problems faced by micro finance institutions and measures to solve it
TRANSCRIPT
A
GRAND PROJECT
ON
PROBLEMS FACED BY MICRO FINANCE INSTITUTIONS
AND MEASURES TO SOLVE IT
By
Brijesh G. Rupapara (Roll No. 46)
Jitendra V. Patoliya (Roll No. 36)
PGDM Program
Batch 2008-2010
Parul Institute of Management
Vadodara
January 2010
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PREFACE
Our grand project is on “In-depth Study on Problems faced by Micro Finance
Institutions” has provided us a golden opportunity for exploring our knowledge of
classroom teaching to real life of corporate. It is rightly said that student without
practical knowledge is just like a bird without wings.
In this project, we have studied various aspects considered as pillars before starting
Micro Finance Institutions. There are number of factor considered by Micro
Finance Institutions for its development. We have studied on the services provided
by SHGs and NGOs. We have also covered various schemes of Grameen Bank.
At the end of the study we have mentioned about the findings of the study. This
primarily includes the credit access to the poor people of India. We have also
suggested about various improvements to be made in credit assessment of Micro
Finance Institutions and speedier access to the credit. This project has guided us in
aligning our career as a techno commercial person. Any admirable things, which
one can see, are due to the efforts made by our teachers in the academic and
corporate world. We take sole responsibility of any mistake, fault or
misconception, you may find in this project.
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ACKNOWLEDGEMENT
We are very thankful to our PIM-PGDM and Director N.K.Kapoor who has given
us an opportunity to get practical knowledge in the field of finance and also for
helping us to undergo this grand project. The learning during this project has been
a great experience.
We are also indebted towards our project guide Prof. N.K.Kapoorfor their
invaluable guidance throughout this project.
We are also very much grateful towards other faculty members for his noble help
and motivation, which has enhanced our level of satisfaction for this project.
We are also indebted towards our institute for giving us an opportunity to get the
grass route realities of the financial world. Finally we are thankful to all those who
have directly or indirectly help in this project.
Thus, it was because of all these people, we were motivated to achieve successful
completion of our project.
________________ _________________
(JitendraPatoliya) (BrijeshRupapara)
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EXECUTIVE SUMMARY
Microfinance emerged as a noble substitute for informal credit and an effective and
powerful instrument for poverty reduction among people who are economically
active but financially constrained and vulnerable in various countries.It covers a
broad range of financial services including loans, deposits and payment services,
and insurance to the poor and low-income households and their micro
enterprises.Persuaded with the potential role of micro financing in alleviating
poverty, the South Asian countries especially India & Bangladesh have been
actively pursuing the policy of setting up formal network of microfinance
institutions. These institutions include NGOs/NBFCs and government sponsored
programs.
Some leading MFIs, e.g. Grameen Bank in Bangladesh, have created financial
modes that serve increasing number of poor. They also lead to repayment rates
positively comparable with the performance of many commercial banks. Whenever
we think about microfinance services, the name of country comes in our mind is
“Bangladesh”. India is second most populated country in the world. If we see the
condition of India, more than 60% people lives below poverty line. It means out of
total population of 1.20 billion, 70 crore people are poor. This section of society
can’t borrow fund from commercial bank due to their inability of meeting
requirement of collateral security for taking loan from these banks. This shows
scope of development of MFIs in India.
If we have seen the scenario of MFIs in India then there are very few MFIs and
cover only fraction of its total potential. In India MFIs are facing some challenges
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which we will discuss in this report. If we can overcome these challenges then
there is no doubt in making India as market leader in providing microfinance.
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CONTENT TABLE
CH. TITLE Page
No.
1 INTRODUCTION 8
2 METHODOLOGY 10
2.1Objective of Report 10
2.2 Research Design 10
2.3 Research Methodology 10
2.4 Implication of this study 11
2.5 Limitation of the study 11
3 HISTORY OF MICRO FINANCE 12
4 WHAT IS MICRO FINANCE 14
4.1 Utilizaiton of Micro Finance credit 14
4.2 Approach to MFIs 15
4.3 Demand for Micro Finance Services 16
4.4 Supply of Micro Finance Services 18
4.5 Major Achievements of Micro Finance 20
4.6 Challenges 21
4.7 Lessons learned 24
5 DATA ANLAYSIS AND INTERPRETATION 27
6 BUSINESS MODEL FOR KALPTARU MFI 40
6.1 Sources of income for MFIs 41
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6.2 Reward and recognition to borrower 42
6.3 Product & services offered by P&R MFI 44
7 SUGGESTIONS 47
8 CONCLUSION 48
9 BIBLIOGRAPHY 50
10 ANNEXURES 51
1. INTRODUCTION
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The age old saying, “India is a rich country where poor people live”, still holds
well. In the present era there is a need for practical and workable solutions to
improve the socioeconomic conditions of the poor in India, thereby helping in
wiping out the deep-rooted problem of poverty. Globalization has brought
substantial benefits around the world, but in many developing countries it is
contributing to a growing disparity between the rich and the poor. In a country like
India, The structure of the economy is dualistic. We can see the Growing
Companies, booming stock market and soaring profits, making the rich, richer on
the one hand while faltering incomes and wages in the field of agriculture and
allied activities is making the poor, poorer on the other. This worsens the access of
the poor to the economic opportunities through which they could build up their
assets and enhance income in order to come out of poverty cycle.The potentials to
avail such economic opportunities mainly depends on the degree of access to
financial services. The commercial banking sector does not consider the poor
bankable owing mainly to their inability to meet the eligibility criteria, including
collateral. Thus the poor in most countries have had no access to formal financial
services.
The more rational way to help the poor could be the provision of sustainable
economic opportunities at grass-root level especially provision of required
financial services at competitive rates to support their investments and viable
business activities. So, micro finance is one of the most effective solutions of this
problem.
India is perhaps the largest emerging market for micro finance. Over the past
decade, the Micro finance sector has been growing in India at a fairly steady pace.
Though no micro finance institution (MFI) in India has yet reached anywhere near
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the scale of the well-known Bangladeshi MFIs, the sector in India is characterized
by a wide diversity of methodologies and legal forms.
Micro finance phenomenon is one of the most remarkable socio-economic
developments of recent times. Because of their economic circumstances, poor for a
long time were considered non-bankable. However, the evolution of the
phenomenon of micro-credit has proved that the poor are creditworthy if organized
in small groups. Over the period micro-credit has had profound impact not only
from finance perspective but, more importantly, from the perspective of poverty
alleviation. In the recent years Micro-Finance has been recognized as an effective
development intervention and thereby a lot of Micro-Finance institutions and
programs targeted to the poor have emerged. In India there are a wide range of
Micro-Finance institutions active in this sector, each with its own way of going
about the task of making financial services accessible to the poor.
Till recent times most of the micro-finance institutions and programs have been
only focusing on providing saving and credit services to the non-bankable.
However a growing number of MFIs have recognized that providing credit is not
enough for the sustainable development of the people and are thus is now
providing a range of other financial services including insurance and other support
services along with savings and credit services. The poor are vulnerable to
different types of risks and adopt various strategies to reduce the impact of the
losses. Micro Finance services are very essential for the low income households to
cope with uncertainties and emergencies like illness or injury, Death, Natural
disasters, theft and life cycle needs.
2. METHODOLOGY
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2.1 Objective of Report
1) Current MFIs activities of India
2) Limitation of MFIs
3) Scope of MFIs in India
4) To develop a business model for MFIs
2.2 Research Design
Inductive studies were done. This method is practically useful when the researcher
has a clear idea of the problems.
The research is aimed at collecting information from the various sources like
Internet and Business Magazine, which will assist us to analyze the micro finance
sector as our macro part and to develop a business model for MFIs at micro level.
Therefore, the most appropriate research design is an inductive one.
2.3 Research Methodology
Research methodology consists of the subject coverage, data collection, data
analysis and interpretation. Various methods are used to supplement the research:
1. Coverage: it includes location, population study, population size and units of
observations, which are very essential for this report.
Location: LIMDA, ISHWARPURA, PREMPARA and PIPALIYA
Population study: We have taken a sample study of the above
mentioned villages.
Units of observation: We have observed in total 500 people from the
above mentioned villages.
2. Data collection: The method of data collection is informal.
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Sources: Following two sources were used:
a) Primary Sources: Primary data was collected by Informal talk with
the MD of Deepak Foundation, faculty members and the survey of
500 people from the different villages.
b) Secondary sources: Secondary data that was utilized in the project
was the data provided by the Internet, Magazines etc.
3. Data analysis and Interpretation: This includes the overall analysis of the data
collected and interpretation of the facts witnessed in the research.
2.4 Implication of this Study
The report helps to identify the measures to improve the micro finance servicesand
to develop as business model to provide the various services of micro finance,
exposure growth in the coming years, with the purpose of improving its
performance by strengthening the way to provide the services.
2.5 Limitation of the Study:
As some of information is not revealed, whatever suggestions
generated by us is based on certain assumptions.
Due to time constraints we analyzed only the sample of 500 people,
so sample error is possible.
3. HISTORY OF MICRO FINANCE
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The history of micro financing can be traced back as long to the middle of the
1800s when the theorist Lysander Spooner was writing over the benefits from
small credits to entrepreneurs and farmers as a way getting the people out of
poverty. But it was at the end of World War II with the Marshall plan the concept
had a big impact.
Micro finance institutions (MFIs) have expanded rapidly in recent years:
According to the Microcredit Summit Campaign, micro finance institutions had
154,825,825 clients, more than 100 million of them women, as of December 2007.
In 2006, Mohammad Yunus and the Grameen Bank were awarded the Nobel Prize
for Peace, for their contribution to the reduction in World Poverty.
[[[[
Today, the term which we use as MF has its root in 1970. At that time a small
institution named as Grameen Bank of Bangladesh came up with concept of MF
and the person who has developed the MF was Mohammad Yunus. He has started
and shaped the emerging concept of micro financing. Another pioneer in this sector
is Akhtar Hameed Khan. At that time a new wave of micro finance initiatives
introduced, many new innovations into the sector. Many pioneering enterprises
began experimenting with loaning to the underserved people. The main reason why
micro finance is dated to the 1970s is that the programs could show that people can
be relied on to repay their loans. It is possible to provide financial services to poor
people through market based enterprises without subsidy. Shore bank was the first
micro finance and community development bank founded 1974 in Chicago .
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Another organization, the caisse populaire movement grounded by Alphone and
Dorimene Desjardins in Quebec, was also concerned about the poverty. Between
1900 to 1906 when they founded the first caisse, they passed a law governing them
in the Quebec assembly; they risked their private assets and must have been very
sure about the idea about microcredit.
Today the World Bank estimates that more than 16 million people are served by
some 7000 micro finance institutions all over the world. CGAP (CATFISH
GRANT ASSISTANCE PROGRAM) experts say that about 500 million families
benefits from these small loans making new business possible. In a gathering at a
Microcredit Summit in Washington DC the goal was reaching 100 million of the
world´s poorest people by credits from the world leaders and major financial
institutions.
The year 2005 was proclaimed as the International year of Microcredit by The
Economic and Social Council of the United Nations in a call for the financial and
building sector to “fuel” the strong entrepreneurial spirit of the poor people around
the world.
.
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4. WHAT IS MICRO FINANCE?
Micro finance is the provision of a broad range of financial services such as
deposits, loans, payment services, money transfers, and insurance to poor and low-
income households and, their microenterprises. Micro finance services are
provided by three types of sources:
• Formal institutions, such as rural banks and cooperatives;
• Semiformal institutions, such as nongovernment organizations; and
• Informal sources such as money lenders and shopkeepers.
Institutional micro finance is defined to include micro finance services provided by
both formal and semiformal institutions. Micro finance institutions are defined as
institutions whose major business is the provision of micro finance services.
4.1 Utilizationof Micro Finance Credit
There are basically two ways for utilization of micro finance credit they are as
follows:
1. Productive utilization:
Productive utilization means use of micro finance credit for the purpose of
purchasing profit generating asset (i.e. loan for purchasing of a sewing
machine).
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2. Non-productive utilization:
Non-productive utilization means use of micro finance credit for satisfying a
personal financial requirement of a lower income section of a society (i.e.
loan to be given for the education for children).
As MFIs we are required to encourage our borrower to use a credit for
productive purpose rather than non-productive purpose because it can help
to generate employment and provide opportunity to them to take
independent decision as they are owner of their business.
4.2 Approaches to MFIs
In general there are two approaches which are followed by MFIs
1. Minimalist:
It is also known as “credit only approach” where only credit is provided with
the assumption that a poor people will use it for economic activity.
2. Maximalist:
It is also known as “credit plus approach” where MFIs helps in capacity
building through a various programs such as business related training, access
to a market along with a provision of credit.
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So from the above two approaches of MFIs we can say that minimalist
approach focus only on providing credit rather than how to utilize the money
or invest money or give them financial guidelines where they need to invest
so they get the maximum return out of it here, the minimalist approach failed
and the maximalist approach came up with the overcome of where
minimalist approach was failing. So we can say that maximalist approach is
more beneficial than minimalist approach.
4.3 Demands for MicroFinance Services
The poor and low-income households and their microenterprises inthe Region are a
diverse group. Their demand for micro finance servicesalso reflects this diversity.
The collective demand of thesegroups for financial services is large and the types
of services theydemand vary across households and microenterprises and over
time.This large demand and the heterogeneity of services needed acrosshouseholds
and microenterprises and over time have created scope for commercial financial
intermediation.
Poor and low-income households and their microenterprises inthe Region have a
large demand for safe and convenient depositservices. This demand reflects the
importance of savings for thesehouseholds and microenterprises for a variety of
reasons. The poorneed to save for emergencies, investment, consumption,
socialobligations, education of their children and many other purposes. Theyhave
the capacity and willingness to save. Savings are important formicroenterprises and
provide them with a major source of investmentfunds. The large demand for
deposit services among the poor isconfirmed by empirical evidence. For example,
the number of savings accounts in unit desas of BRI (Bank Rakyat Indonesia)
increased, from 5.0 million in 1988 to16.1 million in 1996. Most of these accounts
belong to poor households.
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The cooperative rural banks in Sri Lanka had 4.7 million depositaccounts at the
end of 1998; while the Association for SocialAdvancement, micro finance NGO in
Bangladesh, had over 1.4 millionactive savings accounts of poor households at the
end of 1999.Extensive use of informal savings arrangements by poor householdsis
another indicator of their demand for savings facilities. In somecountries, the poor
pay high prices to those providing deposit services.The demand for deposit
services is particularly strong among poorwomen in the Region.
The demand for microcredit that originates both from householdsand
microenterprises is also large. Poor households in the Regionrequire microcredit to
finance livelihood activities, for consumptionsmoothening, and to finance some
lumpy nonfood expenses forpurposes such as education (e.g., school fees and
books), housingimprovements, and migration. Many Asian countries have
numeroussmall farms and their operators also require micro finance services.
Theother source of demand is nonfarm microenterprises, which cover awide array
of activities such as food preparation and processing,weaving, pottery, mat and
basket making, furniture making, and pettytrading.
The demand for other financial services among poor and lowincomehouseholds
and their microenterprises could also be significant.A good share of rural
households borrow, many more save, but allseek to insure against the vagaries of
life and therefore the demand forinsurance services among the poor is vast.
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A private insurancecompany in Bangladesh that started to provide micro-insurance
servicesto low-income households on a commercial basis, for example, foundthat
its client base was expanding rapidly. At the end of 1999, thiscompany had over
800,000 clients, about 50,000 of which areconsidered poor. This experience shows
that the supply of such servicescreates its own demand because the real demand for
such servicesremains hidden when suitable products are not available in the
market.
4.4 Supply of MicroFinance Services
The market structure in microfinance varies significantly acrosscountries in the
Region depending on their stage of financial development, level of economic
development, policy environment, and other factors. However, aspects of the
supply, particularly about different types of suppliers, may be usefully discussed.
The micro finance services are supplied mainly by informal sources. Their
collective outreach, both breadth and depth, is vast in most countries. They supply
mainly short-term credit and charge higher interest rates than semiformal and
formal sources. Because of the relatively greater bargaining power enjoyed by the
informal suppliers in general, the terms and conditions under which services are
provided do not enable the clients to fully harness economic opportunities. The
informal sources operate in highly localized areas. Therefore, their contribution to
financial intermediation and improvement of resource allocation is also limited.
For example, informal sources do not allow savings to be collected from more than
a small group of individualswell known to one another, and they do not move
funds over largedistances. Most informal insurance mechanisms are typically
weak,particularly against repeated shocks, and often provide only
inadequateprotection to poor households.
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The involvement of formal sources in micro finance has increasedduring the last
two decades. This greater involvement has stemmedfrom (i) the expansion of the
scope of formal institutions intomicro finance through downscaling and
establishment of linkageprograms with semiformal sources of different types; (ii)
the emergenceof new formal institutions focused on micro finance, such as
theGrameen Bank of Bangladesh; (iii) reforms of state-owned financialinstitutions
such as unit desas of BRI; and (iv) the introduction of newmicro finance programs
by the governments through nonfinancialinstitutions. However, the formal
operations concentrate mostly onproviding credit facilities, and savings
mobilization has yet to receiveadequate attention, with few exceptions.
Formal micro finance has changed to some extent with increasinginvolvement of
private sector institutions. The Bank Dagang Bali inIndonesia has expanded its
micro finance operations and increased itsclients. Badan kredit-desas, owned by
Indonesian villagers, nowreach 1.7 million clients, and the Grameen Bank in
Bangladesh, ownedlargely by its borrower members, operates in over 38,000
villages with1,140 branches and reaches about 2.4 million clients.
Cooperatives are also playing a significant role as financial intermediaries in the
Region, particularly in India, Sri Lanka, Thailand, and Viet Nam. The thrift and
credit cooperative societies in Sri Lankareach about 800,000 households while
primary agricultural cooperativesocieties in India have about 89 million members.
These cooperatives,among other things, provide micro finance services. In many
countries,the cooperatives have begun to explore possibilities for deeperpenetration
into the micro finance market and show a greater concernabout their financial
viability than they did in the 1980s.
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A major feature of semiformal micro finance sources in the Regionis the extensive
involvement of NGOs. NGOs have become important providers of micro
financeservices. Their involvement is important because their clientsin general are
poorer than those reached by many formal institutions,their services are targeted in
most countries to serve poor women, andtheir credit services are provided largely
on the basis of social collateral.The small average loan sizes of NGOs, which
usually range from about$30 to $150 per active loan account, suggest that their
clients includethe poorest. NGOs in some countries are trying to organize
themselvesinto national coalitions to improve the industry standards and self-
regulation.A few NGOs in the Region have plans to transformthemselves into
formal financial institutions.
4.5 Majorachievements inMicro Finance
The MFIs and other financial institutions (OFIs) providing micro financeservices
have expanded their outreach from a few thousand clients inthe 1970s to over 10
million in the late 1990s. The developments inmicro finance in the Region have set
in motion a process of changefrom an activity that was entirely subsidy dependent
to one that canbe a viable business.
(i) MFIs and OFIs mobilizing voluntary savings have shattered themyth that poor
households cannot and do not save, and provedthat savings can be successfully
mobilized from poor households.This is perhaps a more important achievement of
micro finance inthe Region than the expanded outreach in access to credit.
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(ii) MFIs, OFIs, and their clients have shown that the poor arecreditworthy (poor
women, in particular) and financial servicescan be provided to and accessed by the
poor on a profitable basisat low transaction costs without relying on physical
collateral, if itis done with appropriate financial technology and a commitment
To achieve efficiency.
(iii) Micro finance services have triggered a process toward broadeningand
deepening of rural financial markets.
(iv)Micro finance services have strengthened the social and humancapital of the
poor, particularly women, at the household,enterprise, and community level.
(v) Sustainable delivery of micro finance services on a large scale insome countries
has generated positive developments inmicro finance policies and practices among
all stakeholders:governments, central banks, micro finance service providers, and
external funding agencies.
4.6 Challenges
The achievement in micro finance in the Region has been impressiverelative to the
status in the 1970s. However, a number of major problemsremain.
1. Policy environment
Despite general improvement in the policy environment for financialsector
programs, the policy environment for micro finance in manycountries including
India remains unfavorable for sustainable growth in micro financeoperations.
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In India process of registration is very burocratic and takes so much time.
Moreover there is no stable policy environment for micro finance institutions it is
always depend on ruling party (i.e. B.J.P, congress). The policy will also change if
there is change in ruling party.
2. Limited retail level institutional capacity
As new and emerging MFIs following are the problems to be faced by us as far as
retail level capacity is concern
(i) Lack capacity to leveragefunds, including public deposits, in commercial
markets;
(ii) Are unableto provide a range of products and services compatible with
thepotential clients’ characteristics;
(iii) Do not have an adequate networkand delivery mechanisms to cost-effectively
reach the poorest of thepoor, particularly those concentrated in resource-poor
areas and areaswith low population densities
(iv) Do not show a vision and acommitment to ensure their financial soundness and
sustainabilitywithin a reasonable period, and become subsidy independent
(v) Do not have the capacity to manage growth prudently.
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Most of the state-sector institutions or programs that providemicro finance services
have been created within and nurtured by adistorted policy environment. They do
not have a business culture.
3. Inadequate investments in agriculture and rural development
Agricultural growth, which requires for the growth in the ruralnonfarm subsector,
significantly influences rural financial marketdevelopment. India is not making
adequateinvestments for agricultural growth and rural development. This is amajor
constraint on the development of sustainable micro financeservices. The
insufficient investments in physical infrastructure(especially irrigation; roads;
electricity; and support services formarketing, business development, and
extension) continue to increasethe risk and cost of micro finance and particularly
discourage privateinvestments in the provision of micro finance services on a
significantscale. Also, in the absence of economic opportunities created bygrowth-
inducing processes, micro finance cannot be expected to playa significant role in
poverty reduction.
4. Sustainability
The main challenge for MFIs is the problem of its sustainability which indicates
lapse in their financial procedure, organizational design and governance. Here we
can say that most of the MFIs in INDIA depending on donation or subsidies it are
like getting success through other. If they stop helping them, then they will fail
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5. Loan without security
MFIs target the group of lower income people and providing loan to them. Such
people are not able to give the security for loan. That will lead to bad debt for
MFIs in case of failure of repayment of loan.
4.7 Lessons learned
(i) Adoption of the financial system development approach is the keyto
achieving sustainable results and to maximizing developmentimpact.
This approach emphasizes an enabling policy environment,financial
infrastructure, and the development of financialintermediaries that are
committed to achieving financial viability andsustainability within a
reasonable period and that can provide avariety of financial services, not
just credit, to the poor.
(ii) Micro finance clients are more concerned about access to servicesthat are
compatible with their requirements than about the cost ofthe services.
(iii) Given the diversity of demand for financial services, a broad rangeof
institutional types is required to expand the outreach.
(iv) Strong retail institutions committed to outreach and sustainabilityare
essential for extending the permanent reach of financialservices and to
have a significant impact on poverty reduction.Thus, building the
capacity of institutions with a commitment toreach the poor is vital.
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(v) Financial institutions committed to provide micro finance services inmost
developing countries require considerable technical assistance for
capacitybuilding. This is particularly true for institutions that target
potentialclients in resource-poor areas and the poorest of the poor.
(vi) The demand for savings services by poor households andmicroenterprises
is as strong as or stronger than the demand forcredit. Expansion of the
outreach of savings services can have apotentially significant impact on
both institutional sustainability andpoverty reduction.
(vii) Because micro finance is primarily targeted to the poor who
aredisadvantaged, social mobilization is necessary to introduce themto a
formal or semiformal, market-oriented institutional environment.This is
particularly true for poor women and the poorest of the poor. It
isimportant, however, to distinguish between financial intermediation
andsocial intermediation in designing support programs.
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DATA ANALYSIS
AND
INTERPRETATION
5. DATA ANALYSIS AND INTERPRETATION
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1. Your Age?
AGE GROUP
16-20
21-25
26-30
31-35
36-40
41-45
46-50
51-55
56-60
61-65
66-70
71-75
0
20
40
60
80
100
120
44
99
70 7364 65
31
2010 8
313
No. of RespondentPercentageColumn3
AGE
NO
. O
F RE
SPO
NDE
NTS
INTERPRETATION
From the above graph we can clearly see that more than 90% of the population is
between the ages of 16-50 years. It means they are considering as a productive
work force. We can give loan to them for starting their own business which
improves their living slandered.As they are physically efficient to do work.
2. Education Qualification
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Illiterate Primary S.S.C H.S.C Graduate0
20
40
60
80
100
120
140
160
180165 167
75
35
58
33 33.4
157 11.6
No. of RespondentsPercentage
QUALIFICATION
NO
. O
F RE
SPO
NDE
NTS
INTERPRETATION
Here we can see that nearly 33% of the population is illiterate and 34% of
the population had gone through primary education only. These illiterate
people also include child labor which is 25% of total illiterate people.
Money is major constrain for the parents of child laborwhich is again a
scope for us where we can develop as a MFI.
Here we can observe from above chart that 33.6% people get education
either at S.S.C level or more.
3. Marital Status
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Married Unmarried0
50
100
150
200
250
300
350
400
450398
10279.6
20.4
No. of RespondentsPercentage
MARITAL STATUS
NO
. O
F RE
SPO
NDE
NTS
INTERPRETATION
As the most of the people in the village are uneducated and thus this create a huge
gap of understanding and thus at the very young age they get married. So here it
talks about the mentality of the people that how the illiteracy effect even the living
standards of the people also. After get married most of women remain unemployed
and sitting at their home idle. So it clearly indicates the potentiality for
development MFI by framing SHGs of women.
4. Number of years you are in this village?
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STAYING IN THE SAME VILLAGE
More than 3 years Less than 3 years0
100
200
300
400
500
600
496
4
99.2
0.8
No.of RespondentsPercentage
NO OF YEARS
NO
. O
F RE
SPO
NDE
NTS
INTERPRETATION
Basically we found out that almost 99% of the populations of the villages
were residing in the village since more than 3 years and major of them owed
their own houses only. So it was one of the plus points because we can at
least trust them that they are being part of the village since long period.
When we are going to give them loan it require for us to verify that
particular person has living in the same village since last 3 year. As it is one
of the criteria for giving them loan.
5. Occupation
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Agriculture Labour Other Unemployed0
50
100
150
200
250
115
205
80
100
2341
16 20
No. of RespondentsPercentage
OCCUPATION
NO
. OF
RESP
ON
DEN
TS
INTERPRETATION
Here almost 41% of the people are doing labor work because of they are not
having enough money power so that they can do their own business, so
though if they possess any specific skills they have to hide that skill because
of insufficiency of money. Hence they go for the labor work and one more
thing that nearly 20% of population is unemployed, so one of the major
concern where we can define our scope to develop MFI.
6. Income per day
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Rs.0 Less than Rs.50
Rs.50 to Rs.100
Rs.100 to Rs.150
More than Rs.150
0
20
40
60
80
100
120
140
160
115 111
149
101
2423 22.229.8
20.2
4.8
No.of RespondentPercentage
INCOME (in Rs.)
NO
. OF
RESP
ON
DEN
T
INTERPRETATION
From the observation we can see that 75% of the total population earns less
than Rs. 100 per day. It means they have potentiality to repayment of loan.
Most of them are engaged in either in labor work or agriculture. It is again
scope for us to provide them financial services at micro level.
7. Are you having a bank account?
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Yes No0
50
100
150
200
250
300
350
203
297
40.659.6
No. of RespondentsPercentage
HAVING BANK A/C.
NO
. OF
RESP
ON
DEN
T
INTERPRETATION
One of the major things is that 60% of the people were not even having a
bank account also. So if they want to deposit any amount they were not able
to do it. And one of the major reason as being illiterate if they go to bank
then there will be no one to guide them how to proceed for opening a bank
account and if they open a bank account then they would be not be able to
keep the minimum required balance in the account. So these are some of the
major reasons that why the villagers were not having a bank account. This is
an opportunity for us to develop our MFI. As it indicates that they cannot
access financial services provided by commercial bank.
8. Is there any financial institution providing loan to you at cheaper rate?
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Yes No0
100
200
300
400
500
600
0
500
0
100
No. of RespondentsPercentage
FI'S PROVIDING LOAN AT CHEAPER RATE
NO
. OF
RESP
ON
DEN
TS
INTERPRETAION
It was really interesting there are no financial institutions which provide the loan at
cheaper rate. The people are in need of loan in order to meet their livelihood so
even they pay high rate of interest also and they are in need of any such institution
which provides loan to them at the cheaper rate.
9. Is there any SHG working in your village?
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Yes No0
100
200
300
400
500
600
0
500
0
100
No. of RespondentsPercentage
ANY SHG's WORKING
NO
. OF
RESP
ON
DEN
T
INTERPRETATION
Even there are no SHGs also working in these villages, so there is a huge
scope for the SHGs to come up in these villages and start their business. As
it is new emerging concept of linkage between SHG and bank to provide
empowerment to the downtrodden people of rural area. So as MFI we can
become pioneer in providing financial services by linking SHGs with our
micro finance enterprise.
10.Do you have any Photo Identity Proof?
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Yes No0
100
200
300
400
500
600
487
13
97.4
2.6
No. of RespondentsPercentage
ANY PHOTO IDENTITY PROOF
NO
. OF
RESP
ON
DEN
TS
INTERPRETATION
One good thing which was seemed out in these villages was that at least they
were having photo identity proof almost 97% of the people were having it.
So at least they were being recognized to be the Indian civilization.it means
most of them are fulfilling one of the criteria for giving them loan facility.
11.How many earning members are there in your family?
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0 1 2 3 More than 30
50
100
150
200
250
3
151
197
100
49
0.6
30.239.4
209.8
No. of RespondentsPercentage
NO. OF EARNING MEMBERS IN FAMILY
NO
. OF
RESP
ON
DEN
TS
INTERPRETATION
Nearly 70% of population was like that were only one or two members were the
earning members in the family and the rest other were dependent on them and this
lead to a huge pressure on the member who is earning and provide livelihood for
the rest of the members of the family. So family in which there are more than three
earning members can start their own business if provide them loan facility and
Families which have less than one earning member can get employment in the
same business. By this way we can provide them empowerment.
12. Do you think that is there any requirement of MFIs for providing you
loan?
Parul Institute of Management Page 37
Yes No0
100
200
300
400
500
600
500
0
100
0
No. of RespondentsPercentage
REQUIREMENT OF MFI's
NO
. OF
RESP
ON
DEN
TS
INTERPRETATION
There was not a single individual who refused to us that they are not in
requirement of MFIs. Basically these villages need such types of institutes who
help them and provide loan to them at cheaper rates. Also provide them other
financial facility (i.e. micro insurance, acceptance of micro deposits etc.) which
they require most.
13. Do you possess any inherent skill in you?
Parul Institute of Management Page 38
Yes No0
50
100
150
200
250
300
350
400
450
500
63
437
12.6
87.4
No. of RespondentsPercentage
INHERENT SKILL
NO
. OF
RESP
ON
DEN
TS
INTERPRETATION
There are nearly 13% of the population who possess specific skills like tailoring,
handicraft, etc. which can be effectively utilized and by this way they can groom
up and come up with new ideas and new concepts. We can also develop some new
skills by providing them training and utilize the same skill for getting business.
6. BUSINESS MODEL FOR“KALPTARUMICRO FINANCE
INSTITUTION”
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MFIs satisfy the financial requirement of poor section of the society. We will plan
to give a loan (maximum up to Rs.5,000) to lower income group who are not
focused by commercial banks. For the purpose of getting success at MFIs at initial
stage we are required to give loan for productive asset only (i.e. loan for
purchasing equipment for handicraft item). If we give loan for a productive use
only then they will generate profit out of it.
Now problem of reimbursement of loan may take place. This problem can be
solving if we grant loan for productive use not for non-productive use. Now we are
required to collect this loan in an installment of small amount. Before they start to
earn profit from this productive asset we are required to collect principle amount
only. Once they are starting to earn profit we can get some of the portion of their
profit which is consider as interest income for us.
If we follow this model then we can generate profit from operation of MFIs by
doing business through this model for 2 to 3 years. Then we can have accumulated
profit that we can plough back and expand our business. Once after generating a
profit by this way and creating enough capital for us, now we can also give loan for
non-productive use and charge interest on it at nominal rate which will become
additional income for MFIs. And we can also increase the limit of loan providing
for productive purpose (more than Rs. 5,000). So if lower income people invests
more in productive asset and generate more and more profit, then it ultimately a
profit for MFIs only as they are sharing their profit for getting interest income.
6.1 Sources of income for MFIs
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One of the major reasons for less development of MFIs is its dependability on
external sources for fund (i.e. donation, subsidies, etc.). If we want to get success
in MFIs then we have to rely less on external sources for fund. We can also
generate the fund for us through following sources:
1. Contribution from promoters
If we want to start MFI then it is required to invest some portion of money
from our side. If we invest money at initial level then we can start our
business and circulate this money by providing money. Once we start to
provide a loan then we will get income in form of interest and we can able to
expand our business in this case we would like to say that “MONEY CAN
ATTRACT MORE MONEY”.
2. Deposits from Public
One of the major sources of income for us after starting operation of our
business is to accept a small amount of deposit from lower income section of
the society. If a labor work into agriculture wants to invest and/or deposit
Rs. 50 then he cannot approach to a bank for such a small amount i.e. is a
big opportunity for us to collect fund through deposit to run our business.
Here we would like to say that “SMALL SMALL DROPS OF WATER
FILL THE LAKE”
3. Advertisement
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A product which are producing with the help of asset purchase through our
borrowing we can put the name of any business organization on those
product as advertisement for those business organization. For e.g. if our
borrower produces sweater from woolen then we can put a sticker of Bank
of Baroda in that sweater or we can also give the same product in a
polythene printed on the name of Bank of Baroda. In return we can get
income from this bank as we are doing their advertisement.
As it is our business policy to motivate our borrower who can generate more
profit out of their productive asset so there by arranging a social function
and other event where number of people will come and so they can come to
know about our business and that is an indirect cost less advertisement for
our business. If we put hoarding of any business organization on those
functions so we can get revenue from them also. In this way an
advertisement becomes a major source of income for us.
4. Insurance Premium
As micro insurance is one of the product MFIs. We know that still many
insurance companies have not started up with micro insurance, so we can
approach to all that insurance companies and can tell them to have a tie up
with us or they can sell their micro insurance product to the employees of
our organization and hence through this was the insurance companies as well
as our business can be benefited from this.
5. Collection from Business Organization and NGOs
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It is also a major source of income for us. Business organization believes in
doing CSR (corporate social responsibility) activities, if we convince them
to give this money to us. Now we can utilize the same to give micro loan
and providing other micro finance facility. Here in this case we will require
giving loan on the name of such an organization that provides money to us
not on the name of our organization. In this way both provider and users
(MFIs) are in benefit. MFIs get income in form of interest, while for
provider of loan it is CSR cum PUBLICITY.
6.2 Reward and recognition to borrower
Once we provide a loan for a productive purpose now we are required to create a
competitive environment among ours borrower that can motivate them to earn
more and more profit. In short, we are required to arrange some programs and
giving a reward in form of award or monetary benefit, to a person who generate
more profit from asset purchase with the help of our borrowing it gives recognition
and self-motivation to them for earning more and more profit.
As it is our business policy to have some portion of profit generated by them if
they earn more profit it will increase profitability of our business.
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6.3 Products and services offered by Kaptur Micro Finance
Institution
1. Microloans
Microloans (also known as microcredit) are loans that have a small value; most
loans are less than US$100 in size. These loans are generally issued to small
scale entrepreneurs who run micro-enterprises in developing countries. Examples
of micro-enterprises include basket-making, sewing, street vending and raising
poultry. The average global interest rate charged on micro-loans is about 35%.
Although this may sound high, it is much lower than other available alternatives
(such as informal local money lenders). Moreover, MFIs must charge interest rates
that cover the higher costs associated with processing the labor-intensive micro-
loan transactions.
Kaptur Micro Finance Institution loan model
A group is comprised of six to 10 women/men, and 25-45 groups form a “center”.
Women/men are jointly responsible for the loan of their group, and of the
center. The first loan is Rs. 5,000.
It takes 50 weeks to reimburse principal and interest rate; the interest rate is 12%.
They are required to pay interest only after they start to earn profit out of the
asset purchased through loan provided by us. If they all reimburse they are
eligible for second loans of Rs.5,000-7,000; loans amounts increase up to Rs.
15,000 (if they are regular in paying loan consecutive for 3 years).
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Unlike other micro finance organizations, Kalptaru Micro Finance Institution does
not require its clients to borrow to start a business: the organization recognizes
that money is fungible, and clients are left entirely free to choose the best use of
the money, as long as they repay their loan.
Eligibility criteria for loan
(a) female/male, (b) aged 18 to 59, (c) residing in the same area for at least
one year, (d) has valid identification and residential proof (ration card, voter
card, or electricity bill), (e) at least 80% of women/men in a group must own
their home. Groups are formed by women themselves, not by Kalptaru
Micro Finance Institution. Kalptaru Micro Finance Institution does not
determine loan eligibility by the expected productivity of the investment
(although selection into groups may screen out women/men who cannot
convince fellow group-members that they are likely to repay)
2. Micro savings
Micro savings accounts allow individuals to store small amounts of money for
future use without minimum balance requirements. Like
traditional savingsaccounts in developed nations, micro-savings accounts are
tapped by the saver for life needs such as weddings, funerals and old-age
supplementary income.
3. Micro-Insurance
Individuals living in developing nations have more risks and uncertainties in their
lives. For example, there is more direct exposure to natural disasters, such as
mudslides, and more health-related risks, such as communicable diseases.
Parul Institute of Management Page 45
Micro-insurance, like its non-micro counterpart, pools risks and helps provide risk
management. But unlike its traditional counterpart, micro-insurance allows for
insurance policies that have very small premiums and policy amounts. Examples of
micro-insurance policies include crop insurance and policies that cover outstanding
balances of micro-loans in the event a borrower dies. Due to the high
administrative expense ratios, micro-insurance is most efficient for MFIs when
premiums are collected together with microloan repayments.
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7. SUGGESTIONS
1. MFIs should closely monitor the utilization of credit by their clients and
encourage them to use more for productive purpose.
2. They should take positive action to stimulate entrepreneurial spirit of an
economically weaker section of the society.
3. Agency related input for capacity building in terms of various other non-
financial services such as development of forward linkage (motivating
workshops, training activities, assisting in purchase of machinery and tools,
locating suppliers, etc.) and backward linkage (such as marketing assistance,
identification of dealer or sales person, development of common brand, etc.)
are also required for the development of micro finance enterprises.
4. The utilization of loan has a strong bearing on the economy, so MFIs should
follow up strongly for utilization and should take periodical feedback.
5. Proportion of economically weaker section of women is significantly less in
entrepreneurship category. To motivate women empowerment, they should
provide privilege loan to women.
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8. CONCLUSION
Some valuable lessons can be drawn from the following experience of successful
micro finance operations. India is going to stand among the countries developed
and we must accept fact that poverty alleviation and reduction of income
inequalities, has to be the top most priority. In this backdrop impressive gain made
by SHG-Bank Linkage Programmed in coverage of rural population with financial
services offers a ray of hope. The paper argues for mainstreaming of impact
assessment and incorporation of local factors in service delivery to maximize
impact of SHG Bank Linkage Programmed on achievement of Millennium
Development Goals (MDGs) andnot letting go the opportunities.
The conclusion of this study is that micro finance can contribute to solve the
problem of inadequate housing and urban services as an integral part of poverty
alleviation programs. The challenges lies in finding the level of flexibility in the
credit instrument that could make it match the multiple credit requirements of the
low income borrowers without improving unbearably high cost of monitoring to
end use lenders. A promoting solution is to provide multipurpose loans or
composite credit for income generation, and consumption support.
Micro finance can indeed be sustained in the long run in a profitable manner; going
by the increasing number of commercial banks that have evinced interest in this
area, the future is seems to be bright. The changing face of micro finance in India,
appear to be positive in terms of the ability of micro finance to attract more funds
and therefore increase outreach. This will lead in measuring how this positions
micro finance in terms of poverty alleviation and social impact a going forward.
Parul Institute of Management Page 48
Micro finance remains a powerful tool for development. It may not be a panacea,
but it has brought a sea of change in the lives of many. Only spreading the outreach
of micro finance will bring down the cost of capital, the operating cost to
strengthen the bonding between micro finance and the formal financial system.
However, for sustainable development of the poor.
Rural economy, focus must be on development of rural infrastructure and rural
economy, to ensure that there exist activities which require financial assistance.
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9. BIBLIOGRAPHY
Web URL
(1) http://www.investopedia.com/terms/m/micro finance.asp
(2) micro finance\Grameen Bank - Wikipedia, the free encyclopedia.htm
(3) Opportunity International - Wikipedia, the free encyclopedia.htm
(4) Www. Themix.org
(5) micro finance\GTZ Financial Sector Development Programme.htm
(6) http://www.cgap.org/p/site/c/template.rc/1.9.34818/
(7) http://www.rmmfi.org/?page_id=27
Magazines
Micro Finance in India a State of the Sector Report, 2007
ICFAI Banker Article on micro finance September 2009
Micro Finance as insight into the world of micro finance July-September 2009
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ANNEXURES
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10. ANNEXURES
Annexure – 1
Questionnaire
Dear Sir/Madam,
We are the students of Parul Institute of Management, Vadodara and
presently doing a Grand Project on “PROBLMES FACED BY MFIs AND
MEASURES TO SOLVE IT, Vadodara”. We request you to kindly fill the
questionnaire below and we assure you that the data generated shall be kept
confidential.
Name: ………………………………………………………………………..
Address: ……………………………………………………………………..
Contact No :®………………( O)……………… (M)………………………
City: ………...............Pin: ………………….Village: …………………….
1. Your Age: ____________________
2. Education Qualification.
(a) Illiterate (b) Primary
(c) S.S.C (d) H.S.C
(e) Graduate
3. Marital Status.
(a) Married (b) Single
No. of Children: __________
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4. Number of years you are in this Village.
(a) Less than three year’s (b) More than three year’s
5. Occupation.
(a) Worker (b) Farmer
(c) Other
6. Your income per day.
(a) <than Rs.50 (b) Between Rs.50 to Rs.100
(c) Between Rs.100 to Rs. 150 (d) >than Rs. 150
7.Are you having a bank account?
(a) Yes (b) No
8. Is there any financial institution providing loan to you at cheaper rate?
(a) Yes (b) No
9. Is there any SHG working in your village?
(a) Yes (b) No
10. Do you have any photo identity proof?
(a) Yes (b) No
If yes, please specify which_______________________
11. How many earning members are there in your family?
(a) 1 (b) 2
(c) 3 (d) More than 3
12. Do you think that is there any requirement MFIs for providing you loan?
(a) Yes (b) No
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13. Do you possess any inherent skill in you?
(a) Yes (b) No
If yes then which_______________________
Date:
Signature by
Interviewer Interviewee
_____________ ____________
Thank You
Parul Institute of Management Page 54
Annexure – 2
1. Your Age?
Sr. No. Category No. of
Respondents
Percentage
1 16-20 Years 44 8.8
2 21-25 Years 99 19.8
3 26-30 Years 70 14
4 31-35 Years 73 14.6
5 36-40 Years 64 12.8
6 41-45 Years 65 13
7 46-50 Years 31 6.2
8 51-55 Years 20 4
9 56-60 Years 10 2
10 61-65 Years 8 1.6
11 66-70 Years 3 0.6
12 71-75 Years 13 2.6
Total 500 100
Annexure – 3
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2. Education Qualification
Sr. No. Category No. of
Respondents
Percentage
1 Illiterate 165 33
2 Primary 167 33.4
3 S.S.C 75 15
4 H.S.C 35 7
5 Graduate 58 11.6
Total 500 100
Annexure – 4
3. Marital Status
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Sr. No. Category No. of
Respondents
Percentage
1 Married 398 79.6
2 Unmarried 102 20.4
Total 500 100
Annexure – 5
4. Number of years you are in this village?
Sr. No. Category No. of
Respondents
Percentage
1 More than 3
years
496 99.2
2 Less than 3 years 4 0.8
Total 500 100
Annexure – 6
5. Occupation
Parul Institute of Management Page 57
Sr. No. Category No. of
Respondents
Percentage
1 Agriculture 115 23
2 Labor 205 41
3 Other 80 16
4 Unemployed 100 20
Total 500 100
Annexure – 7
6. Income per day
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Sr. No. Category No. of
Respondents
Percentage
1 Rs.0 115 23
2 Less than Rs.50 111 22.2
3 Rs.50 to Rs.100 149 29.8
4 Rs.100 to Rs.150 101 20.2
5 More than Rs.150 24 4.8
Total 500 100
Annexure – 8
7. Are you having a bank account?
Sr. No. Category No. of
Respondents
Percentage
1 Yes 203 40.6
2 No 297 59.4
Total 500 100
Annexure – 9
8. Is there any financial institution providing loan to you at cheaper rate?
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Sr. No. Category No. of
Respondents
Percentage
1 Yes 0 0
2 No 500 100
Total 500 100
Annexure – 10
9. Is there any SHG working in your village?
Sr. No. Category No. of
Respondents
Percentage
1 Yes 0 0
2 No 500 100
Total 500 100
Annexure – 11
10.Do you have any Photo Identity Proof?
Sr. No. Category No. of Percentage
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Respondents
1 Yes 487 97.4
2 No 13 2.6
Total 500 100
Annexure – 12
11.How many earning members are there in your family?
Earnings Members No. of Respondents Percentage
0 3 0.6
1 151 30.2
2 197 39.4
3 100 20
More than 3 49 9.8
Total 500 100
Annexure – 13
12.Do you think that is there any requirement MFIs for providing you loan?
Sr. No. Category No. of
Respondents
Percentage
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1 Yes 500 100
2 No 0 0
Total 500 100
Annexure – 14
13. Do you possess any inherent skill in you?
Sr. No. Category No. of
Respondents
Percentage
1 Yes 63 12.6
2 No 437 87.4
Total 500 100
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