Chapter 4 – Micro Finance

Introduction
In India, microfinance is a dynamic space having multitude of players which are offering various products
and services to people having low income with different approach. Banking system along with various
other legal forms like NBFCs, Cooperatives, Section 25 companies and NGO-MFIs all have approached
rural markets. Many newer forms of relationship are emerging among the entities for leveraging on each
other’s strength. There have been new developments, though penetration of microfinance still remains
low. There are sufficient gaps which are required to be filled and this would lead to certain further
changes in microfinance in future. Microfinance which is a powerful tool for addressing challenge of
eradication of poverty, raising caution regarding the overwhelming push for MFIs for becoming
financially self sustainable, greatly transparent and more public awareness. Microfinance in India is
dynamic and multifaceted industry. Unique economic circumstances in mid-1980s created situation
which was ripe for commercialized microfinance industry. With support and help from international
organizations, government and local businessmen, microfinance sector in India have evolved into highly
commercialized and profitable industry. As sector began to flourish, few MFIs proved to lead way with
regards to profitability and innovation. The path which these institutions paved eased road for the other
institutions which followed. Competition provoked more efficient operations that lent with lower costs
and more options for the customers; in addition, the outreach expanded and there was increase in
profits.

Therefore, commercialization produced successful and effective financial institutions which positively
contributed towards banking system. Competitive forces helped to integrate lower income population
into more formal financial sector. Thus, while microfinance industry in India promotes development of
country’s financial system, informal sector is both empowered and included. New challenges and
opportunities are being felt in field of microfinance.

In addition, Indian government must take initiative for monitoring microfinance system that would assist
lower income micro-entrepreneurs, resulting in improvement in the income earnings and expenditure
leading them towards enjoyment with higher standard of living. Microfinance industry made gains
coverage of the rural poor population with financial services. Microfinance evolutionary growth have
given great opportunity to rural poor for attaining reasonable social, cultural and economic
empowerment, leading to a better standard of living and quality of life for participating households.
Microfinance institutions need to educate villagers on ease of procedures for availing loans. Access to
microfinance help the poor people in improving their living standards.

Objectives of the Chapter

 To explain the evolution and growth of Micro – finance in India
 To evaluate the relationship between Micro – finance and social security
 To familiarise the impact of Micro – finance on livelihood of poor people
 To know more about the models of Micro – finance

402 Rural Finance 146 MGNCRE

RM3-Integarated Marketing Communications
  To explain the challenges and prospects of Micro-financing

Chapter Structure

4.1 Micro finance – Evolution and Growth

Microfinance is considered as a tool towards economic development which has objective of assisting
poor people so as to reduce poverty. Microfinance covers many services which includes savings, money
transfer, insurance, counseling etc apart from credit provision. In India, Micro finance started in the
early 1980s. It involves Non-Government Organizations (NGOs) and self-help groups (SHGs) that come
together to provide credit and savings service to people who do not have access towards formal banking
system. Micro finance organizations have been undertaking activities from perspective of development
in various areas and they do not focus on profit. These organizations are getting support by government
bodies like Small Industries Development Bank of India (SIDBI) and National Bank for Agriculture and
Rural Development (NABARD). There are some trusts which are set up specifically for making funds
available to people who are in the lowest level in the society.

Provision of credit to Microfinance sector is actually based on following:

a) It addresses concerns of alleviation of poverty through enabling poor to work their way out of
poverty.
b) It enables empowerment of women through routing of credit directly to the women; this
enhances status within families of women, community and also society at large.
c) Making credit access easier is much more important for poor than getting cheaper credit which
could involve a lengthy bureaucratic procedure and delay.
d) Poor people are not generally in position of offering collateral for securing credit.

402 Rural Finance 147 MGNCRE

RM3-Integarated Marketing Communications
 e) The market is imperfect in this sector and size of loan is also very small in size. The transaction
cost is higher and they are unavoidable. However, when community set up their own
institutions like cooperatives and SHG federation, the transaction cost could become low.
f) Transaction cost could be reduced through economy of scale. The increase in the scale could not
be achieved for both individual operations as well as sector as whole in absence of recovery of
cost and also profit incentive.

Many people think that microfinance means to provide small loans i.e. microcredit to families which are
very poor for helping them to engage in productive activity or nurturing their own small businesses.
Micro finance now includes many financial services including savings, credit, insurance etc. It has been
realized with time that the poor and very poor require diversity of financial product, specifically those
who lack in accessing traditional or formal financial institution.

Micro credit became prominent in 1980s, though there were earlier experiments in this field which
could be dated back to a period 30 years back in Brazil, Bangladesh and other countries. Micro credit
avoided pitfalls of previous generation related to development lending which was targeted, through
insistence on repayment, charging rate of interests which could cover credit delivery cost and through
focus on the client group whose alternative credit source was informal sector. The emphasis got shifted
from the rapid disbursing of the subsidized loans for supporting the targeted sector towards building of
a local and sustainable institution for serving the poor. Microcredit was largely a private (non-profit)
sector initiative which avoids becoming of overtly political. This has consequently outperformed virtually
in all other ways for development of lending. In a traditional way, microfinance has focused on helping
the poor in getting access to credit products which are standardized. Poor people also need a diverse
range in financial instruments for building asset, stabilizing consumption and protecting themselves
against various risks. Concept of microfinance is to provide some reliable and efficient way for providing
a variety of financial products.

Evolution of MFIs Industry

Microfinance has built solid track record as critical tool for fighting against poverty and have entered
financial mainstream. Rapid growth of industry over past many years has reached millions of clients.
Microfinance has reached lesser population as compared to the population who actually needs a lot of
support for reducing or removing poverty. There are many people who are not having access or a little
access towards formal financial services. Financial services can actually help in changing the life of the
poor people in many ways. Some of these ways are mentioned below:

402 Rural Finance 148 MGNCRE

RM3-Integarated Marketing Communications
 Figure 4.1 Ways how financial services could help poor people

Microfinance has been powerful catalyst in empowering women. Evolution of microfinance industry is
driven by many factors. Some of these factors are mentioned below:

Figure 4.2 Factors of microfinance evolution

As this industry has developed, there is a shift from specialized NGOs to increasing number of licensed

402 Rural Finance 149 MGNCRE

RM3-Integarated Marketing Communications
 and regulated MFIs which stresses that impact and sustainability go hand in hand.
Evolution of Microfinance sector could be divided into distinct phases broadly:

Figure 4.3 Phases of evolution of Microfinance sector

 Phase 1: The Cooperative Movement (1900-1960)

During this phase, credit cooperatives were vehicles to extend subsidized credit to villages under
government sponsorship. For instance, up to mid 1900’s microcredit essentially turned to the support of
the agricultural sector, with low interest rates, strong government subsidies and institutions for the
most part not sustainable. During the last years, the sector has been characterized by a fast evolution
and a commercialization process: reduction of grants and increment of equity investments; the
approach moved to sustainability in terms of operational and financial self-sufficiency.

 Phase 2: Subsidized Social Banking (1960s – 1990)

In 1960’s, credit delivery system in rural India was largely dominated by cooperative segment. The
period between 1960s and 1990s is referred to “social banking” phase. With failure amongst the
cooperatives, government focused on measures like the following:

402 Rural Finance 150 MGNCRE

RM3-Integarated Marketing Communications
 Figure 4.4 Subsidized social banking

While these steps have helped in reaching larger population, this period was characterized by misuse of
credit on large-scale, created negative perception about credibility of micro borrowers among the
bankers, thus this lead to hindering access towards banking services for low-income people.

 Phase 3: SHG-Bank Linkage Program and Growth of NGOMFIs (1990 – 2000)

After 1990s, India witnessed second phase ‘financial system approach’ of credit delivery. This concept
held great appeal for NGOs which are working with the poor, prompting them for collaborating with
NABARD in this programme. Failure of the subsidized social banking triggered paradigm shift in the
delivery of rural credit with NABARD which initiated Self Help Group (SHG) Bank Linkage Programme
(SBLP), which aims to link informal women's groups towards formal banks. This program helped to
increase banking system outreach towards the unreached people and initiate change in bank’s outlook
towards the families having low income. During this period there was an extension of credit at the
market rates. This model generated lot of interest amongst newly emerging Microfinance Institutions
(MFIs), which are largely of a non-profit origin, for collaborating with NABARD under this program.
Macroeconomic crisis in early 1990s led towards introduction of Economic Reforms of 1991 which
resulted in greater autonomy to financial sector. This led to emergence of private sector banks which
are new generation would become important players in microfinance sector a decade later.

Figure 4.5 Financial Systems Approach

 Phase 4: Commercialization of Microfinance: The First Decade of the New Millennium
Post reforms, the rural markets emerged as new growth drivers for Banks and MFIs. Banks are taking
interest in sector not only as a part of their corporate social responsibility (CSR) but also as new business
line. On demand side, NGO-MFIs increasingly began transformation of themselves into more regulated
legal entities like Non Banking Finance Companies (NBFCs) for attracting commercial investment. MFIs
set up after the year 2000, saw themselves lesser in developmental mould and more as businesses in
financial services space, which caters to untapped market segment while also created value for their
shareholders. This overriding shift brought changes in institutions' capital structures, legal forms, growth

402 Rural Finance 151 MGNCRE

RM3-Integarated Marketing Communications
 strategies, strategic alliances and sources of funds.

Figure 4.6 Phase 4 of evolution of microfinance in India

In India, Microfinance started evolving in early 1980s with formation of informal Self Help Group (SHG)
to provide access towards financial services to needy people who are not having access towards credit
facilities.

Growth of Microfinance in India

Indian Government have considerably enhanced the allocation for provision of education, sanitation,
health and other facilities that promotes well being and capacity building of poor. Indian government
puts emphasis to provide financial services to underprivileged and poor since independence.
Commercial banks were nationalized in the year 1969 and were directed towards lending 40% of their
loan at a concessional rate to the priority sector. Priority sector included agriculture and other rural
activities and weaker sections of society in general. The aim of microfinance was providing resources for
helping the poor for starting their micro enterprise for attaining self sufficiency. Indian government also
launched various poverty alleviation programs as mentioned below:

402 Rural Finance 152 MGNCRE

RM3-Integarated Marketing Communications
 Figure 4.7 Poverty alleviation programs initiated by Indian government

But all these programs could not achieve their desired goal because of poor execution and malpractices
on part of the government officials. Public funds meant for poverty alleviation are being diverted or
misappropriated through manipulation by locally powerful or corrupt people. For supplementing efforts
of the micro credit government of India have started very good scheme viz. Integrated Rural
Development Programme (IRDP) in the year 1980. But the supply side programs could achieve partially.
It involved the commercial banks in giving loans of less than Rs 15,000 to poor people and in nearly 20
years, resulted in financial assistance of around Rs 250 billion to roughly 55 million [Link]
with IRDP was that the design incorporated substantial element of subsidies (i.e. 25-50% of each family’s
project cost) and it resulted in extensive misuse of funds and malpractices. This situation led bankers for
viewing IRDP loan as motivated handout and there was a failure in following up with the borrowers. This
resulted in estimation of the repayment rates in IRDP to range between 25-33%. Two decades of IRDP
experience in 1980s and 1990s affected credibility of the micro borrowers in view of bankers and
ultimately this hindered access of less literate poor towards banking services. This act of government
had serious long term impact on development of micro entrepreneurship among the underprivileged
people of the society. These programme failed because of political interference and poor execution.
Programmes suffered from various issues which are mentioned below:

402 Rural Finance 153 MGNCRE

RM3-Integarated Marketing Communications
 Figure 4.8 Issues with poverty alleviation programmes

These programmes were basically subsidy driven and they ignored process of social intermediation
which was necessary for success of the self-employment programmes. One-time provision of credit
without follow-up action and lacking continuing relationship between the borrowers and the lenders
also contributed towards failure of programmes. The planning commission constituted committee in the
1997 for reviewing effectiveness of wage employment and self-employment programmes. The
committee recommended merger of all the self employmentprogrammes. The committee also
recommended shift of the importance from the individual beneficiary approach to group based
approach. It emphasized on identification of the activity clusters in specific areas and stronger marketing
linkages and training. Indian government accepted recommendations of committee.
On April 1st, 1999, new programme called Swarnajayanti Gram Swarojgar Yojana (SGSY) was launched
through the amalgamation programmes like IRDP (Integrated Rural Development Programme) and
number of allied programmes such as TRYSEM (Training of Rural Youth for Self Employment), DWCRA
(Development of Women and Children in Rural Areas), SITRA (Supply of Improved Toolkits to Rural
Artisans), GKY (Ganga Kalyan Yojana) and MWS (Million Wells Schemes).

402 Rural Finance 154 MGNCRE

RM3-Integarated Marketing Communications
 About Amalgamation programmes

(1) Training of Rural Youth for Self-Employment (TRYSEM)

This Scheme is a facilitating component of the IRDP that aims to provide basic entrepreneurial and technical skills to
rural poor aged between 18 to 35 years for enabling them in taking up an income generating activity. The Eighth Plan
emphasized importance of proper assessment of training needs among rural youth related to self and wage-
employment opportunities, group training and training quality. During Eighth Plan, 15.28 lakh youth have been
trained under TRYSEM, of whom 34.16 percent took up self-employment and 15.05 percent took wage-employment;
while remaining 50.79 percent have remained unemployed.

(2) Development of Women and Children in Rural Areas (DWCRA)

This special scheme aims to strengthen gender component of IRDP. This started in 1982-83, on pilot basis, in 50
districts and has extended to all districts of India. DWCRA scheme is directed to improve living conditions of women
and children through provision of opportunities for self-employment and accessing basic social services. Main
strategy which was adopted under this programme is about facilitating access for the poor women towards
employment, training, skill upgradation, credit as well as other support services.

(3) Supply of Improved Toolkits to Rural Artisans (SITRA)

It was launched in July 1992, as sub-scheme of IRDP in few selected districts. This scheme has later extended to all
districts of India. Under this scheme, variety of craftsman, except the weavers, needle workers, beedi workers and
tailors were supplied with an improved hand tool kit within financial ceiling of Rs.2000. Out of this amount, the
artisans are required to pay 10 percent and remaining 90 percent is subsidy from Indian Government. Supply of the
power driven tools was subjected to ceiling of Rs.4500 under this scheme.

(4) Ganga KalyanaYojana (GKY)

Irrigation facility is provided to agricultural land through lift irrigation scheme which utilizes perennial source of
water (rivers) and lifting water through pipe lines. Wherever the perennial water sources are not available, bore
wellis drill on water points identified by expert geologists.

(5) Million Wells Schemes (MWS)

This scheme would continue in Ninth Plan for providingmaximization of the agricultural output. Simultaneously, level
of ground water would be required to be maintained by adopting suitable recharging practices so that small and
marginal farmers could derive maximum benefits from small holdings. Until recently, focus under MWS was on
employment creation, with secondary objective to provide source of irrigation. This situation has been modified by
delinking MWS from JRY and repositioning it as beneficiary-oriented scheme of irrigation to enhance agricultural
productivity levels of small as well as marginal farmers.

Source :NitiAyog (n.d.). Poverty Alleviation in Rural India :Programes and Strategy. Retreved from
[Link]

This is a holistic program covering all aspects of self-employment such as formation of SHGs, credit,
training, technology, marketing and infrastructure. This programme aimed at establishment of large
number of microenterprises in the rural areas. SGSY is credit-cum-subsidy programme. It lays emphasis
on the activity clusters. This programme got tremendous response from beneficiaries. SHGs benefitted a
lot under this programme. In a similar way, entire network of RRBs and primary cooperatives were

402 Rural Finance 155 MGNCRE

RM3-Integarated Marketing Communications
 established for meeting needs of rural sector in poor and general in particular, have proved to be huge
failure.
RRBs faced the burden of directed credit and restrictive interest regime, due to which position of RRBs
deteriorated quickly while the cooperatives suffered from mismanagement, corruption and privileged
leadership. Microfinance initiative in private sector in India could be traced back to the initiative
undertaken by Shri Mahila SEWA (Self Employed Women’s Association) Sahakari Bank in the year 1974
to provide banking services to poor women employed in unorganized sector in Ahmadabad in the state,
Gujarat. This Bank was established at initiative of 4000 self employed women workers who contributed
share of Rs. 10 each with specific objective to provide credit to these women for empowering them and
freeing them from the vicious circle of debt. As in March 2009, SEWA Bank had over 318,594 account
holders with a total working capital of Rs 1291.89 million.

Microfinance industry groups seek PM Modi’s help to secure repayment

Moratoriums on term loans

Microfinance industry group has sought PM Narendra Modi’s help for securing repayment moratoriums on the
term loans, as they have failed earlier for convincing their lenders for giving them grace period. There are many
smaller MFIs who have defaulted in their loan repayments and others have been facing liquidity squeeze as
most banks as well as financial institutions have
They said that a couple of smaller MFIs have already defaulted their loan repayments last week, while others
are facing a liquidity squeeze, since most banks and financial institutions have refrain from extension of
moratorium benefit despite RBI’s advisory on this issue. “Time is running out. This is a situation when urgent
action is required. As RBI did not communicate anything to clarify the issue of moratorium so far, we wrote to
the PM for his intervention,” Sa-Dhan Executive Director P Satish told Economic Times.
Both Sa-dhan, India's largest microfinance industry body having 212 members, and Microfinance Institutions
Network (MFIN), industry grouping for NBFC-MFIs, have separately urged to the prime minister for taking
action.
MFIs borrow from development financial institutions (DFIs), Banks as well as other non-bank lenders for on-
ending to support the small entrepreneurial activities like tea stall, cattle rearing, tailoring etc. MFIs passed on
moratorium benefit to many borrowers after RBI came out with regulatory package for fighting economic
impact of corona virus outbreak. MFIs have Rs 53,853 crores of outstanding borrowing as on March end.
Around two-third of this amount was from the banks while balance was from the non-bank lenders which
includes DFIs like SIDBI. As per the letter from Sa-Dhan, there have been misinformation and even outright
denial by few DFIs, NBFCs and few financial other institutions, but not all the banks that moratorium would not
cover microfinance. Not extending moratorium would cause MFIs to face significant cash-flow issues, in
absence of any kind of collections even for the operating costs. About 56 million poor women across 620
districts borrowed micro loans worth Rs 2.16 lakh crores. Out of these, borrowers have received Rs 66,159
crores from 85 NBFC-MFIs and another Rs 2,395 crores from 18 NGO-MFIs. Banks, other NBFCs and small
finance banks also have microfinance exposure, with the retail deposits as source of funds.

Source :

Ray A. (2020). Microfinance industry groups seek PM Modi’s help to secure repayment moratoriums on term
loans. Retrieved from [Link] industry/banking/finance/microfinance-
industry-groups-seek-pm-modis-help-to-secure-repayment-moratoriums-on-term-loans/articleshow
/[Link]

402 Rural Finance 156 MGNCRE

RM3-Integarated Marketing Communications
 To Do Activity
Ask the students to choose any one poverty alleviation programme which has been initiated by the
government and discuss about the achievement of that programme with the class.

4.2 Micro-Finance and Social Security

Microfinance is provision of loans and various other financial services to poor. Microfinance has evolved
due to efforts of the committed individuals and many financial agencies for promoting self-employment
and contribution towards poverty alleviation and provisioning of social security. India has developed its
own model of microfinance organizations in form of savings and credit groups which are known as Self
Help Group (SHGs) that are bank-linked. These SHGs are formed and managed by poor people and these
bring social change and lead to empowerment. In India, most microfinance institutions attempt in going
beyond savings and credit groups for providing microfinance services which could be in the form of
insurance and savings. Many people believe that microfinance is about providing smaller loans
(microcredit) to families who are very poor for helping them to get engaged in productive activities or
nurturing their tiny businesses. With time, microfinance has included broader range of financial services
i.e. credit, savings, insurance, etc. and this has been a development as it has been realized that poor
people lack in access towards traditional financial institutions which are formal in nature and even poor
people require a variety of financial products.

Specific Loans from Micro Finance Institutions (MFIs)

Microfinance is a way through which access is provided to people towards loans, insurance, credit,
savings accounts and transfer of money. These facilities are provided for owners of small business and
the entrepreneurs in underdeveloped part of India. Beneficiaries of the microfinance are basically those
who do not have access to the traditional financial resource. Interest rate on the microloans is generally
high than as compared to the traditional personal loan.

The working of MFIs is not standardized across the nation and MFIs in different areas might have
uniquely structured loan for different purpose.

Figure 4.9 Products provided by Microfinance

402 Rural Finance 157 MGNCRE

RM3-Integarated Marketing Communications
 Microfinance include following products
(1) Micro Loans
Microfinance loans are provided to the borrowers without any collateral. End result of the microloans
should have been the recipients to outgrow smaller loans and making them ready for the bank loans
which are traditional in nature.

(2) Micro Savings

Micro savings account allows the entrepreneurs to operate the savings accounts without any minimum
balance. This account helps the users in inculcating financial discipline and developing an interest in
savings for future.

(3) Micro Insurance

This is a type of coverage which is provided to the borrowers of micro loans. This insurance plan has a
lower premium than the traditional insurance [Link] certain situations, the recipients of micro loans
are required to undergo various training courses related to management of cash flow or book-keeping.

Traditionally, microfinance has also focused to provide a standardized credit product. The poor, just like
the other people, also need diverse range of financial instruments so that they could build assets, for
stabilizing consumption and protecting themselves against various risks. Social security is very important
for the people who are residing in the rural areas.

Social Security
How does microfinance help the poor?
Experience shows that microfinance can help the poor to increase income, build viable businesses, and
reduce their vulnerability to external shocks. It can also be a powerful instrument for self-empowerment
by enabling the poor, especially women, to become economic agents of change. Poverty is multi-
dimensional. By providing access to financial services, microfinance plays an important role in the fight
against the many aspects of poverty. For instance, income generation from a business helps in not only
expanding the business activity but also in contributing to household income and its attendant
benefiting on food security, children's education, etc. Moreover, for women, who, in many contexts, are
secluded from public space, transacting with formal institutions can also build confidence and
empowerment. The extent to which individuals around the poverty line are vulnerable to shocks (like
illness of a wage earner, weather, theft, or other such events) produce a huge claim on the limited
financial resources of the family unit, and, absent effective financial services, can drive a family so much
deeper into poverty that it can take years to recover.

Needs of poor people for credit facilities

The poor people require credit facilities for many reasons. Few reasons are mentioned below:

402 Rural Finance 158 MGNCRE

RM3-Integarated Marketing Communications
 Figure 4.10 Needs of poor people for credit facilities

(1) Needs are Small and Arise Suddenly

The poor people need smaller amounts for fulfilling their needs and it becomes difficult for them to
approach the formal financial institutions for smaller amounts more frequently. The poor people are not
much aware about saving money so that they could apply for a certain amount of loan and could later
utilize the remaining amount which was unused for a particular current need. The need also sometimes
arise suddenly and due to the time required for applying to banks and other financial institutions is
more, poor people prefer to get funds from the money lenders.

(2) Formal Institutions Demand Collateral Security

The poor people are unable to provide collateral security to the formal financial institutions to get loans.
Many poor people do not own assets in their name which they could provide as collateral. People
residing in the rural areas, many of them have been struggling to fulfill their daily needs of their families
and it is not possible them to save money so that they could buy assets.

(3) Funds Requirement for Meeting Consumption Demand

Poor people need funds for meeting their consumption demands. Many a times, it becomes difficult for
them to obtain finance from formal institutions. There could be different consumption needs for which
poor people might require funds.

402 Rural Finance 159 MGNCRE

RM3-Integarated Marketing Communications
 Few of the consumption expenses are mentioned below:

Figure 4.11 Consumption needs of poor people

(4) Investment in Income Generating Activities

The poor people require funds so that they could secure the future of themselves and also of their
families. Sometimes people belonging to the rural areas are also willing to save money for future, but
they are unable to get funds from the banks or other financial institutions since there are various
formalities which they are unable to fulfill. Many poor people are not even aware of income generating
activities, rather they are more focused on current consumption.
Social Security of Microfinance Consumers

402 Rural Finance 160 MGNCRE

RM3-Integarated Marketing Communications
 Figure 4.12 Social security of microfinance consumers

(1) Avoidance of Over-Indebtedness

There can be two perspectives in this issue. On one hand, lower-income borrowers would take more
credit and could end up being over-indebted and may not be able to repay. On other hand, due to
market competition, lenders might seek to increase risk at cost of providing more credit than borrowers
would be able to repay. Credit risk is the biggest risk which is being faced by MFIs. The problem of over-
indebtedness of the clients is continuously a major problem in micro-finance sector.

(2) Transparent Pricing

Transparent pricing is very important and it is the moral responsibility of MFIs that the cost and rates
which are involved in credit are clearly disclosed to the poor people explicitly since micro-finance is
devised for protecting vulnerable and poor people. Until now, consumer protection awareness was
lesser among the poor people. But, now more people are aware about the transparency and as such
transparency and fair treatment of the clients is a key towards good lending practices. Today, extensive
technology applications are being used, so it has become very important for every financial institution to
follow transparency practices.

(3) Appropriate Collection Practices

Debt collection practice should be carried out with proper diligence. It is very important that the
customers are aware about the products and practices which are posing risk. The approach that is
adopted by the financial institutions should be complimented by financial education also. Collection
practices should vary with the customer. Collection practice which is adopted should be appropriate to
the customer.

(4) Privacy of Client Data

There is requirement for respecting privacy of the client data and permission should be the taken from
the customer before the data is being used for any other purpose. There is a threat to the customer’s
data and it is very important that the customers need to be encouraged for using the latest technology
in a proper way. With advancement of microfinance sector in terms of business, there are many other
entities who are interested in getting data so as to market their products and services. It is the duty of
all the entities to maintain privacy of customer’s data and encourage them to use various online services
which are being provided.

(5) Mechanisms for the Redress of Grievances

It is crucial that the MFIs have a proper mechanism for handling problems and complaints. The
mechanism should be responsive and timely in nature. It is very important that the poor customers have
proper access towards the redressal mechanism and the grievances are timely dealt with. There is a
requirement of a protective approach on part of the supervisory authorities for establishing and
enforcing fair standards. In the absence of a simple and practical means for redressal of issues, the
inexperienced MFI customers are left vulnerable towards balance of power which unduly favors MFIs.

402 Rural Finance 161 MGNCRE

RM3-Integarated Marketing Communications
 According to RBI, the redressal cell should be the first reference point for a consumer to register a
grievance or lodge complaint.
(6) Ethical Staff Behaviour
The staff members of MF institutions should behave ethically and it is responsibility of management of
MFIs for ensuring adequate measures so as to detect and curb corrupt and unethical behaviour. It is
necessary for the MFI that poor people are encouraged to take the help of MFI in meeting their
productive and consumption purpose. MFI staff should take proper precaution to help the poor people
that they are not misguided and they are able to understand the rule and regulations of the MFI. The
staff members of the MFI should help poor people in coping up with their financial issues and help them
with financial products and services.

Micro Insurance – A Tool for Social Security

Micro-insurance envisages protection of the low-income people against debt traps which often imperil
their livelihood and their lives. This is an outgrowth of the micro-finance, with MFIs being leading
providers of micro-insurance. Ordinary life risks can completely wipe out the entire savings of a family.
Vulnerability and poverty reinforce each other. Often, trigger for poverty becomes an illness. Illnesses
are severe risk and could even eat away most of hard-earned savings in the lower income communities.
This results in bankruptcy. Many poor people prefer to avail health insurance facility instead of life
insurance. Many people who belong to rural areas are driven away by the cost which is levied by
hospitals for health issues. Poor people could manage risks and avoid debt if they have taken micro-
insurance policies for protecting accumulated wealth, generate income and even get fair chance for
rescuing themselves and families out of poverty.

Use of Digital Technology to further the Reach

The insuring cost against an unforeseen development is lower as compared to self-insurance through
savings and is smaller relative to household budget. Government, donors, and various other
development actors who are engaged in combating poverty and also responsible for designing social
protection measures need insurance as a weapon for eradicating poverty. Key challenge for micro-
insurance is high cost of administering it. The poor people have been living off the banking grid. The
poor families are scattered across countryside, which makes physical access difficult, and even
transaction costs for issuance of smaller policies to millions through service agents is also very high.

Rapid advances in the system of digital payment are creating opportunities for connecting poor
households for affordable and reliable financial tools through various digital interfaces. Insurance
coverage could be widened through coupling services with the existing mobile financial products or
through creation of new mobile solutions which bring insurance services directly to consumer’s phone.
Micro-insurance is developed segment in India now.

Understanding micro-insurance products

Micro-insurance is crucial strategy on range of risk management options. Increasing access of the poor
households to insurance could prevent them from relying on publicly funded support for coping with the
environmental and economic shocks. It helps them to adopt an alternative or a more productive

402 Rural Finance 162 MGNCRE

RM3-Integarated Marketing Communications
 livelihood (for example, cultivate higher-yield crop insured against risk of drought) which could help to
lift them out from poverty.

There are three major types of micro-insurance products.

Figure 4.13 Types of micro-insurance products

(1) Life Insurance

It is most common form of micro-insurance which is facilitated by extension of micro-finance model
into coverage area. However, life insurance provided by the MFIs is mainly way of insuring loans i.e.
credit life insurance rather than to provide income support in case of death of policyholder.

(2) Agricultural Insurance

It mainly consists of crop insurance which covers farmers against multiple shocks and pay out against
the losses that insurer assesses by observing the harvest yields. Index-based insurance pays out fixed
sum to the farmers when independently observed trigger (i.e. often rainfall levels, crop yield or livestock
mortality rate) show that an insured event have occurred.

(3) Health Insurance

Many countries have been developing private, public and community-based health insurance program
for pooling risks associated with the health shocks. Coverage of the programmes remains quite low,
particularly among poor, but there is some growth in the community health insurance for the lower-
income population.

Need for Assessment and Providing Guidance by Micro Insurance Companies

For poor people for reaping real benefits of micro-insurance, there is a requirement that the insurance
companies function with sense of responsibility. Because of lack of proper awareness and failure of the
institutions for properly guiding them, people buy insurance policies without sufficient planning and give
up a midway because they do not have money for paying premium. The micro insurance companies

402 Rural Finance 163 MGNCRE

RM3-Integarated Marketing Communications
 should not aggressively push out their products without adequate assessment of consistency in the
income streams of buyers for servicing their policies as this could harm the poor more. Customers might
end up in losing heavily in the form of penalties in case the poor people are not having sufficient funds
as required by the insurance plans. The customers who are uninformed might face huge risk, hence it is
very important the poor people try to evaluate an insurance product and also the insurance providers
should keep their customers well informed about the cost which are involved in insurance. Important
determinant for financial products for seeking enrolment of poor is how far providers produce trust. The
greatest challenge which exists in micro-insurance schemes is striking right balance between
affordability and adequate protection for delivering real value to insured. Micro-insurance provides a
way for ending poverty cycle through safety net which families require. If poor people are aware that
they have been covered under insurance plan, they will be able to plan for their future, invest for
expanding their businesses, diversification of crops and will be able to send their children to schools
without having any fear that they would lose their savings in case something happens to them.

Success Story of Brihaspati Bag under MCDF (Micro-finance) Program

Brihaspati Bag, is a resident of UttorKonkondighi is member of MCDF (MUKTI Community Development Fund) that
has been built for supporting livelihood amongst rural women entrepreneurs of India. Her story is success story of
woman entrepreneur who borrowed money as a part of social and microfinance investment in India.

Brihaspati and her husband were living in absolute poverty. Against all the odds, they were managing education
of their younger daughter. They have one a son and two daughters. The elder daughter got married and younger
one was studying in the 8th standard. Their only son used to work as a motor mechanic. After joining MCDF there
family had some relief.

Brihaspati took a loan of Rs. 10000/- initially for setting up rice processing business. Later, she started earning
around Rs. 5000/- pm after repayment of installments and then she could repay the loan in a period of one year.
Later she possessed a capital of Rs. 50,000 for enlarging business. Brihaspati wished to set motor garage for his
son and continue her daughter’s education which could make her daughter eligible for higher education.

MCDF program helped Brihaspati in building up confidence and proved her as woman entrepreneur. Her success
story is example for other women too of the rural SHG.

Source :Success Story of Brihaspati Bag under MCDF (Microfinance) Program. (2015). Retrieved from
[Link]

To Do Activity
Find any one success story related to Microfinance and discuss with the class in detail.

402 Rural Finance 164 MGNCRE

RM3-Integarated Marketing Communications
 4.3 Microfinance and Livelihood Approach
Livelihood
Livelihood is a means of support, it is something which provides income for living, especially a paid work
for securing necessities of life. Livelihood activities are economic activities which people know,
undertake and own for earning today and in to future. Sustainable livelihood is one which could cope
with, and recover from, shocks and stresses maintain or enhance its capabilities and assets while not
undermining existing resource base.

Livelihoods activities are undertaken by the people are actually shaped by the following:

Figure 4.14 Livelihood activities

(1) Knowledge
People take up livelihood activities on the basis of the knowledge that they have. There are many tasks
or jobs available which people could take up as their livelihood. The only thing required is to search for
that particular task which is known to a person and then such a task could be taken up for the purpose
of earning a living. Knowledge plays a very important role in helping a person to start earning more in
their life. Training could also be obtained for doing a specific job but still there is a requirement that
people should have some basic knowledge for doing a particular job.

(2) Assets
Assets owned by people could help them to earn for their livelihood. All assets are not earning in nature
means they may or may not help in earning. But still there are some assets like owning a house, land,
machinery, furniture, etc, these assets could help people in earning as they could be given on rent for
some or the other purpose and people could earn for their livelihood. It is very important for people to
buy assets so that they could utilize from the assets in future whenever they face any financial issue.

(3) Inherent Capabilities

The inherent capabilities within a person could also help them in earning a living. Some people are born
with inherent capabilities which could be taught by them to others in the form of training or it could be

402 Rural Finance 165 MGNCRE

RM3-Integarated Marketing Communications
 used further in their own small business. The way a person works is different from the other people, so
in case a person has a good art which could be related to any particular sector, it could be further
developed and people could earn for a living from it.

These livelihood activities could be enhanced further by five basic assets which have linkage to each
other. These basic assets are mentioned below:

Figure 4.15 Basic assets available to people

(1) Natural Capital

The natural resource stocks that people could draw on for their livelihood which includes forest, land,
air, water, etc.
The following are the examples of natural capital:

402 Rural Finance 166 MGNCRE

RM3-Integarated Marketing Communications
 Figure 4.16 Example of Natural capital
(2) Social Capital
Social capital is taken to mean the social resources such as networks, social claims, social relations,
affiliations, associations. In particulars, the poor they access within the networks and connectedness
that increases people’s trust and ability to work together and expand their access to wider institutions,
such as political or civic bodies. Like the human capital, social capital also has intrinsic value; good social
relationships are not only a means, but they are an end in themselves.

The following are the examples of social capital

Figure 4.17 Example of Social capital

(3) Human Capital

Human capital involves the knowledge, skills, good health and working ability. Good health is not simply
means to earn a livelihood, but it is an end in itself.

402 Rural Finance 167 MGNCRE

RM3-Integarated Marketing Communications
 The following are the examples of human capital

Figure 4.18 Example of Human capital

(4) Physical Capital

The basic infrastructure which people need for making a living, equipment and tools which are being
used by people.

The following are the examples of physical capital:

Figure 4.19 Example of Physical capital

(5) Financial Capital

Financial capital includes savings which could be in any form, access to financial services and regular

402 Rural Finance 168 MGNCRE

RM3-Integarated Marketing Communications
 money inflows. The following are the examples of financial capital:

Figure 4.20 Example of Financial capital

An increase in one type of capital would lead to increase in other the amounts of capital, for example, as
the education level (increase in human capital) of people increases, they might get better job and this
would increase his or her earnings (increase in financial capital). Increase in financial capital would lead
to upgradation of their home as well as facilities (increase in physical capital). Sometimes, however a
form of capital could also decrease with the increase in another capital. For example, when a person or
household sell their land for migrating to another city, in this case there is a decrease in physical capital
and increase in financial capital.

Impact of Microfinance on Livelihood

Microfinance has a significant positive impact in changing of livelihood through reduction of poverty and
this brings positive shift in attitude toward life and improvement in living standard. Through
microfinance, people have gained in the following ways:

402 Rural Finance 169 MGNCRE

RM3-Integarated Marketing Communications
 Figure 4.21 Impact of Microfinance on livelihood

MFIs are working towards betterment of people and supporting them in improving their livelihood.
Microfinance is an important component of livelihoods approach that helps poor in improving their
livelihoods through strengthening of natural, social, human, physical and financial capital. This approach
includes the following:
 Giving salaried job to people and other opportunities for earning.
 Providing savings, loans and other financial services
 Providing training in jobs and business skills
 Developing alliances, institutions and networks for advance economic interest
 Promotion of social and policy changes which improves people’s livelihood prospect

The Sustainable Livelihood Approach

The sustainable livelihood approach helps in improving the understanding about livelihoods of poor. It
organizes factors that enhance or constrain livelihood opportunities, and show the way they are related.
It could help in planning development activities and assessing contribution that the existing activities
have made for sustaining livelihoods. Sustainable livelihoods approach improves the understanding of
livelihoods of poor. It is a way of thinking about scope, objectives and priorities for the development
activities. This approach is based on evolving thinking about the way poor people have been living. It
helps in formulation of development activities which are the following:

Figure 4.22 Features of activities which are part of Sustainable livelihood approach

402 Rural Finance 170 MGNCRE

RM3-Integarated Marketing Communications
 Sustainable livelihood approach facilitates identification of the practical priorities for actions which are
based on interest and views of those who are concerned.

Figure 4.23 The sustainable livelihoods framework

(1) Capital Assets

Sustainable livelihoods framework helps in organizing the factors which enhance or constrain the
livelihood opportunities and show the way they are related to each other. It is a central notion that
different households have access to different livelihood assets that sustainable livelihood approach aims
towards expansion. Livelihood assets, which poor must often make choices about include natural, social,
human, physical and financial capital.

(2) Vulnerability Context

Vulnerability could be characterized as insecurity in well-being of the following in facing changes in
external environment:

Figure 4.24 Vulnerability context

People are moving in and out of poverty and concept of vulnerability captures process of change better
than measurement of poverty line. Vulnerability has two facets mentioned below:

402 Rural Finance 171 MGNCRE

RM3-Integarated Marketing Communications
 Figure 4.25 Facets of Vulnerability

(a) External Side

It is related to seasonality, critical trends and shocks.

(b) Internal Side

It is related to defenselessness which is caused by lack in the means and ability so as to cope with them.
The vulnerability context includes the following
 Shocks like illnesses, conflict, storms, floods, pests, droughts, diseases
 Seasonality like employment opportunities and prices
 Critical trends like environmental, economic, demographic, technological trends and governance

(3) Policies and Institutions

Livelihood outcomes and strategies are not only dependent on access towards capital assets or
constrained by vulnerability context; they are transformed by environment of processes and structures.
Structures are public and private sector organizations which set and implement legislation and policy;
deliver services; and trade, purchase, and perform all manner of the other functions which affect
livelihoods. Processes embrace the regulations, laws policies, agreements, operational arrangements,
societal norms, agreements and practices that in turn determine the way in which the structures
operate. Policy-determining structure cannot be effective in absence of the appropriate institutions and
processes through which policies could be implemented. Processes are very important in every aspect of
livelihood. They provide incentive which stimulates people in making better choices. They deny or grant
access towards assets. They enable people in transformation of one type of asset in to another through
the markets. They have strong influence on the interpersonal relations. One main problem, the poor
people and the vulnerable ones face is that processes which frame their livelihoods might systematically
restrict them unless government adopts some other policy, in turn, filter down to the legislation and
even to the lesser formal processes.

402 Rural Finance 172 MGNCRE

RM3-Integarated Marketing Communications
 (4) Livelihood Strategies and Outcomes
Livelihood strategies aim towards achieving livelihood outcomes. Decisions related to livelihood
strategies might invoke activities based on natural-resource, non-natural resources-based and the off-
farm activities, remittances and migration, grants and pensions, diversification versus intensification,
and long term versus short-term outcomes, some of these might compete with each other.
Potential livelihood outcomes could include the following:

Figure 4.26 Potential livelihood outcomes

Success Story - How Yashoda, Laxmi, and Prema became entrepreneurs thanks to microfinance
smaller amount of loan from organizations like Inditrade could often make big difference in lives of rural people i.e.
Yashoda of Periyavoor, Tamil Nadu. She was concerned about her increasing household expenses and wanted to
supplement her husband’s income while taking care of children and her house. She realized that she could open
small provisional store at her own residence. She knew many people around her; she actually knew what should be
sold. At same time, she thought of taking care of the responsibilities she had at home. All she required was some
financial support. Then she heard about Inditrade and approached company for loan. With loan of Rs 30,000 to
Yashoda, she does an average business of Rs. 1500-2000 per day, which could provide her daily income of Rs. 300 -
800. Her children and her husband also helped her in managing the store. Yashoda had a dream of sending her
children to good school. Her dream of providing good school education to her children came true with finance. From
tasty pickle from Allepey or lac bangles from Hyderabad, most of the people are using products from small
businesses of villages and smaller towns of India. More and more women are starting new ventures and this was
possible due to loan given by micro-financing firms. For supporting small but ambitious women entrepreneurs,
Inditrade Capital launched their micro-financing arm. This organization was catering to Tamil Nadu and Maharashtra
in March 2017. This organization aimed towards expansion into other geographies like Kerala, Chhattisgarh,
Karnataka and many other states in future. Inditrade (erstwhile JRG) is leading player in agri-commodity financing
business in the southern India and it was incorporated in the year 1994. Over years, company forayed into the
lending business (NBFC), insurance broking, commodity trading and microfinance.
Source : Sharika Nair (2017). How Yashoda, Laxmi, and Prema became entrepreneurs thanks to microfinance.
Retrieved from [Link]
microfinance

To Do Activity
Visit website of any MFI and prepare a presentation about the products and services being offered by
them and also about the impact that it has made on the livelihood of poor people.

402 Rural Finance 173 MGNCRE

RM3-Integarated Marketing Communications
 4.4 Different Models of Micro-Finance
Micro finance is provision of credit and other financial services and products which are of small for the
poor people to enable them in raising their level of income and improve their living standard. It has
been recognized that microfinance helps poor people in meeting their needs for smaller credit and other
financial services. The flexible and informal services offered to the lower-income borrowers to meet
their modest livelihood and consumption needs have not only made the movement of microfinance
grow at rapid pace, but also impacted lives of millions of poor people in a positive way.

In India, banking sector witnessed branch expansion on a large scale after the nationalization of banks in
the year 1969, which facilitated shift in focus of banking from class banking to mass banking. It was
realized that, notwithstanding wide spread of the formal financial institutions, these institutions could
not cater to frequent and small credit needs of many poor people. This resulted in a search for some
alternative reforms and policies to reach out poor people for satisfying their credit needs.
Beginning of micro finance movement in India can be traced by Self-help group (SHG) - bank linkage
programme (SBLP) which was started as pilot project in the year 1992 by NABARD. This programme
came out to be very successful and popular model of microfinance in India. Other approaches like micro
finance institutions (MFIs) have also emerged subsequently.

Micro Finance Delivery Models

Non-availability of banking and credit facilities to underprivileged and poor segments of society have
always been major concern. Accordingly, both Government and RBI the Reserve Bank have taken many
initiatives from time to time as mentioned below:

Figure 4.27 RBI and Government initiatives towards microfinance models

It was realized that further there was requirement of direct efforts for addressing credit needs of the
poor people. In response to requirement of the poor, micro finance movement started with introduction
of SHG-bank linkage programme in early 1990s. The SBLP model has emerged as dominant model in

402 Rural Finance 174 MGNCRE

RM3-Integarated Marketing Communications
 terms borrowers and loans outstanding. In terms of the coverage, this model has been considered as the
largest micro finance programme. The RBI, SIDBI and NABARD have taken many initiatives for providing
momentum to micro finance movement in India.

Various Micro finance delivery models have been mentioned below:

Figure 4.28 Micro finance delivery models

(1) SHG-Bank Linkage Programme
With SBPL, micro finance sector got recognized in India. Internationally, lots of consultative effort and
groundwork was in progress since 1980s and this set a backdrop for microfinance efforts in India. The
field of microfinance is diversified and is still evolving. There is no such single model or approach which
fits in every circumstance. Concept of microfinance implies to flexible and informal approach to credit
needs of poor. Every model is required to be tailored as per the local needs and circumstances.

Sixth General Assembly of Asia-Pacific Rural and Agricultural Credit Association (APRACA) which was
held at Kathmandu, Nepal in the month of December 1986 considered project proposal on ‘promotion
of linkages between banking institutions and SHGs in rural savings mobilization and credit delivery to the
rural poor’. It was decided at that moment that every member country was required to form a Task
Force for conducting survey of the SHGs and thereafter suitable national level programmes were
formulated. Consequent upon this, Task Force was setup in India in Ministry of Agriculture, for
identifying existing SHGs, undertake survey of groups and draw an action plan for channeling flow of
savings and credit between rural poor and banks through the SHGs and identifying concrete projects for
action research. Accordingly, in the month of February 1987, it was decided that study team which was
led by NABARD and comprised representatives from various financial institutions, were required to be
constituted for undertaking survey. Survey was undertaken in the month of September 1987 and report
discussed at 18th Executive Committee Session and 10th Foundation Anniversary of APRACA which was
held at New Delhi in November 1987. This survey report actually laid foundation of SHG-bank linkage
programme in India launched as pilot project in the year 1992.

NABARD launched a pilot after extensive consultation with RBI, commercial banks and non
Governmental Organizations (NGOs) with following objectives:

402 Rural Finance 175 MGNCRE

RM3-Integarated Marketing Communications
 i. Evolving supplementary credit strategies to meet credit needs of poor by combining sensitivity,
flexibility and responsiveness of informal credit system with strength of administrative and
technical capabilities and financial resources of formal credit institutions
ii. Building mutual trust and confidence between bankers and rural poor
iii. Encouraging banking activity, both on thrift and credit sides, in segment of population that
formal financial institutions find usually difficult to cover

SHGs were expected for facilitating collective decision making by poor and providing ‘doorstep banking’,
Banks as wholesalers of credit, were required to provide resources, while NGOs were to act in the form
of agencies for organizing poor, building their capacities and facilitating process of empowering them.
This programme has come long way from pilot project for financing many SHGs across country. This
model has proved its efficiency as mainstream programme for banking with poor people who come
under different categories mentioned below:

Figure 4.29 Categories of poor people for SHG-Bank Linkage programme

Other small category of poor people could include vending and hawking in rural areas.
This programme has various advantages, the main advantages are mentioned below:

402 Rural Finance 176 MGNCRE

RM3-Integarated Marketing Communications
 Figure 4.30 Advantages of SHG-Bank Linkage programme (SBLP)

This programme started as an outreach programme not only aimed to promote thrift and credit, but it
also immensely contributed towards empowerment of rural women.
Under the SBLP, following three different models have emerged:

Figure 4.31 Models under SBLP

Model II has emerged as most popular model under SBLP programme. Regional Rural Banks, Commercial
banks and co-operative banks have been actively participating in SBLP.

(2) Micro Finance Institution Approach

While SBLP model has remained most widely used microfinance model in India, MFI model has also

402 Rural Finance 177 MGNCRE

RM3-Integarated Marketing Communications
 gained momentum. MFI model in India is characterized by diversity of legal and institutional forms.
Broadly, approach of RBI is emphasizing on informality of micro-finance and focusing on developmental
aspects. Regulatory dispensation put in place by RBI seeks towards enabling enhanced credit flow from
the banks through MFIs and could be refined further by RBI, as required. For bringing micro-finance
entities under regulatory system through separate legislation, RBI felt that the microfinance movement
across country which involved common people has benefited immensely through its flexibility and
informality. Hence, their organization, methods of working and structure is required to be simple and
any regulation would be inconsistent with core-spirit of movement. It was felt that ideally, NABARD or
banks should devise appropriate safeguard locally in their own relationship with MFIs, taking into
account different organizational forms of these MFI entities. The MFIs have been providing other non-
credit services also like training, capacity building, products marketing of SHGs, micro-insurance, etc.

MFIs in India exist in various forms based on registration as mentioned below:

Figure 4.32 Forms of MFIs based on registration

These MFIs are actually scattered across country and due to multiplicity of the registering authorities,
there is not much reliable estimate of number of MFIs which are existing.

402 Rural Finance 178 MGNCRE

RM3-Integarated Marketing Communications
 Characteristics of Microfinance Institutions (MFIs)

Figure 4.33 Characteristics of Microfinance Institutions (MFIs)

(1) Increasing Size and Growth
The size of MFIs has been increasing and also growing, this seems to warrant clearer policy framework
for covering operations in the financial services additionally to credit, in respect of both Bank-and
NABARD-led micro-finance through SHGs and MFIs.

(2) Delivery of Non-Credit Financial Services

Delivery of the non-credit financial services like mutual funds and insurance by MFIs seem to be possible
but as pre-condition, there is need for clear framework for approaching different regulators for the non-
bank financial services by MFIs.

(3) Varied Organizational Forms

The organizational forms of MFI appear varied, though activities in many cases include non-financial
services. The different forms of MFI have different legal framework and this is due to their
organizational form.

(4) Different State Governments take Varying Approach

Different State Governments take varying approach towards MFI including subsidizing the interest rate.
The spread and nature of micro-finance movement differ across States significantly.

(5) Significant Part of Current Microfinance Activity is Related to Credit

402 Rural Finance 179 MGNCRE

RM3-Integarated Marketing Communications
 A significant part of the microfinance activity is actually related to credit, that is perhaps attributable
towards both felt credit needs and absence of conscious policy thrust regarding non-credit related
financial services.

(6) Technological Development Provides Window for Opportunity

Development in technology has been providing a window of opportunity for reducing transaction costs
and thus enables microfinance in becoming a profitable activity and commercially viable.

Five Organizational Forms of MFIs

Figure 4.34 Organizational forms of MFIs

Under the NBFC model, NBFCs encourages villagers to form a Joint Liability Groups (JLG) and give loan to
the individual members of JLG. Individual loans are jointly and severally guaranteed by other members
of Group. Many NBFCs operating under this model started off in the form of non-profit entity which
provides micro-credit and various other services to poor. However, since they found themselves unable
in raising adequate resources for rapid growth of activity, they converted themselves into for-profit
NBFCs. The others entered the field of microfinance as for-profit NBFCs, as they saw profit NBFCs more
viable business proposition.

(3) Bank Partnership Model

Banks could use MFIs as their agent for the following activities of banks:

402 Rural Finance 180 MGNCRE

RM3-Integarated Marketing Communications
 Figure 4.35 Bank activities handled by MFI under Bank partnership model

In this model, Bank is lender and MFI acts as agent to handle work items related to monitoring of credit,
supervision as well as recovery, while borrower is an individual. MFI acts like an agent and it takes care
of all the relationships with client, from the first contact through the final repayment. Another variation
in this model is where MFI, an NBFC, holds an individual’s loan on it and books for a while, before
securitizing and selling them to bank. Such refinancing through securitization enables MFIs greater
funding access. In this system, banks use reach and viability of the MFIs for disbursal of loans to targeted
population. MFIs as well as similar agencies act as mediator between bank and the end consumer. In this
model MFIs for larger funding access hold borrower’s loan on its account for a certain period and
refinance through means of securitization.

(4) Banking Correspondents

RBI has taken various initiatives over last few years to increase banking outreach and to ensure greater
financial inclusion. Significant step towards financial inclusion was issue of RBI guidelines in the month
of January 2006 to engage BCs by the banks to provide banking as well as financial services. Regulatory
framework for BCs model have been progressively moving ahead for ensuring that consumer protection
is not at all compromised while facilitating the enhanced outreach of banking services. Relaxation in
regulatory framework was possible due to rapid changes in the technology, as in terms of Core Banking
Solution (CBS) and relatively lower cost biometric handheld devices to ensure fraud prevention and
authenticity.

BCs are retail agents those who are engaged by various banks for providing banking services at various
locations besides bank branches and ATM. Banks those are adopting BC model are required to take
complete responsibility for the acts of omission and commission of BCswhich they engage and ensure
thorough due diligence as well as additional safeguards to minimize agency risk. Basically, the BCs
enable bank towards expansion of outreach and offer a limited banking services range at lower cost, as
setting up of brick and mortar branch which may not be viable. BCs are integral part of business strategy

402 Rural Finance 181 MGNCRE

RM3-Integarated Marketing Communications
 to achieve a greater financial inclusion.

To Do Activity
Discuss any one of the following organizational form in detail by forming groups of 4-5 students :
• Trusts
• Societies
• Cooperative Societies
• Not-for-Profit Companies
• Non-Banking Finance Companies

4.5 Challenges and prospects of micro financing in Rural India

There are many microfinance institutions who have been serving people in the rural areas. Some of
these families are very poor and some could manage their livelihood in a better way. There are some
challenges which are being faced by micro finance in India:

(1) Lack of information

There are many sources of credit information in our country, but none of them focus on small and rural
borrowers. It becomes difficult for obtaining information about Credit information on these borrowers
since majority of them rely on money lenders and other informal lenders for credit. Such lenders
generally do not share information about the borrower’s record of good credit repayment to the other
finance providers.

(2) Financial illiteracy

One major challenge in India toward growth of microfinance sector is the illiteracy of poor people. Due
to illiteracy it becomes very difficult to create awareness related to microfinance among them and it
becomes difficult to serve them in the form of microfinance clients.

402 Rural Finance 182 MGNCRE

RM3-Integarated Marketing Communications
 Figure 4.36 Challenges of micro financing in India
(3) Heavy Dependence on Banks and Financial Institutions
MFI’s are dependent on borrowings from banks and financial institutions. For most MFI’s, the sources of
funding are restricted to apex MFIs and private banks. In these banks which are available, the funds are
typically for short term. There is tendency among some of lending banks and financial institutions for
sanctioning and disbursing of loans to MFIs around end of accounting year due to their targets.

(4) Regional Imbalances

The growth of SHGs and MFIs is unequal geographically. There is concentration of SHG credit linkages
more in the southern states. States which are having more number of poor people, the coverage of SHG
is low. The regional imbalances are due to the following factors:

Figure 4.37 Reasons for regional imbalances of MFIs and SHGs

402 Rural Finance 183 MGNCRE

RM3-Integarated Marketing Communications
 (5) Inability to Generate Funds
MFIs do not have the ability for raising sufficient funds in microfinance sector and this is a challenge.
Though the NBFCs could raise funds through private equity investment as they are having profit motive,
MFIs are restricted to accept public deposits.

(6) Interest Rate

MFIs charge very high rate of interest, which becomes difficult for the poor to pay. MFIs are private
institutions and therefore there is a requirement that they remain economically sustainable. MFIs do
not get any type of subsidized credit for lending activities and this is the reason why they require
recovering even their operational cost from the borrowers.

(7) Weak Governance

There are many MFI’s which are not willing to convert to corporate structure; hence they remain closed
towards transparency and also improved governance, thus they are unable to attract capital. MFI’s have
been facing challenge to strike balance between business and social goals. Management need to adapt
business models which are based on increased transparency and changing scenarios; and this would
enable them to attract private equity fund and capital infusion.

Measures to Overcome Challenges

There are some measures which could help in overcoming challenges faced by MFIs while providing
micro finance services for having sustainable development. These measures are mentioned below:

Figure 4.38 Measures to overcome challenges

402 Rural Finance 184 MGNCRE

RM3-Integarated Marketing Communications
 (1) Database of Information
Data about the credit worthiness of the poor people should be well maintained. MFIs should help poor
people in getting loans so that they do not need to go to the money lender for any kind of credit
requirement. The people in rural areas tend to approach the money lenders, since they get funds easily
from the money lenders without much documentation. The MFIs are formed for providing support to
the poor people. It is a responsibility of the MFIs to ease out the procedure of sanctioning loans to the
poor people.

(2) Financial Awareness

People living in the rural areas have lesser financial awareness. They are not self sufficient since their
income is very low, some even find it difficult to meet their consumption needs. For requirement of
funds, many of them approach informal way. It is very important that they are made aware about the
formal ways so that they could easily take and manage their finances.

(3) Alternative Sources of Fund

In the absence of adequate funds, growth and reach of MFIs becomes restricted and for overcoming this
problem MFIs should also try to find out some other sources of funds for funding their portfolio of loan.
Various alternative sources of funds for MFIs might be created through conversion into for-profit
company i.e. Portfolio Buyout, NBFC and Securitization of Loan etc.

(4) Encourage Rural Penetration

MFIs are opening branches in places where few MFIs are already in operation instead of focusing on
reducing the initial cost. Encouraging MFIs for opening new branches in areas of low microfinance
penetration by providing financial assistance will increase the outreach of the microfinance in the state
and check multiple lending. This would increase the rural penetration of microfinance in state.

(5) Transparency of Interest Rates

MFIs have been employing different patterns to charge interest rate and few of them are charging
additional charges and interest free deposits (which is a part of loan amount that is kept as a deposit on
which no such interest is paid). All these conditions make pricing very confusing and hence borrower
feels incompetent in bargaining power. So there should be a common practice to charge interest rate
which should be followed by all the MFIs so that this makes sector more competitive and beneficiary
gets freedom for comparing different financial products and services before buying them.

(6) Field Supervision

Field supervision could be adopted as medium to monitor conditions on the ground and corrective
action should be initiated wherever required. This would keep an eye on performance of the ground
staff of MFIs and also on their recovery practices. This would encourage MFIs for abiding by a proper
code of conduct and work in an efficient way. However, problem of feasibility and also the cost involved
in physical monitoring of microfinance sector remains an issue.

402 Rural Finance 185 MGNCRE

RM3-Integarated Marketing Communications
 (7) Proper Regulation
When microfinance was in the growing stage and the individual institutions were free for bringing in
innovative operational models, the need for regulatory environment was not much of concern.
However, in the current stage, when there have been years this sector has been working and has been
performing well, there is a need of regulatory environment for protecting interests of stakeholders and
promotion of growth.

(8) Complete Range of Products

The MFIs functioning in India should provide variety of products as mentioned below:

Figure 4.39 Range of products of MFIs

MFIs are acting as substitute to banks in different areas where people are not having access towards
banks, have been providing a complete range of products which would enable poor people for availing
all services.

(9) Technology to Reduce Operating Cost

MFIs should use IT tools, applications and new technologies for reducing their operating costs. MFIs
should be encouraged for adopting cost-cutting measure for reducing their operating costs. Also
initiatives such as development of common Management Information System (MIS) and other software
for MFIs could be taken for making operations more efficient and transparent.

Prospects of Microfinance
Microfinance programmes have witnessed phenomenal growth in past years. These programmes have
been helping the poor people in many different ways. However, focus of most of microfinance service
providers have remained on expansion of outreach of microfinance programmes with little attention
related to quality, depth and viability of financial services. Besides removal of these problems there is lot
which could be done in this field for making this programme more effective. Some future prospects of
micro financing have been discussed below:

402 Rural Finance 186 MGNCRE

RM3-Integarated Marketing Communications
 Figure 4.40 Prospects of Microfinance

(1) Growth Prospects

Microfinance programmes have wider prospect towards expansion both about depth and outreach of
the services provided. Microfinance has covered many households through its microfinance
programmes, but still there are poor households to be covered. Still there is ample scope for covering
the unreached people belonging to the poor households. The average amount of loan being provided to
SHG members under its various schemes is not a bigger amount and this amount could meet only the
liquidity requirements and are not sufficient in helping people to start productive activities. There is lot
of demand for credit among the poor people and there is a vast demand which is still unmet, hence
there is lot of scope for growth of MFIs and also microfinance service providers. For expansion of
microfinance
Programmes; the SHGs may be linked with post offices for credit disbursement to rural poor by utilizing
vast network of post offices in the rural areas.

(2) Reducing Regional Disparity

Spread of the microfinance programme is not equal among various regions and the spread is limited in
poorer states. So, there could be ample scope for spreading microfinance programmes in unreached
areas which includes poorer states. However, taking steps towards this direction, NABARD has identified
few states for scaling up microfinance programmes so as to reduce regional disparity. These priority
states are mentioned below:

402 Rural Finance 187 MGNCRE

RM3-Integarated Marketing Communications
 Figure 4.41 Priority states as defined by NABARD
These states have a large number of poor people and these people could not be reached by
microfinance programmes. There were special efforts put in by NABARD which resulted in increase in
number of SHGs credit linked in these states. Growth rate in the states is much higher as compared to
growth at the national level but is not increasing as compared to previous years. Therefore there could
be some other measures which could be taken up by NABARD for eradicating regional disparities in
coming future.

(3) Schemes to Support MFIs

MFIs play a very important role for reaching poor people who have not been served by formal financial
institutions. But there are many such institutions which are restricted by RBI for collecting savings from
their own members and raise public funds. It becomes difficult to determine financial health of these
institutions since they don’t publish their financial reports annually. Therefore, formal financial
institutions hesitate in providing loans to these institutions. As a result, MFIs face paucity of funds and
this becomes a hurdle for them to expand microfinance programmes. For tackling problem, there are
some schemes could be adopted for providing help and support for capacity building of the MFIs for
expansion of various microfinance programmes.

(4) Regulation of MFIs

There are various entities like mutual benefit societies, co-operative societies or mutually aided societies
etc. which are engaged in microfinance activity. These entities are guided by different laws under which
these are registered. Lack of single regulatory authority restricts orderly growth of the microfinance
sector. Keeping regulatory problems in view, Indian government has proposed legislation and
formulated bill for regulation and development of microfinance sector. The MFIs should be regulated
under the same regulatory authority, so that they could be regulated properly. In case of any kind of

402 Rural Finance 188 MGNCRE

RM3-Integarated Marketing Communications
 offence by the microfinance organizations, redressal mechanism as well as disputes settlement is very
important and this is possible in case all the MFIs are regulated by single regulator.

(5) Insurance Services

In India, penetration of the insurance services among the rural poor people is limited and there is great
potential for same. Moreover, the poor people are very much vulnerable to natural uncertainties and
insurance plays a very important role for them. Network used for the microfinance programmes could
be used for tapping potential of insurance in the rural markets. Microfinance Institutions, Self-Help
Groups and Non-Government Organizations can be used as micro-insurance agents. They could offer
target specific insurance products at relatively lower cost, for lower coverage of the amount. Micro-
insurance would facilitate penetration of insurance to remote and rural areas. However, some NGOs are
providing accident, crop and life insurances in our country, but there is a requirement that these
services are expanded.

(6) Flexibility in Programme

Some main features of microfinance programme include regular group meetings, compulsory savings,
record maintenance etc. These bindings lead to exclusion of the core poor people from joining
microfinance programmes. Therefore, for expansion of outreach of programme to poorer people, there
is need for introducing more flexible system. A Project in Orissa enabled poor for saving in kind and
raising resources against such savings and providing access towards participative food, self-managed
and security system. Under this project, SHG members could save and get credit both in the form of
cash and kind which depends on their convenience. Such flexibilities in microfinance programmes might
increase affordability and access of rural poor.

(7) Technical Innovations

For improving quality of the microfinance services there is a requirement of technical innovations.
Electronic devices are also being used for expansion of outreach and improve functioning of
microfinance.

Figure 4.42 Technical innovations in microfinance

402 Rural Finance 189 MGNCRE

RM3-Integarated Marketing Communications
 (1) ATMs
ATMs are very helpful in facilitating saving, loan and payment transactions in remote rural areas where
it becomes difficult for opening bank branches.

(2) Mobile Phones

Mobile phone provides rural poor borrowers with the communication facility.

(3) Computers
A computer with operator helps illiterate group members in maintaining records of group’s financial
activities. Computers can be used for providing important information which is related to crop inputs,
weather conditions, land records, products prices, etc. in villages.

(4) Processor Cards

Processor cards are being used to keep records of the group activities like loans, savings and other
financial transactions. They help in reducing paper work and save time for bank officials. These
innovative techniques in the microfinance sector have been playing a very important role and have
improved the functioning of the microfinance sector.

To Do Activity
Ask the students to form group of 4-5 members and ask them to select any one challenge and any
Summary
one prospect of micro-financing and present them before the class using examples.

Microfinance covers many services which includes savings, money transfer, insurance, counseling etc
apart from credit provision. In India, Micro finance started in the early 1980s. It involves Non-
Government Organizations (NGOs) and self-help groups (SHGs) that come together to provide credit and
savings service to people who do not have access towards formal banking system. Micro finance
organizations have been undertaking activities from perspective of development in various areas and
they do not focus on profit. These organizations are getting support by government bodies like Small
Industries Development Bank of India (SIDBI) and National Bank for Agriculture and Rural Development
(NABARD). There are some trusts which are set up specifically for making funds available to people who
are in the lowest level in the society. Microfinance has evolved due to efforts of the committed
individuals and many financial agencies for promoting self-employment and contribution towards
poverty alleviation and provisioning of social security. India has developed its own model of
microfinance organizations in form of savings and credit groups which are known as Self Help Group
(SHGs) that are bank-linked. These SHGs are formed and managed by poor people and these bring social
change and lead to empowerment. In India, most microfinance institutions attempt in going beyond
savings and credit groups for providing microfinance services which could be in the form of insurance
and savings. Many people believe that microfinance is about providing smaller loans (microcredit) to
families who are very poor for helping them to get engaged in productive activities or nurturing their
tiny businesses. Livelihood is a means of support, it is something which provides income for living,
especially a paid work for securing necessities of life. Livelihood activities are economic activities which

402 Rural Finance 190 MGNCRE

RM3-Integarated Marketing Communications
 people know, undertake and own for earning today and in to future. Sustainable livelihood is one which
could cope with, and recover from, shocks and stresses maintain or enhance its capabilities and assets
while not undermining existing resource base. Micro finance is provision of credit and other financial
services and products which are of small for the poor people to enable them in raising their level of
income and improve their living standard. It has been recognized that microfinance helps poor people in
meeting their needs for smaller credit and other financial services. The flexible and informal services
offered to the lower-income borrowers to meet their modest livelihood and consumption needs have
not only made the movement of microfinance grow at rapid pace, but also impacted lives of millions of
poor people in a positive way. There are many microfinance institutions who have been serving people
in the rural areas. Some of these families are very poor and some could manage their livelihood in a
better way.

Model Questions
 Discuss the phases of evolution of microfinance sector.
 Which poverty alleviation programmes were initiated by the Indian government?
 What are the products provided by MFIs to poor people?
 Discuss the needs of poor people for credit facilities.
 Discuss the features of activities which are part of Sustainable livelihood approach.
 What are the basic assets available to poor people? Discuss in detail.
 Explain Micro-finance delivery models in detail.
 Discuss about the different organizational forms of MFIs.
 Explain the challenges being faced by the micro-finance industry.
 Discuss the prospects of micro-financing in rural India.

References
 Bhuiyan A., Ismail A., Chamhuri S., Islam A. (2012). Microfinance and Sustainable Livelihood: A
Conceptual Linkage of Microfinancing Approaches towards Sustainable Livelihood. American journal
of environmental sciences. 8(3):328-333. Retrieved from ttps://[Link]/publication
 Ruchika Mahajan (2017). Microfinance in India : Issues and challenges. 6 th International Conference
on recent development in Engineering Science, Humanities and Management. National Institute of
Technical Teachers Training & Research, Chandigarh, India. Retrieved from [Link]
 Serrat O. (2017). The Sustainable Livelihoods Approach. In: Knowledge Solutions. Springer,
Singapore Retrieved from [Link]
 Sinha, Sanjay (2013), Financial Services for Low Income Families: An Appraisal, Management Review,
Vol. 15, No. 2, June, Indian Institute of Management, Bangalore

402 Rural Finance 191 MGNCRE

RM3-Integarated Marketing Communications