a project report ankit patel

8/8/2019 A Project Report Ankit Patel

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SUBMITTED TO:

PROF. RANJANI SRINIVASAN

SUBMITTED BY:

ANKIT PATEL

20/DEC/2010

³A STUDY ON

SUSTAINABLITY OF SMALL

MICROFINANACE

INSTITUTIONS´



2

A PROJECT REPORT

ON

³SUSTAINABLITY OF SMALL

MICROFINANACE INSTITUTIONS´ By

ANKIT PATEL

(MOOO18)



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SECONDARY DATA

PART1

INTRODUCTION

Microfinance has received increasing attention in many discussions about thenever ending problems of poverty and economic growth promotion. The role of microfinance institutions (MFI) assumed increased importance after the financialcrisis in the USA. Microfinance has demonstrated that poor people are viablecustomers as long as their financing is approached in a right was such that moralhazard, adverse selection and other agency problems are mitigated. Microfinance

development led to a number of strong institutions focusing on poor people¶sfinance and it begun to attract the interest of private investors. But despite theseachievements, there is still a long way to go to extend access to all who needfinancial services.

Following this point of view, we first describe the position of MFI, products andservices in modern microfinance and their position in developing countries. After this exposition we concentrate on role and performance of MFIs worldwide in thelight of financial and economic crisis in recent years. Robinson definesMicrofinance as small-scale financial services for both credits and deposits that are

provided to people who farm or 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 localgroups in developing countries, in both rural and urban areas. Subsidized credit haslong been believed to be the panacea for the eradication of poverty for decadesnow. But perhaps the only thing subsidized credit could create was NonPerforming Assets (NPAs). The realization that the core issue for the poor wasaccess to credit rather than the cost of credit came very late. Microfinance is oftencredited with putting an end to the interest rate debate for the poor. A host of

players have entered microfinance space, each having a reason of its own. It is believed that, Microfinance, unlike other developmental efforts, gives quick andtangible results. Many NGOs that were early entrants gradually metamorphosedinto full fledged lenders, developmental professionals left their cushy careers to setup microfinance firms. Even many banks have experimented with working

exclusively with self help groups and therefore have .microfinance branches.



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WHAT IS MICROFINANCE?

As the name suggests, microfinance is the field of offering financial services to people on a small (micro) scale, such as businesses with low or moderate incomes, but you can read more meticulous definitions here and here. According to Forbes,microfinance is probably the best known means of helping small business ownersin developing countries move out of poverty.The definition for according to TheAsian Development Bank (ADB) is any financial service targeted toward the poor,such as:

y Deposits

y Finance schemes or micro loans up to $3,000

y Payment services

y Money transfers

y Insurance to poor and low-income households and their micro-enterprises

Microfinance Institutions (MFIs) provide micro services through a variety of lending models, while micro entrepreneurs use these services. The theory is that if the poor have access to these services, their financial lives will be more stable,

predictable and secure, allowing them to plan and improve their livelihoodsthrough education, healthcare and empowerment.In other words, microfinance converts poverty into an economic opportunity thatevades the idea of exploitation.

WHAT ARE THE SOURCES OF MICROFINANCE?

y Microfinance providers come in various forms which can be broadlygrouped as follows:

y Formal Microfinance Institutions ± rural/microfinance/village banks,

commercial banks, telecom firms, and cooperatives (see examples)Semi-formal Microfinance Institutions nongovernmental organizations



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SUSTAINABILITY: SOME DEFINITIONS

From bankers perspective, a microfinance institution is said to have reached

sustainability when the operating income from the loan is sufficient to cover all

the operating costs. This definition adopts the bankers perspective and sticks to

accounting approach of sustainability. However, Shah (1999) adopts for an

integrated approach in defining the term sustainability as the accounting

approach to sustainability that takes into account the financial aspect of the

institution is too narrow for him. For Shah, the concept of sustainability includes,

amongst other criteria, - obtaining funds at market rate and mobilization of localresources. Therefore, his performance assessment criteria for the financial

viability of any microfinance related financial institution are: repayment rate,

operating cost ratio, market interest rates, portfolio quality, and demand driven

rural credit system in which farmers themselves demand the loans for their

project. From bankers perspective, sustainability of microfinance institution

includes both financial viability and institutional sustainability (self-sufficiency) of

the lending institution (Sharma and Nepal, 1997). The frames of reference in

bankers definitions are therefore, more financial, administrative and institution

focused.



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MICROFINANCE INSTITUTIONS (MFIs)

Most MFIs started as not-for-profit organizations like NGOs (non-governmentalorganizations), credit unions and other financial cooperatives, and state-owned

development and postal savings banks. An increasing number of MFIs are noworganized as for-profit entities, often because it is a requirement to obtaining alicense from banking authorities to offer savings services. For-profit MFIs may beorganized as non-bank financial institutions (NBFIs), commercial banks thatspecialize in microfinance, or microfinance departments of full-service banks.

Some MFIs provide non-financial products, such as business development or health services. Commercial and government-owned banks that offer microfinanceservices are frequently referred to as MFIs, even though only a portion of their assets may be committed to financial services to the poor.

CREDIT DELIVERY METHODOLOGIES USED BY

MICROFINANCE INSTITUTIONS

MFI¶s use two basic methods in delivering financial services to their clients.

These are:

(1) Group Method

(2) Individual method

GROUP METHOD

This is one of the most common methodologies for providing micro-finance.Group method primarily involves a group of individuals, which becomes the basic

unit of operation for the MFIs. As we have discussed earlier, MFIs have to providecollateral free loans, group methodologies help in creating social collateral (peer

pressure) that can effectively substitute physical collateral. Group becomes a basic

unit with which MFIs deal. The advantage of group methodology is that

Groups are trained to own joint responsibility for loans that are taken byindividuals in the group.



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Groups ensure repayments from all individuals in that group and incase of adefault

Groups functions as the forum where the credit discipline and other related issues

are discussed.

Group may have to jointly own the responsibility of defaults and pay on behalf of defaulting client.

Group also help credit appraisal and provide opinion on creditworthiness of each

individual in the group.

Groups methodology also helps in controlling cost

This ensures that even without taking any physical collateral, the MFI is able tomanage its credit risk (loan related risk).

MFIs actually deliver the financial service at the client¶s location which could be avillage in rural areas or a colony/slum in urban area. Having a group helps theMFIs in getting all clients at one spot rather than visiting each individual¶s house.This helps the MFI in increasing the efficiency of staff and controlling the cost.Group methodology creates a forum where individuals come and discuss, can

provide opinion, and exert social pressure.

The advantage of Group methodology can easily be appreciated by the fact if the aMFI employee has to visit each individual house in isolation, it would be verydifficult. Also in the absence of a group, if a client refuses to pay there is no forumwhere such a case can be discussed or there is no method through which the MFIcan expert pressure on the client.

Group methodology is also important because in case of larger loan defaults afinancial institutions can take recourse o legal action but in small loans legal

recourse is not an economically sound option. An MFI who may have anoutstanding or Rs 3,000 at default cannot apply legal pressure as the cost of

recovery through that method can be higher than the amount to be recovered itself.

Moreover, the clients that the MFIs are dealing with are generally poor and mayface genuine problems at times. Rather than taking an aggressive/legal approach,which such vulnerable clients it is always better to have more constructive andcollective approach, which is provided by the Groups.



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Due to the various advantages, as indicated above provided by groups, thismethodology is widely accepted and used in micro-finance across the world.

Self-help Group and Joint Liability Groups (Grameen model and its variants) are

two common credit delivery models in India.

SELF ± HELP GROUPS (SHGS)

Self-help Group concept has its origin in India. SHGs are now considered to bevery important bodies in rural development and are therefore found in almost all

parts of the country and their number is still rapidly growing. SHGs are formed by Non-Government Organisations as well as Government agencies and are used aschannels for various development programmes.

A Self-Help Group is an association of generally up to 20 members (not exceeding20 members), preferably from the same socio-economic background. SHGs arefacilitated by Government agencies or NGOs for members to come together for discussing and solving their common problems either financial or social throughmutual help. An SHG can be all-women group, all-men group, or even a mixedGroup. However, it has been the experience that women¶s groups perform better in

all the important activities of SHGs. Mixed group is not preferred in many of the places, due to the presence of conflicting interests.

Some of the distinct features of SHGs are

(i) Recognized by government: SHGs are well recognized and accepted bygovernment, SHGs can open bank accounts in the name of SHG. They can alsoreceive government grants and funds for development activities.

(ii) SHGs are social intermediaries: SHGs do not restrict their functions only tofinancial transactions. SHGs are often involved in many social activities. There areexample where SHGs have taken up social issues and fought against social evilslike alcoholism, violence, against women, dowry, getting into village politics and

being elected as Sarpanch.

(iii) Books of accounts: SHGs maintain their own books of accounts. These aresimple books to keep records of their savings, loans income and expenditures.

Strong SHGs also make their Balance sheets and Income statements.

(iv) Have office bearers: SHGs gave a structure where there is a Group President,Secretary and Treasure. They are elected by the group.



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(v) SHGs are more autonomous as they decide their own rules and regulations.

(vi) SHGs mobilize thrift and rotate it internally.

(vii) SHGs can hold bank account and can also borrow from banks and other

financial institutions.

We see that SHGs are groups, which are more autonomous. While they areinvolved in financial transactions, their role is not just restricted to it. SHGs arealso involved in various social issues.

As more SHGs are formed they have started federating themselves into clustersand clusters in turn as SHG Federations. The Federations are able to channelisefunds to the SHGs and also help in improving the managing and financial skills of SHGs.

JOINT LIABILITY GROUP ± GRAMEEN MODEL

Grameen model is based on the concept of joint liability. It is the brainchild of Prof.. Muhammad Yunus, founder of Grameen Bank in Bangladesh. Grameenmodel is the most accepted and prevalent micro-finance delivery model in theworld today. Many MFIs have accepted the model as it has high focus onstandardization and discipline

Grameen model, as mentioned, is a joint liability group model. Here five-member groups are formed and eight such groups form a Center. Hence, in a full-capacityCenter there are 40 members (8 x 5). However, over the years people haveexperimented with Centers of different sizes and now there are variations of 5-8groups within a Center. Center is the operational unit for the MFI, which meansthat MFI deals with a Center as a whole.

Meetings also take place only at the Central level and individual groups do not

meet. Group meetings take place only in front of the Field staff of the MFI. AGrameen model is focused on financial transactions and other social issues are

generally not discussed. The Group and Center are Joint liability Groups, whichmeans that all members are jointly responsible (µliable¶) for the repayment. MFIrecovers full money from Center, if any member has defaulted: the group membershave to pool in money to repay to the MFI. If Group members are unable to do it,Center as whole has to contribute and share the responsibility.

Some other features of Grammen Model are:



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(i) The group meeting take place every week

(ii) Interest rate are charged on flat basis

(iii) MFI staff conducts the meeting

(iv) All transactions take place only in Center meetings

Grameen model is focused on providing financial services to the clients and hencethere is an emphasis on standardization and discipline. The model suggests weeklymeeting for frequent interaction with the clients to reduce credit risk. The meetingsare conducted for carrying out the financial transactions only. The meetings areconducted systematically in a short-time and other social issues are not discussed.Flat interest is charged again for making the system standardized. In flat ratesystem installment size of repayment remains small for all weeks and hence isconvenient and easier to explain. Also, it is easy to break the loan installment intothe principal and interest component.

We see that the SHG and Grameen model have originated with two differentapproaches. SHG model has been developed with holistic view of developmentand empowerment of society where financial transactions are only one part of it.While Grameen model is specifically focused on providing financial services to thelow-income clients.

JOINT LIABILITY GROUPS (JLG)

Grameen model is a particular form of joint liability Group but in India there areother forms of Joint liability Groups as well. MFIs, particularly in urban areas,form JLGs of five-members. These are group of individuals coming together to

borrow from the financial institution. They share responsibility (³liability´) andstand as guarantee for each other. There is a Group Leader in such JLGs, manyMFIs prefer such group in urban business areas. Such JLGs do not hold periodicmeetings.

Typically members are shopkeepers from same locality. These forms of JLGs aresomewhere between Group and Individual lending methods. While lending in suchJLGs is to individual members small JLGs still provide some sort of comfort to theMFIs. Also collection can be done from a single point, generally from the Groupleader rather than going to each individual. As in urban areas shopkeepers do nothave time to hold meeting, these JLGs do not meet.



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INDIVIDUAL METHOD

So far we have discussed the Group based lending method. However MFIs are alsoincreasingly providing loans to individuals. In Individual lending method, MFIs

provide loans to an individual based on his/her own personal credit worthiness.Individual lending is more prevalent with clients who generally need bigger sizeloans and have the capacity to produce guarantee and generate enough comfort tothe MFI. MFIs generally base their decision on personal knowledge of the client,his/her reputation among peers and society, client¶s income sources and business

position. MFIs also ask for individual guarantors or take post-dated cheques fromclients.

Individual guarantors come from friends or relatives well known to the borrower and who are ready to take liability of repaying the loan, should the borrower fail todo so. If the loan is significantly larger, then MFIs may also take some collateralsecurity.

IMPACT OF MICROFINANCE

The impact of microcredit has been studied more than the impact of other forms of microfinance. Microcredit can provide a range of benefits that poor householdshighly value including long-term increases in income and consumption. A harsh

aspect of poverty is that income is often irregular and undependable. Access tocredit helps the poor to smooth cash flows and avoid periods where access to food,clothing, shelter, or education is lost. Credit can make it easier to manage shockslike sickness of a wage earner, theft, or natural disasters. The poor use credit to

build assets such as buying land, which gives them future security. Women participants in microcredit programs often experience important self-empowerment.

Empirical studies on the impact of credit are difficult and expensive to conduct and

pose special methodological problems. Most impact studies to date have foundsignificant benefits from microcredit. However, only a few studies have madeserious efforts to compensate for the methodological challenges. In fact, manystudies would not be regarded as meaningful by most professionaleconometricians. A new wave of randomized trial studies is now in process, whichshould yield a more definitive picture.



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Even so, there is a strong indication from borrowers that microcredit improvestheir lives. They faithfully repay their loans even when the only compelling reasonis to ensure continued access to the service in the future.

Other microfinance services like savings, insurance, and money transfers havedeveloped more recently, and there is less empirical research on their impact.Client demand indicates that poor people value such services. MFIs that offer goodvoluntary savings services typically attract far more savers than borrowers.

ISSUE OF INTEREST RATES ON LOANS TO THE

POOR

Concerns often arise as to why microcredit interest rates are higher than the bank interest rates that wealthier people pay. The issue is cost: the administrative cost of

making tiny loans is much higher in percentage terms than the cost of making alarge loan. It takes a lot less staff time to make a single loan of $100,000 than1,000 loans of $100 each. Besides loan size, other factors can make microcreditmore expensive to deliver. Credit decisions for borrowers who have neither collateral nor a salary cannot be based on automated scoring. These decisions

require substantial intervention of a loan officer in judging the risk of each loan.MFIs may operate in areas that are remote or have low population density, makinglending more expensive. This is often why traditional banks tend to stay away fromsuch areas. If an MFI wants to operate sustainably, it has to price its loans high

enough to cover all its costs.

Although microcredit interest rates can be legitimately high, inefficient operationscan make them higher than necessary. As the microcredit market matures in agiven country, administrative costs usually drop as managers learn from experience

and in some cases because competition forces lower pricing and greater efficiency.



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MICROFINANCE & SUSTAINABILITY

Financial sustainability is a tool for reaching the maximum number of clients.MFIs may only operate for a limited time, reach a limited number of clients, or be

driven more by political goals than by client needs if services are not priced atsustainable levels.

Donors and governments cannot provide enough subsidized funds to meet the hugedemand for microfinance. Even if there were enough donor and governmentmoney, it would be better spent on other development priorities that, unlikemicrofinance, cannot be delivered without continuing subsidies. Sustainable MFIs

have the potential to attract non-subsidized resources to finance expansion of outreach. Experience has even shown that borrowers are more likely to repaylenders who operate without subsidies at they are more confident the institution

will be around to give them future loans.

The trade-off between financial viability and reaching very poor people is muchless acute than many once thought. A number of financial providers have managedto offer high-quality financial services to very poor people while also coveringtheir costs. Moreover, correlation between MFI profitability and client povertylevel has proven to be a statistically weak one. This may be more driven by the

vision of particular MFIs than by any inherent unprofitability of low-endmicrocredit.

Most MFIs are still unprofitable. A more meaningful way to look at profitability isto consider the overall number of clients served by profitable MFIs, rather than thenumber of profitable MFIs themselves. In 2006, 44% of all microborrowerscaptured by the MIX database) were being served by profitable institutions. If onenarrows the focus to private MFIs such as NGOs and licensed institutions, thenmore than 3/5 of the borrowers are already being served profitably, and the long-

term trend is upward.

MFIs are on average more profitable than the commercial banks in their countries.

This does not show that microfinance is inherently more profitable thancommercial banking. Rather, the differential is likely due to microfinance being animmature industry in most countries where providers¶ profits have not yet beensqueezed down. Measured by return on the equity invested by shareholders, MFIsare on the average less profitable than banks, but this is mainly because MFIs arenot yet as fully leveraged as banks²i.e., MFIs fund their assets with more of their own money and less of the money deposited by savers. Even so, well-managed



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microfinance have already shown to be profitable enough to integrate intomainstream financial sectors.

TRACK APPROACH FOR BUILDING A SUSTAINABLEMICROFINANCE SECTOR (MFS) IN INDIA

There is a huge unmet demand for micro-finance. Bridging the demand supply gaprequires an environment that attracts large numbers of microfinance providers.There is a need to adopt a three track approach, using mutually complementarystrategies:

· Incentivising existing mainstream financial service providers (apex financial

institutions, such as NABARD, SIDBI and HUDCO, commercial banks, insurancecompanies, cooperatives, and NBFCs) to enter the microfinance sector as a serious

business proposition.

· Encouraging new microfinance institutions (MFIs) with a supportive policy andregulatory framework and financial resources to enlarge and expand their services.

· Building a strong demand system in the form of community-based developmentfinancial institutions (CDFIs), with the help of NGOs and others.

There are many aspects of the existing legal and regulatory framework, whichdiscourage mainstream FIs from increasing outreach and achieving sustainabilityin microfinance.Further growth in microfinance can only be possible by redressing these limitationsin the legal and regulatory framework. These constraints apply both to mainstreamFIs (track 1) and The concept of Local Area Banks (LABs), with a lower start upequity of Rs 50 million, has not yet been operationalised by the RBI. The privatefinance ³companies´ ± so called, but not actually companies under the CompaniesAct are not allowed to take deposits, and thus their source of funds is the owners¶

personal funds and borrowings from relatives. To incorporate, at the moment thereare only two options ± either be a co-operative or be an NBFC (nonbankingfinance company).

Track 3 is grassroots up. It is desirable to build a strong demand system in the formof community-based development financial institutions (CDFIs), with the help of

NGOs and others. Such a system is required to convert latent demand into effective



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demand, wean away microfinance customers from moneylenders, remove theexpectation of low interest rate and capital subsidies that have spoiled borrowersover the years, restore the repayment norm, and build local stake in grassrootsfinancial structures. Having explained the three tracks for building themicrofinance sector in India, we focus on track 2 (MFIs), as other presenters fromIndia will be dealing with track 1 (mainstream FIs) and track 3 (CDFIs).

MULTIPLE DIMENSIONS OF SUSTAINABILITY

Sustainability is not just financial, there are multiple dimensions of sustainability. We have to look at sustainability from the point of viewof:

y Demand and Supply Characteristics and Their Impact onSustainability of MFIs

y Sustainability of the Mission of MFIs

y Legal and Regulatory Framework for Promoting Sustainabilityof MFIs

y Ownership and Governance to Promote Sustainability of MFIs

y Financial Sustainability of MFIs

DEMAND AND SUPPLY CHARACTERISTICS AND

THEIR IMPACT ON SUSTAINABILITY

Demand for Microfinance Services:

The demand for microfinance services ± savings, credit and insurance ± isapparently insatiable in India. In that sense, India is perhaps the largest emergingmarket for microfinance services.

Credit: With a population of 1000 million, India has nearly 400 million people below or just above an austerely defined poverty line. Thus, approximately 75million households need micro-finance. Of these, nearly 60 million households arein rural India and the remaining 15 million are urban slum dwellers. The current

annual credit usage by these households was estimated in 1998 to be Rs 4,65,000million or US$ 11 billion. Even though the unmet demand is large, the emerging³competition´ from mainstream banks can overwhelm MFIs, which are still in



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their nascent stage. This is so as banks are able to cross-subsidize their micro-credit, and charge interest rates below cost and can out-price any MFI. This hasmajor implications for the sustainability of MFIs.

Savings and Insurance: Apart from credit, there is an unfulfilled demand for savings and insurance services. In the case of savings services, while banks have

provided access to a large number of small depositors, the demand is nowhere near

being met. The Reserve Bank of India (RBI) has tightened up deposit takingactivity since 1997, but this has, perversely, also led to legitimate MFIs being notallowed to take deposits and thus provide savings services to the poor. The supplyof insurance services to the poor has increased substantially over the 1990s, andthere are a large number of low premium schemes covering them against death,accidents, natural calamities, and loss of assets due to fire, theft, etc.

The Supply of Microfinance Services and Competition for MFIs

The total outreach of the existing specialized microfinance service providers isquite limited. Starting with credit first, we see that there is no authoritativecountrywide estimate of microcredit disbursed or clients served. We haveattempted a preliminary estimate in Appendix 1. The total barely crosses Rs 1500million, which is not even 0.3 percent of the existing credit usage by poor families.By March 31, 1999, banks have cumulatively financed Rs 570 million, comprisingnearly 33000 SHGs all over India. NABARD has established a goal to help

promote 1 million SHGs by 2008 AD. One million SHGs will absorb at least Rs50,000 million worth of funds. To meet this goal, obviously, the banking systemhas to cooperate with NABARD in an unprecedented big way.

In order to make MFIs sustainable, the characteristics of demand need to bemodified to ensure that diffused demand gets consolidated (such as by organising

borrowers into SHGs) and users become willing to pay full costs of services (atefficiency levels).

Sustainability of Mission

MFIs are usually established to fulfil a mission ± of reaching credit and financial

services to the poor who are otherwise unreached by mainstream FIs. Thus MFI tryto simultaneously achieve the twin goal of access (by the poor) and sustainability(of the institution).



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LEGAL AND REGULATORY FRAMEWORK TO PROMOTE

SUSTAINABILITY OF MFIS

Regulation helps in long term sustainability, even though MFIs may chafe under it

in the initial years. Regulation and supervision ensure that MFIs are run prudentlyand cases of poor people losing their money due to fraud or incompetence, areminimised. At present, most Indian MFIs are NGOs, and thus not treated as part of the mainstream financial sector. Various actions and announcements of the GoIand the RBI are indicative of the acceptance and recognition of the role of NGO-MFIs as part of the micro-finance sector. There is also restriction on the usage,

volume of credit and channel of lending.

Ownership and Governance to Promote Sustainability of MFIs

The pattern of ownership of MFIs and good governance are crucial to their sustainability.Ownership can be of no one (as in NGOs), of member-users (as in cooperatives),or of investors (as in companies). Each ownership pattern has its problems and plus

points.Governance structures emanate from the ownership pattern, though it is possible tohave a looser or tighter governance within the same type of entity.

Ownership of MFIsAs stated earlier, a vast majority of MFIs in India are non-profit NGOs, which are

legally not ³owned´ by anyone. NGO-MFIs are registered as Societies or Trusts,under the Societies Registration Act, 1860 or the Indian Trust Acts, 1882.Accountability is structurally limited in case of these legal forms. There is anabsence of a supportive framework for encouraging entrepreneurs to providemicro-finance services on a for-profit basis. Indeed, the concept is looked at a bitsuspiciously both within the sector and by policy makers. Yet, this will have tochange if sustainable MFIs have to be established in large numbers.



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G overnance

One has to accept the fact that as MFIs grow larger, governance is likelyto vest with professionals. Is institutional sustainability possible only in

a model where the MFI is managed by professionals? It appears so, sincethe other option is to depend on exceptional charismatic leaders, whether of NGOs or cooperatives. The microfinance sector in India at present

badly needs a large number of microfinance entrepreneurs (MFEs), whocan set up new MFIs. A systematic process for identifying and nurturingMFEs is required.

Human Resources

Human resources are the key to the long run sustainability of anyorganisation as they are the ones who bring difference in the manner MFIs operate and function. MFIs need, first and foremost, those whowill establish them, that is, the Micro-Finance Entrepreneurs (MFEs).

FINANCIAL SUSTAINABILITY

The key to MFI financial sustainability is by controlling costs and bad debts,increasing volumes and by offering other financial services such as savings andinsurance. Most Indian MFIs are not yet financially sustainable. In order to achievefinancial sustainability, MFIs should:

· Control costs by reducing average cost of funds, cost of operations and cost of bad debts.· Increase volumes· Increase services ± savings and insurance

Suggestions for Building Sustainable MFIs In India

Recommendations have been suggested for establishing an enabling environment

to promote sustainable MFIs in India. Interested readers may want to look at themain paper for details.



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Need to Enact/ Amend Laws and Regulations

y Amend the RBI Act, 1934 to add a chapter on MFIs

y Establishing a new form of NBFC ± the Micro Finance Company

y Permitting MFIs to take deposits from members/borrowersy Changing priority sector guidelines

y Changes in the Acts governing NABARD, SIDBI and HUDCO

y Changes in the Income Tax Act

y Tax benefits need to be extended to the microfinance sector

y Allow NGOs to give foreign grants as loans and grants to SHGs/CDFIs.

y Simplify foreign investment regulations to enable MFIs to raise foreign

equity.

THE NATURE OF MICROFINANCE: MICROFINANCE VS.MICROCREDIT

Micro-credit is defined as a credit (small amounts) provided to very poor, oftenunemployed people without any collateral, to help them live better 1. Just smallcredits can help these people to repay their previous loans and start their own new

business. The amount of credit is smaller and the credit cycle is shorter thanstandard loans of commercial institutions ± typically from six to twelve monthswith weekly or fortnightly installments. The system of installments; built on

regular, fixed small installments starting very early after contract is signed; is lessencumbering for clients but is more exacting from administrative aspect . Theinterest rate of microcredits seems to be very high in comparison with standard

bank loans in developed part of the world. The interest earnings should cover the probability of default, inflation and mainly the administrative costs; they can be 10 ± 25 % of the sum of credits advanced by MFI2. The most of MFIs are financedexternally by international organizations, NGOs or the state budgets ± the measureof dependence on this revenue and self-sustainability should be the talking point infollowing sections.

What is microfinance? Microfinance refers to small-scale financial services ± primarily credit and savings ± provided to people who farm or fish or herd; whooperate small enterprises or microenterprises where goods are produced, recycled,repaired, or sold; who provide services; who work for wages or commissions; whogain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and groups at the local levels of

developing countries, both rural and urban. (Robinson, 2001). Thus, the broader



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definition of microfinance includes not only microcredits but also other financialservices, which can be offered to the poor. Interested economists found soon thatnot only small credits but also other services connected with lending couldimprove economic lives of the poorest (Bauer, Chytilova, Morduch, 2008). In thesedays we can include also improvement in health care and infrastructure to thesystem of microfinance. The most of MFIs connect their credit services also witheducational or saving programs or business trainings, retraining scheme or

technical trainings. Logically the investments can be more profitable when the people have access to training, which can improve their skills. The costs of these programs obviously increase the interest rates but the gains for both the borrowersand MFIs outweigh them. For example in organizations as Pro Mujer and Freedom

from Hunger, the training is a central part of the provision of credit. The coursesfor dressmakers are very common. After successfully passing the course, womencan ask for credit on the sewing machine. The training needs to be focused not

only on business or technical skills, but also for better knowledge of proper nourishment - mostly of children: the nutritious foods to feed children, theimportance of breast feeding or how to treat a child with diarrhea (McNelly,Watetip, Lassen and Dunford, 1996).

Various researches found that the poor do not have all the expenditures in small

sums like for clothing and food. From time to time they need also bigger amounts

necessitated by different situations. Some can be predictable like a dowry, the

education of children, home building and festivals. Very poor people spend

surprisingly lot for various festivals (Banerjee and Duflo, 2006). Another situationcan be unpredictable like emergency cases such as a sudden sickness and injury or

wars, floods or other natural disasters. Finally yet importantly, the poor can face an

investment opportunity such as buying land or other productive assets or setting up

a new business. For these cases people should have some savings, but poor people

have difficulties to save in traditional institutions or at home, thus, they try to make

use of other non-official ways like deposit collectors, credit cooperatives or

Rotating Savings and Credit Associations (ROSCA). Here is a place for another

innovative component of microfinance ± microsavings



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BRIEF HISTORY OF MFIS

Over the past 10 years or so, microfinance has rapidly evolved and expanded from

the relatively narrow field of micro enterprise credit to the more comprehensive

concept of microfinance (which includes a range of financial services for poor people, including savings, money transfers and insurance) to the enormous

challenge of building inclusive financial systems. Although the history of

microfinance could be divided into several pivotal parts, the revolutionary progress

was initiated in 1976 by Muhammad Yunus. This economic professor and

successful founder of the Grameen Bank of Bangladesh started out by loaning 28

USD for working capital to a group of petty traders and crafts people, mostly

women, in the village close to Chittagong University. With a simple system of

small and frequent payments and minimal paperwork, the women paid back their loans in full and on time. In addition, micro credit program has found that women

are more likely to repay their loans and in general are more reliable borrowers. But

more importantly, given that microcredit s purpose is primarily social, women tend

to spend their own earnings on better nutrition, housing and education for their

families. This brings long-term benefits to the community, cutting into the cycle of

chronic poverty and dependency. A recent World Bank study shows that wage

levels are higher in the villages served by Grameen and that the health, education

and self-esteem of its borrowers and their families are significantly improved.



22

PRODUCTS AND SERVICES IN MODERN MICROFINANCE

For a long time the offer of financial services to low-income clients meant thegranting of microloans to develop microbusinesses. The beneficiaries of microcredit have typically been the poorest of the poor , the poor and women,who have mainly benefited from small loans used to finance their cash flow. In the

past decades microcredit projects have assumed wider features than their original

ones. In modern microfinance the poorest of the poor is no longer the only client.All the victims of financial exclusion have now been added to the traditional target

beneficiaries. In addition to developing countries, there are now industrializedcountries with high levels of financial exclusion; in addition to the non-profitinstitutions there are an ever-increasing number of traditional credit intermediaries.

The step from microcredit to microfinance requires the effort of reconsideration of

the business models and the distribution methodology of financial services. It is not by chance that many authors define the current period as the financial servicesera and underline how the recent consideration of the variety of new financialservices motivates the knowledge of an increasing complexity and variety of needsof low income clients (Rutherford, 2003). The poor, in fact, do not only need

productive loans: they need further financial services in order to meet other

specific needs. Examples are the demand for credit or savings in order to provideeducation for their children; the need for insurance services to deal with shock or emergency situations; the requirement for savings and insurance services to meetthe costs of old age and funeral services. From this perspective, it is then possibleto distinguish between the following needs:

a) Medium and long term funding needs (circulating and fixed capital),b)Access to safe, fast and cheap payment systems,c) saving and liquidity needs or d) risk hedging. Such needs can be met by usingthe typologies of financial services that are typically considered in the studies of financial intermediation: credit products ± the most common credit products inmicrofinance are microcredit and microleasing.

Another essential financial service presents so-called payment services ± alongside savings and loan products, a limited number of MFIs have begun to offer

payment services also. These are included in a category of financial services thatthe poor request in order to have the possibility of transferring money throughsecure channels. The demand for such services mainly derives from thosecategories of clients that have a greater managerial ability and those need to

perform transactions through alternative means to cash ± often associated with



23

deposit products ± such as cheques, bank transfers and credit/debit cards. Recentlysome MFIs have begun to offer credit cards, debit cards and smart cards. Overallthe demand for payment services arises ± considering the necessary exceptions ± through the specific needs of banking clients: safety, availability and accessibilityto payment instruments, fast and cheap settlement. On the other hand, the MFIsthat offer payment services are not, so far, numerous because of the complexity of the infrastructure and the technology that payment systems require.

Last group are insurance products ± the demand for health and loan insurancederives from the need of low-income customers to limit and cover the risks in caseof death or loss of assets. Microinsurance products, drawn up to reduce uncertaintyand its effects, represent a fundamental instrument in microfinance, given thevulnerability of the poor to risk. Natural disasters, health problems of the

beneficiary or death of livestock, are all events that can be dealt with by

microfinance, do find in insurance cover an important management solution. It isnecessary to point out, that microinsurance is not always the best solution for reducing the vulnerability of the poor to risks and for improving the quality of theloan portfolio. Insurance is a high risk business; in developed countries this islimited to insurance companies or to financial intermediaries used to managing asingle portfolio of numerous, similar, risks. In developing countries, many MFIs

operate at the limits of legality, this being due to an unfavorable legal andregulatory context and/or the inability of many MFIs to define and successfullymanage microinsurance schemes. These aspects show how it is very oftenadvisable to create partnerships with formal insurance providers, rather thanoffering microinsurance products directly. These partnerships present variousadvantages for formal insurers as well as for MFIs. The insurers can gain access tonew markets, MFIs can benefit from the expertise of formal institutions in definingclient responsive products, without having to spend time and resources in thedesign phase of the product. On the other hand, offering insurance productsdirectly involves incurring greater risks, especially if the insurance side of the

business is not separate from the savings and credit side. Furthermore, directlyoffering insurance products requires different skills from those required for creditor saving supply. Finally, the MFIs can incur more moral hazard problems (Torre

La, M., - Vento, G. A., 2006).



24

MICROFINANCE INSTITUTIONS AS PROVIDERS OF

FINANCIAL SERVICE

Microfinance institutions originated in developing economies. For the

understanding of their functions and operations, their position in the financeservices sector in the developing countries has to be explained first. The mostobvious group of finance providers both in developed and developing countries isrepresented by well-known traditional banks. These institutions never (or hardlyever) provide financial services to the poor clients. And there are many logicalreasons why they do not do that. The problem of adverse selection and information

asymmetry (ex ante as well as ex post moral hazard) is really severe in the case of these customers. The poor have no or very little income, they do not have steadyemployment and cannot offer any collateral, which banks require. The poor clientshave no credit history, banks are too far away to verify and observe their behavior

± there is little information. In addition, the loans are generally far toosmall compared to transaction costs (bad information, no addresses, noinfrastructure...).Despite these facts, the potential of credit markets in developing countries is high.Potential entrepreneurs are usually missing starting seed capital, but returns oncertain small businesses are fairly high. The returns on businesses in agricultureand trade can be above 100 % annually (Mexico, Ghana, Kenya). According toempirical evidence, annual returns on investments in microenterprises often exceed100 percent too. The other source of finance is represented by microfinance

institutions which could be classified into three main categories, depending on theregulatory thresholds of their organizational structures:

Informal institutions (self-help groups, credit associations, families, individualmoney lenders) properly do not have the status of institutions. They are providersof microfinance services on a voluntary basis and are not subject to any kind of control or regulation.

Semi-formal institutions are usually registered entities, subject to all relevantgeneral laws.They can be defined as microfinance financial intermediaries (MFFIs) and they

represent the most traditional category of MFI: they are mostly credit-onlyinstitutions which provide various financial services but generally, they do notcollect deposits or alternatively they cannot grant credit, as is the case with postal



25

saving banks. Therefore, MFFIs are subject to financial regulatory requirements,according to the wideness of their financial intermediation activities, but they arenot under banking regulation. Within this category, it is possible to includedifferent types of institutions with different structural and organizationalcomplexity (financial NGOs, financial cooperatives, credit unions, postal saving

banks). The most popular and widespread are, however, financial NGOs thatoperate principally by offering microcredit as part of development projects, often

combined with the offer of technical assistance and other social intervention for beneficiaries. To this aim the NGOs make use, in part or entirely, of fund donated by supranational institutions and agencies, as well as from donor states. Some of the most developed NGOs offer different types of financial services, raise privatefunds and collect savings from their clients. Formal institutions can be further classified into three main categories: microfinance banks (MFBs), microfinanceoriented banks (MFOBs) and microfinance sensitive banks (MFSBs).They can all

offer credit and they are all deposit-taking institutions: for these reasons, they areall under banking regulation. Within MFBs, it is possible to list a limited number of pure microfinance banks (PMFBs), cooperative banks and development banks.PMFBs are banks specialized in offering only microfinance services. These may bethe result of upscaling of NGOs specialized in microcredit that have converted to

banks in order to maximize the economic sustainability of their initiatives and

widen their client base. Alternatively, such intermediaries may result from a process of privatization of public banks,with the aim of providing financial supportto the local community. Lastly, they may be newly created banks which aim toenter into the microfinance market, attracted by the large profits and positive

performances achieved by intermediaries specialized in micro-enterprises.Microfinance services can also be offered by different types of cooperativeinstitutions, which operate exclusively or mainly for the benefit of their ownmembers. These include more organized credit unions ± such as those based in theUK and Ireland- which offer credit and other services to their own members; theRotating Savings and Credit Associations (ROSCAs), more common in developingcountries, which provide rotating credit to their own members using resourcesfrom a centralized fund made available by the savings of the members themselves;and cooperative credit banks. Despite their differences, the common characteristics

of these institutions lie in the legal status of cooperative companies and in the possibility to collect time deposits, mainly through partners. The chance to offer demand deposits, on the other hand, is largely prohibited by regulatory authorities,due to the higher complexity that would derive for those institutions in liquiditymanagement, as well as for the higher contribution to the systematic risk.Development banks are large, centralized, and usually government-owned bankscreated to support specific sectors (small business developing banks) or geographic



26

areas (rural development banks); in some developing countries they also take theform of private banks. Finally, in recent years, within formal microfinanceinstitutions, it has been possible to include some commercial banks, bankinggroups and financial conglomerates. Here, two categories of intermediaries can beidentified: microfinance-oriented banks and microfinance-sensitive banks.

In the area of microfinance-oriented banks it is possible to group together all the

banks or financial institutions which are specialized in financing small to mediumenterprises and micro-enterprises and which are therefore professionally inclined totake an active part in microfinance programmes. These are mainly small, local

banks, strongly rooted in the local territory, as well as financial institutions whichcome directly from local bodies. Finally, in the sphere of microfinance-sensitive

banks it is possible to include all the banks and financial intermediaries that, for economic reasons or for the positive externalities deriving for their own image,

view microfinance as an attractive opportunity. These consist, mainly, of bankinggroups, particularly large ones, or financial conglomerates which decide to enter into the microfinance sector downscaling their traditional activities ± albeit to alimited extent compared to their own core business, creating specific companies or specialized divisions within their organizations (Molyneux, P., Vallelado, E.,2008).

MICROFINANCE IN INDIA

Microfinance sector has covered a long journey from micro savings to micro creditand then to micro enterprises and now entered the fi eld of micro insurance, microremittance, micro pension and micro livelihood. This gradual and evolutionarygrowth process has given a great boost to the rural poor in India to reachreasonable economic, social and cultural empowerment, leading to better life of

participating households. Financial institutions in the country have been playing aleading role in the microfi nance programme for nearly two decades now. Theyhave joined hands proactively with informal delivery channels to give microfinance sector the necessary momentum. During the current year too, microfinance

has registered an impressive expansion at the grass root level. The year 2008-09 isthe third year that the data on progress in microfi nance sector have been presentedon the basis of returns furnished directly to NABARD by Commercial Banks(CBs), Regional Rural Banks (RRBs) and Cooperative Banks operating in thecountry. The data includes the information related to savings of Self Help Groups(SHGs) with banks as on 31 March 2009, loans disbursed by banks to SHGs duringthe year 2008-09 and outstanding loans of SHGs with the banking system and the



27

details of Non-Performing Assets (NPAs) and recovery percentage in respect of bank loans provided to SHGs as on 31 March 2009.The data received from banks have been compiled on region-wise, State-wise andagency-wise basis in this booklet. The booklet also has the details related to SHGsunder Swarnjayanti Gram Swarojgar Yojna (SGSY) and exclusive women groups.In addition, the information related to bulk lending under Bank -Micro Finance Institutions (MFIs) ± SHGs has also been compiled.

The banks operating, presently, in the formal fi nancial system comprises of PublicSector Commercial Banks (27), Private Sector Commercial Banks (28), RegionalRural Banks (86), State Cooperative Bank (31) and District Central CooperativeBanks (371). It is observed that most of the banks participating in the process of microfi nance have reported their progress under the programme.

NABARD has been instrumental in facilitating various activities under microfinance sector, involving all possible partners in the arena. It has been encouragingthe voluntary agencies, bankers, socially spirited individuals, other formal andinformal entities and also government functionaries to promote and nurture SHGs.The focus in this direction has been on training and capacity building of partners,

promotional grant assistance to Self Help Promoting Institutions (SHPIs),

Revolving Fund Assistance (RFA) to MFIs, equity/ capital support to MFIs tosupplement their fi nancial resources and provision of 100% refi nance against

bank loans provided by various banks for microfi nance activities.



28

PROBLEMS AFFECTING MFIS

Although there have been various successful stories about microfinance institutionshelping the poor, they face many problems. The problems can be solved on many

occasions but sometimes cannot be avoided. We discuss the problems MFIs faceunder the following broad categories.

1. Ethical Reasons: Microfinance Institutions can be often viewed as a profitmaking organization. The desire to make MFIs an industry, commercialize micro-lending or enable them to be a profit making institutions should not distract themfrom one important aspect for which they are formed in the first place: socialservice by enabling poor to work on profit making projects or small businesses.

Many a times, the lack of this aspect can lead the microfinance institutions to behave similar to the local moneylenders. Furthermore, the important point of

corruption cannot be neglected. Another reason of failure has been lack of motivation. MFIs thrive on better economical conditions and an economic downturn can incur heavy loss on them. In such adverse situations, MFIs generally loseman power too.

2. Managerial Reasons: One of the major problems which the MFIs can resolve ismanagerial problems. They tend to be fairly straightforward and the solutions tothem are also pretty straightforward. Managerial problems are a major factor andthey have more effects than any other problems discussed. These problems include

mainly: lack of management training, poor record keeping and obviously lack of management capacity.

3. Legal Reasons: Microfinance institutions can be viewed as a social organizationhelping the poor and a profit organization too. In many countries, profitorganizations are registered under different set of acts and non-profit organizationscome under different legislations. On the first view, it could seem unsubstantial,

but these legalities sometimes create complications

4. ³Unfortunate´ Reasons: Sometimes microfinance institutions have to face

problems which cannot be resolved. These problems arise in cases when something

³unfortunate´ happens to a person or a community



29

CURRENT SCENARIO

The emerges is that it is very critical to link poor to formal financial system,

whatever the mechanism may be, if the goal of poverty allieviation has to be

achieved. NGOs and CBOs have been involved in community development for long and the experience shows that they have been able to improve the quality of

life of poor, if this is an indicator of development. The strengths and weaknesses of

existing NGOs/CBOs and microfinance institutions in India indicate that despite

their best of efforts they have not been able to link themselves with formal

systems. It is desired that an intermediary institution is required between formal

financial markets and grassroot. The intermediary should encompass the strengths

of both formal financial systems and NGOs and CBOs and should be flexible to

the needs of end users. There are, however, certain unresolved dilemmas regardingthe nature of the intermediary institutions. There are arguments both for and

against each structure. These dilemmas are very contextual and only strengthen the

argument that no unique model is applicable for all situations.

SUCCESSFUL MICROFINANCE MODEL THAT HAVE

EMERGING IN INDIA

An intermediate model that works on banking principles focus on both savings &

credit activities and where banking services are provided to the clients either

directly or through SHGs

There is also a wholesale banking model where the clients comprise NGOs, MFIs

& SHG federations. This model involves a unique package of provide both loans

and capacity building support to its partners

There is an individual banking-based model that has its clients as individuals or

joint liability groups.



30

PART 2

NABARD

INTRODUCTION NABARD is set up as an apex Development Bank with a mandate for facilitating

credit flow for promotion and development of agriculture, small-scale industries,

cottage and village industries, handicrafts and other rural crafts. It also has the

mandate to support all other allied economic activities in rural areas, promote

integrated and sustainable rural development and secure prosperity of rural areas.

In discharging its role as a facilitator for rural prosperity NABARD is entrusted

with

1. Providing refinance to lending institutions in rural areas

2. Bringing about or promoting institutional development and

3. Evaluating, monitoring and inspecting the client banks

BESIDES THIS PIVOTAL ROLE, NABARD ALSO:

Acts as a coordinator in the operations of rural credit institutions

Extends assistance to the government, the Reserve Bank of India and other

organizations in matters relating to rural development



31

Offers training and research facilities for banks, cooperatives and

organizations working in the field of rural development

Helps the state governments in reaching their targets of providing assistanceto eligible institutions in agriculture and rural development & Acts as regulator for

cooperative banks and RRBs

SOME OF THE MILESTONES IN NABARD'S ACTIVITIES ARE:

Refinance disbursement under ST-Agri & Others and MT-Conversion/ Liquidity

support aggregated Rs.16952.83 crore during 2007-08.

Refinance disbursement under Investment Credit to commercial banks, state

cooperative banks, state cooperative agriculture and rural development banks,

RRBs and other eligible financial institutions during 2007-08 aggregated

Rs.9046.27 crore.

Through the Rural Infrastructure Development Fund (RIDF) Rs.8034.93 crores

were disbursed during 2007-08. With this, a cumulative amount of Rs.74073.41

crore has been sanctioned for 280227 projects as on 31 March 2008 covering

irrigation, rural roads and bridges, health and education, soil conservation, drinking

water schemes, flood protection, forest management etc.

Under Watershed Development Fund with a corpus of Rs.613.71 crore as on 31

March 2008, 416 projects in 94 districts of 14 states have benefited.

Farmers now enjoy hassle free access to credit and security through 714.68 lakh

Kisan Credit Cards that have been issued through a vast rural banking network.

Under the Farmers' Club Programme, a total of 28226 clubs covering 61789

villages in 555 districts have been formed, helping farmers get access to credit,

technology and extension services.



32

MISSION

Promoting sustainable and equitable agriculture and rural development through

effective credit support, related services, institution building and other innovative

initiatives.

OBJECTIVE

NABARD was established in terms of the Preamble to the Act, "for providing

credit for the promotion of agriculture, small scale industries, cottage and village

industries, handicrafts and other rural crafts and other allied economic activities in

rural areas with a view to promoting IRDP and securing prosperity of rural areas

and for matters connected therewith in incidental thereto".

THE MAIN OBJECTIVES OF THE NABARD AS STATED IN

THE STATEMENT OF OBJECTIVES WHILE PLACING THE

BILL BEFORE THE LOK-SABHA WERE CATEGORIZED AS

UNDER :

1. The National Bank will be an apex organisation in respect of all

matters relating to policy, planning operational aspects in the field of

credit for promotion of Agriculture, Small Scale Industries, Cottage and

Village Industries, Handicrafts and other rural crafts and other allied

economic activities in rural areas.

2. The Bank will serve as a refinancing institution for institutional credit

such as long-term, short-term for the promotion of activities in the rural

areas.

3. The Bank will also provide direct lending to any institution as mayapproved by the Central Government.

4 .The Bank will have organic links with the Reserve Bank and maintain

a close link with in.



33

PRIMARY DATA

PART2

BRAHMIN COMMUNITY

This SHG works on Community Model. This SHG provides loan to the

poor person who comes under his community. There are total 13

members in this group. Every month each person gives Rs. 5,000 for the

purpose of giving loan. And they have a bank account in Dena Bank

where they deposit these amount every month. The chairperson has the

responsibility of taking the money and depositing into the bank. Their

first priority to give loan is in its member group only and they willcharge 1% p.m and then they will give loan to the needy person. If there

is no one to take the money then the amount will be in the bank only.

And the interest earned is distributed within the group members.

Questions asked:

If they provide loan to the poor person then only it is applicable:

From how many years you have been providing microfinance to thepoor people?

y From 1998, they are providing the microfinance.

Which type of loan do you give?

y All type of loans viz. personal loan, commercial loan, etc.

On what basis do you give the loan?

y They provide loan on relationship basis and if there is no relation

between the parties then they sanction the loan on the basis of

credibility and their background.



34

What is the minimum amount for the loan?

y The minimum amount is Rs. 500

y The maximum amount of loan given to one person is Rs. 50,000.

Do you take any security against the loan disbursed?

y No. They don¶t take security.

What is the interest rate charged by you?

y They charge 1% p.m.

What is the repayment ratio?

y Till now the repayment ratio is 100%. Still no one has become bad

debt.

Any guarantors needed?

y No guarantors needed.

From where do you get the finance?

y There are total 13 members in the group so they bring funds

according to the loan amount. And they don¶t disbursed more than

Rs. 50,000 to one person.

What is the turnover of this SHG?

y Turnover is Rs. 35,00,000.

If any person doesn¶t repay the loan amount then what are the steps

that you take against the default person?



35

y Still it doesn¶t happen so we don¶t know what we will do but we

will see why the person is not able to repay the money if the

problem is genuine then we may not take the money.

y If the problem is not genuine then we will take the money by hook or crook.

y If he is unable to repay the loan then we will take it whatever

amount he/she gives.

Bishi

This SHG works on Credit Union Model.

In this Bishi, there are 276 members who help each other. It was started

before 10 years ago. The working style of this Bishi is as follows:

y Total members: 76

y Minimum Amount: Rs. 100

y Weekly payment (Sunday)

y Maturity: One year y Total Turnover: Rs. 1 cr

y Penalty: Rs. 21 per share

y Interest charge @ 2% per month.

y If any person wants a Bishi then he has to inform before one week

and then and then only he will get the Bishi.

y Two guarantors are needed who are the part of this Bishi.

y If any person does not pay the amount of Bishi on time then thechairperson will collect Rs. 21 per share as a penalty.

y The amount of interest will be distributed within the members.

y If any member doesn¶t pay the amount of loan on time then it is the

responsibility of the guarantors to pay the loan as well as interest.



36

Advantages

y No restrictions on members.

y Fix interest rate.

y No documents required.

Disadvantages

y A person has to inform about the loan before one week.

y Biasness can happen.

y Loan amount will be within your liability.

y A person has to take the B C for the whole year.

Umiya Mitramandal

It was started 3 years ago with an intention to help the small vendors

because they are unable to get the small loan from the financial

institution and if they need small loan then they go to the moneylender

which charges high interest.

y Started since last three years back in Mehsana.

y It is a group of people of one particular area of Mehsana. (Greeen

Park)

y Office at the Ambica Parlour.

y There are around 50 members on this group.

y Recovery is easy.

y No one is the owner.

y Member has to pay Rs.100 per week.

y Any member can get the loan upto Rs.5000.



y If no one borrows money then that money will be given to outside

person on interest rate @ 10%.

y Income of interest will be distributed within the members.

y One has to pay money within three months.

y Accounts maintained by three or four people of the group at

Ambica Parlour every night.

Bibliography

1. www.microfinanceinfo.com (12/7/2010) 2. http://ifmr.ac.in/cmf (11/29/2010)

3. www.basixindia.com (11/29/2010) 4. www.nabard.org (12/15/2010) 5. www.sewa.com (12/12/2010) 6. www.wikipedia.com (125/2010) 7. www.sbi.com (12/14/2010) 8. http:// www.unitedprosperity.org/us/faqs (11/29/2010) 9. http://mas.co.in/contactus.aspx (12/16/2010) 10. http:// www.edarural.com/documents/SHG-Study/Executive-

Summary.pdf12/7/2010) 11. http:// www.microfinancefocus.com/new s/2010/04/01/special-

report-is-t he-crisis-over-t he-outlook-for-microfinance-investment-2010/12/8/2010)

12. CGAP Microfinance Global Evaluation Survey 2010

(12/14/2010) 13. http://indiamicrofinance.com/financial-regulation-financial-

inclusion-speech-deputy-governor-reserve-bank-

india.html (12/7/2010)

a project report ankit patel

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