKE MANY DIFFERENT LEGAL FORMS.…15

REGULATION AND SUPERVISION OF INDIA’S

FINANCIAL INSTITUIONS, INCLUDING BANKS
AND MFIS…………………………………………………….17

REGULATORY APPROACHES AND INITIATIVES

IN THE MFIS SECTOR………………………………………21

AN UNFINISHESD VERSION OF THE MICROFINANCE

BILL OF 2007…………………………………………………25

THE MOST IMPORTANT CONCERNS……………………..30

THE PRELIMINARY STPES TAKEN IN PREPARATION

FOR THE VOTE ON THE BILL……………………………..37

CO-OPERATION AND EXCHANGE ACROSS

INTERNATIONAL BOUNDARIES…………………………..38

METHODOLOGY……………………………………………..40

THE TERM “THE NEW MANTRA IN RURAL FINANCE”

OFTEN REFERS TO MICROFINANCE……………………...43

MICROFINANCE IN THE INDIAN CONTEXT……………..47

THE PART PLAYED BY NGOS IN THE FIELD OF

MICROFINANCE……………………………………………...66

SUPPORT FROM THE GOVERNMENT FOR FUNDING

BASED ON SHG……………………………………………….69

CONCLUSION…………………………………………………78

REFERENCES/ BIBLIOGRAPHY…………………………….80
1. INTRODUCTION

1.1 Microfinance can be defined as the provision of savings, credit, and financial
services and products of very small amount to the poor in rural, semi-urban, or urban
areas for the purpose of enabling them to raise their income levels and improve their
living standards (for the time being, a small amount is considered to be up to 50,000
Indian Rupees). Microfinance as a concept has been used in India for more than a
century, since since the country's cooperative banking system was established at the
turn of the 20th century. Over the years, in the context of a large population that is
both socially disadvantaged and financially excluded, there have been policy
initiatives, institutional thrusts, and efforts made for the furtherance of microfinance
services by policy makers, development institutions, and implementing agencies.
These efforts have been made by policy makers, development institutions, and
implementing agencies. The government moved forward with a number of different
legislative initiatives. Microfinance has been able to expand its reach and become
more extensive as a result of India's achievements in the financial industry. Among
them were the nationalization of the commercial banking sector in 1969, the
establishment of Regional Rural Banks (RRBs) in 1975, reforms of the financial
sector (since 1991), and the implementation of pro-poor schemes and programs via
the credit delivery system, among other initiatives. In a similar vein, the initiatives
taken by the Reserve Bank of India (RBI), also known as the Central Bank of the
Country, had a positive impact on the growth of microfinance. These initiatives
included a focus on the expansion of rural bank branches, priority sector norms, and
financial inclusion, amongst other things.

According to the priority sector guidelines, forty percent of the net bank credit should
be channelled toward the various sectors and activities that have been selected, with
eighteen percent going to agriculture, ten percent to disadvantaged groups, and so
on. Microfinance has remained to be the most significant obstacle for rural credit
despite the fact that there are over 6000 villages and 74% of poor people living in
rural regions.

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accounts are for small size loans, which fall under the purview of microfinance. By
an Act of Parliament in 1982, the National Bank for Agriculture and Rural
Development (NABARD) was established for the purpose of fulfilling the mission of
"integrated rural development" via its three principal tasks of financial,
developmental, and supervisory activities. In addition to this, it was a catalytic factor
in the creation of microfinance.

1.2. Despite the amazing growth of the organized banking system and the continuous
emphasis on policies and programs that benefit the poor up to the 1980s, a
significant portion of the underprivileged remained to be denied access to the
financial system. During this time period, the widespread misperception about
impoverished people and banks, which holds that poor people cannot save money,
are not creditworthy, and are unable to successfully run businesses, reigned supreme.
In addition, there were significant flaws in the traditional lending technique, system,
and schemes, which led to delays in the provision of timely and sufficient credit to
those in need. Because of poor targeting, a mismatch between borrowers' capabilities
and the purpose of loans, a lack of linkage with other support systems, leakages at
various levels, a lack of voluntary participation due to directed credit, inadequacy of
loan, and consequently substandard asset creation, the impact of poverty alleviation
programs was diluted. NABARD started looking for alternative policies, processes,
procedures, savings and loan products, other supplementary services, and new
delivery mechanisms that would meet the needs of the underprivileged and the poor.
This search was began in January of 2005
.

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1.3. Self-Help Groups, sometimes known as shgs,

The Self-Help Group Bank Linkage Program (SHG-BLP) was conceived of and
initiated by NABARD in 1992 as a pilot project with 500 SHGs. This program was
designed to combine the complementary strengths of informal organizations and
formal lending institutions (SHGs). The linkage concept involves forming small groups
of the poor that are cohesive and participatory, encouraging the members of these
groups to regularly pool their savings, and then using the combined savings to make
small interest-bearing loans to group members. In this way, group members learn the
intricacies of proper financial management while also benefiting from the practice.
First, the SHGs connect their savings accounts with banks, and after the banks have
gained trust in the group dynamics and their internal lending procedures, they begin
to issue loans in proportion to the savings accounts. The victorious completion of the
program demolished every misconception about the Banking with the Poor. The
program was made more widespread in 1996 when it was realized that it had the
potential to provide an innovation that would enable the less fortunate to get timely,
hassle-free, and cost-efficient access to microfinance. The banks included the
initiative as part of their routine lending activity as well as their priority sector lending.

.
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With the support of the Reserve Bank of India's monetary policy, the continued multi-
pronged promotional efforts and leadership of the National Bank for Agriculture and
Rural Development (NABARD), and the participation of all other stakeholders,
including the Self-Help Promoting Institution (SHPI), financing banks, and the
Government of India, the project was a success. etc., the SHG-BLP has continued to
thrive throughout the years. As of the 31st of March in 2009, more than 6.12 million
SHGs had been connected to savings totaling Rs.54456.20 million, and more than
4.24 million SHGs had been linked to loans, with a total loan outstanding of
Rs.226808.5 million. This indicates that the program has grown into a nationwide
movement. It is the most extensive microfinance program in the world,
encompassing approximately 86 million families, and it is also the most extensive
financial inclusion initiative in India. SHGs have evolved into the primary mode of
transportation for the development process, which has led to the convergence of all
development and livelihood initiatives.
The program has led to the formation of a large number of SHPIs, Federations, and
Business Facilitators, and most importantly, it has ushered in the socio-economic
empowerment of the poor, particularly women. The program has also had a
transformative effect on rural financial institutions and their approaches to the
delivery of microfinance to the poor. The rapid expansion of the program has
highlighted a number of new problems and obstacles, such as ensuring an equitable
distribution of self-help groups (SHGs) across all of the regions, promoting micro-
enterprise opportunities for more established SHGs and their members, and
preserving the quality of SHGs, amongst others.

1.4. On the other hand, microfinance institutions (MFIs) of various legal forms have
achieved tremendous progress and increased their outreach via self-help groups
(SHGs), joint liability groups (JLGs), and people by providing them with financial
services at their front doors. In the context of the SHG-Bank Linkage Programme,
financial institutions have, in addition to providing direct funding to SHGs, provided
funding to MFIs for the purpose of on-lending to SHGs and other small borrowers.
As of the 31st of March in 2009, there were 1915 MFIs that had loan balances of
Rs.50091 million via this channel. In addition to that, the MFIs have been operating
in an aggressive expansion mode. Despite the growth of their business portfolio,
outreach, and financial services, the microfinance institution (MFI) sector is facing a
number of issues and challenges, including multiple financing, over-indebtedness, a
weak governance/internal checks and control system, high interest rates, and a lack
of transparency in their operations, amongst others.

1.5. Despite the success of programs like the SHG-Bank Linkage Programme and
microfinance institutions, there remains a significant gap in the provision of financial
services to low-income people. In India, the World Bank estimates that there are 456
million people living in poverty, with around 42% of the entire population, or 1.15 billion
people, living below the revised International Poverty Line (IPL), which is now set at 1.25
dollars (50 Indian rupees) per day. According to the findings of the National Sample
Survey Organisation (NSSO) Survey (59th Round), 51.4% of farmer

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households do not have access to either formal or informal sources of financial
support. Only 27% of all farmer families have access to official forms of credit, and
one third of this group additionally borrows from non-formal sources. The majority of
farmers do not have access to alternative sources of credit. When seen in this light,
the microfinance industry has a significant opportunity for expansion. In addition to
small farmers, marginal farmers, oral lessees, tribals, dryland farmers, rural women,
and others like them, there is a new generation of consumers who have expectations
for the financial services they get to meet their specific requirements.

India, which has the world's biggest population of people living in poverty, has been
a logical target for testing the effectiveness of microfinance as a method for reducing
the effects of poverty. India's participation with modest loans aimed largely at the
rural poor is not a new concept. India's official banking industry is a nationalized
system that has placed an emphasis on rural and developmental banking for many
decades. However, in recent years there has been a surge in interest in microcredit
and microfinance in the form of group-lending without collateral. This is in part due to
the remarkable success of institutions such as the Grameen Bank in Bangladesh,
which is located nearby, as well as BRI, BancoSol, and other organizations located
in further away countries. Many people who were skeptical about the efficacy of
microfinance in India have been won over by the achievements of organizations like
as SEWA in Western India and SHARE and BASIX in Southern India. These
organizations have shown that microfinance can, in fact, make a difference in India.
The "SHG-Bank Linkage Program" run by NABARD has, in reality, been responsible
for the creation of the biggest microfinance network in the whole globe over the
course of the last ten years. This program was designed to link self-help groups of
disadvantaged people with banks. The strategy of self-help groups has garnered
passionate support from key officials like Chandrababu Naidu, who is the Chief
Minister of Andhra Pradesh. Even the national government has come to recognize
the benefits of group lending and has begun to employ this strategy in an effort to
reduce the prevalence of poverty.

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India is the birthplace of microcredit, which refers to the practice of providing poor
people with small loans. Historically, traders and moneylenders have been the ones
to extend credit to the underprivileged in rural areas.

However, the interest rates that they charge are typically exorbitant, which results in
significant hardship and impoverishment for the borrowers, including undesirable and
illegal practices such as bonded labor. Today, when we talk about microfinance, we
don't mean the kind of exploitative tactics that were common in the past; rather, we
mean lending money to people who are impoverished at rates that are affordable
while still being sustainable.

Within India, the microfinance movement in Western and Southern India has
received the most attention, both in the media and in academic research1. This
attention has been focused on two regions: The leading microfinance non-
governmental organizations (NGOs) in India, such as SHARE, BASIX, SEWA,
MYRADA, and PRADAN, have garnered the attention of academics, members of the
media, and members of the government. This attention is warranted. In particular,
the state of Andhra Pradesh has seen a phenomenal increase in the number of
microfinance activities, and its success stories have also received a significant
amount of media attention.

In spite of this, Self-Help Groups, also known as SHGs, have quietly proliferated
across the majority of India's districts over the past few years, typically at the behest
of various non-governmental organizations (NGOs) focused on developmental work.
Now, thousands of SHGs are home to millions of low-income people, the majority of
whom are women. It should come as no surprise, given the lack of an easily
accessible data source covering the operation and performance of multiple MFIs and
SHGs spread out over a region, that the majority of the existing research on
microfinance in India, as in the majority of other countries, has focused on
developing case studies, often covering the well-known success stories. This is

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because there is no data source that can cover the operation and performance of
multiple MFIs and SHGs spread out over a region. In this piece of writing, we will be
attempting to take a rather unique approach.

The paper is structured in the following manner throughout its entirety. In the
following paragraphs, a brief history of lending to rural India's underserved
population by India's rural banking sector will be presented. In the following
paragraphs, we will examine the many facets of self-help groups, which are
becoming an increasingly important player in the field of microfinance. The
effectiveness of the rural banking system in the realm of microfinance is analyzed in
the fourth section of the report. A glimpse into the foreseeable future serves as a
fitting capstone for the fifth and final section.

People who farm, fish, or herd; operate small or micro enterprises where goods are
produced, recycled, repaired, or traded; provide services; work for wages or
commissions; gain income from renting out small amounts of land, vehicles, draft
animals, or machinery and tools; and to other individuals and local groups in
developing countries in both rural and urban areas are eligible for microfinance.
Microfinance is a term that refers to the provision of small-scale financial services,
including both deposits and loans.

Since India's independence, the government has placed a significant emphasis on

expanding access to financial services for the country's lower-income citizens. When
the commercial banks were nationalized in 1969, they were given the directive to
lend forty percent of their available loanable funds to the priority sector at a reduced
interest rate. Agriculture, along with other activities that took place in rural areas, and
lower social strata in general, were included in the priority sector. The provision of
resources with the intention of assisting the less fortunate in becoming self-sufficient
was the goal. They did not have the resources or
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employment opportunities necessary to become financially self-sufficient, let alone

meet the requirements for the most basic level of consumption.

In 1980, a credit program known as the Integrated Rural Development Programme

(IRDP) was initiated in order to supplement the work that had already been done.
However, these supply-side programs (which ignore the demand-side of the
economy), which were helped along by corruption and leakages, did not accomplish
very much. In addition, the percentage of total rural credit contributed by the formal
financial sector was 56.6%, while the percentage contributed by informal finance
was 39.6% and the percentage contributed by unspecified sources was 3.8%. [RBI
1992]. Not only had the flow of formal credit been lower, but it had also been uneven.
The poor were excluded from the system because it relied on collateral and
paperwork. The gap in the market was continued to be filled by the moneylender in
the village, who levied interest rates ranging from 2% to 30% per month (Rural
Credit and Self Help Groups-Microfinance needs and Concepts in India-
K.G.Karmakar 1999). Seventy percent of landless and marginal farmers did not have
a bank account, and 87 percent of those farmers did not have access to credit from
a formal source ( World Bank NCAER, Rural Financial Access Survey 2003)

The worldwide Microfinance Revolution took place against the depressing backdrop
of these circumstances. In India, the practice started in the 1980s with the
establishment of a few informal Self-Help Groups (SHG) that participated in micro
activities that were financed by microfinance. But Shri Mahila SEWA Sahkari Bank,
India's first Microfinance Institution, was established as an urban co-operative bank
by the Self Employed Women's Association (SEWA) not long after the organisation
(founder Ms. Ela Bhatt) was established in 1974. The bank was established as an
urban co-operative bank.

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The Mysore Resettlement and Development Agency (MYRADA) sponsored project
on "Savings and Credit Management of SHGs" received partial financing from
NABARD during the 1986-1987 fiscal year. This project was the first official effort to
be put into action under the direction of NABARD. (National Bank For Agriculture
And Rural Development). Integration of Indian Microfinance into the Economy'- P.
Satish, 2005]

2. MFIS CAN TAKE MANY DIFFERENT LEGAL FORMS

The inadequacies of the banking system in terms of outreach to the bottom of the
pyramid on the one hand and the exploitative practices of village money lenders in
relation to their customers, which trapped them in an ever-moving vicious circle of
poverty, paved the way for the creation of people-based voluntary organizations that
started to focus on or diversify to microcredit. These organizations were a response
to the inadequacies of the banking system.

2.1 NGO-MFIs

The Indian Trust Act of 1882 or any other state legislation that governs trusts for
public religious or charitable purposes is used to register the non-governmental
organizations (NGOs) as public or private trusts. A good number of them are also
registered in accordance with the Societies Registration Act of 1860 or any other
state legislation that governs organizations like Societies. The size of NGO-MFIs,
their philosophies and approaches to providing microfinance, and the role that
financial intermediaries play can vary greatly from one another.

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2.2 MUTUAL FINANCIAL COOPERATION

Cooperative Societies that are registered as either a cooperative society, a mutual

benefit society, or a mutual aided society under any State enactment relating to such
societies or any multi-State cooperative Society that is registered under the Multi-
State Cooperative Societies Act, 2002, are allowed to engage in microfinance
activities.

2.3 NON-BANKING FINANCIAL COMPANIES (NBFC)

Microfinance is a service provided by non-bank financial companies (NBFCs) that

are for-profit and registered under the Companies Act of 1956.

It is against the law for non-profit Section 25 companies and non-governmental

microfinance institutions (NGO-MFIs) to take deposits from the general public. The
Reserve Bank of India exercises stringent control over NBFCs classified as "For
Profit" that accept deposits from the general public.

2.4 As a result, there are now three distinct types of institutions operating in the
microfinance market. To begin, apex development institutions such as NABARD, the
Small Industries Development Bank of India (SIDBI), and the Rashtriya Mahila Kosh
(RMK) supplied banks and MFIs with funding and promotional support. Second, the
banks in rural India, which have more than 150,000 branches, have increased the
scale of their microfinance delivery, primarily through the Self-Help Group Business
Loan Program (SHG-BLP). Thirdly, MFIs that fell into the aforementioned categories
began offering a wide range of goods and services.

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In the absence of a fully-fledged and all-encompassing regulatory infrastructure, it is
impossible to get data that is both concrete and genuine on the number and
character of MFIs.

According to the Annual Report of the RBI, there were 12,739 NBFCs, of which 336
NBFCs were authorized to accept deposits from the general public. According to the
Sa-dhan Quick Report 2009 (which is an umbrella organization for MFIs), there were
232 MFIs that supported 2.26 crore families and had loan outstandings of Rs. 11374
crore. Shares of 62% of customer outreach and 75% of the overall business portfolio
were distributed among organizations operating for profit. According to the
Inventorisation Survey that was carried out by GTZ in 13 different states, a total loan
outstanding of Rs.41420 million was owed by 786 MFOs as of the 31st of March in
2008. This included 3 cooperatives, 445 MACS, 24 NBFCs, 9 Section 25 companies,
199 societies, and 106 trusts. In spite of this, only 4% of the agencies (companies)
were responsible for 67% of the total loan outstanding.

3. REGULATION AND SUPERVISION OF INDIA'S FINANCIAL

INSTITUTIONS, INCLUDING BANKS AND MFIS

3.1 FINANCIAL SERVICES INDUSTRY

The Banking Regulation (BR) Act of 1949 is the primary piece of legislation that
establishes the legal framework for the regulation and supervision of formal banking
institutions. There are a total of 1770 urban cooperative banks, 80 commercial banks
(CBs), 86 regional rural banks (RRBs), 4 development finance institutions (DFIs),
12739 non-bank financial corporations (NBFCs), 31 state cooperative banks (SCBs),
and 370 district central cooperative banks among the financial institutions (DCCBs).
In accordance with the B.R. Act, together with certain provisions of the RBI Act of
1934, the RBI assumes powers to prescribe standards and liquidity, solvency, and
soundness of the regulated institutions so as to ensure that the interests of
depositors are protected.

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This is done in order to ensure that depositors' interests are protected. RRBs and
SCBs/DCCBs will be under the supervisory jurisdiction of NABARD, without dilution
of the regulatory and supervisory powers of RBI. Commercial Banks, Urban
Cooperative Banks, and For-Profit NBFCs that are registered with RBI will be subject
to the supervisory and regulatory jurisdiction of RBI. Over the course of many years,
the policies and procedures governing supervisory and regulatory oversight of these
institutions have been established and refined.

While the Board of Financial Supervision (BFS) in the Reserve Bank of India (RBI)
provides direction and guidance to exercise regulatory and supervisory powers, the
Board of Supervision (BOS) in the National Bank for Agriculture and Rural
Development (NABARD) extends policy guidance in the supervision of regional rural
banks (RRBs).

The asset classification and provisioning norms, the supervisory rating standards, the
liquidity, the disclosure norms, the Risk Management System, the audit and
accounting principles, the exposure limits, the codes of standards and fair practices,
the on-site inspection processes, the Off-site Surveillance System (OSS), the
statutory reporting and compliance through Prompt Corrective Action (PCA) trigger
points, the preventive action through warning signals, and the punitive action through
regulatory directions or penalties.

The CBs have been given the directive to comply with the Basel II standards within
the allotted amount of time. These safeguards and obligations must be fulfilled by
the financial institutions that provide microfinance services. RRBs and cooperative
banks have been given the opportunity to implement and comply with the various
principles of supervision that have been enshrined by the Basel Committee. This is
the case despite the fact that RRBs and cooperative banks have not been required

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to comply with the various principles of Basel Principles of I/II supervision,

particularly within any specific time frame.

When it comes to the inspection process and the supervisory rating of RRBs and
Cooperative Banks, NABARD has implemented the CAMELSC approach (which
stands for Capital, Asset Quality, Management, Earnings, Liquidity, Systems, and
Compliance). In addition to making appropriate recommendations to RBI for
licensing and regulatory action and providing inputs on an as-needed basis,
NABARD has developed and implemented appropriate supervisory best practices
that pertain to RRBs and Cooperative Banks. This is in addition to making
appropriate recommendations to RBI. In this particular course of action, there has
been consistent progress.

3.2 THE CONTROL AND SUPERVISION OF MFIS

NBFCs have played significant role in the Indian Financial Sector in providing
outreach to the small clients. By amending the RBI Act of 1934 in 1996, the Reserve
Bank of India (RBI) was able to bring non-bank financial companies (NBFCs) under
its regulatory authority. This was done with the intention of integrating NBFCs into
the larger financial system. This opened the door for obligatory registration with the
RBI of companies that provided financial services, obligatory credit rating of non-
bank financial companies that accepted deposits, and the compliance of non-bank
financial companies with prudential regulations. According to Section 45-IA of the BR
Act, a non-banking financial company (NBFC) is not permitted to start or continue
operations unless it first obtains a certificate of registration from the RBI and reaches
a Net Owned Funds (NOF) threshold of Rs.20 million (shareholders'
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equity plus internally generated reserves). In addition to complying with the
standards of the RBI, all NBFCs are required to comply with the provisions of the
Companies Act related to Board of Directors, Share Capital, Management Structure,
audit, maintenance and publishing of books of accounts, and general conduct, etc.
Important prudential norms to comply with include the Capital Adequacy Ratio (CAR),
which is based on the risk weight of assets and is set at 15%, income recognition,
accounting standards, asset classification, provisioning for bad and doubtful debts,
disclosures in balance sheet, etc.

Not less than 15 percent of their deposits should be invested in specified securities
and approved securities, which include government securities and bonds guaranteed
by the government. NBFCs are required to notify RBI of their intention to open
branches. To comply with prudential norms on CAR, ceiling on concentration of
credit/investment/quantum of deposits, etc., however, only non-bank financial
companies that accept public deposits are required to do so. Therefore, the RBI has
the authority to issue stringent policy prescriptions and regulatory directions to
NBFCs that have the necessary NOF and accept deposits from the general public.
However, based on the volume of loans, 77% of the MFI Sector is directly regulated
by the RBI, while 75% of the MFIs themselves operate outside of the regulatory
framework. MACS, Trusts, and Registered Societies are examples of prudentially
unregulated businesses. These entities often have a restricted number of customers
and transact a low amount of business.
 4. REGULATORY APPROACHES AND INITIATIVES

IN THE MFI SECTOR - LESSONS LEARNED

FROM INTERNATIONAL EXPERIENCE AND RESEARCH

4.1 THE BENEFITS OF GOVERNMENT OVERSIGHT

Although the regulation of MFI Sector has been of recent origin, the regulation per se
of banking sector is established, widely recorded and assessed throughout the years.
The following are considered as important advantages and benefits of regulation and
supervision of banks/MFIs:

i. Ensures that the depositors' interests are protected;

ii. Put prudential norms, standards, and practices into place;
iii. Provides appropriate information regarding the genuine risks faced by the
banks/MFIs;
iv. Encourages systemic stability and, as a result, helps maintain public
confidence in banks and other financial institutions;
v. Prevents the failure of a bank or other financial institution (MFI) and potential
dangers by intervening at the appropriate time;
vi. Inflicts punishment on those who break the rules, behave inappropriately, or
don't conform to the standards of behavior;
vii. Offers invaluable advisory inputs for the problem-solving and overall
improvement of banks and other financial institutions;
viii.Fosters a banking and financial system that is secure, robust, and sound, as
well as an effective banking and financial policy, and
ix. Fosters and fosters growth and development of the economy in an orderly

manner.
4.2 THE BEGINNINGS, CURRENT PRACTICES, AND FUTURE DIRECTIONS OF

REGULATION FROM AN INTERNATIONAL PERSPECTIVE

The early years of the 21st century saw a proliferation of nation-state initiatives
aimed at supervising and regulating the burgeoning microfinance industry. Latin
America was the birthplace of many of the early efforts to put microfinance under the
official regulation and supervision of the financial system. The topic of microfinance
has made its way onto the agendas of policymakers all over the world regulatory
bodies and government watchdogs Over fifty countries have already implemented or
are considering specific arrangements for the regulation and supervision of
microfinance, either as a separate new law or as amendments to the existing legal
and regulatory framework. These specific arrangements can either be seen as a
separate new law or as amendments to the existing legal and regulatory framework.
In some nations, the Central Bank is responsible for both regulatory and supervisory
functions, whereas in others, a separate authority (either already existing authorities
or newly established authority/networks) has been empowered and delegated the
authority to perform these functions.

Self-Regulatory Organizations, also known as SROs, have been put through their
paces in a few nations, particularly for non-prudential regulation. Regulation is
defined as a set of statutory rules that apply to MFIs, and supervision is defined as
the process of implementing and enforcing compliance with these rules. The
principles also define supervision as the process. A clear distinction between
prudential and non- prudential regulation is also established. To ensure the safety of
depositors, prudential regulation establishes minimum requirements for capital
adequacy, loan loss provisioning, and financial solvency, among other things. Non-
prudential regulation addresses enabling aspects of the economy, such as the
operation of businesses, the monitoring of their performance, the provision of credit
information services, transparent reporting and disclosure, codes of fair practices
and systems, consumer protection, and the prevention of fraud, among other things.
There have been some variations in the scope of the regulations as well as how they
are applied; for example, some have extended prudential to include only deposit-
taking MFIs. Lower minimum capital, higher capital adequacy, lower unsecured
lending limits, more aggressive loan loss provision, simpler loan documentation,
lower physical security and branching needs, lower frequency and content of
reporting, lower reserve against deposits, ownership suitability, and diversification
requirements are some of the suggestions made in recognition of the unique
characteristics of MFIs and small loans that are mostly uncollatoralized. In order to
determine whether or not MFIs are financially stable, the majority of nations make
use of both quantitative and qualitative indicators. The regulatory rating indicator of
ACCION CAMEL has been suitably adopted to MFIs. The rating agencies like planet
rating, M-CRIL, Micro Finanza, Moody‘s, Standard and Poor, etc., have also
developed suitable rating norms and could be useful tools for regulators/supervisor
There has been also attempts to evolve social performance rating standards by
integrating economic and social rating, by the Social Performance Task Force
(SPTF), CERISE, CGAP - Grameen Ford, FINCA‘s FACT Tools, Planet, M-CRIL, etc.
Although, guiding principles on Regulation and Supervision of Microfinance
established in 2003 by Consultative Group to Assist the Poor (CGAP) suggests
some unanimity, there has been diversity in trends and practices around the globe.
4.3 THE FOLLOWING ARE SOME GENERAL EXPERIENCES AND LESSONS

THAT HAVE BEEN GAINED INTERNATIONALLY IN REGARDS TO THE

REGULATION OF MICROFINANCE.

(i) Microfinance has been conceived with a wider spectrum and perspectives

(ii) Microfinance has been driver to building inclusive sector.

(iii) Regulatory framework is tailored to the national circumstances.

(iv) Regulation is geared more toward actions than it is toward institutions

(v) Regulation should be appropriate to the projected benefits

(vi) Elements for an enabling framework are to support microfinance operations and

raise the degree of access to financing.

(vii) The purpose of the regulation is to encourage linkage and partnership between

different retail outlets, microfinance organizations, and banks.

(viii) The purpose of regulation is to ensure consumer protection, which includes the
prohibition of deceptive and unfair practices in lending and collection, the disclosure
of all full costs, fees, and terms of products and services, and the provision of clients
with information that is accurate, complete, accessible, comparable, and transparent.

(ix) The regulatory framework for microfinance should figure out methods to exert
pressure on the social goals that are being pursued through microfinance
transactions.

(x) Regulation is to set performance standards portfolio management, MIS, internal

control system and governance.

(xi) The regulation ensures registration, reserves, compliance with prudential norms,

and directions in the reporting requirements that must be met.

(xii) There is no point in regulating those over whom we have no authority to

exercise supervision.

The international experience of microfinance regulation clearly indicates that in

several countries in Asia and Africa, microfinance could be central to achieving
overall social objectives and that a conducive environment including a relevant legal
framework needs to be provided for the sector to grow in an orderly and systematic
manner.

5. AN UNFINISHED VERSION OF THE MICROFINANCE

(DEVELOPMENT AND REGULATION) BILL OF 2007
A Task Force was established in 1999 to address the issue of developing and
implementing an appropriate statutory and policy framework for the regulation and
supervision of the growing microfinance sector in the country. This issue had drawn
the attention of Policy Makers in the midst of debates over the issue in the country
(under the Chairmanship of the then Managing Director of NABARD). to investigate
the associated issues and to report back with recommendations regarding both
short-term and long-term solutions to the problem
The Government of India (GOI) took the initiative to draft the Micro Financial Sector
(Development and Regulation) Bill, 2007 in conjunction with the Reserve Bank of
India (RBI), the National Association for Microfinance and Rural Development
(NABARD), the Indian Banking Association (IBA), and the microfinance sector. This
was done with the intention of establishing an appropriate legal framework,
institutional mechanism, and policy environment. The objectives were as under:
(1) To ensure the development of the microfinance sector is conducted in an

organized, comprehensive, and integrated manner;

(2) To broaden and make it easier for poor and disadvantaged people to participate

in the financial system;

(3) To safeguard the interests of low-volume depositors and thrift institutions;

(4) To remove any opportunity for exploitation of the most vulnerable customers in

the sector and

(5) To facilitate universal and easy access to credit, thrift and other financial facilities

to women and disadvantaged.

5.1 THE AIMS OF THE GOI IN THIS RESPECT WERE SET OUT IN

THE SUCCESSIVE UNION BUDGET ANNOUNCEMENTS - 2006 AND

2007.
The Union Cabinet gave its approval to the draft legislation, and on March 20, 2007,
it was presented to the Parliament for consideration. After that, the bill was sent to
the Standing Committee of the Parliament for further consideration. Everyone who
had a stake in the matter had given their opinions and suggestions to the Committee
at the time. The time of Lok Sabha ended and new Govt., at the Centre took control
following the general election. The GoI is mulling to re-introduce the measure in the
Parliament. In the meantime, the Committee on Financial Inclusion, also known as
the Dr. Rangarajan Committee, has suggested that the Bill be used to regulate the
entire MFI Sector, including NBFCs.

5.2 PROVISIONS AND KEY FEATURES OF THE DRAFT BILL THE FOLLOWING

ARE SOME OF THE KEY PROVISIONS AND FEATURES OF THE DRAFT BILL:

i. The bill intends to entrust the regulatory, supervisory, promotional, and

developmental roles for microfinance services provided by Microfinance
Organizations to the National Bank in recognition of NABARD's track record in the
relevant field (MFOs)

ii. As NBFCs and Section 25 Companies are already regulated by RBI, it only seeks
to regulate and develop the Micro Finance Organisations (e.g. Societies registered
under Society Registration Act, 1860, Trusts created under the Indian Trust Act,
1982, Public Trust under State enactment, Cooperative Societies under Multi-
Purpose Cooperative Societies Act, 2002, Cooperative Society or Mutual Benefit
Society) that provides thrift and/or other types of microfinance services for those who
are economically disadvantaged and/or impoverished.

iii. A Microfinance Development Council (MFDC) will be established to advise the

Regulator and provide policy directions. This council will be comprised of senior
executives from the RBI, NABARD, SIDBI, NHB (National Housing Bank), and the
Government of India.
iv. Envisages policies and procedures for MFOs for registration and cancellation of

registration

v. Defines the powers and functions of Regulator in various aspects in implementing

the provisions of the Act and obligations of the supervised MFOs.

vi. Envisages the functions and the jurisdiction of Auditors, Ombudsman (for

redressal of public grievances) and the GOI.

vii. The establishment of sanctions on account of breaches of the Act

viii. Institution of Micro Finance Development and Equity Fund (MFDEF) for

promotion and development of microfinance services.

ix. The areas under which regulations to be made by the Regulator and the rules to

be framed by GOI.

5.3 EXPECTATIONS REGARDING THE ROLE OF THE REGULATOR

The following responsibilities have been assigned to the Regulator according to the

draft of the bill:

i. To encourage and guarantee the steady expansion of financial management

services;

ii. The design of policies to promote more transparency, effective management,

improved governance, and the provision of efficient MF services;

iii. To develop sector-related benchmarks and performance standards, including

codes of conduct, methods of operations, and governance;

iv. Establishing rating standards for microfinance organizations; gaining access to

bank financing; acting as a business correspondent or facilitator;

v. Specifying accounting standards and auditing procedures, books of accounts;

vi. the development of information and databases for the microfinance industry;

Supporting the education, training, and capacity building of consumers in the context
of institutional growth;27 | P a g e
vii. Providing assistance with research and documentation as well as information

distribution

viii. Registration of Undertakings: Procedures, Issuance, and Cancelation;

ix. Carrying out on-site inspections, off-site monitoring, and the distribution of

directives;

x. Utilizing punitive measures in the event of a violation or the dissemination of

misleading information;

xi. Coordination with other government agencies; and

xii. Managing/ administering Ombudsman program, mFDEF, mFDC.

5.4 THE OVERARCHING PHILOSOPHY OF THE BILL THAT IS BEING

PROPOSED—GOING BEYOND TRADITIONAL BANKING REGULATION

i. The regulation of microfinance services should be geared more on the activities

than the institutions;

ii. Regulation to safeguard the protection of consumers (Micro-clients) – Redressal

of Public Complaints;

iii. Regulation to simultaneously stimulate development processes, taking into

consideration the extremely early stage and delicate nature of microfinance services
and MFOs;

iv. Regulation that would apply to thrift or any other kind of financial service;

v. The more stringent registration and regulatory requirements imposed on MFOs

providing thrift services in comparison to those imposed on other types of financial
services; and

vi. Regulation that strikes a balance between the growth of non- or lightly-regulated

enterprises and strict adherence to financial discipline.

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5.5 ANTICIPATED RESULTS OF IMPLEMENTING THE PROPOSED BILL

i. The establishment of order and discipline within MFOs, as well as a sound system,
fair procedures, and governance; ii. The encouragement of disclosures and openness
about the functioning;

iii. Producing a database of information on MFOs, including financial details and

information; Common Reporting;

iii. The Establishment of a System for the Management of Social Performance;

v. Offering members of the organization security for their thrift savings;

vi. Ensuring that Customers' Concerns Are Addressed and Resolved;

vii. Initiating corrective and developmental action in response to findings from on-site

inspections and OSS reports;

viii. Making it Easier to Carry Out Reliable Accounting Procedures, Audits, etc.;
ensuring compliance with inspection and auditing standards, which will ultimately
lead to an increase in performance
29 | P a g e
 6. THE MOST IMPORTANT CONCERNS

In spite of the fact that the Law has a lot going for it, there have been a lot of
disagreements over the purpose of regulation, the institutional framework, and the
specific justification for merging parts of development and regulation that are
envisioned in the bill. In the following, we will conduct an in-depth analysis of these
three issues:

6.1 THE JUSTIFICATION FOR THE REGULATION

6.1.1 IMPROVING CUSTOMERS' ACCESS TO FINANCIAL RESOURCES

Over the course of the last decade and a half, the importance of microfinance as a
component of initiatives designed to alleviate poverty has gained widespread
recognition. As a direct consequence of this, a growing number of non-governmental
organizations (NGOs), as well as government-funded, bilateral and multilateral
development efforts, are integrating microfinance into their respective programs. As
NGOs-MFOs have been developing their enterprises, they have come up against the
restrictions of grants and donor finances. As a result, MFOs are increasingly
searching for funding through the banking system, capital from private and public
sources, and are attempting to collect deposits from their customers. It is projected
that the MFOs have served close to 5 million customers on a cumulative basis via
their outreach efforts. It is no longer acceptable to overlook the fact that smaller
NGO MFOs are providing financial services to the less fortunate, especially given
the possibility that the traditional banking system would not be able to immediately
take their place. Surveys, on the other hand, indicate that lenders operating in the
informal sector continue to have a significant presence in rural India

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and are still able to offer services that are not yet supplied to the same degree by the

official and semiformal sectors.

6.1.2 THE TRANSFORMATIVE POTENTIAL OF MFOS

The NGO MFOs are short-term organizations that provide assistance to the very
underprivileged, who are not currently being supported by the nation's banking
system. Due to the fact that they need a greater amount of capital to support their
businesses, these customers may eventually graduate and become direct customers
of the banks. These Non-Governmental Organization Microfinance Organizations
(NGO MFOs) play a vital part in India's rural financial system, and they need to
gradually transform into full-fledged formal financial institutions, either in the form of
cooperatives or as businesses or NBFCs. In order to facilitate the transition of NGO
MFOs into formal, regulated financial institutions, it is necessary for these
organizations to adhere to the norms and procedures that are appropriate for
entering formal financial institutions. The mission of the MFO Development and
Regulation is to facilitate this transition and to assist these organizations in being
fully integrated into the mainstream financial system.

6.1.3 REGISTRAR'S CONSTRAINTS

The Non-Governmental Organizations that Function as Organizations (NGO MFOs)

are often registered as Societies under the Societies Registration Act or as Trusts
under the Indian Trusts Act or their respective versions in several states throughout
the nation. These types of legal structures are not intended to govern the financial
mediation process. When it comes to the role they have in the financial mediation
process, these MFOs sometimes function as if they are operating in a conceptual
void. The poor customers who have no protection at all are the ones who are
sometimes the ones to suffer as a result of the actions and inactions of these MFOs.
Even though the Registrar is often thought of as a regulator of MFOs under these
legal Acts, the Registrar is not a regulator of MFOs under these legal Acts in the
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traditional meaning of the word. These legal Acts are now being used by MFOs. The
Regulator's purview extends only to the realm of administration; the question of
whether or not MFOs are solvent from a financial standpoint is neither within his
purview nor a concern of his. For instance, the role of the Registrar of Societies in
each state is to ensure compliance with the terms of the primary Act as well as any
comparable Acts that have been adopted by the other states. The primary Act does
not provide a definition for the word "Registrar."

The Registrar does not have excessive powers in terms of the management of the
operations of a society, as can be seen from the list of powers and responsibilities
that he is responsible for doing. Regarding the functionality of a society's Micro
Finance activities, the Registrar is not responsible for any kind of prudential
regulation or for determining the financial performance or solvency of the society.
The Registrar has the authority to step in only in extreme circumstances, such as
when there is a serious disagreement in the administration of the society or when
there is reason to believe that the society intends to mislead its creditors or
participate in other activities that are illegal or prohibited.

The administration of savings that belong to low-income individuals is included in the

definition of "providing financial services," which also include the management of
funds that belong to public entities. Because of the accessibility of resources and the
permissive nature of the regulatory environment, non-governmental organizations
(NGOs) and other organizations may engage in microfinance without having a
complete comprehension of the intricacies and disciplines of financial management.
It is conceivable that the entrance of firms that are not well equipped or that are not
properly motivated may take financial intermediation, as has already occurred to
some degree. Not only is it crucial that the standards be implemented in the
relatively near future, but it is also essential that some kind of regulation be given
some thought in order to ensure that the expansion of this essential industry is not
accompanied by a significant increase in the number of catastrophic events.

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6.1.4 MARKET-BASED SYSTEM

The overarching goal of the regulation and supervision of MFIs is to build a market-
based specialty financial system for all financial goods and services, including credit,
savings, insurance, transfer facilities, and other client-oriented offerings. A financial
system that is built on markets presupposes the presence of adequate competition
and incentives to supply customers with the most cost-effective services available,
where "cost" refers to all expenses, including interest rates, transaction fees, and
monitoring expenses. The ultimate goal of microfinance institutions (MFIs) and non-
governmental organizations (NGOs) that provide access to financial services for the
poor should be to "mainstream" their customer base. This will help to prevent the
marginalization of clients in relation to financial services. A secondary objective is to
raise the level of practice, make it more sustainable, and provide it the ability to
contribute to the expansion of the financial system.

6.1.5 THE REASONS BEHIND THE REGULATION

The presumption that there is a disparity in the amount of information held by the
lender and the borrower serves as the impetus for government action in the form of
regulation. The lender has less information than the borrower has on the borrower's
plans for the cash and the borrower's capacity to repay the loan. When a financial
institution accepts deposits, that institution knows more than the depositor does
about how the funds will be utilized and also about the institution's own stability.

The transaction is plagued by issues of "adverse selection" and "moral hazard" as a

consequence of the asymmetry of knowledge that exists inside it. (Staschen 1999)
There is regulation in place to match the actions of the institution (the agent) and the
client (the principal), and it is accomplished in three ways: control the actions of the
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agent; restrict the decision-making power of the agent; and set appropriate
incentives for the agent in such a way that the interests of the agent and the principal
are harmonized. Even though it has the lowest monitoring cost, the final choice is the
one that is the most difficult to construct. The first two choices both entail a
supervisory agency that has the legal capacity to exercise control over the agent,
and they both result in inefficiencies in the market.

In economic theory (but not in development finance), the manager‘s goal is to

maximize his knowledge advantage not just over his rivals but also over the
customers which are restrained by regulation. In actuality, the regulation of financial
organizations makes use of all three of the aforementioned approaches.

In short, the reasons for regulation are (a) It is difficult for small depositors to closely
monitor the performance of the MFOs and (b) Even if the MFOs do not take deposits,
they largely handle public money in the form of debt raised from the banks and they
are liable to behave opportunistically and pursue personal gains at the expense of
the client and the tax payers funds.

Some regulatory framework is important if the ultimate objective is to extend, scale

and mainstream this section of the financial system. As a result, regulation makes an
effort to achieve the goals of minimizing the risk of opportunistic conduct on the part
of the institution (protection of the customer), as well as avoiding unnecessary runs
on the system and, as a result, preserving its stability. If there is not a significant
mobilization of public deposits, then the level of regulation will be limited to a bare
minimum.

6.2 THE RATIONALE FOR INTEGRATING DEVELOPMENT AND REGULATION

It is generally acknowledged that the primary purpose of a conventional regulation is

to ensure the safety of depositors. On the other hand, microfinance places an
emphasis on oversight and regulatory plus. For this reason, the bill is known as the

34 | P a g e
MF (Development and Regulation) Bill. It contemplates promotion, supervision, and
regulation, and it prescribes a multi-pronged developmental and promotional role for
the regulator, in addition to registration, inspection, issue of directions, and imposing
penalty in case of non-compliance to its directions and regulations. In addition, the
bill is known as the MF (Development and Regulation) Bill.

Microsavings, microloans, microinsurance, micropensions, and micromoney

transfers are all considered to be components of microfinance on a global scale.
There are instances when these things are entwined into one another. For instance,
micro insurance and micro savings are so intertwined into one another that it would
be difficult to draw a line between the two. In any case, the purpose of the Bill is not
to regulate these add-on activities in and of themselves but rather to regulate micro
financial services. In the case of micro insurance and micro pensions, regulation
would only pertain to the client protection aspect of the business.

In addition, the bill's primary emphasis is placed on microfinance service providers

rather than MFOs. Both developmental and regulatory components have been
integrated into contemporary legislation in India, such as the Insurance Regulatory
Development Authority (IRDA) Regulation and the Provident Fund Regulation,
amongst other examples.

6.3 THE MANY REASONS WHY NABARD OUGHT TO BE THE REGULATOR

The decision made by the GOI to suggest NABARD take on the roles of promoter,
supervisor, and regulator for MFOs has been met with approval on several fronts,
most likely as a result of the following set of practical considerations:

(i) The Committee to Review Arrangements for Institutional Credit for Agriculture and
Rural Development was the driving force for the establishment of NABARD
(CRAFICARD). Their thinking and vision was that in the context of the complexities
and diversities of rural India, an organization like NABARD could take a holistic view

35 | P a g e
of rural development and assume the triple role of financing, development, and
supervision of Rural Financial Institutions in order to facilitate integrated rural
development. This was the basis for their thinking and vision.

(ii) A number of committees, such as the Expert Committee, the Narasimahan

Committee, and the Vyas Committee, among others, had evaluated the supervisory
role of NABARD and praised its professional approach as well as its role in striking a
balance.

(iii) On a global scale, regulatory and supervisory organizational structures in the

banking and MFI sector have shown numerous distinct models that are successful in
a variety of nations. A survey conducted by the International Monetary Fund in April
2007 covering 139 regulatory and supervisory agencies in the financial sector
revealed the existence of various organizational structures in regulation and
supervision, such as a stand-alone supervisory agency, authority based in a central
bank or ministry of finance, or authority that is combined with other agencies.

(iv) Over the past 27 years, NABARD's supervisory services have been recognized
for their effectiveness in the context of difficult and complex organizational entities,
specifically RRBs and cooperative banks. It has implemented a number of the most
effective supervisory practices that have been developed over the years. The
professional Board of Supervision, which is made up of experts and stakeholders,
and the separate Department of Supervision, which has staff members who are both
experienced and knowledgeable, ensure that the approach taken is professional and
independent. Rural credit, microfinance institutions, and RFIs are viewed in their
entirety by the government officials who have direct experience in the field in a
variety of capacities.

(v) Its pioneering role in financing, promotion, and development of microfinance has
been widely recognized. In particular, its leadership role in the SHG-Bank Linkage
Programme as well as its management of the Microfinance Development and Equity
Fund (MFDEF) have garnered a lot of attention.

(vi) The NABARD departments responsible for development and financial services

have internalized the findings of the inspections conducted on RRBs and

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cooperative banks, and they have implemented corrective measures in response to
those findings. On this basis, it is anticipated that inputs from supervisory and
regulatory bodies will cause NABARD to take developmental action with regard to
MFOs.

(vii) The presence of NABARD across all of India, with its Regional Offices in each
state and its District Development Managers (DDMs) in each district, would make it
easier to provide market intelligence that is relevant to supervisory and regulatory
functions.

7. THE PRELIMINARY STEPS TAKEN IN

PREPARATION FOR THE VOTE ON THE BILL

The will of both the GOI and Parliament will determine whether or not the Bill is
passed into law. NABARD has taken a series of steps to better understand the
system and practices of the MFOs. These steps include conducting system studies
in select MFOs, organizing training/exposure programs on promotion, supervision,
and regulation of MFOs for its officers and the officials of MFOs, evolving rating
norms, developing MIS, etc. Regardless of the shape, structure, and nature of the
supervisory and regulatory architecture, NABARD has taken a series of steps to
better understand the system and practices of the MFO The component of promotion,
supervision, and promotion of MFOs has been included envisaging different
interventions as part of the Technical Collaboration - NABARD-GTZ Rural Finance
Programme. This component falls within the jurisdiction of the NABARD-GTZ Rural
Finance Programme. The Government of India has, on occasion, been given a
variety of crucial insights on issues that are connected to the topic at hand.

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 8. COOPERATION AND EXCHANGE

ACROSS INTERNATIONAL BOUNDARIES

The development of microcredit and microfinance has been the subject of

international initiatives. Over the course of the years, the Micro Credit Summit, the
Declaration of Millennium Development Goals (MDG), and the participation of
international donor organizations have all played significant roles in the development
of the microfinance industry. The majority of central banks, regulatory and
supervisory authorities, and other regulatory and supervisory bodies should make
comparable efforts in regulation and supervision in order to allow the sharing of
mutual experience and learnings. A significant amount of research, discussion, and
compromise are required to develop a new regulatory framework for the
microfinance industry. Before opening a regulatory window, considerable research,
analysis, and insight into the workings of MFIs may be required if the cost of
regulation and supervision is to be shared by the supervisory regulated entities. The
development of regulatory, supervisory, and development architecture, tools and
methods, rating norms, disclosure standards, risk management system, Off-site
Surveillance System (OSS), Computerization, and Management Information System
(MIS), etc. could be the subject of mutual understanding and cooperation. It would
be rewarding to design training modules for supervisors and those they supervise on
various aspects of systems and standards in MFIs through collective effort. These
modules would be used in MFIs. The Inspection Manuals and Guidelines can be
drafted by drawing from the collective wisdom of those with experience in the field.

Recent research (viz., Hirschland, Harper, and Chao-Beroff - 2008) by a group of

microfinance experts on member-owned institutions (MOI) points in a similar
direction and recommends for an international Task Force of experts, promoters,
and practitioners to build consensus on good practices for MOIs operating in rural
areas and to identify norms, standards, and related risks as a step towards
appropriate regulation and supervision. Others, including Wevas and Fisher (2006),

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have suggested using a process analogous to that of the Basel Accord to develop

international guidelines for the regulation of MFIs.

.
RESEARCH METHODOLOGY

Hypothesis: Based on above analysis we create following hypothesis to check from

primary home level data in specified research locations.

There is tremendous unmet demand for home loans in lower segment

MFH and MFE (microfinance for enterprise) inter-linkages might provide a good
platform for MFH growth. Microenterprise loan effects borrower‘s income where as
microcredit for housing impacts borrower‘s assets base and may impact income.

Rate of repayment is less in case of microfinance for housing loan than regular
microcredit. In the case of a microenterprise loan, the ability of the borrowers to
repay the loan is determined by the production of future revenue; however, in the
case of a home loan, the repayment capacity of the borrower is determined by the
borrower's present surplus as well as future cash flow .

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METHODOLOGY

The research uses the methodologies that will be discussed below in order to arrive

at the proposed goals and findings.

An examination of secondary sources of information and data:

We collected secondary data on microfinance for housing that was available from
published reports, documents, and other literatures, and we analyzed it in the
context of the Indian economy.

Pilot visit and consultation with a variety of housing finance institutions (HFC, Banks,
MFI, NBFC, NGO), apex housing organizations (HUDCO, NHB), a low cost housing
consultancy agency (Micro Home Solution), and local experts in addition to other key
informants.

Primary field survey: Household surveys were carried out using a structured
questionnaire that was developed specifically for the purpose of the study.
Thesesurveys were carried out in a variety of sample villages located within two
districts each in the states of Kerala and Karnataka (mainly to cover MFH clients)
Interviews with top executives and other staff members of several housing
microfinance lending organizations and the institutions that support them.

Participation in focus groups in some of the sample villages and the gathering of

information from some of the key informants in the research areas

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PRINCIPAL FACTORS, CONDITIONS, AND SITUATIONS:

We chose two distinct models out of the few housing microfinance programs that are
already known to exist in India. These models were chosen on the basis of their
evolution, operation, product design, and other aspects that match the spirit of the
study. One of these two programs was started by the state government with
assistance from commercial banks, and the other was supplied by a microfinance
institution (MFI). However, the study areas were chosen following a series of
discussions with the relevant stakeholders and local experts, as well as
consideration of how well the MFH program had been carried out. The intensity of
the program was taken into consideration when selecting districts and Taluks. Since
the majority of districts followed a similar pattern of MFH activities, this was the most
important factor.

The selection of the sample households was done through a process of

representative random sampling in order to capture different aspects of the MFH
program in a variety of settings.

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We chose the research locations and the customers of certain well-known
organizations who have been working with MFH for some time so that we could
conduct a more in-depth analysis of them. This was done while keeping in mind the
restricted housing microfinance products and schemes. However, efforts were made
to investigate other housing microfinance programs such as the Gujarat Mahila
Housing SEWA Trust and the Indian Association of Savings and Credit (IASC), but
these programs were not taken into consideration for a detailed study due to the
characteristics and scope of the present study as well as other factors associated
with it. With the assistance of the university, we were able to collect detailed
household information regarding demographic characteristics, house types and
characteristics, house use patterns, pre-MFH housing priorities and plans, current
housing expenditures, housing loan terms and conditions, post-MFH changes in
housing expenditures, non-MFH borrowing patterns and conditions, status of
housing activities, housing credit use, constraints, and other social-economic
household characteristics.

Sample homes for the Bhavansree initiative in Kerala were from customers of three
different banks: SBI, SBT, and ICICI Bank. The majority of the Karnataka families
that made up our sample were microcredit customers of various SHG groups that
had been founded by MYRADA and are now being handled by SFRS (Sanghmithra
Rural Financial Servises).

At the village level in Karnataka and at the CDS level in Kerala, a random selection
of households was carried out depending on the kind of household and the type of
housing activity. However, previous information about the group and housing
activities was acquired from the concerned bank branch managers or credit officers
and examined before the visit to the sample villages/CDSs. This was done in order
to prepare for the visit.

42 | P a g e
THE TERM "THE NEW MANTRA IN RURAL FINANCE"

OFTEN REFERS TO MICROFINANCE.

Beginning in the 1950s, the rural finance strategy that was followed in the majority of
developing nations was based on the provision of subsidized loans to rural sectors of
the population by means of organizations that were either state owned or directed.
Several different theoretical presumptions served as the foundation for the expansion
of credit coverage brought about by governmental actions. According to Seibel and
Parhusip (1990), this method was developed on the premise that rural micro-
entrepreneurs are unable to organize themselves, that they require subsidized credit
for the purpose of increasing their income, and that they are unable to save money
due to their financial circumstances. According to Yaron, Benjamin, and Piprek
(1997)3, the conventional approach in rural finance, which is significantly weighted
toward direct interventions, may be traced back to the impact of Keynesianism. In this
method, the key problem areas that were visualized in rural financial markets
included, in addition to the assumptions that were listed above, a lack of credit in rural
areas, the absence of modern technology in agriculture, low savings capacity in rural
areas, and the prevalence of usurious moneylenders.

Interventions on the part of the government were made with the goal of correcting the
inefficiencies and flaws that existed in the rural loan markets. Interventions of varying
scope and intensity were implemented in the majority of developing countries during
the period between the 1950s and the 1980s. These interventions included the
establishment of state-owned financial institutions, the imposition of interest rate
ceilings on deposits and credit, the provision of credit subsidies, the targeting of credit
to specific industries, and the nationalization of private banks.
This supply led' approach in rural finance caused a variety of qualitative issues, such
as concerns about the financial viability of institutions as a result of a high rate of
loan delinquency, cornering of subsidy by well off people in what has been described
as rent seeking' behavior, continued presence of moneylenders, and inability to
reach the core poor, which led to a reorientation in thinking around the 1980s. These
issues led to a shift in perspective. The United States Agency for International
Development (USAID) conducted a spring review of Small Farmer Credit in 1972–
1973, which covered 60 reports on specific farm credit programs in developing
countries. This was followed by the Food and Agriculture Organization of the United
Nations (FAO) holding a World Conference on Credit for Farmers in Developing
Countries in 1975. These two events were the first landmarks to point out the
shortcomings of the directed and subsidized credit approach. The United States
Agency for International Development (USAID) and the World Bank hosted a
colloquium in 1981 titled "Rural Finance in Low Income Countries," which helped
crystallize these ideas and inspire the development of new ways of thinking about
rural finance. Hulme and Mosley (1996)4 get credit for this. the counter revolution
against Development Financial Institutions (DFIs), which were a prime symbol of
government intervention in rural credit markets to the "Ohio school," as the
economists5 at Ohio State University provided the theoretical underpinnings to the
critique of the previous approach and contributed to the transfer of these ideas into
the operational policies of the World Bank.
The advent of microcredit in the late 1970s and early 1980s, against the background
of increased global emphasis on the shortcomings of prior approaches in rural
finance, explains a significant portion of the main theoretical foundations of this
concept. The success of microlending to the poor without the requirement of
collateral was demonstrated by the initial innovations in microcredit that were
implemented in different contexts, including Bangladesh, Bolivia, and Indonesia8.
Rhyne (2001)9 notes that these interventions provided examples of methods for
providing improved outreach and cost recovery when lending money to the less
fortunate. In spite of the differences in the contexts in which they were implemented,
these early innovations shared a number of common principles. These principles
included a reliance on the borrower's reputation or the pressure of peers as a form of
loan security rather than collateral, the utilization of social capital, positive incentives
for repayment, and interest rates that approached or covered cost. These inventions
served as the impetus for replication all around the world, and the fundamental ideas
upon which they were founded continue to serve as the cornerstone of microfinance
interventions to this day.
The ability of microfinance to assist economically disadvantaged people without
requiring any kind of social collateral or guarantee has contributed to its widespread
allure. Microfinance has been referred to as a Win-Win proposition since it generates
almost complete repayment rates. This Win-Win argument is the foundation for the
mainstreaming of microfinance across the globe and its acceptance by the
international community working in development. The idea of providing long-term
financial services at market prices is known as the "Financial System" approach or
"Commercial Microfinance," respectively. As of the 31st of
December in 2004, the progress report that was submitted by the Micro Credit
Summit Campaign10 indicates that 3,164 microcredit institutions have reached 92.27
million clients, which translates to the fact that microcredit interventions have reached
333 million poor families around the world. Remenyi (2000, page 30)11 succinctly
captured the obsession with microfinance in the development sector when he said,
"every bilateral donor and NGO seems to believe that it too must be involved in
microfinance if it is to retain credibility as a development agency with an option for the
poor." This statement encapsulates the microfinance mania in the development
sector.
MICROFINANCE'S GROWING FOOTHOLD AROUND THE WORLD

It is hypothesized that the new paradigm of providing unsecured small scale financial
services assists low-income individuals in capitalizing on available economic
opportunities, increasing their levels of disposable income, streamlining their
consumption needs, lowering their degree of susceptibility, and giving them more
agency.

James Wolfensohn, who served as president of the World Bank prior to the current
administration, stated that "Microfinance fits squarely into the Bank's overall strategy."
You are aware that the goal of the Bank is to raise living standards and reduce
poverty. This is to be accomplished by fostering long-term economic and investing in
people through the provision of loans, technical assistance, and strategic direction.
Microfinance makes a direct contribution toward the achievement of this goal. The
central role that microfinance plays in the Poverty Reduction Strategy Paper is a
direct reflection of the importance placed on this topic.

The World Bank, which is aware of the significance of microfinance, has also made
significant strides toward growing the industry. Important turning points include the
formation of the Consultative Group to Assist the Poor (CGAP) in 1995 as a
collaboration of 33 public and commercial development organisations and the
foundation of the Microfinance Management Institute (MAFMI) in 2003. CGAP serves
as a "resource center for the entire microfinance industry," which means that it
incubates and supports new ideas, innovative products, cutting-edge technology,
novel mechanisms for delivering financial services, and concrete solutions to the
challenges of expanding microfinance. CGAP was established in 2002.

MAFMI was founded with funding from CGAP and the Open Society Institute in order
to address the need for technical and management expertise in the microfinance
industry. 44 | P a g e
The dominant theoretical direction of microfinance has been significantly influenced
by CGAP, which has played an important role in this process. Commercial
microfinance' has been the overarching principle that has guided the wide range of
CGAP operations, including the dissemination of microfinance best practice, grant-
making to microfinance institutions, and the promotion of national-level policy on
microfinance. The CGAP dossier on Best Practices' and brochure on Key principles
of microfinance' clearly convey the idea of insisting on full cost recovery via market-
based interest rates and a greater recovery rate of microloans. Both documents may
be found on the CGAP website. The impact of the CGAP ideology has also had an
effect on the way the World Bank thinks about microfinance. In his message tothe
CGAP annual meeting in 2005, the current President of the World Bank
acknowledged this fact by saying, "CGAP has helped build consensus around the
fundamentals of an inclusive financial system." (CGAP has helped build consensus
on the fundamentals of an inclusive financial system.) The G8 gave its approval to
the CGAP Key Principles of Microfinance last year, and this year they are being
championed by Worldwide, as a consequence of the CGAP framework, excellent
practice is gradually becoming standard practice.

In addition to the Asian Development Bank and other regional multilateral

development banks, commercial microfinance is a cause that is supported by the
Asian Development Bank. The Asian Development Bank (ADB), in its outline of its
policy for microfinance, states on page 17 that "to the poor, access to service is
more important than the cost of services" and that "the key to sustainable results
seems to be the adoption of a financial-system development approach." These
statements provide support for the logic presented above.

The reasoning that is provided in support of this is almost always based on two
arguments: a) subsidized funds are limited and cannot meet the vast unmet demand,
which is why private capital must flow to the sector; and b) the ability of the poor to
afford market rates. Both of these arguments are universally used. Although many
researchers, such as Morduch, have pointed out the flaws of the Win-Win proposition,
such as the belief that there is congruence between commercial microfinance and
poverty outreach, the scope of this paper will be limited to analyzing how the focus on
commercialization has pushed impact assessment to the background.45 | P a g e

MICROFINANCE AS WELL AS THE MDGS

The favorable correlations that exist between microfinance and the accomplishment
of the Millennium Development Goals predominate in the microfinance research that
has been published in recent years (MDGs). According to the report published in
2005 by the Microcredit Summit Campaign, the campaign provides much-needed
optimism for the achievement of the Millennium Development Goals, particularly
those goals related to the elimination of poverty. According to CGAP (ibid), a rising
body of data demonstrates that microfinance is a significant contextual component in
the accomplishment of the Millennium Development Goals (MDGs). This gives weight
to the previous statement.

Access to financial services is cited as being essential for eradicating poverty and
achieving the Millennium Development Goals (MDGs) in the ADB's topic chapter on
microfinance (ibid). It was announced by the International Fund for Agricultural
Development (IFAD), the Food and Agriculture Organization (FAO), and the World
Food Programme (WFP) that it will be possible to achieve the eight Millennium
Development Goals (MDGs) by the deadline that was set for 2015 "if the developing
and industrialised countries take action immediately" by implementing plans and
projects, in which the role of microcredit could play a significant part.

46 | P a g e
MICROFINANCE IN THE INDIAN CONTEXT

The patterns that have been observed all over the world have been mirrored in the
policies that the Indian government has implemented for rural finance since the
1950s. The expansion of poor people's access to credit has been and will continue
to be a central focus of anti-poverty efforts planned and carried out in India. The
concept that led to the expansion of outreach of financial services, primarily credit,
was that the welfare costs of being excluded from the banking sector are very
significant, particularly for those who live in rural poverty. Beginning in the late 1960s,
India hosted one of the largest state interventions in the rural credit market. This
phase of Indian history has been euphemistically referred to as the "Social banking"
phase. It resulted in the nationalization of existing private commercial banks, the
massive expansion of branch networks in rural areas, the provision of mandatory
directed credit to priority sectors of the economy, subsidized interest rates, and the
establishment of a new set of rural banks at the district level as well as an apex bank
for agriculture and rural development (NABARD20) at the national level. All of these
changes occurred simultaneously. Because of these measures,significant progress
was made in terms of reaching people in rural areas and increasing the volume of
credit. As a consequence of this, between the years 1961 and 2000, the average
population served by a single bank branch decreased tenfold, from approximately
144,000 to 14,000 (Burgess & Pande, 200521), and the proportion of rural credit
extended by institutional agencies rose from 7.3% in 1951 to 66% in 1991.

These impressive gains did not come free of charge, however. The tolerance for
loan defaults, loan waivers, and lax appraisal and monitoring of loans increased as
a result of government interventions such as directed credit, state-owned Rural
Financial Institutions (RFI), and subsidized interest rates. The problem appeared to
be two-fold at the beginning of the 1990s: first, the institutional structure was not
profitable in rural lending, and second, it did not serve the needs of the poorest
people. In a nutshell, it had produced a framework that was "quantitatively
impressive but qualitatively weak."

47 | P a g e
For a more complete understanding of the current paradigm, it is necessary to place
the development of microcredit in India within this context. Further impetus was
supplied by successful microfinance initiatives carried out by non-governmental
organizations (NGOs) all over the globe, particularly in Asia and in some regions of
India. In this context, NABARD's search for alternative methods of approaching the
rural underprivileged brought to light the existence of informal groups of the
underprivileged. It was realized that the poor had a tendency to band together in a
variety of unofficial ways for the purpose of pooling their savings and doling out short-
term, unsecured loans to group members at varying costs on the basis of their
individual levels of need. During the 1980s, social development NGOs23 were the
ones who first uncovered the idea of self-help. NABARD came up with the idea of
linking these groups with banks after it became apparent that the lack of adequate
financial resources was the only factor preventing the potential of these groups from
being fully realized. In order to remove this barrier, NABARD devised the concept of
linking these groups with banks. The program has come a long way since 1992,
passing through stages of pilot (1992–1995), mainstreaming (1995– 1998), and
expansion phase (1998 and onwards), and has emerged as the world's biggest
microfinance program in terms of outreach, covering 1.6 million groups as of March,
200524. The program began as a pilot in 1992 and continued through 1995, after
which it entered the expansion phase. It has a dominant position in the industry and
is responsible for around 80 percentage of the market share in India. There are
generally three different models of credit linkage between SHGs and banks that are
available through the program that is widely known as the SHG-Bank Linkage
program. Handholding and an initial period of inculcating the habit of thrift are
followed by collateral-free credit from the bank in proportion to the group's savings.
However, the underlying design feature that is present in all of these programs
remains the same. This feature is the identification, formation, and nurturing of
groups either by non-governmental organizations (NGOs), other development
agencies, or banks. The decision regarding whether or not to take out a loan, whether
or not to lend money to other members of the group, and the interest rate all fall
under the purview of the flexible approach. The "collective knowledge of the
impoverished," "the organizational capacity of the social intermediary," and "the
financial power of the Banks" were all taken into consideration while designing this
system 48 | P a g e
Another illustration of a Win-Win proposition, the fact that the program is
advantageous for both the banks and their customers is one of the most important
reasons contributing to its overall success. Because of its high recovery rates and its
ability to lower transaction costs by outsourcing the costs associated with monitoring
and appraising loans, the program is an appealing proposition for banks. Records
show a recovery rate as high as 95% for loans extended by banks to SHGs, and a
study sponsored by FDC26, Australia, observed that the reduction in costs for the
bankers is approximately 40% when compared to earlier loans under the Integrated
Rural Development Programme (IRDP). Siebel and Dave (2002)27 reported findings
that were very similar to this one in regard to the commercial benefits of SHG
lending to banks. The coverage of the poor has increased as a direct result of the
program's exclusive focus on reaching those sections of the population that were
previously inaccessible via the financial system. The non-reliance on physical
collateral and complete flexibility in loan purpose and amount have both contributed
to an increase in the coverage of the poor and the marginalized in society .Both the
Government of India and the Reserve Bank of India have expressed their strong
support for the program from a public policy standpoint. The mention of annual
targets by the Finance Minister in his annual budget speech is one illustration of the
importance that the government places on it. Another illustration is the incorporation
of a similar group-based lending approach into the government's program to alleviate
poverty. Both of these examples highlight the significance that the government
places on this issue. The accomplishment of the program in providing access to
financial services for low-income people has garnered praise and admiration from
people all over the world. A policy paper published by the World Bank lauds the
program and states that it is particularly well-suited to India because the model
makes use of India's extensive network of rural bank branches, which are otherwise
unable to reach the rural poor. The paper also states that the model is particularly
well-suited to India.
49 | P a g e
"FINANCIAL SYSTEM" APPROACH: THE MOVING OF THE "GOALPOST" AND

THE IMPACT OF THIS CHANGE

The expansion of microfinance in India needs to be analyzed not only in light of the
financial sector reforms that have been implemented in India since 1991 but also in
light of the emphasis placed globally on the commercialization of the sector. The
financial sector reforms in India have focused on fostering a market based financial
system by increasing competition and improving the quality of financial services. The
new approach has been deeply influenced by the reorientation among international
rural financial policy makers centering around concepts such as self-help, self
sustained growth and institutional viability. Under the new approach, institutional
viability is of prime concern and instruments of directed credit and interest rate
directives have been totally diluted or been done away with. As a consequence,
banks are increasingly shying away from rural lending as well as rationalizing their
branch network in rural areas. Burgess & Pande (ibid) have brought out this fact in
their study by stating that while between 1977 and 1990 (pre reform period) more
bank branches were opened in financially less developed states, the pattern was
reversed in post reform period. Thus although, the availability of the rural poor to
credit via conventional bank lending has declined in post reform era, the policy
proposal is to replace this vacuum through microfinance. Flowing out of bad
experiences of the previous state intervention, institutional viability has been the
focus point for assessment of success of credit initiatives. The philosophy and
design of SHG-Bank linkage programme reflects this new concern vividly by
emphasising on full cost recovery in order to become an attractive proposition for
banks. Siebel & Dave in their study on commercial aspects of SHG programme
succinctly state the new paradigm with focus on institutional sustainability by saying
that as against the long standing tradition of government owned banks undermining
rural finance with cheap credit ―NABARD belongs to the new world of rural finance:
it is profit making; and it actively promotes the viability of rural banks under its
supervision.

50 | P a g e
The topic of impact assessment has been pushed into the background as a result of
this shift, which has centered on the parameters of institutional success. Either an
inference is made about the effect evaluation based on proxy indicators such as the
amount of credit, repayment rates, and outreach, or one-off sample impact
assessment activities are carried out. The field study was carried out so that a better
understanding of the clients' point of view could be gained, along with an
investigation into the elements that influence payback rates and the effect of credit
on the socioeconomic well-being of customers. The investigation included data from
93 client households hailing from five different Self-Help Groups located in three
distinct regions across Western and Central India. Although it is possible that the
number is statistically insignificant when compared to the scope of the program, the
utilization of participatory methods of research contribute to its richness and worth.
Only organizations that had participated in the program for at least two years at the
time of the study were considered, as it is possible that groups that had been formed
for less than two years were not the most suitable to capture impact.

As the space restrictions of paper prohibit a full enumeration of field research results,
only the major findings of the field research30 having an influence on the primary
element of the article are included – \s-

1. All consumers were saving regular amounts of money at

monthly/bimonthly interval building up the group savings - Internal loaning
of group funds was very high resulting in significant waiting time for members
interested in borrowing - Social awareness index of group members as
measured on Likert Scale showed a definite positive trend after joining the
group - Reliance on moneylenders for credit eliminated or decreased in case
of approx 2/3rd of clients - No specific benchmarks for group membership
leading to inadequate poverty targeting - Only 6% clients had taken up any
economic activity post group formation - Marginal increase in real term
income level after joining the group - Bank credit to group often a result of
banker‘s zeal to achieve targets rather than based on group demand - Bank
51 | P a g e
 credit as well as loans used overwhelmingly for consumption purpose - Group
members not willing to borrow to take up economic activity on account of
credit risk and absence of skills - Prompt Repayment a factor of group
pressure and sourced out of reduced consumption, extra work and borrowing
from other sources - High rates of interest in internal lending among group
members (2-3%) was perceived by members as imposed by the group
formation agency and considered as being better than even higher rates of
informal sector.

2. Further summarizing the data at the expense of over simplicity, it can be

concluded that although the initiative had clear influence on construction of
social capital, it had negligible impact on income levels. At this juncture, it
would be beneficial to highlight that making a good contribution on the social
arena is, in and of itself, a big success; nonetheless, the challenge comes in
extending that positive influence to operations on the economic front. The
results fit awkwardly with past assessments of the initiative in regard of
economic effect, while being in consonance with social impact. In their
research that was commissioned by NABARD, Puhazhendhi and Satyasai
(2000)31 covered a total of 223 SHGs located in 11 different states
throughout India. The research indicated that 58.6% of sample homes
documented an increase in assets from pre to post SHG condition, an extra
200 economic activities taken up by sample households and drop in the
number of sample households with annual income levels of Rs.22500 from
73.9% to 57%. Another study32 covering 60 different SHGs in Eastern India
was carried out in 2002 and was commissioned by NABARD with financial
assistance from SDC33, GTZ34, and IFAD 35. The results of this study
support the findings of an earlier evaluation in that there was a rise of 23% in
annual income and a rise of 30% in asset ownership among 52% of sample
households. World Bank policy study paper (ibid) 2005 describes the results
of Rural Finance Access Survey (RFAS) done by World Bank in cooperation

52 | P a g e
 with NCAER36. The RFAS encompassed 736 SHGs in the states of Andhra
Pradesh and Uttar Pradesh and also pointed to good economic effect. The
data reveal 72% average growth in real terms in family assets, change in
borrowing pattern from consumer loans to productive activities and 33% rise
in income levels.

The dispersion of field research results needs a situational examination of the field
study findings. The research locations shared a number of characteristics with one
another, which is something that can be stated to be true of the majority of the rural
terrain in India. The predominant employment of group members was agriculture
augmented by various activities such as agricultural work, industrial labour and
poultry. Their precarious situation has been exacerbated over time by the fact that
they are located in rain-fed areas, the absence of irrigation facilities, the deterioration
of agricultural terms of trade, and the fragmentation of land. The members of the
group lacked any specialized handicraft abilities and had not obtained any skills
training for the purpose of engaging in any other activity that was not related to
farming. In this case, after the SHG was implemented, the members of the group
were content to use the savings from the group as well as the bank loan as a
replacement or reduction of more expensive borrowings from informal sources. The
high rate of internal lending that was reflected in bank and group records was utilized
by them for the purpose of meeting their requirements for consumption as well as
emergency situations. Detailed interaction demonstrated that group members do not
have the confidence to utilize credit for constructive objectives in light of lack of
chances and partially also instilled via their prior borrowing experience. Irrigation and
falling commodity prices function as disincentive in agricultural sector investments,
while lack of skills and invasion of rural markets by giant consumer goods
corporations decrease the potential for rural micro enterprises. It is remarkable that
at the same time that globalization is putting pressure on national-level companies,
the penetration of national companies into rural markets is narrowing the market
sphere for rural businesses.

53 | P a g e
In light of this situation, it appears somewhat naive to imagine that the availability of
microcredit would lead to the growth and success of microbusinesses. In his paper,
which draws on African experience, Dichter (2006)37 correctly draws attention to
both of these aspects by pointing to the "infertile context" of rural settings and saying,
"if the large majority of us in the advanced economies are not entrepreneurs, and
have had in our past little sophisticated contact with financial services, and if the
majority of us use credit, when we do, for consumption, why do we make the
assumption that in the developing countries, the poor are not able to use credit for
consumption?"

Besides recognizing the good social benefits, the field research data also indicate to
smoothing of consumption requirements and considerable decrease in dependency
of exploitative informal sources of credit. These elements represent a considerable
welfare benefit in and of themselves; however, the research concerns the application
of this to economic growth, which is an entirely different realm than the management
of short-term crises.

In the absence of any significant economic development, the findings logically point
to an unmistakable trend of repayments being made out of reduced consumption,
increased working time as farm labor, and borrowing from relatives, other groups in
the vicinity, or moneylenders in extreme cases. This is because repayments are
made out of reduced working time and increased working hours. In such a
circumstance, although loan volume, outreach and repayment may superficially
justify the intervention and make it desirable for bankers, its influence on economic
advantages for customers is lost out. The common underlying assumption that lies
behind the reliance on such parameters is the belief in the linear cycle of credit,
which begins with the receipt of credit and is then followed by economic activities, an
increase in income or assets, and then repayment out of additional income.

54 | P a g e
The crucial problem of "effect assessment" at the client level is neglected when one
relies on credit off take and recovery as a proxy for good economic growth. This
facet of microfinance has garnered an increasing amount of attention in recent years.
According to Dichter (ibid), the use of proxies to justify effect, such as the payback
rate, is not acceptable since it does not investigate the source of the repayment. Due
to the fungibility of money, the justification for its use as a criterion requires that it be
linked to the revenue generated by economic activity. According to Deubel (2006)38,
who cites Buckley (1997)39, using the rate of loan payback as an indicator may
demonstrate a participant's capacity to repay, but it does not take into consideration
the effect of the loan on the firm. According to Weiss and Montgomery (2004)40,
high recovery rates might be the result of significant social pressure, and these rates
do not represent the ability to repay.

Because of the emphasis placed on maintaining financial viability, a significant

portion of the assessment criteria for microfinance interventions are centered on the
performance of the institutions involved. According to Weber (2006)41, the positive
effect of microfinance is used to support its development; nevertheless, a significant
portion of this evaluation is based on the performance of institutions and an
avoidance of interacting with the repercussions of their work. This point is brought up
by him in a very significant way when he makes the observation that "Thus, as long
as institutional sustainability obtains, it has been fairly common practice among the
policy makers—and their commissioned researchers—to interpret financial viability
as indicative of the social, political, and economic success of microfinance
programmes" (ibid, p 53). In addition to this, he contends that such an approach is
both the ideology and practice of neoliberalism because it is predicated on the
ontological premise that competitive financial institutions lay the groundwork for the
success of entrepreneurial endeavors and are in the best position to alleviate
poverty.

The authors Simanowitz and Walter (2002, page 3)42 make the astute observation
that "Microfinance is a compromise between social and financial aims." Up to this
point, the majority of attention has been focused on financial and institutional

55 | P a g e
performance. Imp-Act43, based on three years of action research covering 30
organizations in 20 countries, has been advocating for the mainstreaming of Social
Performance Management (SPM) to improve the efficiency of microfinance in
reducing financial exclusion and poverty. This is to bring the social aspect back into
microfinance.

Although there is a chance that microfinance may be profitable for banks, there is a
question mark over whether or not it will be profitable for customers. The institutional
strategy, which was developed as a result of previous unfavorable experiences, has
moved the goalpost to financial soundness, but in doing so, it has neglected to
acknowledge the critical role that credit play plays.

Given these circumstances, it is possible to state with absolute confidence that the
capacity of microfinance to contribute to the attainment of MDGs in India, particularly
the elimination of poverty, remains questionable. Greeley (2005)44 observes, quite
correctly, that in the absence of specific poverty targeting and mainstreaming of
impact assessment, the claims about the impact of microfinance on the achievement
of MDG lack credibility. This is because of the lack of credibility surrounding specific
poverty targeting.

56 | P a g e
 THE ROAD AHEAD

The rural financial industry in India is now at a crossroads. As a result of changes in

the financial industry, which placed an increased focus on profitability as the primary
measure of overall performance, banks are becoming more reluctant to lend money
in rural regions and are also streamlining their branch network in rural areas. This fact
has been brought to light by Burgess and Pande (ibid), who, in their study, state that
while more bank branches were opened in financially less developed areas during
the pre-reform period of 1977 to 1990, the pattern changed dramatically during the
post-reform period, and the opposite occurred. Therefore, despite the fact that the
post-reform era saw a reduction in the rural poor's access to credit, the policy advice
is to replace this vacuum via the use of micro credit. The Self-Help Groups (SHG)
Bank Linkage Program has seen unprecedented expansion, and the present plan is
to concentrate on thirteen of the country's least developed states while
simultaneously advancing the already established SHGs to the microbusiness level.
At this point, the article argues that incorporating effect evaluation as a fundamental
design aspect of the SHG-Bank linkage project is an absolute must if the programme
is to contribute to the elimination of poverty. This is because there is an urgent need
to do so. It is difficult to overstate how important it is to shift attention away from
institutions and back to people, as well as to embrace a strategy that is more locally
focused on the needs of individuals. In accordance with the principles underlying the
practice of commercial microfinance, it is of the utmost importance that limited public
resources be utilized wisely and with improved targeting

57 | P a g e
When evaluating a microfinance intervention, putting the appropriate amount of
attention on effect assessment is an essential component of the triangle45 of
elements that must be considered.

The incorporation of effect assessment into the SHG-Bank linkage program will need
more work and resources, in addition to causing tension with the program's existing
emphasis on quantitative expansion. The realization that there is a significant trade
off between sustainable economic effect and exponential expansion calls for daring
judgments about public policy. According to a policy research working paper
published by the World Bank (ibid), ensuring that a focus with achieving numerical
objectives does not outweigh attention to group quality will be an important future
issue for the SHG-Bank linkage program.

Even while the purpose of this study is to bring out the missing link of effect in the
present paradigm of rural finance, which focuses primarily on the sustainability of
institutions, other crucial concerns that have an influence on impact also need
consideration. As of right now, the SHG-Bank linkage program does not have any
specific social or economic criteria for inclusion of members into groups to be credit
connected. This is because the SHG-Bank linkage program takes a flexible
approach to its implementation.

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However, as was shown above, there is a very low probability that the provision of
loans in an unproductive local environment would result in productive investment.
The inclusion of core impoverished people in the program, who previously had little
expertise in economic activities, further restricts the productive utilization of wealth.
To make the most efficient use of limited resources, it is essential to categorize
credit demand according to individuals' economic and social standing. Robinson
(2001)46 is certainly correct when he observes that commercial microfinance is not
intended for those who are destitute or living in abject poverty; rather, it is targeted at
people who are economically engaged but nonetheless poor. She is of the opinion
that extending credit to people who are too poor to use it effectively is of no benefit
to either the borrower or the lender, and that doing so would only result in an
increase in debt burden and an erosion of self-confidence.

As a result, she recommends that this segment of the population should not be the
target market for the financial sector, but rather for state poverty and welfare
programs. In addition to this, credit may be put to little effective use in communities
that are resource deprived and are geographically isolated, and this is true
regardless of socioeconomic class. When it comes to places like these, the flow of
credit has to follow governmental investments in infrastructure and the creation of
forward and backward links for economic activity. The homogenization of service
delivery will continue to have a limited effect since it does not completely take into
consideration the situational context or the demands of the customer.

PROVISION OF SERVICES RELATING TO MICROFINANCE

According to statistics provided by the RBI, a significant portion of the overall credit
requirements of the rural population is satisfied through informal sources. The
magnitude of the dependence of the rural poor on informal sources of credit can be
observed from the findings of the All India Debt and Investment Survey, 1992, which
shows that the share of the non-institutional agencies (informal sector) in the
outstanding cash dues of the rural households was 36 percent. This finding
demonstrates the extent to which the rural poor are dependent on informal sources
of credit. However, the dependence of rural households on such informal sources
had steadily decreased from 83.7 percent in 1961 to 36 percent in 1991. This
change occurred as a result of a reduction in total outstanding dues.
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THE CHALLENGES PRESENTED BY MAINSTREAM FINANCIAL INSTITUTIONS

It is necessary to address the challenges that are associated with the legal,
regulatory, organizational, and mental frameworks in order to make it possible for
microfinance services to be made available to those who are in need. In addition,
these frameworks must undergo the necessary transformations in order to become
more efficient.

The mainstream financial institutions are flush with funds and have access to
enormous amounts of deposits in savings accounts that are offered at competitive
rates. In point of fact, the credit deposit ratio is lower the poorer the region is; the
majority of the eastern United Provinces, Bihar, Orissa, and the North-East all have
credit deposit ratios in the 20-30 percent range. Therefore, despite the fact that
banks maintain a physical presence in rural areas and provide preferential interest
rates, rural producers are unable to gain access to these institutions; as a direct
consequence, the remaining deposits are flowing into the financial sector.

THE FINANCIAL INDUSTRY AND LENDING TO THE UNDERSERVED IN RURAL

AREAS: SOME BACKGROUND

Due to the fact that priority-sector lending is an explicit part of the official banking
industry in India, the country has established a network of rural banks that is very
uncommon, if not unrivaled, throughout the globe. In 1999, there were 196 RRBs
with over 14,000 branches spread throughout 375 districts across the country, with
each branch serving around three villages on average. Even more amazing is the
breadth of coverage provided by the rural banking system in its whole. The RRBs,
the nationalized commercial banks, and the credit cooperatives — which are
comprised of Primary Agricultural Credit Societies (PACS) and Primary/State Land
Development Banks (P/SLDS) — all have one branch for every 4,000 rural residents
combined. This ratio is maintained by all three types of financial institutions (Bhatt
and Thorat, 2001).

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In spite of the extensive publicity it has received, the formal banking industry has not
had much of an effect on microfinance or on lending to the poor. The RRBs were
established in the middle of the 1970s with a clear purpose for lending to the poor.
This was done because it was believed that the rural affluent were dominating the
cooperative banks and that the commercial banks had an urban bias. 1 Note, for
example, the work that Fisher and Sriram (2002) did.

During the first two decades of its existence, political pressure and a concentration
on outreach at the cost of responsible lending procedures resulted to very high
default rates, with total losses that exceeded Rs. 3,000 crores by the year 1999. In
the middle of the 1990s, reforms were implemented in response to the
recommendations made in the Narsimhan Committee Report. These reforms freed
RRBs from some of the restrictions that had been placed on their ability to function
by lowering the interest rate cap and granting them permission to invest in the
money market. Since that time, the RRBs' overall financial situation has significantly
improved, as evidenced by a reduction in their losses and the fact that more than 80
percent of them are now profitable. However, a significant portion of this turnaround
can be attributed to a shift in investments toward government bonds (which have
gained value due to declining interest rates) and loans to non-poor individuals in
rural areas. The priority placed on ensuring the program's long-term financial health
has resulted in significant budget cuts. The proportion of rural and small loans held
in bank portfolios has significantly shrunk over the past few years, which is perhaps
not surprising given the current economic climate. The rural areas have also seen a
significant shift in the locational distribution of bank branches, which have moved
away from those areas.

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The formal rural banking system in India has had a difficult time striking a balance
between the two competing goals of outreach and financial performance throughout
the entirety of its existence. Following the reform, there was a shift in emphasis,
which was beneficial to the latter but detrimental to the former.

This relocation away from rural communities is reflected, as well, in the lending
portfolios of scheduled commercial banks. At the end of the 2001-2002 fiscal year,
the portion of outstanding credit that was allocated to agriculture by scheduled
commercial banks was less than 10%, which is an even lower percentage than the
portion allocated to personal loans (housing loans and loans for consumer durables).

In recent years, there has also been a fall in the significance of small loans. A
simultaneous migration away from rural areas is suggested by the fact that more
than 98% of rural loans are for amounts of less than 2 lakhs rupees. It's not hard to
see where this change is coming from logically. In 2002, 45 percent of the people
who borrowed money from scheduled commercial banks were from rural areas, but
these borrowers were only responsible for 13 percent of the banks' total outstanding
debt. The corresponding numbers for metropolitan areas came in at 15% and 54%,
respectively. Because they are now more concerned with their financial performance,
the banks are, as a natural consequence, reorienting their portfolios toward the low-
cost market segment.

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.SELF-HELP GROUPS (ALSO KNOWN AS SHGS) MAY SERVE AS
BORROWING UNITS
Self-Help Groups, often known as SHGs, are the fundamental building block of
India's burgeoning microfinance movement. An SHG is a group of a few people who
pool their savings into a fund that they may draw from as and when it is required.
These individuals are often low-income, and women make up a large percentage of
the group. A group like this would often have ties to a financial institution, whether it
a rural bank, a co-operative bank, or a commercial bank, where they will have a
group account.

The bank will eventually begin to lend to the group as a whole without requiring any
collateral, instead relying on the members of the organization to self-monitor and put
pressure on one another to ensure that the loans are repaid.

Members of a SHG often come from a variety of households and number anywhere
from five to twenty in total. A name is often given to a group such as this. Each of
these kinds of groups has a leader and a deputy leader who are chosen by the
members of the group. The members confer with one another to determine the
amount of money that each member is required to contribute personally to the group
account. The minimum amount that a person is required to deposit on a monthly
basis is often rather minimal, ranging between 10 and 20 rupees (about 20-40 US
cents). This would equate to a monthly savings amount of between Rs. 100 and Rs.
200 (between $2 and $4) for a group of ten people. The management of a local rural
or commercial bank establishes a savings bank account for the organization on the
basis of the resolutions that have been passed and signed by all of the members of
the group. The money that has been saved is obtained from each individual member
by a certain date (often the 10th of the month) and then placed into the bank account.

For an ambitious villager, joining an already established SHG is sometimes an

expensive endeavor. When a new member joins the group, they are required to
make a deposit equal to the entire amount of the group's accumulated individual
savings as well as interest. This is done so that the members remain on equal
footing. In addition, the new member has to be welcomed by each and every
member of the group already in place. As a result, it is often less difficult for an
individual who is not already associated with a SHG to initiate a new SHG than it is
to join a SHG that is already in existence.

After then, individual members may apply for loans out of these funds, and if their
requests are approved by a unanimous vote at a group meeting, they will get the
monies. In light of such determinations, the bank consents to the customer's request
to withdraw money from the group account. These loans are known as "interloans,"
and they are totally supported out of the funds that are created by the members of
the organization itself.

Loans often have very short terms for making payments, ranging from three to six
months. When the SHG has shown consistent loan issuance and repayment over a
period of six months, the bank will consider providing the SHG with a bank loan. The
maximum amount that may be borrowed is determined by a multiple (often four
times) of the total amount of money in the group account. This limit is likewise
attained gradually beginning at a lower value and working its way up figure.

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THE PART PLAYED BY NGOS IN THE FIELD OF MICROFINANCE

The formation of self-help groups nearly usually requires support from a third party.
Organizing Self-Help Groups (SHGs) is a task that is taken on by developmental
non-governmental organizations (NGOs), which frequently have a lengthy history of
working in a specific region for projects such as literacy and sanitation, amongst
others. These NGOs are the ones that bring people together, explain the concept to
them, attend and help coordinate a few of the initial group meetings, assist them in
maintaining accounts, and link them with banks. Recently, several rural banks have
been given the designation of Self-Help Promoting Institutions (SHPIs), which means
that they assist in the establishment and "nursing" of self-help groups (also known as
SHGs). The split of SHGs according to the institution that was responsible for their
promotion is shown in Figure 2. Although Figure 2 demonstrates that more than half
of the SHGs are established by government agencies, it is important to keep in mind
that approximately sixty percent of government-established SHGs originate from just
one state: Andhra Pradesh. In this state, the state government has taken an
extremely proactive role in SHG financing. Outside of the scope of the governmental
sector, a small number of organizations have been successful over the course of the
last quarter century in effectively alleviating poverty via the use of micro-credit. The
Western Indian chapter of the Self Employed Women's Association (SEWA). State of
Gujarat and the Working Women's Forum located in the state of Tamilnadu in the
southern region of the country were among the pioneers in this endeavor.

The decade of the 1990s saw the introduction of a number of non-governmental

organizations, which provided the industry with a significant boost (NGOs). The
majority of these non-governmental organizations (NGOs) have historically served
the underprivileged in a variety of other developmental capacities, and they have just
recently begun to provide microcredit as one of the services they offer. A few others,
motivated by the achievements of microfinance in other locations, decided
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to found their own MFIs. Self-Help Groups, often known as SHGs, are quickly
becoming a prevalent rural occurrence in several Indian states. Self-Help Groups are
comprised of the underprivileged, the majority of whom are women. In most
instances, nongovernmental organizations (NGOs) provide the essential leadership
and administration to organize and administer such groupings. In addition to this,
they serve as the essential connection between the aforementioned organizations
and the conventional banking system. At the present time, there are well over 500
non-profit microfinance institutions (NGO-MFIs) that are actively involved in
microfinance intermediation throughout the nation.

Non-governmental organizations (NGOs) that are active in the field of microfinance

face a number of significant obstacles in the legal, regulatory, and financial spheres.
They are often registered with the legal system as societies and trusts, and they
have no equity capital. As a result, they can never be considered "capital sufficient"
when it comes to leveraging debt.

Additionally, these non-governmental organizations are not subject to any particular

oversight by any regulatory authority, and the only obligation placed on them is to
provide yearly financial reports to the registrar of societies. This absence of specific
regulatory provisions has acted as a mixed blessing in the area; on the one hand, it
has allowed for the organic growth and spread of NGO MFIs; on the other hand, it
has led to a lack of financial sustainability for the majority of these organizations,
sometimes with disastrous effects on the goodwill of microfinance as a whole.

CREATING LINKS BETWEEN COOPERATIVES AND THE CONVENTIONAL

RURAL BANKING SYSTEM

The primary benefit of participation in self-help groups is the increased likelihood of

shared culpability and, as a "peer monitoring" of the debtors who are members.
Together with the non-governmental organizations that support them, they help to
lower the transaction and monitoring costs of small lending for the banks and
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provide credit to those who are considered to be the poorest of the poor. As a result,
it should not come as much of a surprise that they have gained a significant amount
of interest in the banking industry serving rural areas as well as from the government
in recent years.

In recent years, there has been the emergence of a number of alternate models of
the connection between SHGs, NGOs, and banks. One example of such a model is
one in which the financial institution makes a direct loan to the SHG, and the SHG in
turn makes loans to its individual members. This concept may be adapted in such a
way that a non-governmental organization (NGO) offers training and direction to a
SHG while the SHG continues to deal directly with the bank. Within the context of
India, this has shown to be the most successful approach. Another option is for the
NGO to serve as a middleman between the bank and the SHG by borrowing money
from the bank and then lending it out to various SHGs. Another option calls for the
bank to make the loan directly to the individual borrower, while the NGO and the
SHG take on the role of advisors. In this case, the NGO provides assistance to the
bank in the process of loan monitoring and recovery. Figure 3 depicts an
approximation of the national distribution of small heating appliances across the
various bank financing schemes.

SUPPORT FROM THE GOVERNMENT FOR FUNDING BASED ON SHG

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69 | P a g e
The majority of the process of forming and nurturing SHGs was first handled by non-
government entities; nevertheless, the government has not been oblivious to the
developmental potential of the microfinancing process that is based on SHGs. In
recent years, government initiatives designed to improve society have increasingly
focused on reaching low-income people by way of SHGs. Beginning with the
Rashtriya Mahila Kosh and continuing on with the Indira Mahila Yojana, the
government has used the SHG strategy in a significant number of its programs that
aim to alleviate poverty. The Swarnajayanti Gram Swarojgar Yojana (SGSY), which
began operations in 1999, is considered to be the most significant of the several
government projects that use the SHG methodology. Village and block level
administrators are under increasing amounts of pressure to meet objectives that call
for the formation of a particular number of SHGs by a given date. This acceptability
of the SHG-based developmental strategy is growing at an increasing rate. As a
result, Panchayats are also encouraging the formation of SHGs in many different
regions.

SHGs are often connected to local banks or to money given by wholesale credit

providers like NABARD or SIDBI (Small Industries Development Bank of India) via
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non-banking financial corporations (NBFCs) and other non-governmental
organizations (NGOs). After a certain amount of time, members of the SHG get into
the routine of saving money, and after that, the group starts giving out loans to
members who have applied for them using the money that they have saved
collectively. After a few iterations of loans that have been successfully repaid, a SHG
will start borrowing from an external source (i.e. a bank). After a period of existence
of six months, SHGs are often considered "bankable" by financial institutions.

The engagement of the government in microfinance, on the other hand, has not
been a completely unqualified boon. The politicization of the subsidy allocation for
SHGs has developed into a significant issue in recent years. Panchayat members
have a lot of influence over whether or not a business is eligible for government
subsidies. As a result, Panchayats now compete with non-governmental
organizations (NGOs) and rural banks to create SHGs. Even while Panchayat-
formed SHGs are eligible for government subsidies, these groups are often
susceptible to political pressure and the inappropriate use of money by the
Panchayats and/or political parties that recommended them. Additionally, the NGO-
created SHGs have access to trustworthy and knowledgeable guidance from the
nursing NGOs that founded them. Therefore, the quality of groups created by non-
governmental organizations (NGOs) is often higher than that of groups formed by
the local government (Panchayats), and villagers are frequently eager to join the
former. If nothing is done to stop these age-old difficulties of government programs
in poverty reduction, they may actually hurt the movement by weakening the
essential principles of self-help and empowerment of the poor. If this problem is not
stopped promptly, it can destroy the cause.

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THE SWARNJAYANTI GRAM SWAROJGAR YOJANA

In recent years, the Swarnjayanti Gram Swarojgar Yojana (SGSY) has established
itself as the primary anti-poverty initiative that has been implemented by the
government. It was initiated in April of 1999, and its goal is to eradicate poverty
among the rural underprivileged during the next three years by creating large and
sustained revenue. At the core of this strategy is the formation of self-help groups
(SHGs) comprised of low-income individuals. The acquisition of assets that may be
used to generate money is the intended end result of the program. "The SHG
strategy encourages the impoverished to strengthen their self-confidence via
communal action," as stated in the SGSY Guidelines. They are able to identify and
prioritize their requirements and resources as a result of the interactions that take
place during group meetings and the making of collective decisions. In the end, this
process will lead to the strengthening and socioeconomic empowerment of rural
poor people, as well as an improvement in their collective bargaining power.

The SGSY plan calls for the identification of a group of activities to be carried out at

the block level, as well as the financing of SHGs to carry out these activities.

The program is carried out throughout the whole nation by means of a hierarchical
system of SGSY committees, which are located at the central, state, district, and
block levels respectively. The actual implementation calls for close cooperation
between various levels of government officials, most notably the DRDAs (District
Rural Development Agencies), managers from participating banks, NABARD, and
non-governmental organizations (NGOs). The actual funding transfers from the
government would be handled by the DRDAs, which would then be provided to the
banks in the form of subsidies. The program acknowledges the significant part that
non-governmental organizations (NGOs) play in the establishment and maintenance
of self-help groups and makes an effort to include them in the activity.

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For small and medium-sized businesses, the SGSY program is an outstanding
source of subsidized credit. If a group can maintain its existence for a period of six
months, it will qualify for a revolving fund from a partner bank in the amount of
25,000 rupees. The government is providing a subsidy of Rs. 10,000 toward the
repayment of this loan; therefore, banks are only allowed to charge interest on
amounts that are greater than Rs. 10,000. The 25,000 rupee fund injection is
counted toward the total corpus of the group. Six months after the groups have been
awarded the revolving fund, they will be evaluated, with certain exceptions, to
determine whether or not they are prepared to engage in economic activities. They
would be qualified for a loan and a subsidy for economic activity up to a maximum of
Rs. 10,000 per group member or Rs. 1.25 lakhs per group, whichever is less, if they
were to pass the test. There are also incentives, which are paid out in several stages,
to non-governmental organizations (NGOs) or "animators" who are responsible for
incubating and cultivating SHGs.

Even though having sufficient funding is essential to the success of SGSY, it is not
the only component. In order for the program to be successful, it is necessary to first
identify activity clusters, then determine the training requirements of swarozgaris,
then provide appropriate training, and finally build the capacity of both the groups
and their individual members in the activities that have been chosen. In addition, the
SGSY is neither the first nor the only government initiative to test out the SHG
methodology. DWCRA (Development of For example, the Women and Children in
Rural Areas program utilizes this strategy as well.

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THE BANKING INDUSTRY AND THE WORLD OF MICROFINANCE

Microfinance in India has seen significant contributions from both the informal
banking sector and the formal banking sector. Self-Help Groups, or SHGs, are
primarily comprised of impoverished women in India and have been involved in a
significant portion of the microfinance initiative there. The NABARD Bank Linkage
Program, which was first put through its paces as a pilot in 1991–1992 and then
given its full go-ahead in 1996, has been a significant initiative to link thousands of
SHGs like these all over the country to the conventional banking system. By the end
of 2002, it had linked over half a million SHGs to the banking system and had
distributed a total of around 1026 crores worth of loans. The work that NABARD
does is complemented by the efforts of other organizations. By March 2001,
institutions like as SIDBI had already distributed more than 30 crore rupees to self-
help groups (SHGs) by way of 142 MFI-NGOs.

In the middle of the 1980s, the Asia and Pacific Regional Agricultural Credit
Association placed a strong focus on tying the self-help groups of rural poor to the
official banking system. As a direct consequence of this, the Self-Help Group-Bank
Linkage came into being. The Reserve Bank of India (RBI) included the program in
its "priority sector lending," and the Government of India recognized the program in
its Budget in the year 1999. On the occasion of the tenth anniversary of the
program's inception in 2002, NABARD commissioned a few studies to attempt an
evaluation of the program. These studies were published in 2002. According to the
findings, the program has developed into the most successful microfinance network
in the entire world and has achieved some very impressive statistics.

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As of March 2002, the program had a total cumulative lending amount of Rs 1,026
cores, which is equivalent to approximately $218.27 million USD. It covered 461,478
SHGs. According to unofficial estimates, the total amount of money saved in SHGs
is greater than Rs 875 crores (US $ 186.31 million). Ninety percent of the financed
SHGs were all-organizations. women's 444 Banks (121 RRBs, 209 cooperatives
banks, all 27 public sector banks, and 17 private banks) with a total of 17,085
branches participated in the program, with the goal of providing credit to
approximately 7.8 million low-income households located in 488 districts. The typical
loan amounts are Rs 22,240 (US$ 463) for each SHG and Rs 1,300 (US$ 27) for
each individual member. Today, it is estimated that the program will cover well over
500,000 SHGs, and cumulative loans will exceed 1,200 crore, with a total of over 8
million households benefiting. (Kropp and Suran (2002) and Seibel and Dave (2002)).
[Citation needed]

There is a significant amount of fluctuation in the percentage of total SHGs

represented by the state-by-state distribution of SHGs that are associated with
banks (see Figure 3). Over 42 percent of all connected SHGs are located in Andhra
Pradesh, giving it an unusually substantial part of the total. Following closely behind
with around 12% and 11% share respectively is Uttar Pradesh (includes Uttaranchal),
followed by Tamil Nadu. The second largest state is Karnataka, with around 9%.
Therefore, around one quarter of the nation's total greenhouse gas emissions come
from the rest of the country. Therefore, when seen from the viewpoint of the whole of
India, the experience of the SHG-bank connection has been very one-sided in favor
of the South and has not offered an equitable access to credit for the less fortunate
in India.

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THE PATH THAT LIES AHEAD - OPPORTUNITIES AND OBSTACLES

In this article, we have attempted to provide an overview of the microfinance industry

in India from a high-level perspective. In recent years, there has been undeniably a
substantial increase in the number of advancements made, and the idea and
practice of SHG-based microfinance has now established itself firmly in various
regions throughout the nation. Due to the fact that impact assessment has been very
restricted up until this point, it is difficult to estimate and quantify the impact that this
Indian microcredit experience has had on the state of poverty in India up to this point.
In order to make a significant difference in poverty, there is unquestionably a lot
more work that needs to be done in terms of outreach. Microcredit, on the other
hand, has successfully moved from the status of a "experiment" to that of a generally
recognized paradigm of rural and developmental financing in India. This is due to the
fact that the logic and justification of SHG-based microfinance have been
established firmly enough. This is by no means a trivial accomplishment. In point of
fact, if the mentalities of individuals are the most significant barrier to the
implementation of a new idea, then this may very well be one of the most significant
developments in the history of the microfinance industry.

The road that lies in front of you is definitely littered with obstacles. It is not an easy
effort to expand existing operations to include millions of more individuals and bring
them within the purview of microfinance. The almost ideal rates of payback are the
most compelling aspect of this kind of financing, and they are what justifies the
somewhat higher fees associated with it. The expansionist ambition of those who
work in microcredit should be tempered with the quality of loans; this is, without a
doubt, a significant issue.

75 | P a g e
Although the engagement of the government in SHG-based microfinance is a good
development, it is not without its own set of problems. The presence of political
favoritism and unethical practices almost usually follows in the aftermath of
government assistance. It is essential to make certain that the actions the
government is taking regarding microfinance do not follow in the footsteps of their
many well-intentioned forebears.

The simultaneous growth of investment potential and the increase of the skill levels
of borrowers is, nevertheless, the most difficult obstacle to overcome in the field of
development. A surplus of low-skilled services is an unacceptable replacement for a
limited availability of credit. Because microcredit makes credit more readily available,
there is less of a need for microconsulting and business coaching.

Planning and other services, such as marketing, are being experienced with a higher
degree of acuity. It is unrealistic to expect microcredit to solve all of the challenges
facing rural economic development. It may be said that its function in the economy is
comparable to that of credit in certain respects. There is a string involved, and that
string may impede movement; nonetheless, it is almost difficult to pull on a string. In
order for the microcredit project to be a genuine success, there is a pressing need
for investments that provide returns that are greater than the interest rates that can
be charged on sustainable microcredit.

However, the information that has been collected so far — the majority of which is
anecdotal – speaks to the many positive side-effects of microcredit. There is little
question that there will be long-term socioeconomic gains associated with the
emancipation of women as well as the inculcation of financial training and discipline
among the less fortunate. Because of this, the concepts of self-help and microcredit
hold the key to economic and socio-cultural independence for India's millions of
underprivileged people, unlocking the doors to a heretofore untapped reservoir of
human entrepreneurship.

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MOVING FORWARD

The majority of the problems described in the previous paragraph are now being
worked on at different levels, and if the efforts are successful, these obstacles might
be greatly removed. Because of the long-term nature of microfinance initiatives, the
Indian government has been advocating their usage as an alternative to poverty
alleviation programs of the IRDP kind in recent years. This is due to the fact that
microfinance enterprises are more likely to be financially viable. The Ministers of
Finance have mentioned the need of expanding the MFIs' spheres of influence in
each of the two most recent Budget Speeches. In its announcement of a new
lending policy in April of 1999, the RBI made a point to highlight the importance of
microfinance. A micro-credit cell has been formed by the RBI; a Micro-credit
Innovations Department has been established by NABARD; and HUDCO is also in
the process of drafting a scheme quite similar to this one. The Reserve Bank of India
has established a Task Force, which among other things is looking at the regulatory
and legal concerns facing microfinance in India. The issue of improper legal
structure for MFIs is one of the topics that is now being addressed by the Task Force.

A growing number of microfinance institutions (MFIs) have started to address the

problem of the long-term financial viability of their programs and have began to take
actionable actions toward reaching this goal of sustainability. At the very least, the
majority of them have raised their interest rates in order to compensate for their
expenses. Some of them have begun the process of transforming themselves into
businesses that are operated for profit and have actively sought out commercial
investors to back their endeavors. Microfinance will not only become more business-
oriented as a result of this, but the overall quality of governance will also improve.

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The formation of professional networks for those working in the field of microfinance
in India is yet another step in the right direction that has been taken in the industry in
recent years. These networks are useful not just for spreading awareness but also
for formation, the exchange of experiences, and other similar endeavors. There is
also the possibility that these may evolve into a Self-Regulatory Organization of
Microfinance Institutions.

CONCLUSION

There are now 260 million people in poverty in India, which accounts for 26% of the
entire population. On the one hand, optimists believe that India will be among the top
five economies in the world by the year 205047. On the other hand, the Indian
economy is currently at a key crossroads. The magnitude of the challenge can be
estimated from the data presented above, and if India is to take its place among the
developed nations of the world, there is no escaping the undeniable reality that
eradicating poverty and bringing about a more equitable distribution of income must
be the topmost priority. The effectiveness of India's efforts to alleviate poverty will
determine whether or not it will meet the Millennium Development Goal (MDG) of
reducing the number of people living in poverty by half by the year 2015 and whether
or not it will achieve broad-based economic development.

A glimmer of optimism is provided by the remarkable progress that the SHG-Bank

connection program has achieved in increasing the proportion of the rural population
that has access to financial services. The purpose of this article is to advocate for
the mainstreaming of impact assessment and the inclusion of local elements in
service delivery in order to maximize the effect of the SHG–Bank linkage program on
the attainment of MDGs and to avoid missing out on this opportunity. Microfinance in
India has now reached the stage where it can take off as a result of the pioneering
work that has been done over the last 10 years. Making significant headway in
moving microfinance institutions (MFIs) into the next circle of
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relevance and sustainability is possible with some effort. In order to address this
issue, we need regulations that are both creative and forward-looking, and which are
founded on the reality of thriving MFIs. This, in conjunction with a commercial
strategy taken by MFIs toward the goal of making microfinance financially viable, will
make this sector dynamic and enable it realize its single-minded aim of providing
financial services to the underprivileged. Certainly! Here's an expanded The scope of
microfinance in India extends far beyond mere financial transactions; it represents a
beacon of hope for millions who have been marginalized by traditional banking
systems. Through its inclusive approach, microfinance endeavors to break the cycle
of poverty by providing individuals and communities with the tools they need to uplift
themselves economically. Despite encountering obstacles along the way, such as
regulatory hurdles and challenges in reaching remote areas, the microfinance sector
in India has demonstrated resilience and adaptability. It has shown that with the right
mix of innovation, regulation, and social responsibility, significant strides can be
made towards financial inclusion and poverty alleviation.The future of microfinance
in India holds immense promise. As technology continues to advance, opportunities
abound for leveraging digital platforms to expand the reach of financial services to
even the most remote corners of the country. Furthermore, the integration of
microfinance with other developmental initiatives, such as healthcare and education,
can create synergies that amplify the impact of interventions, leading to holistic
development outcomes. Moreover, there is growing recognition of the importance of
a client-centric approach in microfinance, which emphasizes understanding the
unique needs and circumstances of clients and tailoring financial products and
services accordingly. By prioritizing the welfare and empowerment of its clients, the
microfinance sector can build trust, foster long-term relationships, and drive
sustainable social and economic change.

In conclusion, the scope of microfinance in India transcends mere financial

transactions; it embodies a vision of empowerment, inclusion, and dignity for all. By
embracing innovation, strengthening regulatory frameworks, and fostering
collaboration among stakeholders, microfinance can continue to be a powerful

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force for positive change, driving towards a future where every individual has the

opportunity to thrive and contribute to India's collective prosperity.

REFERNCES/BIBLIOGRAPHY

Microfinance in India: A Conversation Between R. Srinivasan and M. S.

Sriram (2003)
Microfinance and the State: Exploring Areas and Structures of Collaboration
is a book written by M. S. Sriram (2005)
The Transformation of the Microfinance Sector in India: Experiences, Options,
and Future by M.S. Sriram and Rajesh S. Upadhyayula (2002)
Impact of Self-Help Groups on Formal Banking Habits, a Study Conducted by
Mahendra Varman P. (2005)
The findings of a national study were presented by Frances Sinha in her
paper titled "Access, Use, and Contribution of Microfinance in India" (2005)
Malcolm Harper, Andreas Berkhof, R V Ramakrishna-SHG-bank Linkage as a
Method for Introducing Changes into Cooperatives (2005)
Microfinance in India: Empirical Evidence, Alternative Models, and Policy
Imperatives, by Rajaram Dasgupta (2005)
Institutionalizing Microfinance in India: An Overview of Strategic Issues, by
Tara S. Nair (2001) BASIX: Building Sustainable Microfinance Institutions in
India is a book written by Vijay Mahajan and G. Nagasri (1999)

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