Sip Project

A

Summer Internship Project Report

On

“MAINSTREAMING MICROFINANCE (SHGs):CHALLENGES

AND ISSUES”

In Partial fulfillment for the requirement of

two year course of

Master of Business Administration

Programme

Gujarat Technological University

Submitted to:

Prof. Rajsee Joshi

Submitted By:

NIYATI DAVE (107350592019)

Submitted On:

23RD

July 2011

N.R. Institute of Business Management

Ahmedabad

MAINSTREAMING MICROFINANCE (SHGs):

CHALLENGES AND ISSUES

N. R. Institute of Business Management

(GLS-MBA)

Certificate

This is to certify that Mr. Niyati Dave Enrolment No. 107350592019 student of N. R.

Institute of Business Management (GLS-MBA) has successfully completed his Summer Project

on “―MAINSTREAMING MICROFINANCE (SHGs): CHALLENGES AND ISSUES‖” at

“Banas dairy” in partial fulfillment of the requirements of MBA programme of Gujarat

Technological University. This is his original work and has not been submitted elsewhere.

Date: _________________ Place: _________________

_______________

Dr. Hitesh Ruparel

Director

____________________

Prof. Rajsee Joshi

Assistant Professor &

Project Guide

Declaration I, NIYATI DAVE (107350592019) student of N R Institute of Business Management

hereby declare that I have successfully completed this project on ―MAINSTREAMING

MICROFINANCE (SHGs): CHALLENGES AND ISSUES‖ in the academic year 2010-2011.

I declare that this submitted work is done by me and to the best of my knowledge; no

such work has been submitted by any other person for the award of degree or diploma. I also

declare that all the information collected from various secondary and primary sources has been

duly acknowledged in this project report.

I

Preface

― Experience is the best teacher ‖ the saying has played a guiding role in the infusion of

the summer internship as a part of Master of Business Administration (M.B.A.) program of the

N.R.INSTITUTE OF BUSINESS MANAGEMENT(GLS), Ahmedabad under the GTU

guideline.

Mere theoretical knowledge does not help us in real life situation so the summer

internship is devised in the syllabus where in management students learn how to handle the

actual situation. In every professional course, practical project is an important factor. Professor

gives students theoretical knowledge of various subjects in the college but they are practically

exposed of such subjects when they get knowledge of the actual operations of functions of

management in the organization.

The main objective behind this project is to picture microfinance and study its various

model and loopholes of the same so that a better model can be devised and suggested to the

company and banks involved in the process of microfinance. Banas dairy has developed itself

over a period and today is apex milk producing dairy in Asia. GCMMF stared ‗white revolution‘,

with Banas dairy playing an important role in the fulfillment of the same.

Suppliers of raw milk to Banas dairy are those farmers who lack knowledge as to

microcredit, savings and SHGs. I have tried to study the reasons and give suggestions as to how

dairy can become a bridge to poverty eradication and women empowerment and financial

inclusion of these villages from which the dairy gets its raw milk.

The report is supported by figures and data wherever necessary with a view to assist the

reader in developing a clear cut understanding of the topic.

II

ACKNOWLEDGEMENT

The success I have got in the accomplishment of this project work is not only due to my

efforts. I would like to thank N R Institute of Business Management (GLS), Ahmedabad and

Banas Dairy, Palanpur

I would also like to thank Mr. Sangramsigh Chaudhary (M.D., Banas dairy) , Mr.

Ishwar Patel and all the employees who have helped me a lot in this project and provided

encouragement directly and indirectly .

I also would like to thank Prof. Rajsee Joshi for providing her valuable time and

guidance; otherwise it would have been difficult to keep the constant high spirit of work. I also

thank her for her extensive help and for providing valuable information, suggestions and inputs

at various stages of work.

I would also like to thank Mr. Patel (Dena bank), Dr. Suran (General Manager

NABARD, Ahmedabad), Mr.A.K.Sharma (Bank of Baroda) for giving their invaluable

insights and time for guiding me in this project.

At last, I feel greatly obliged and take the pleasure to thank Dr. Hitesh Ruparel,

Dierctor of N.R.I.B.M for giving me such an opportunity to widen my spectrum of knowledge

through this project. Though it has not been possible for me to include the names of all those

people who had supported and encouraged me during the course of the project through this study

in no way reduces the value of all that they had shared.

III

EXECUTIVE SUMMARY

Microfinance is today becoming the most fund allocated sector as far as state and central

government is concerned. Even RBI is keenly focusing upon the development of microfinance

and all the wings of it like micro credit, micro savings, and micro insurance. India consists of

70% of rural population. These rural population have credit requirement for their spending. They

generally take credit by informal means i.e. moneylenders or village heads. It was found that

formal structure of credit and savings would boost up the rural economy. For this reason it was

necessary to include rural economy into the entire financial structure. Thus microfinance is now

given a boost by the government.

Government has taken various initiatives regarding the upliftment of the rural

economy. More over various micro credit schemes have been also put forth by government like

Sakhee mandal, Mission Mangalam (Gujarat only). Etc. Employment schemes like SGSY

(Swarnim Gram Swarojgar Yojna) and SJSRY ( Swarn Jayanti Sehri Rojgar Yojna) have also

been implemented. There are various models of microfinance amongst which the model of SHG

bank linage model is considered to be the most reliable and contributing to microfinance. I have

also shown how each SHG is rated and which factors are considered while loan is provided to

SHGs.

Banaskantha District Cooperative Milk Producers' Union Limited known as Banas

Dairy is a cooperative organization established in the year 1969 under the Gujarat Co-operative

societies Act 1961 with the support of NDDB as a part of their Operation Flood Program

launched to bring about white revolution in the country. Today it is Asia‘s largest milk producing

dairy and has great contribution in GCMMF.

Banas dairy acts as a garunter for the societies that provides milk to the dairy. The

people which provide milk to the dairy also have farming as another means of earning income.

This is why Micro finance has close linkage with the dairy industry. I have surveyed the villages

in which Banas dairy has a collection center and tried to study their lifestyle and loan purpose

IV

and their awareness about the SHGs. My survey has shown mostly people take loan for the

porpose of farming i.e. crop loan.

People also have issues of the effective interest rate provided by the banks at the time of

loan and for the repayment the effective interest rate is higher. There is also very little awareness

regarding the SHGs except the Sakhee Mandal in which women participate for taking the micro

credit. No farmers have yet awareness as to the SHGs inspite of the fact that SHG is a very

reliant model.

I have studied the model and its weaknesses and have tried to suggest a different

model which can overcome some of the weaknesses.

index

SR. No. Particulars Page No.

1. Introduction

1.1 Introduction to Research Methodology 2

1.2 Statement of Problem 2

1.3 Objective 2

1.4 Literature Review 2

1.5 Research Design 5

1.6 Research instrument 5

1.7 Scope 5

1.8 Sample Size 5

1.9 Sample Technique 5

1.10 Data Sources 6

1.11 Research Analysis 6

1.12 Classification and Tabulation of Data 6

1.13 Statistical Analysis of Data 6

1.14 Limitations 7

1.15 Beneficiaries 7

2. Industry Profile

2.1 Introduction 9

2.2 Industry Segment 9

2.3 Advantages of Milk Industry 10

3. Gujarat Cooperative Milk Marketing Federation

Ltd. (GCMMF

3.1 History and Management 13

3.2 Overview 14

3.3 Amul Models 15

3.3.1 Supply Chain Model 15

3.3.2 Organizational Management Model 16

4. Company Profile

4.1 Introduction 18

4.2 Finance at Banas Dairy 20

4.3 Process and Vehicle for Milk Storage 22

4.4 SWOT Analysis 25

5. Microfinance

5.1 Introduction 27

5.2 Principles at G8 Summit 28

5.3 Value Attributes of Microfinance 29

5.4 Why Microfinance? 30

5.5 Microfinance in India 31

5.6 Microfinance in Gujarat 33

5.7 NABARD 33

6. Microfinance Models

6.1 Models 38

6.2 SHG – Bank Linkage Model 41

6.3 Highlights of SHG – Bank Linkage Model

2010

46

6.4 Status of Microfinance in India – NABARD

Report

46

6.5 SHG – Bank Linkage Model Statistics 47

6.6 Structure of Microfinance in India 48

7. Microfinance Products

7.1 Microfinance Products 51

7.2 SHG Model 52

7.2.1 Calculation for Cash Credit Limit 55

7.3 JLGs 56

7.4 Difference between SHG and JLG 58

8. Microfinance Loopholes

8.1 Introduction 60

8.2 Loopholes 61

8.3 Problems 64

9. Challenges in Microfinance

9.1 Financial Inclusion 69

9.2 Relation between Financial Inclusion and

Development Indicators

70

9.3 SHG & Financial Inclusion 71

9.4 Empowering women with microfinance 72

9.4.1 Why Target Women? 74

9.4.2 Avoiding Undesired Consequences 75

10. Analysis of Questionnaire 77

11. Findings 100

12. Suggestions and Recommendations 104

13. Conclusions 109

14. References 112

15. Annexures 114

1

CHAPTER 1

RESEARCH METHODOLOGY

2

1.1 INTRODUCTION TO RESEARCH METHODOLOGY

Research methodology is a methodology for collecting all sorts of information & data

pertaining to the subject in question. The objective is to examine all the issues involved &

conduct situational analysis. The methodology includes the overall research design, sampling

procedure & fieldwork done & finally the analysis procedure. The methodology used in the

study consistent of sample survey using both primary & secondary data. The primary data has

been collected with the help of questionnaire as well as personal observation and interviewing

the people book, magazine; journals have been referred for secondary data. The questionnaire

has been drafted & presented by the researcher.

The Survey is carried for farmers, tenant farmers and laborers who take loan either

from bank or any other informal method of finance. Various topics like the purpose for loan,

savings, which bank do they prefer and for which reason etc. have been surveyed and found out.

Suggestions have been given so that Banas dairy can help with the development of microfinance

1.2 STATEMENT OF PROBLEM

To help Banas dairy find a model where in they can help their raw milk suppliers connect

to microfinance and its various areas

To suggest refined model of microcredit which minimizes defaulters

To find why villages in Palanpur and surrounding do not prefer SHG

1.3 OBJECTIVES

To understand the role of Banas Dairy in empowering the people associated with them

specially women empowerment

To understand the applicability of SHG

3

To find out the purpose of taking loan by famers, tenant farmers and laborers

To determine the level of awareness about SHG and JLG among famers, tenant farmers

and laborers

To know their readiness to take loan from financial institutions.

To make recommendations how Banas Dairy can help further in women empowerment &

microenterprise.

1.4 LITERATURE REVIEW

Literature review shows which articles or journals or research reports were referred to

during the project report as a source of secondary report. This topic has been covered on a later

stage. Major highlights of literature review are as follows:

1. Self-Help Groups as Financial Institutions: Policy Implications Using a Financial Model

Authorg: R. Shrinivasan (professor and coordinator of the Finance & Control Area at the Indian

Institute of Management, Bangalore

This paper uses a spreadsheet financial model to identify key financial policy parameters

that influence the performance of self-help groups (SHGs) whose primary activity is

microfinance. The focus is on long-run (ten-year) performance. There is bad news for those

policy makers and practitioners who focus unduly on growth as measured by loan activity. A

conservative financial policy that does not inject external funds into the SHG in the initial years

and, when it does, does so with moderation, seems appropriate in the long run. Additionally, a

high loan interest rate policy produces SHGs that are strong financial institution.

2. Self Help Group Bank linkage model and financial inclusion in India

Author: Smita Nirbachita Badajena(a Research Scholar in Economics at IIT, Bombay.)

.Prof. Haripriya Gundimeda (Associate Professor in Economics at IIT, Bombay.)

This paper talks about Micro-finance being the provision of thrift, credit and

other financial services and products of very small amounts to the poor for enabling them to raise

4

their income levels and improve their living standards (RBI, 2005). Microfinance is one of the

most remarkable socio-economic developments in the present era. The micro finance sector

started getting recognition in India after the launch of the self help group linkage model in the

year 1992. Self Help group linkage model is one of the indigenously developed and successfully

operated models of Micro-finance in India. Under this model, the SHGs are financed by bank

without any collateral, peer group pressure is considered as collateral by the lenders. SHG led

micro finance approach also helps to reduce the burden of heavy transaction cost faced by formal

financial institution in India.

3. SHG-Bank Linkage Program in India

Author: Hema Bansal( Assistant professor at M.S.University, baroda)

This study attempts to review the spread of credit linkages between self-help

groups (SHGs) and banks across credit delivery models adapted by the Reserve Bank of

India (RBI) and the National Bank for Agriculture and Rural Development (NABARD). It

further examines the spread of credit linkages across different regions and states of India. It

also reviews the participation of commercial banks, regional rural banks, and cooperatives

in the SHG-Bank Linkage Program across different states in India.The analytical section of

the paper is divided in five parts. The first section reviews the spread of self-help group

linkages to banks across three different models that have been adopted by the National Bank

to route credit to SHGs. The second

4. Self-Help Groups: A Keystone of Microfinance in India - Women empowerment &

social security

Author: C.S.Reddy (APMAS,CEO)

Microfinance has evolved over the past quarter century across India into various

operating forms and to a varying degree of success. One such form of microfinance has been the

development of the self-help movement. Based on the concept of ―self-help,‖ small groups of women

have formed into groups of ten to twenty and operate a savings-first business model whereby the

member‘s savings are used to fund loans. The results from these self-help groups (SHGs) are

promising and have become a focus of intense examination as it is proving to be an effective method

5

of poverty reduction. This paper examines the SHG operating model, the state of SHGs today, their

impact on civil society and how they need to be supported going forward. The rise of SHGs and

more formal SHG Federations coupled now with SHG Bank Linkage

1.5 RESEARCH DESIGN

This is a descriptive research, which will be conducted on a sample size of 100

respondents. Following which the analysis has been carried out on the data collected to

understand the various reason for preferring loan from banks to informal system of credit and

awareness regarding SHG.

1.6 RESEARCH INSTRUMENT

Research instrument used is specifically a questionnaire including mostly close-

ended questions which can be coded and hence analyzed for the study and to reveal important

required information. For certain questions face to face interviews were also undertaken.

1.7 SCOPE

The scope of my survey is limitsed to the villages in which Banas dairy has its

collection center.

1.8 SAMPLE SIZE

Sample of 100 customers was taken into study, and their data was collected. Farmers who take

loan form sample size

1.9 SAMPLING TECHNIQUE

To study the project, a judgmental and convenience sampling technique was used.

6

1.10 DATA SOURCES

Primary data

The primary data source was through questionnaire survey and interview with the people

associated to microfinance .to

Secondary data

Various microfinance journals and reports have been referred to along with data available on

internet

1.11 RESEARCH ANALYSIS

The collected data has been edited, coded, tabulated, grouped and organized according

to the requirement of the study. Tool specifically that will be used will be Excel. Analysis will be

done specifically by studying each and every question. Further statistical methods like Chi-

Square, Z-Score, trend analysis and trend forecasting on basis of some parameters will be used in

order to justify the need of information. Also, charts and plots can be used to depict better picture

of information sorted from the survey.

1.12 CLASSIFICATION AND TABULATION OF DATA

The data thus collected were classified according to the categories, counting sheets &

the summary tables were prepared. The resultant tables were one dimensional

1.13 STATISTICAL ANALYSIS OF DATA

Out of the total respondents, the respondents who responded logically were taken into account

while going into statistical details & analysis of data. The tools that have been used for analyzing data &

inference drawing are mainly statistical tools like percentage, averages, etc.

7

1.14 LIMITATIONS

The major limitation faced during the survey was time constraint. Moreover the

people in these villages were not aware about loan due to illiteracy prevailing in these area.

1.15 BENEFICIARIES

The beneficiaries from this internship and survey would be Banas dairy, Banks of

Banaskatha district, Various NGOs and the people in the villages of Banaskatha.

8

CHAPTER 2

INDUSTRY PROFILE

9

2.1 INTRODUCTION

13% of the total production of the milk is contributed by India. The large vegetarian

sector of the India feed upon the dairy products of India.

This part of the industry has helped the Indian economy in better possible ways. Some

of the glaring problems of the economy are dealt with much ease. The unemployment and the

rates of poverty have diminished as this sector has provided ample scope to these fields. The

industry has seen rapid growth in recent years. The best possible technologies are undertaken and

the resources are used in fullest extent so that the sector reaches the booming phase.

India houses the largest livestock in the world. 50% percent of the buffalo and 20 % the

cattle are present in India in respect to world. Moreover the milk and the milk products of India

are highly acclaimed in different parts of the world. It ranks first in producing dairy products in

India. Some of the past reports of the past year found that when the production of milk was 72

million then the demand reached 80million. So the country under the regulatory bodies have

gone far to increase the production of milk and other milk products to higher extent.

The preset production of milk as marked in the year 2009- 2010 is 112mt which follows a

growth rate of 4%. But the recent research confirmed that by 2012-21 the growth rate must

increase to 5.5% where the quantity produces should be 180mt. this is only due to higher the

consumption rate. More over the country is stressing on the milk product industries to increase

their production rate, all the public and the private sector s of milk production are taken into

grant.

The per capita availability of milk is 253grams/day. The government is trying hard to

increase these rates too. Because of the increase in population there arises a need that the milk

production must increase in order to meet the demands of rising poplation.

10

The rate of milk production:

In 1950 the production of milk was 17 million tonnes

In 1996 the production of milk was 70.8 million tonnes

In 1997 the production of milk was 74.3 mT

In the recent years from 2009-2011 the production is 112mt

The Projected rate of production of milk in 2020 would become 240 mT population

However so as to meet the rising demand of the consumer the production is expected to

rise up to 220- 150 mt by 2020.

If the above figures are achieved then India would be able to contribute to 30-35% to

world's milk production.

2.2 INDUSTRY SEGMENTS:

Cheese is growing at 15% per annum

Ice-creams are growing at 15 % per annum

Chocolates this mark as the 4% of the total sweet confectionary consumed by the people

Biscuits- this cover a wide range of production and contribute a huge in the industry

Bread and bakery products share a 37% and a 75% of the industries share.

Fluid milk- the annual growth rate from 2010-2013 is 6.8 %

Some of the other dairy products are like curd, ghee, khoa, powdered milk and soon that is

much in demand in India and is widely consumed.

2.3 ADVANTAGES OF MILK INDUSTRY IN INDIA:

Due to high production of milk the scope of milk processing would also increase

There is a improved purchasing power of the consumer

The transport facilities are easy and are readily available

The manufacture instruments of high quality are coming along

Apart from the cooperative and public milk sectors there are certain upcoming private

sectors

11

There is highly trained and wide recourse of man power

The natural resource of the country is such wide that it gives scope for further widening.

Besides, growth in milk production is likely to continue at the present rate

of 4.4% in the near future. Demand for milk, at current rate of income growth estimated to grow

at 7% per annum. Interestingly, demand for milk is expected to grow steadily over the next two

decades as the low income rural and urban families who have higher expenditure elasticity would

also increase their income due to new economic environment

With the World Trade Organization (WTO) coming into effect, from 01

April 2001 and the imports and exports getting liberalized in the global economy, the dairy

industry, which includes dairy products, faces both an opportunity

12

CHAPTER 3

GUJARAT COOPERATIVE

MILK MARKETING

FEDERATION LTD.

(GCMMF)

13

3.1 HISTORY AND MANAGEMENT

Gujarat Cooperative Milk Marketing Federation Ltd. (GCMMF), is India's largest

food product marketing organisation with annual turnover (2010-11) US$ 2.2 billion. Its daily

milk procurement is approx 12 million lit (peak period) per day from 15,712 village milk

cooperative societies, 17 member unions covering 24 districts, and 3 million milk producer

members.

It is the Apex organisation of the Dairy Cooperatives of Gujarat, popularly known

as 'AMUL', which aims to provide remunerative returns to the farmers and also serve the

interest of consumers by providing quality products which are good value for money. Its success

has not only been emulated in India but serves as a model for rest of the World. It is exclusive

marketing organisation of 'Amul' and 'Sagar' branded products. It operates through 47 Sales

Offices and has a dealer network of 5000 dealers and 10 lakh retailers, one of the largest such

networks in India. Its product range comprises milk, milk powder, health beverages, ghee, butter,

cheese, Pizza cheese, Ice-cream, Paneer, chocolates, and traditional Indian sweets, etc

GCMMF is India's largest exporter of Dairy Products. It has been accorded a "Trading

House" status. Many of our products are available in USA, Gulf Countries, Singapore, The

Philippines, Japan, China and Australia. GCMMF has received the APEDA Award from

Government of India for Excellence in Dairy Product Exports for the last 13 years. For the year

2009-10, GCMMF has been awarded "Golden Trophy' for its outstanding export performance

and contribution in dairy products sector by APEDA.

For its consistent adherence to quality, customer focus and dependability, GCMMF has

received numerous awards and accolades over the years. It received the Rajiv Gandhi National

Quality Award in1999 in Best of All Category. In 2002 GCMMF bagged India's Most Respected

Company Award instituted by Business World. In 2003, it was awarded the The IMC

Ramkrishna Bajaj National Quality Award - 2003 for adopting noteworthy quality management

practices for logistics and procurement. GCMMF is the first and only Indian organisation to win

topmost International Dairy Federation Marketing Award for probiotic ice cream launch in 2007.

14

The Amul brand is not only a product, but also a movement. It is in one way, the

representation of the economic freedom of farmers. It has given farmers the courage to dream.

To hope. To live.

3.2 GCMMF - AN OVERVIEW

Year of Establishment 1973

Members 17 District Cooperative Milk Producers' Unions (13

Members & 4 Nominal Members)

No. of Producer Members 3.03 Million

No. of Village Societies 15,712

Total Milk handling capacity

per day

13.67 Million litres per day

Milk Collection (Total - 2010-

11)

3.45 billion litres

Milk collection (Daily Average

2010-11)

9.2 million litres (peak 12 million)

Milk Drying Capacity 647 Mts. per day

Cattlefeed manufacturing

Capacity

3690 Mts. per day

Sales Turnover -(2010-11) Rs. 9774 Crores (US $2.2 Billion)

15

3.3 MODELS OF AMUL

3.3.1 SUPPLY CHAIN MODEL

16

3.3.2 ORGANIZATIONAL MODEL

The Amul model has helped India to emerge as the largest milk producer in the world.

More than 13 million milk producers pour their milk in 1,28,799 dairy cooperative societies

across the country. Their milk is processed in 176 District Co-operative Unions and marketed by

22 State Marketing Federations, ensuring a better life for millions.

17

CHAPTER 4

COMPANY PROFILE

18

BANAS DAIRY-AN OASIS IN DESSERT

4.1 INTRODUCTION

Banaskantha District Cooperative Milk Producers' Union Limited known as Banas Dairy

is a cooperative organization established in the year 1969 under the Gujarat Co-operative

societies Act 1961 with the support of NDDB as a part of their Operation Flood Program

launched to bring about white revolution in the country.

BANAS manufactures a large number of dairy products under AMUL,

SAGAR and BANAS brands. thier product range includes Amul Pasteurised Milk, Amul longer

Shelf Life Milk, Amul Butter, Amul Ghee, Sagar Ghee, Amulya Powder, Sagar Tea and Coffe

Whitner, Sagar SMP, Amul SMP, Amul Shakti Powder, a wide range of Amul Ice Creams,

Banas Peda, Banas Tea etc. The products of dairy are marketed through Gujarat Cooperative

Milk Marketing Federation, Anand. We also provide a large number of technical inputs to over

1.8 lac farmer households, which are organized through 1200 odd Village level Cooperative

Milk Societies.

19

This is the administrative office at Banas dairy. Moreover Banas dairy along with

the milk collection also provides knowledge regarding the cleanliness of milk and mixing of

water with the milk. There is a milk collection center in each of the villages and one person is

appointed as chairman of the milk collection center from the village itself. They also have 24

hours vet services in which any person from the societies which contribute to the milk

production can ask for vet services and they have emergency mobile vet vans also. Thus Banas

dairy not only collects the milk from each milk center but also provides the skills and method of

increasing the quantity of milk and also the quality of milk.

Banas dairy follows an open door policy as to the complaints and suggestions of the

employees and the societies itself. Moreover the dairy also does social responsibility work. It

has a plant within the campus where it has a water treatment plant in which the waste water

which is removed by the plants in the process of pasteurizing milk and cleaning the vessel is

transferred to this treatment plant which is later on used again to water plants and maintain

garden.

20

4.2 FINANCE AT BANAS DAIRY

Banas also acts as a garunter for the societies who want to take agriculture loans

and therefore facilitates the working of disbursement of micro credit. Banas does all its financial

dealings via Dena bank and Bank of Baroda. These banks are also involved with the dealings of

micro finance and are very active partners of government of Gujarat for micro finance.

Banas dairy has its finance in a very organized manner. The payment to the societies which

provide milk to the dairy is done via banks on every fortnight. Banas has route predefined

covering all the societies which provide milk. In each society they have a dairy in which all the

people fill milk which is then brought to Banas dairy. The following are some of the financial

highlights of Banas dairy for the financial year 2010-2011

Total no of milk societies

contributing milk

1368

Milk production( in thousand

kg)

717663

Milk sales in Rs.

2265.13

Net period

15,20,28,850

General reserve

99769718

NDDB operation flood fund

74955023

21

Banas dairy recently started with the Banas 3 plant which is fully automated and is for

the production of ice cream. It was inaugurated by chief minister Narendra Modi. It is also

planning to development Banas 4 and Banas 5 plants which would also be fully automated. Plant

5 will be for the production of cheese. So the capacity for milk would increase to 150 cr.

Of the milk federation Banas dairy has largest output has far as tetra milk production

is concerned. This milk is exported to various countries like Nepal, Bangladesh. The tetra pack is

most sent to the border countries for the army. The milk power AMULYA is one produced in

huge quantities. Milk power is used in various bakery products and for this reason is consumed

in huge quantities.

22

4.3 PROCESS AND VEHICLE FOR MILK STORAGE

These are the storing vessels for milk. The milk which comes is stored here and then

transferred to the place of pesturizing and t in the palnt as per the requirement. All the palnt have

different requirement as to the quality and quantity of milk. For e.g. for butter the cream needs to

be seprated from milk first and for this the milk via pipes transferred to the butter producing

plant and from there the machines which are installed gets the cream separeted and the low fat

milk is again tranfered to other plant to produce either Amul Kool or paneer.There are laboratory

which on a regular interval test the milk and the contents of milk. The end product i.e. butter of

Amul Kool is also tested and then only sent for loading into the trucks. There is batch

production. There are 4 shifts at Banas Dairy. The production is 24 hours. The workers who are

at the lowest level in factory who work in shifts are paid on daily wages bases.

23

These are the dairy trucks which carry the milk from different collection center to the

dairy. The amount of milk which they bring is generally fixed. There are weighing machines

through which these loaded trucks have to pass through before they wait till the milk is sucked

by the pipes. The routes of these are predefined on which they go for milk collection. Banas is

now expanding to Jaipur also. Entry passes have been provided to each of the trucks.

24

In the above diagram you can see the when the turn of the particular vessel comes there is

a small opening at the end of the vessel from where the milk is sucked by the pipe. This pipe is

connected with the huge storage vessel shown earlier and once the entire vessel is emptied then

the vessel is cleaned via machine before it leaves the area.

There are computers inside the control room which provides the person with all the details

regarding the weight of the truck, the quality of milk and also various details as to the thickness

of the milk and the fat content in the milk whether the milk is of cow or of buffalo etc. so the

milk is transferred according to the plant.

25

4.4 SWOT ANALYSIS OF BANAS DAIRY

STRENGTHS WEAKNESS

Experienced workforce increased amount of diversification

Infrastructure raw material has very short life

Huge production capacity

A good R&D

THREATS OPPURTUNITIES

Local dairy owners and milk producers Huge amount of uncovered market

Decision making authority in the hands of Milk being the basic necessity will be

GCMMF demand forever

Raw material can be covered in many

other forms and has huge exporting

options as India has huge amount of

livestock

26

CHAPTER 5

MICRO FINANCE

27

5.1 INTRODUCTION

India has christened as a developing country with its characteristic demographic unction's

and skewed distributed income structure certainly a rip case for implementing it and so it has

happened albeit, on the national scale.

Microfinance is the provision of financial services to low-income clients or solidarity

lending groups including consumers and the self-employed, who traditionally lack access

to banking and related services.

More broadly, it is a movement whose object is a world in which as many poor and

near-poor households as possible have permanent access to an appropriate range of high quality

financial services, including not just credit but also savings, insurance, and fund transfers. Those

who promote microfinance generally believe that such access will help poor people out

of poverty. The term ―Micro‖ literally means ―small‖. But the task force has not defined any

amount. However as per Micro Credit Special Cell of the Reserve Bank Of India , the

borrowable amount is upto the limit of Rs.25000/- could be considered as micro credit products

and this amount could be gradually increased up to Rs.40000/- over a period of time which

roughly equals to $500 – a standard for South Asia as per international perceptions

Microfinance is a broad category of services, which includes microcredit. Microcredit is

provision of credit services to poor clients. Although microcredit is one of the aspects of

microfinance, critics often attack microcredit while referring to it indiscriminately as either

'microcredit' or 'microfinance'.

Poor people borrow from informal moneylenders and save with informal collectors. They

receive loans and grants from charities. They buy insurance from state-owned companies. They

receive funds transfers through formal or informal remittance networks. It is not easy to

distinguish microfinance from similar activities. It could be claimed that a government that

orders state banks to open deposit accounts for poor consumers, or a moneylender that engages

in usury, or a charity that runs a heifer pool are engaged in microfinance. Ensuring financial

services to poor people is best done by expanding the number of financial institutions available

to them, as well as by strengthening the capacity of those institutions. In recent years there has

also been increasing emphasis on expanding the diversity of institutions, since different

institutions serve different needs. Microfinance presents a series of exciting and acknowledged

28

possibilities for extending market thereby reducing poverty, gender empowerment and

promoting social change.

5.2 PRINCIPLES AT THE G8 SUMMIT

Some principles that summarize a century and a half of development practice

were encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by

the Group of Eight leaders at the G8 Summit on June 10, 2004:

1. Poor people need not just loans but also savings, insurance and money transfer services.

2. Microfinance must be useful to poor households: helping them raise income, build up

assets and/or cushion themselves against external shocks.

3. "Microfinance can pay for itself."Subsidies from donors and government are scarce and

uncertain, and so to reach large numbers of poor people, microfinance must pay for

itself.

4. Microfinance means building permanent local institutions.

5. Microfinance also means integrating the financial needs of poor people into a country's

mainstream financial system.

6. "The job of government is to enable financial services, not to provide them."

7. "Donor funds should complement private capital, not compete with it."

8. "The key bottleneck is the shortage of strong institutions and managers."] Donors should

focus on capacity building.

9. Interest rate ceilings hurt poor people by preventing microfinance institutions from

covering their costs, which chokes off the supply of credit.

10. Microfinance institutions should measure and disclose their performance – both

financially and socially.

29

Microfinance is considered as a tool for socio-economic development, and can be

clearly distinguished from charity. Families who are destitute, or so poor they are unlikely to be

able to generate the cash flow required to repay a loan, should be recipients of charity. Others are

best served by financial institutions.

A small initiative which started in 1976, as experimental lending to poor households in

the village Jobra (Bangladesh) which later came to be known as Garmin Bank is a widely

acclaimed example which bring forth a methodology that brought a paradigm shift breaking the

preoccupation of banking channels thus demonstrating the possibility of eradicating poverty and

having enormous implications.

5.3 VALUE ATTRIBUTES OF MICROFINANCE

First, microfinance is something that is done by the alternative sector – not the

government, and or the commercial sector (later we shall see that there is an ―alternative

commercial sector‖ as well). Therefore by definition, a small loan given by a commission agent

to a small borrower is not seen as microfinance. However when a Non-Governmental

Organization (NGO) gives a similar loan (and on similar interest rates and terms) it is hailed as

microfinance. We should understand this clearly, so that we are able to identify the value

attributes. It is assumed that microfinance is done with a laudable intention and has institutional

as well as non-exploitative connotation. In this case we are unable to define microfinance by the

size and the purpose of the loan.

Second, microfinance is something done exclusively or predominantly with the poor.

Again, the banks do not qualify to be MFOs because they do not exclusively or predominantly

cater to poor. However, to the extent that the banks have got into the business of linking SHGs,

they are considered as providers of finance to MFOs and in some cases promoters of

microfinance, but not as players of microfinance.

Third, microfinance grows out of developmental roots. This is what can be termed as

―alternative commercial sector.‖ This encompasses the first two points – the organisations are

promoted by the alternative sector, and targeting the poor. However the new organizations

growing out of these roots need not necessarily be ―developmental‖ in the form of incorporation.

30

There are MFOs that have been offshoots of NGOs run on commercial lines. There are also

instances where new MFOs are promoted on commercial lines. People who have worked with

NGOs in the past and have ―developmental‖ credentials usually promote such MFOs. The

lendingand related activities done by such MFOs are usually understood to be microfinance.

Very rarely do we find commercial organisations setting up ―microfinance businesses‖.

The other area where microfinance could happen is in the co-operative banking

sector. The cooperative banks have lower entry norms as compared to the mainstream banks.

SEWA bank is one example as to how an NGO was able to promote a co-operative bank to offer

an array of services. However, we do not have many other examples, though this option was

always available to the microfinance sector. One reason why the entire banking option has not

gained popularity is because of the urban focus that the banks might get. While there are several

co-operative societies in the rural areas, banking has been restricted to the urban sector.

However, recently there have been a series of bankruptcies in this sector and therefore it is likely

that there might be regulatory tightening.

5.4 WHY MICROFINANCE?

Subsidies are not the solution to eliminate poverty. More than subsidies poor people

need access to credit and opportunity to exploit their talent. Absence of any recognized

employment and hence absence of collateral make them non bankable, thus reducing the

opportunities to access credit. In developing countries like India, lack of loans from any bank

leaves them with no other option but to borrow money from local moneylenders, who charge

them huge interest rates. To counter this and many such problems, various financial institutions

have come in to existence in the recent years.

The main idea behind microfinance is that poor people, who can provide no

collateral, should have access to some sort of financial services. Microfinance is often considered

one of the most effective and flexible strategies in the fight against global poverty. In many

cases, microfinance institutions are sustainable and the concept can be implemented on the

massive scale necessary to respond to the urgent needs of those living on less than $1 a day, the

31

official poverty line. A lot of microfinance focuses on providing relatively small loans to poor

people who have no access to formal banking services. This provides the poor a platform to start

profit oriented projects or small scale business.

Apart from giving loans, savings are also a very important part of microfinance

services. According to the United Nations, microfinance institutions can be broadly defined as

provider of small-scale financial services such as savings, credit and other basic financial

services to poor and low-income people. The term ―microfinance institution‖ now refers to a

wide range of organizations dedicated to providing these services and includes nongovernmental

organizations, credit unions, co-operatives, private commercial banks, nonbank financial

institutions and parts of State-owned banks. Microfinance is a dynamic field and there is clearly

no best way to deliver services to the poor and hence many delivery models have been developed

over a period of time. Each delivery model has its share of problem and success. In India, various

delivery models have been adopted by microfinance institutions

5.5 MICRO FINANCE IN INDIA

India has one of most extensive banking infrastructures in the world. However, millions

of poor people in India do not have access to basic banking services like savings and credit. In

the mid-1990s, about 70% of India's population lives in rural areas which account for only 30%

of the bank deposits.

About 70% of the rural poor do not have bank accounts and 87% of them do not have

access to credit from banks. In the same period, the share of non-institutional agencies including

traders, money lenders, friends and relatives in the outstanding cash dues of rural households was

36%. In the past, both public and private commercial banks in India perceived rural banking as a

high-risk, high-cost business i.e. a business with high transaction costs and high levels of

uncertainty. Rural borrowers, on their part, felt that banking procedures were cumbersome and

that banks were not very willing to give them credit.

Commenting on the problems faced by the microfinance industry in India, YSP Thorat,

managing director of National Bank for Agriculture and Rural Development (NABARD), and

Graham AN Wright, an international expert in microfinance, wrote, "Poor credit-deposit ratios,

32

unsustainable lending and high-levels of non-performing assets often cripple much of this

infrastructure

In 1954, All India Rural Credit Survey Committee recommended expansion of the

cooperative credit system to cater to the credit needs of the rural poor. The regional rural banks

(RRBs) were incorporated in 1976. By the mid-1970s, the banking sector was operating as a

three-tier system. The first tier consisted of commercial banks, RRBs formed the second tier, and

cooperative banks formed the third tier. About 49% of all scheduled commercial banks operated

from rural areas. In the early 1980s, the Indian government realized the need for microfinance to

provide the rural poor with savings and microcredit services. Loans available through

microcredit schemes were more accessible to the poor people as compared to bank loans. It also

compared favorably with non-institutional money lenders in terms of cost.

In the early 1980s, NABARD study found that though the network of rural bank

branches had been trying to create self employment opportunities by providing bank credit for

over two decades, many poor people remained outside the purview of the formal banking system.

The existing banking policies, procedures and systems including deposit and loan products were

not tailored to the requirements of the poor. They required better access to services and products

rather than subsidized credit. The study concluded that there was a pressing need to improve

access to microfinance. It therefore recommended that alternative policies, systems and

procedures be put in place in order to boost the growth of microfinance in India.

The Reserve Bank of India (RBI) and NABARD were actively involved in spreading

the network of commercial banks in rural areas, especially after nationalization. RBI had made it

compulsory for all private sector banks to open at least 25% of their branches in rural and semi-

urban areas. It had also stipulated that 40% of the net bank credit should be allotted to sectors

categorized as priority sectors, like housing, rural development and agriculture. With these

measures, commercial banks did move into rural areas but the advances given to the poor

remained very low.

To improve the accessibility of the existing banking network to the poor, the Self

Help Group (SHG)7 - Bank Linkage Model was launched in 1992 with a pilot project for

promoting 500 SHGs. The objective of the microfinance initiatives was to facilitate

empowerment of the poor, while pursuing the macroeconomic objective of overall economic

33

growth. In 1995, the RBI set up a working group to study the possibility of linkages between

informal SHGs and banks.

Microfinance sector has traversed a long journey from micro savings to micro credit

and then to micro enterprises and now entered the field of micro insurance, micro remittance and

micro pension. This gradual and evolutionary growth process has given a great opportunity to the

rural poor in India to attain reasonable economic, social and cultural empowerment leading to

better living standards and quality of life for participating households.

Financial institutions continue to play a leading role in the microfinance programme for nearly

two decades now

They have joined hands proactively with the informal channels to give the microfinance

sector the required momentum. During the current year too micro finance has registered an

impressive expansion at the grass root level

5.6 MICROFINANCE IN GUJARAT

On the occasion of the golden jubilee year celebration chief minister Narendra

Modi launched an ambitious campaign by the name MISSION MANGALAM. The objective of

this mission is to organize the poor into Self Help Groups/ Sakhi Mandals, link them with banks

build capacities in them and lead them towards sustainable livelihoods. To implement this

mission, Government of Gujarat formed a company by the name GUJARAT LIVELIHOOD

PROMOTION COMPANY.

Micro finance has developed in Gujarat basically due to the fact that there huge no

of NGOs who volunteer for the same e.g. SEVA and Anandi. Moreover in Gujarat the

government is highly active as far as development of micro finance is concerned. A lot of

schemes and support are being provided by the Government of Gujarat.

34

5.7 NATIONAL BANK FOR AGRICULTURE AND RURAL

DEVELOPMENT (NABARD)

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

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

village industries, handicrafts and other rural crafts. It also has the mandate to support all other

allied economic activities in rural areas, promote integrated and sustainable rural development

and secure prosperity of rural areas. In discharging its role as a facilitator for rural prosperity

NABARD is entrusted with

1. Providing refinance to lending institutions in rural areas

2. Bringing about or promoting institutional development and

3. Evaluating, monitoring and inspecting the client banks

Besides this pivotal role, NABARD also:

• Acts as a coordinator in the operations of rural credit institutions

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

matters relating to rural development

• Offers training and research facilities for banks, cooperatives and organizations working in

the field of rural development

35

• Helps the state governments in reaching their targets of providing assistance to eligible

institutions in agriculture and rural development

• Acts as regulator for cooperative banks and RRBs

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

matters relating to rural development

• Offers training and research facilities for banks, cooperatives and organizations working in

the field of rural development

• Helps the state governments in reaching their targets of providing assistance to eligible

institutions in agriculture and rural development

• Acts as regulator for cooperative banks and RRBs

36

NABARD

TECHNICAL SUPPORT

CREDIT SUPPORT

GROUP LINKAGE

GROUP FORMATION

CORDINATING WITH

PARTNERS

MOTIVATING PARTNERS

INVOVING INSTITUTIONS

INFLUENCING POLICY

ENCOURAGING INOVATIONS

37

CHAPTER 6

MICRO FINANCE MODELS:

38

6.1 MODELS

Microfinance Lending Model 1: Associations

An association is formed by the poor in the target community to offer microfinance

services (micro savings, microcredit, micro-insurance, etc.) to themselves. The association,

which can form on the basis of gender, religion, or political and cultural orientation of its

members, then gathers capital and intermediates between banks, MFIs and its members.

Example: Self Help Groups, SHGs (India)

Microfinance Lending Model 2: Bank Guarantees

A donor or government agency guarantees microloans made by a microfinance/commercial bank

to an individual or group of borrowers. Compulsory deposits by borrowers in such banks are also

included in this model.

Examples: AfriCap Microfinance Fund (Mauritius), Bellwether Microfinance Fund (India), Latin

America Bridge Fund, Microfinance Credit Guarantee Facility (Pakistan)

Microfinance Lending Model 3: Community Banking/ Grameen Bank/ Village Banking

Community Banks/Village Banks are formal versions of ‗associations‘ and are created by

members of a target community who wish to improve their living standards and to generate

employment. By offering microfinance services, these banks seek to develop their communities.

Guarantees are provided by social collateral (peer-pressure) as services are distributed through 5-

member groups where each member‘s eligibility for loans is based on his/her peer‘s

performance.

Examples: Grameen Bank (Bangladesh), MuCoBa (Tanzania)

Microfinance Lending Model 4: Cooperatives

39

Cooperatives are very much like ‗associations and Community Banks‘ except that their

ownership structure does not include the poor. A group of middle or upper class individuals may

form a co-op to offer microfinance services to the poor.

Examples: Co-operative Bank (England), Cooperative Rural Bank of Bulacan (Phillipines)

Microfinance Lending Model 5: Credit Unions

In a credit union, members of a target community gather their money and make loans to one

another at low interest rates. Compared to community banks, credit unions are smaller and non-

profit oriented, charging interest rates that merely allow sustainability.

Example: Unión Progresista Amatitlaneca (Guatemala), Vancity Credit Union (Canada)

Microfinance Lending Model 6: Non-Governmental Organizations (NGOs)

Unlike community-based models, NGOs are ‗external organizations‘ and their activities range

from offering microfinance services (loans, insurance, savings, etc.) to improving credit rating of

the poor, training, education and research. NGOs may also act as intermediaries between the

poor and donor agencies (UN, ADB, World Bank) and operate locally, as well as globally

(through a physical or online presence).

Examples: ACCION International (headquarters in USA), KIVA (Headquarters in USA), Kashf

Foundation (Pakistan)

Microfinance Lending Model 7: For-profit Banks

Commercial Banks, as well as specialized Microfinance Banks offer various financial services to

the poor but the main purpose may be to secure a high return on investment. Unlike other

models, the aim is social development as well as financial progress, beyond institutional

sustainability.

Examples: Bank Compartamos (Mexico), Khushali Bank (Pakistan)

40

Microfinance Lending Model 8: ROSCAs Rotating Savings and Credit Associations

(ROSCAs)

ROSCAs are small groups, typically composed of women, where each member

makes ‗regular cyclical contributions into a common fund‘, which is given entirely to one

member at the start of each cycle (weekly, monthly, quarterly). The benefit of this model is the

matching of a client‘s cashflows with the loan, the ability to structure the deal without interest

rates, and the absence of over-head costs.

Example: Say, a group of 10 women come together in January and pitch in Rs.7 each, making a

total of Rs.70, and this sum is given to Member A for the month. In February, another Rs.70 is

gathered and given to Member B, and the cycle continues for 10 months (10 members). No

interest is charged, and social collateral ensure the money is returned.

Government with the help of NABARD (National Bank for Agriculture and

Rural Development) has through various tests and survey found out that the best model is SHGs

i.e. self help group. Dr. Suran (General Manager NABARD Ahmedabad) also suggested that

SHGs has better reach and is more promising in terms of credit and disbursement of finance.

41

6.2 SHG BANK LINKAGE MODEL- THE MOST SUCCESSFUL MODEL

The SHG-bank linkage program is gaining increasing acceptance amongst NGO

community and bankers. The NABARD envisions covering one third of the rural population in

India by establishing one million SHGs. The government of India has already made

announcements for linking 200,000 SHGs by year 2002–03. The task force on microfinance sees

the SHG-bank linkage program emerging as a major way of banking with the poor in coming

years. It is estimated that at least 25,000 bank branches, 4000 NGOs, and 2000 federations of

SHGs involving 0.10 million personnel of these institutions will be involved in scaling up

microfinance to this magnitude. Under the SHG-bank linkage program, NGOs and banks interact

with the poor, especially women, to form small homogenous groups. These small groups are

encouraged to meet frequently and collect small thrift amounts from their members and are

taught simple accounting methods to enable them to maintain their accounts.

Although individually these poor could never have enough savings to open a bank

account, the pooled savings enable them to open a formal bank account in the name of the group.

This is the first step in establishing links with the formal banking system. Groups then, meet

often and use the pooled thrift to impart small loans to members for meeting their small emergent

needs. This saves them from usurious debt traps and thus begins their empowerment through

group dynamics, decision-making, and funds management.

Gradually the pooled thrift grows and soon they are ready to receive external funds

in multiples of their group savings. Bank loans enable the group members to undertake income

generating activities. There are several advantages of the group lending setup. For one, rather

than a bank, borrowers themselves undertake the task of credit evaluation; this creates a peer

screening effect and reduces the transaction costs as community members have much better

information than banks Two, there is the peer monitoring effect that induces group members to

use their loans in productive ways have developed models that illustrate the working of the peer

monitoring effect. Three, the desire to preserve valuable social ties induces borrowers to spend

extra effort if necessary to secure timely payments. Social ties are valuable because they allow

42

members to borrow in the future and provide business connections. Moreover, a very important

feature of group lending is the collateral effect.

NABARD led SHG bank linkage model is widely accepted as one of the largest and

successful micro finance model in the world. There are three kinds of model are being emerged

under SHG linkage programme. They are:

Model-1: SHGs are financed, guided and promoted by banks.

Model-2: SHGs are promoted by Non Government Organizations/Government agencies but

financed by bank.

Model-3: SHGs are promoted by NGOs but financed through financial intermediaries

like NGOs or by any formal agencies.

Bank‘s losses incurred due to unsuccessful projects are generally reduced as

successful entrepreneurs within each group cover part of their losses. Through the SHG-bank

linkage program the RBI and NABARD have tried to promote relationship banking, i.e.,

improving the existing relationship between the poor and bankers with the social intermediation

of NGOs. The Indian model is predominantly a ―Linkage Model,‖ which draws upon the

strengths of various partners: NGOs, who are best in mobilizing the poor and building their

capacities, and bankers, whose financial strength is financing. As compared to other countries

where parallel model of lending to the poor is predominant, the Indian linkage model tries to use

the existing formal financial network to increase the outreach to the poor, while ensuring the

necessary flexibility of operations for both bankers and the poor.

Various credit delivery innovations such as Grameen Bank Replications, NGO

networking, credit unions, and SHG federations have been encouraged by NABARD for

increasing the outreach. It has also instituted a Micro Credit Innovations Department for

planning, propagating, and facilitating the microfinance movement. Given the network of

43

institutional structures supporting the microfinance movement, the SHG-bank linkage program

has been increasing its outreach substantially. Together the commercial banks, cooperatives, and

regional rural banks had succeeded in linking 114,775 SHGs by March 2000. With an average

size of 20 members per group, the program had reached over 2.2 million households. A large

majority (85%) of the SHGs linked to banks were essentially women‘s groups. The new

microfinance approach has benefited women largely and has emerged prominently as a women‘s

program in rural

The NABARD, Small Industrial Development Bank of India, Housing Urban

Development Corporation, and Rastriya Mahila Kosh are some of the institutions that operate as

the wholesale financers of microfinance. As ―bulk financiers,‖ they leverage funds from the

government, market, donors, and lenders for lending to its partners and NGOs. Reserve Bank of

India and the government lend support to the SHG-bank linkage program through policy

formulation and regulation while the NABARD acts as a facilitator and a refinancing agency.

The program at the grass root level is executed through a network of commercial banks, regional

rural bank (RRBs), district central cooperative banks (DCCBs), and primary agricultural credit

societies (PACS). The program has been gradually gathering momentum. A review of the SHG

credit linkages by these institutions indicated that commercial banks had established the

maximum linkages. The RRBs had a sizable coverage but the performance of cooperatives in the

program was minimal. The average loan per SHG also followed a similar pattern.

Through this program, the Reserve Bank of India and NABARD have tried to promote

relationship banking, i.e., ―Improving the existing relationship between the poor and the bankers

with the social intermediation of the NGOs.‖ The SHG-bank linkage program in India is rapidly

expanding its outreach under the pioneering initiative of NABARD, the monitoring and

supervision of RBI, and the promotional policies of the government of India. At the grassroot

level the program is being implemented by the commercial banks, cooperatives, and regional

rural banks, with government agencies like DRDA/DWDA acting as facilitators.

44

With coverage of two-thirds of SHG credit linkages, the linkage program was

predominant in the Andhra Pradesh, Tamil Nadu, Karnataka, and Uttar Pradesh states of India.

Further, among these four states the program was heavily concentrated in Andhra Pradesh, where

40% of credit linkages were established. The acceptability of the program was relatively higher

in southern India, because the savings and the credit movement was launched here. Some of the

other contributory factors were large coverage of DWACRA groups and the operation of Swarna

Jayanti Swarojgar Yojna Program and the presence of leading MFIs. Kerala, Maharashtra,

Orissa, West Bengal, Gujarat, Madhya Pradesh, Rajasthan, and Bihar together had 23.6% SHG

linkages, while the remaining states and union territories had only 1.47% SHG credit linkages.

Northeastern India and Jammu and Kashmir need special attention and action plans

because of the complexities prevalent in the regional, political, economical, and human

conditions. In Haryana and Punjab the pro poor program had few takers. The major reasons

identified for the spatial coverage of the program in some states were a lack of concentrated

efforts by bankers; the absence of large sized NGOs operating as MFIs.

45

6.3 SOME HIGHLIGHTS OF SHG BANK LINKAGE PROGRAM 2010

Physical

Total number of SHGs savings linked with banks : 69.53 lakh

Out of total [of which] exclusive Women SHGs : 53.10 lakh

Out of total [of which] – SGSY SHGs : 16.94 lakh

Total number of SHGs credit linked during 2009-10 : 15.87 lakh

Out of total [of which] exclusive Women SHGs credit linked : 12.94 lakh

Out of total [of which]-SGSY SHGs credit linked : 2.67 lakh

Total number of SHGs having loans outstanding as on 31 March 2010 : 48.51 lakh

Of which exclusive Women SHGs : 38.98 lakh

Of which-SGSY SHGs : 12.45 lakh

Estimated number of of families covered upto 31 March 2010 : 97 million

Financial

Total savings amount of SHGs with banks as on 31 March 2010 : Rs 6198.71 crore

Out of total savings of exclusive Women SHGs : Rs 4498.66 crore

Out of total savings of SGSY SHGs : Rs 1292.62 crore

Total amount of loans disbursed to SHGs during 2009-10 : Rs 14453.30 crore

Out of total loans disbursed to Women SHGs : Rs 12429.37 crore

Out of total loans disbursed to SGSY SHGs : Rs 2198.00 crore

Total amount of loans outstanding against SHGs as on 31 March 2010 : Rs 28038.28 crore

Out of total loans o/s against Women SHGs : Rs 23030.36 crore

Out of total loans o/s against SGSY SHGs : Rs 6251.08 crore

Average loan amount outstanding per SHG as on March 2010 : Rs 57795

Average loan amount outstanding per member as on 31 March 2010 : Rs 4128

46

6.4 PREFACE OF STATUS OF MICRO FINANCE IN INDIA 2010 –

NABARD REPORT

The Self Help Group (SHG)-Bank Linkage Programme, in the past eighteen years, has

become a well known tool for bankers, developmental agencies and even for corporate houses.

SHGs, in many ways, have gone beyond the means of delivering the financial services as a

channel and turned out to be focal point for purveying various services to the poor.

The programme, over a period, has become the common vehicle in the development

process, converging important development programmes. With the small beginning as Pilot

Programme launched by NABARD by linking 255 SHGs with banks in 1992, the programme

has reached to linking of 69.5 lakh saving-linked SHGs and 48.5 lakh credit-linked SHGs and

thus about 9.7 crore households are covered under the programme, envisaging synthesis of

formal financial system and informal sector.

This booklet presents the consolidated data obtained from the banks along with

preliminary analysis of the various trends and progress under microfinance sector under the two

models viz., SHG – Bank Linkage model and MFI – Bank Linkage model. The data furnished by

the banks have been analysed on a region-wise, state-wise, agency-wise, bank-wise and also for

SHGs

exclusively under Swarnajayanti Gram Swarojgar Yojana and exclusive women SHGs data in

the booklet.

The trend in submitting the Management Information System by banks has shown

improvement. This year all 27 Public Sector Commercial Banks, 19 private sector Commercial

Banks, 81 Regional Rural Banks and 318 Co-operative Banks have submitted the MIS. We thank

all the banks for furnishing the data and expected that in the coming years all the remaining

banks will co-operate in timely and accurate submission of data to us.

The major support provided by NABARD under Micro Finance Development and Equity

Fund relates to promotion and nurturing of SHGs by Self Help Promoting Institutions and

47

training and capacity building of the stakeholders in the Sector. NABARD is also experimenting

innovative projects for further developing the microfinance through Joint Liability Groups.

6.5 SHG BANK LINKAGE MODEL- STATISTICS

Source: Report on status of micro finance in India, NABARD

PARTICULARS

2007-2008

2009-10

No of

SHGs

Amount

(crores)

No of

SHGs

Amount

(crores)

Savings of SHGs with Banks as on 31st

March

Total SHGS

5009794

3885.39

6121147

5545.62

Out of which SGSY

1203070

809.51

1505581

1563.38

Bank loan disbursed to SHGs during the year

Total SHGS

1227770

8849.26

1609586

12253.51

Out of which SGSY

246649

1857.74

264653

2015.22

48

6.6 STUCTURE OF MICRO FINANCE INTITUTIONS IN INDIA

MICRO FINANCE INSTITUTIONS

REGULATED BANKS

COMMERCIAL BANK

GRAMEEN BANKS

COOPERATIVE BANKS

URBAN COOPERATIVE

BANKS

MFI (SPECIAL MICRO FINANCE

INTITUTIONS)

SOCIETY

TRUSTS

NBFC

SEC 25

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Here in the diagram we can see that the banks which are regulated are governed by RBI

under the RBI act and bank act. These institutions are focused on the development and regulation

of overall micro finance and not only just the micro credit part. They also have the pooling of

savings and also see to the transfer of funds and insurance part of micro finance.

According to the survey carried out by NABARD in1981-82 it was found that only

38% of the rural population was into the formal financial banking system and the rest of them

were indulged into the informal financial system which included the landlords, tehsildars,

zamindaars and the cream crowd of the society who was rich and landed money to the tenants

and the poor class of the society at very high rate of interest and collaterals.

MFIs are basically into the credit giving part. They generally are established for micro

credit only and not all other micro finance areas like savings or funds transfer. But recently they

have started pooling the savings only but all the institutions are not allow to save and transfer

funds only some AAA+

( graded by RBI) are allowed to save 1.5 times their net worth.

Out of the four sub institutes Society, Trusts and Sec 25 have around 10% share in the

micro credit part and they are not for profit. Even if they incur profit they cannot distribute

amongst the members. They only can plough back their profits. Whereas NBFC has 90% share

in micro finance and can go for savings also. They can distribute the profit amongst the

members. BANAS DAIRY stands as guarantor for the societies which provide milk to Banas

Dairy.

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Chapter 7

MICRO FINANCE PRODUCTS

51

7.1 MICRO FINANCE PRODUCTS

MICROFINANCE PRODUCTS

INDIVIDUAL

SELF HELP GROUP (SHG)

JOINT LAIBILITY GROUP (JLG)

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7.2 SELF HELP GROUP

An SHG is formed by an initial set of members (generally between 10 to 20 as

greater than 20 comes under the companies act) and the group remains constant. (Initial

membership fees are ignored; they make little difference to the model output.) Each member

saves a specified amount with the SHG. The SHG pays interest on this amount. The members‘

saving should desirably be regular, but in practice it is often irregular. All members may save in

a given month (or there may be a shortfall in the individual saving quantum). A loan cycle

represents the repayment period of a loan to members made by the SHG. The model accepts loan

cycles ranging from 1 to 24 months.

The SHG accumulates savings over the first loan cycle and maintains this with the

MFIs. Thereafter, the SHG lends a fraction of the available funds to members over several loan

cycles (referred to as the self-cycle phase). The balance is saved with the MFI. The loan to

members is repayable in monthly installments over the loan cycle period. Interest is paid

monthly over the loan cycle. At the end of the self-cycle phase, the SHG raises funds from the

MCI and lends a fraction of the total available funds (member savings, surplus retained, and

borrowing from MFI) to members. The balance is saved with the MFI. The loan from the MCI

can be back-to-back (i.e., identical in tenor to the SHG loan to members), or range for periods

from 1 to 24 months.

The SHG incurs an annual operating cost expressed as a fraction of the common fund

(member savings plus accumulated operating surplus) The SHG makes annual profits (losses)

that add to (reduce) the accumulated surplus. The members are generally free to pick their group

depending upon their affinity with the other potential members. This reduces the scope of any

mutual conflict, making it easy for the NGO supporter to build the group in to a strong social and

financial institution. Once the SHG is formed, the NGO supporting it builds a high level system

to follow that helps the SHG to be sustainable. The group members meet regularly (once in a

week) and carry out their financial transactions. The group mobilizes savings among its members

only and provides need based loans to the members only (based on the funds created by savings).

The rules and norms pertaining to finance or other matters are made by the group. The internal

transactions are strengthened first, and after that, the NGO supporting the group links them to

banks for more financial assistance There are many disadvantages of SHG models and they have

53

been discussed in literature, a lot. Despite that fact, the advantages of the SHG have

outnumbered the disadvantages and have made the SHGs as the most popular delivery model for

microfinance in India. We can gauge the popularity from the following simple fact that even the

government programs have SHG as the core of their strategies.

Design features of SHGs

Enables exclusion of rich

Saving first and credit later

Intra group appraisal systems and prioritization:

Credit rationing

Shorter repayment terms

Market rates of interest Progressive lending

Self selection

Focus on women

Federated Self Help Group Model:

Self Help Groups have been very successful in empowering women by providing

direct and indirect benefits to them. However, SHGs are small in size (usually 10 – 15 members)

and are limited in the types of financial services they can provide. Since Self Help Groups are a

widely successful delivery model a need arises to scale them up without compromising with the

success. The Federated Self Help Group model is one such way to scale up the previous model.

Federation of SHGs bring together several SHGs. Compared to a single SHG, federation of

SHGs have more than 1000 members. In Federated SHG model, there is a three tier structure –

54

the basic unit is the SHG, the middle tier is a cluster and the topmost unit is an apex body, which

represents the entire SHG. At the cluster level, each SHG is represented by two of its members.

The representatives of each SHG meet regularly. Information about the groups to the

apex body and vice versa is given by the cluster unit. The apex body usually made up of 10 – 15

members and they form the link between the SHGs and the NGO supporting them. With the help

of federations, an NGO with limited resources can have an impact on a large number of people.

Few notable examples of Federated Self Help Group model are PRADAN, Chaitanya, and

SEWA.

Other NGOs also act as financial intermediaries by borrowing from NABARD or

elsewhere and on-lending to SHGs, either because they aim to become MFIs, or because this is

often the only way by which the groups could access finance, because many bankers refused to

lend to SHGs directly, or even to open savings accounts for them. The financial margin on this

business is however insufficient to cover more than a small part of the transaction costs.

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7.2.1 CALCULATION FOR CASH CREDIT LIMIT

STEP 1:

Calculate the estimated amount of savings at the end of 3 years. The amount saved per month by

the group is multiplied with 36 (months)

e.g. if in a 10 member group, each member is saving Rs.50/- per month, then the total amount

saved by the group per month is Rs.500/- this amount has to be saved by the group at the end of

3 years.

Rs.500/- p.m. * 36 months = Rs.18000/-

STEP 2:

Addition of the revolving fund to calculate estimated corpus amount

Add the revolving fund availed by the group with the amount calculated as estimated savings at

the end of 3 years and calculate the total estimated total corpus

e.g. for the above group if the group avails Rs.5000/- as revolving fund from the state

government , then add this amount to Rs. 18000/- calculated as above

Rs.18000/- + Rs.5000/- = Rs 23000

STEP 3:

Final calculation of cash credit limit

The group will be provided 4 times the estimated total corpus at the end of 3 years as cash credit

limit.

e.g. for the above example, the group should be given 4 times the estimated total corpus which is

Rs..23000/- which would be as follows

Rs 23000/- * 4 = Rs. 92000/-

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7.3 JOINT LIABILITY GROUP (JLGS)

SHGs were successful in providing financial service from the formal banking sector

to the poor. However the issue of linking small farmer Tenant farmers/ oral lessees, share

coppers and the rural nonfarm entrepreneurs with the formal banking sector was a concern.

NABARD came up with the concept of JLGs. It started on a pilot basis in 8 states of India. It

proved to be a very successful way of enhancing people‘s capability to take more credit formally.

JLG is an informal group of preferably 4 to 10 individuals but can be upto 20

members as in the case of SHG. The JLG members would offer a joint undertaking for bank

loans. The JLG members are expected to engage in similar type of economic activities crop

production. JLGs are formed primarily considering the tenant farmers and small farmers

cultivating land without possessing title of their land.

Such farmers do not have any collateral which h they can offer to the bank from

which they take loans so joint liability acts as collaterals. The main aim for any banks would be

to reduce two things

1. Transaction costs

2. Risk

When small loans are given to many people the transaction cost become very high

for the bank as it has to keep record for the repayment schedule, the interest calculation,

disbursement etc. so when loan is taken in group on a whole a big amount is given to a single

group which then the group internally decided who uses how many each group member will use

and for what propose that is not the concern of the bank so bank at last handle a small no of

transaction leading to reduction in the costs. Risk also decreases as there is a group liable for the

repayment of the amount. If any one member does not repay it becomes liability for the entire

group to repay the amount to the bank.

FORMATION OF JLGs:

Banks may initially form JLGs by using their own staff wherever feasible. Banks may also

engage business facilitators like NGOs and other individual rural volunteers to assist banks in

promoting the concept and formation of groups.

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SAVINGS BY JLGs:

The JLG is intended primarily to be a credit group. Therefore savings by JLG members is

voluntary and not compulsory as in the case of SHG. All the JLG may be encouraged to open an

individual ―no frills‖ account. However, if the JLG chooses to undertake savings as well as credit

operations through the group mechanism, such groups should open a savings account in the

name of JLG with atleast two members being authorized to operate the account on behalf of the

group.

JLG MODELS:

Banks can finance JLG adopting any one of the following:

Model –A

Financing individuals in a group: The group would be eligible for accessing separate individual

loans from the financing bank. All members would jointly execute one inter-se document

(making each one jointly liable for repayment of all loans taken by all the individuals in the

group). The financing bank could assess the credit requirement depending on the activities being

undertaken and credit absorption capacity of the individual. However there has to be mutual

agreement and consensus among all members about the amount of individual debt liability that

will be created.

Model-B

Financing the group: The JLG would consist preferably of 4 to 10 individuals and function as

one borrowing unit. The group would be eligible for assessing one loan, which could be

combined credit requirement of all its members. In case of crop loan, the credit assessment of the

group could be based on crop/s and the available cultivable area by each member of the JLG. All

members would jointly execute the document and own the debt liability jointly and severally.

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7.4 DIFFERENCE BETWEEN SHG AND JLG

People generally have a notion that self help group is an institute for micro

credit but in actual sense it is the products of micro finance. The basic difference between SHG

and JLG is that people who form SHG are very poor and unbanked whereas people of JHG are

of mid segment and not very poor and are banked also. The basic purpose for which both the

products are availed is also different. SHG is credit for consumption where as JLGs are formed

because it becomes quite tedious and risky for bank to give credit to each small individual,

instead when a group is formed where in people take mutual guarantee for repayment on each

others‘ behalf makes it easy and lower for banks, this is why JLGs are formed. SHG is in a group

of 10-20 people where as JLG is in group of 5-7 people. No collaterals are required in SHG

where as JLG has mutual guarantee which acts as a collateral. JLG provides only for credit

product but SHG has savings lead credit products i.e. first you save only then can you get credit.

59

Chapter 8

MICROFINANCE LOOPHOLES

and problems

60

8.1 INTRODUCTION

source:microfinance blog, 30df.org

Upper class Poor (earning less than $4-5) who can during emergency spend money on health care and formal

education

Poor (earning less than $2 a day) who cannot afford to spend money on health care and formal education

Ultra poor (earning less than $1 a day) who don't mind not living.

Thus from the above graph we can see that microfinance has been working but not for

the purpose for which it was intended. Only 5% of the ultra poor people have been helped with

microfinance. This is the crowd which is into committing suicide. This mostly includes farmers

who take loan under microfinance but are unaware of the consequences of the non repayment,

which leads to the fact that there land is being hypothecated and leaving them only with the

option of committing suicide.

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8.2 LOOPHOLES

1. Technology related hurdles such as high costs involved in small loan transactions for

microfinance providers.

Most of the times the rural population in not in the light of the technology being

used for various transaction so either the technology which could be easy understood by the

rural crowd is to be used or they need to be trained as to how the new technology id to be

used. Moreover the transactions which are undertaken under the micro finance are very

small that spending for each transaction becomes very costly for the bank.

2. Lack of customized solution/ microfinance models for the poor.

Government of India has centralizes plans for the entire nations microfinance

which is then customized by the state government but then each village has a different

mentality n financial capability which needs to be catered to. But the survey also depicts

that the demand to each rural sector and village has not been catered to. There is huge

chunk of crowd which does not avail the facility of micro credit just because the scheme is

not proper or suitable to them. In normal banking there are many alternatives available to

the general public but in micro finance very few alternatives are available only from those

the people need to choose the credit schemes.

3. Difficulty in measuring the social performance of MFIs.

There are no special instruments for measuring the progress or output of

microfinance. Various banks and institutions have their own models and criterion on

which they measure the performance of their microfinance. But there is no specific fixed

on which the effectiveness or the outcome can be measured. No proper rating is done for

MFIs.

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4. High interest rate of loan made to the poor.

Microfinance institutions walk a thin line as they offer financial services to the

poor at high costs. While high interest rates have been justified in many ways, there are

now accusations about microfinance providers using aggressive loan recovery tactics that

pushes clients to commit suicides (crisis in India). Furthermore, the recent wave

of commercialization of microfinance has led many to question the real motive of

practitioners.

5. Political Risk:

The recent microfinance crisis in India is said to be politically motivated as the

governments owns a rival microfinance institution in the same province where suicides

have soared amongst microfinance clients. More over if the state government is not active

as to the development and functioning of MFIs; the state loses a lot of opportunities for the

rural development. Political support is very much important for upliftment and successful

implementation of micro finance schemes.

6. Lack of understanding consequences of non repayment

Most of the farmers who take microcredit are not aware of the entire structures of

credit or banks do not clarify clearly what would be the consequences of non repayment. It is

for this reason that there is huge non repayment and in the end leading to suicides in India.

This has lead to bad name of micro credit.

7. Purpose

Banks have to give certain part of their finance in the microfinance sector. It is for

this reason they give loans very easily on a frequent basis. When people get loans so easily

they are not using it for the very purpose for which they borrow instead they use for non

productive purpose. E.g. they borrow loan for the purpose of irrigation but instead they use it

for the marriage of their children or for the renovation of their house. Thus the objective of

fulfillment of micro finance is not achieved.

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We would now have a look at what was the purpose of microfinance and microcredit and to what

extend is it fulfilled. After the survey the following outcomes have been underlined.

INTENT REALITY

Providing micro credit to Poor as well as

Ultra Poor

Due to MFI regulation, government rules

and other factors such as access to

commercial banks, ultra poor (who probably

need microfinance the most) are getting

ignored

Engaging poor in the growth of the country

Sure did poor and middle class get benefited

through microfinance, but question still

remains - when will the ultra poor and

unreached section will receive the glorified

microcredit

While microfinance works well for the

upper poor and poor sections of society, the

ultra poor sections of society need much

more than finances.

Even though the realization about under-

served ultra poor is there, but very few

NBFC (Non Banking Financial

Corporations) MFI works with such section

of the society. This behavior is attributed to

the focus of MFIs towards sustainability and

profit.

Ideally, Microfinance's goal should be to

produce social capital.

In reality, Microfinance is being

commercialized in India.

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8.3 PROBLEMS

Although there have been various successful stories about microfinance institutions helping the

poor, they face with many problems. The problems can be solved on many occasions or

sometimes cannot be avoided. We discuss the problems MFIs face under the following broad

categories.

1. Ethical Reasons:

Microfinance Institutions can be often viewed as a profit making organization. The

desire to make MFIs an industry, commercialize micro-lending or enable them to be a profit

making institutions should not distract them from one important aspect for which they are

formed in the first place: social service by enabling poor to work on profit making projects or

small businesses. Many a times, the lack of this aspect can lead the microfinance institutions to

behave similar to the local moneylenders. Furthermore, the important point of corruption cannot

be neglected. Many MFIs in India or elsewhere in world suffer from corruption at various levels:

corruption in the MFI itself, corruption in the MicroEnterprises (MEs) these MFIs support or

corrupt channels, officials or individual service providers.

An example of a group based MFI suffering from corrupt channel once is The Bridge

Foundation (TBF). Located in Bangalore and Chennai in India, TBF serves poor entrepreneurs in

south eastern India. Initially, TBF reliedon local pastors to encourage people to take loan from

them. The pastors were appointed as the lender. The intention of TBF was to provide the poor

members of society with loan using pastors‘ knowledge of the local area and ―goodwill‖. It

turned out that the pastors were more eager to raise the income of their flock in order to increase

their salaries. Furthermore, some of the pastors used their ties with TBF as the base to boast their

financial status and coax beleaguered Hindus in to their congregations. Another reason of failure

has been lack of motivation. MFIs thrive on better economical conditions and an economic down

turn can incur heavy loss on them. In such adverse situations, MFIs generally lose man power

too. In Tanzania, during economic down turn the MFIs perform poorly because of lack of

motivation, resulting in below par loan repayment.

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2. Managerial Reasons:

One of the major problems which the MFIs can resolve is managerial problems.

They tend to be fairly straightforward and the solutions to them are also pretty straightforward.

Managerial problems are a major factor and they have more effects than any other problems

discussed. In developing countries like India this becomes a huge problem because of lack of

management training.One of the major factors attributed to failures of MFIs is poor record

keeping. In India, generally the records are not online and hence it becomes extremely difficult

to search for a record which is a few years old. Furthermore, in many cases, like SHGs in Andhra

Pradesh, the records are kept poorly. For example, somewhat 40% of SHGs have a weak record

which includes both NGO and bank promoted groups and government promoted groups. The

former appears surprising considering the fact that bank records are generally well maintained in

India. One of the factors which led to poor record keeping is the relative complexity in record

keeping. For office bearers and group members, record keeping seems like a waste of time.

Lack of record keeping can have its share of problems. One of the problems can be an

increase in number of defaulters. We will focus on SHGs in Andhra Pradesh where recovery of

loans is not properly handled. Every member of an SHG has to repay the loan regularly

(monthly) and studies show that more than 25% of borrowers are over a year due. The lack of

management training does not help the matter either. Sometimes poor monitoring also leads to

increased number of defaulters. For example, People‘s Bank of Ireland, formed on the same

model as the People‘s Bank of Germany failed miserably and hence was shut down. One of the

reasons of the failure of People‘s Bank of Ireland was poor monitoring by the officials and the

reluctance to follow the norms to ensure timely repayments of loans. Another form of managerial

problems is the lack of management capacity. In many cases, a MFI field officer has to assume

different roles for which proper expert is needed. Since, MFIs work with the poor they need to

have experts in handling social and household problems. In India or its neighbouring countries,

such experts are more needed because of widely present social and gender discrimination.

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3. Legal Reasons:

Microfinance Institutions can be viewed as a social organization helping the poor and a

profit organization too. In many countries, profit organizations are registered under different set

of acts and non-profit organizations come under different legislations. These legalities sometimes

create complications. For example, TBF had to face some problems like how to lend loans as a

charitable organization in India. In India, TBF cannot register as a bank given the enormous

barriers for becoming one. Instead, TBF resorted to register itself as a charitable foundation and

trust, which enabled it to receive funds internationally and domestically for development

purposes. But as a charitable foundation, TBF was not allowed to indulge in to money lending

and hence all loans distributed by them were entered as ―aid‖. The repayments were entered as

―donations‖ with 8% service fee. This in an idealized situation is good but TBF still has to face

chronic defaulters who don‘t repay loans. The usual tactics in this case entail a combination of

personal persuasion and religious obligations. The above case was a lack of a legislation

especially serving microfinance institutions. There are some random acts which prohibit the

growth of microfinance institutions and delimit their impact.

For example, in India, Regional Rural Bank Act does not permit private share holding

in any RRBs, and the Co-operative Acts of all states do not permit district level cooperative

banks to be set up by any sector except the government sector. The result of these two laws

together is that rural credit has been a monopoly of state-owned institutions. Furthermore, there

are certain laws that don‘t affect the MFIs directly but indirectly

4. ―Unfortunate‖ Reasons:

Sometimes Microfinance Institutions have to face problems which cannot be

resolved. These problems arise in cases when something ―unfortunate‖ happens to a person or a

community. A flood or famine can kill the hopes of farmers to pay their loans. Grameen Bank

operates in different regions of Bangladesh and overall the loan repayment record is impressive.

But this varies from region to region and time to time. Districts like Tangail have a 100% loan

repayment records and districts like Rangpur have 30% record in 1996. The reason for such bad

records in Rangpur district is nature. It is repeatedly savaged by flood and major cyclones. Since

the loan repayment time was regular, the people in Rangpur district were unable to pay their debt

67

in time. Under these circumstances, tension runs high between Grameen Bank officials and the

community and requires the most skilled members of Grameen Bank.

Personal plights are another reason which might affect the MFI based on Grameen

Bank model. Since its inceptions, Grameen Bank provided loan to one member of a group of five

and loan repayment was due to peer pressure. Since 2002, Grameen Bank has been working on a

slight variation of the original model. But before 2002, some members have to face problems due

to the original model and their personal plights.

5. Other Reasons:

There are various other factors for the failure of MFI. They can be listed as follows:

Lack of vision is a factor which pushes new MFIs in to extinctions. Formation of an MFI

requires considerable research and should have a clear cut vision of why they are operating and

the clients they will be serving. Sadly, due to lack of research MFIs set up by NGOs fail to scale

up.

MFIs need trained staff to operate. In several cases, drop out of trained staff is very high which

reduces the reach of an MFI. Furthermore, the ―dropping out‖ rate is more than the ―coming in‖

rate. Grameen Bank is an example where trained staffs drop out because of the amount of

workload they have to bear.

MFIs serve society but they are also a profit-making institution. In many cases, MFIs achieve a

lot of success in their programs in initial period, but they fail to maintain the same record in the

long run because of lack of proper commercial orientation, thus making them unsustainable.

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CHAPTER 9

CHALLENGES IN

MICROFINANCE

69

9.1 CHALLENGES IN MICROFINANCE- FINANCIAL INCLUSION

“Inclusive growth‖ is one of the important objectives of eleventh five year plan in

India. Inclusion of each and every section of the society in the process of economic development

and achieving growth with equity is the basic objective of ―inclusive growth‖. Financial

inclusion is conceived as a major driving force to achieve self sustained inclusive economic

growth. Financial inclusion can be defined as the process of ensuring access to financial services

and timely availability of adequate credit where needed by vulnerable Groups such as weaker

sections and low income groups at an affordable cost (Report of the Committee on Financial

Inclusion in India, 2008). Achieving financial inclusion through formal banking system is a

cumbersome task.

Financial inclusion is the delivery of financial services at affordable costs to sections

of disadvantaged and low income segments of society. Unrestrained access to public goods and

services is the sine qua non of an open and efficient society. It is argued that as banking services

are in the nature of public good, it is essential that availability of banking and payment services

to the entire population without discrimination is the prime objective of public policy. The term

"financial inclusion" has gained importance since the early 2000s, and is a result of findings

about financial exclusion and its direct correlation to poverty. Financial inclusion is now a

common objective for many central banks among the developing nations.

The Reserve Bank permitted commercial banks to make use of the services of non-

governmental organizations (NGOs/SHGs), micro-finance institutions and other civil society

organizations as intermediaries for providing financial and banking services. These

intermediaries could be used as business facilitators (BF) or business correspondents (BC) by

commercial banks. The main reason for financial exclusion is the lack of a regular or substantial

income. In most of the cases people with low income do not qualify for a loan. The proximity of

the financial service is another fact. The loss is not only the transportation cost but also the loss

of daily wages for a low income individual. Most of the excluded consumers are not aware of the

bank‘s products, which are beneficial for them. Getting money for their financial requirements

from a local money lender is easier than getting a loan from the bank. Most of the banks need

collateral for their loans. It is very difficult for a low income individual to find collateral for a

70

bank loan. Moreover, banks give more importance to meeting their financial targets. So they

focus on larger accounts. It is not profitable for banks to provide small loans and make a profit.

Major Three Aspects of Financial Inclusion' Make people to

Access financial markets

Access credit markets

Learn financial matters (financial education)

9.2 RELATIONSHIP BETWEEN FINANCIAL INCLUSION AND

DEVELOPMENT INDICATORS

Economic growth follows financial inclusion. In order to achieve the objective of growth

with equity, it is imperative that infrastructure is developed with financial inclusion.

savings and credit accounts - indicators of financial inclusion.

per capita income - indicator of economic development

Electricity consumption and road length -indicators of infrastructure development.

All the above influence economic development which follows adequate financial and credit

facilities

The RBI has simplified the KYC (Know your customer) norms for opening a ‗No

frill‘ account. This will help the low income individual to open a ‗No Frill‘ account without

identity proof and address proof. Self Help Groups are playing a very important role in the

process of financial inclusion. SHGs are usually groups of women who get together and pool

money from their savings and lend money among them. Usually they are working with the

support of an NGO. The SHG is given loans against the group members‘ guarantee. Peer

pressure within the group helps in improving recoveries. Through SHGs nearly 40 million

households are linking with the banks.

Micro finance is another tool which links low income groups to the banks. The

provision of uncomplicated, small, affordable products will help to bring the low income

families into the formal financial sector. Banks have limitations to reach directly to the low

71

income consumers. Correspondents can be considered to be an excellent channel which banks

can use to distribute their product information. Educating the consumers about the financial

benefits and products of banks which are beneficial to low income groups will be a great step to

tap their potential.

But here again the problem lies with the fact that banks are opening accounts with the

initial deposit but then the accounts are not regularly used that is the main problem. The account

once opened is never operated then they can of no use. According to Dr. Suran, General

Manager (NABARD, Ahmedabad) financial inclusion remains to be a challenge for micro

finance

9.3 SHG AND FINANCIAL INCLUSION

In spite of Indian banking sector having witnessed a spectacular progress in spread of

banking networks and extending financial outreaches across the country in the recent past, the

relative decline in the supply of credit in rural areas poses the biggest challenge to achieve

hundred percent financial inclusion before Indian formal financial system. In this context, self

help group bank linkage model launched by NABARD (1992) can be conceived as an alternative

model to bridge the gaps which could not be filled up by formal banking system. It facilitates

extending financial services to unbanked vulnerable section of society. NABARD led SHG bank

linkage model is widely accepted as one of the largest and successful micro finance model in the

world.

There is also a concept of credit widening and credit deepening. There exists a positive

relationship between Financial Deepening with Per Capita Income, Financial Literacy, and an

effective SHG bank linkage programme. larger expansion of branches lead to larger financial

inclusion. Credit widening means to expand the number of people involved in it. To open more and

more accounts in the banks and include higher number of people in t is part of credit widening.

Credit deepening includes all the activities that speedup the usage of microfinance i.e.

activities like taking more and more credit or including various other aspects like earlier that

only existed concept of microcredit and micro savings but now there also exists the concept of

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micro insurance. Covering more and more aspects will lead to a beter awareness and growth of

microfinance.

9.4 EMPOWERING WOMEN WITH MICROFINANCE

Over 3,300 microfinance institutions reached 133 million clients with a

microloan in 2006. 93 million of the clients were among the poorest when they

took their first loan. 85 percent of these poorest clients were women.

-Microcredit Summit Campaign Report 2007

Microcredit plays a critical role in empowering women, helps deliver newfound

respect, independence, and participation for women in their communities and in

their households.

- Juan Somavia, ILO Director-General

The organizations involved in micro credit initiatives should take account of the fact that

Credit is important for development but cannot by itself enable very poor women to

overcome their poverty.

Making credit available to women does not automatically mean they have control over its

use and over any income they might generate from micro enterprises.

In situations of chronic poverty it is more important to provide saving services than to

offer credit.

A useful indicator of the tangible impact of micro credit schemes is the number of

additional proposals and demands presented by local villagers to public authorities.

India is the country where a collaborative model between banks, NGOs, MFIs and

Women‘s organizations is furthest advanced. It therefore serves as a good starting point to look

73

at what we know so far about ‗Best Practice‘ in relation to micro-finance for women‘s

empowerment and how different institutions can work together.

It is clear that gender strategies in micro finance need to look beyond just increasing

women‘s access to savings and credit and organizing self help groups to look strategically at how

programmes can actively promote gender equality and women‘s empowerment. Moreover the

focus should be on developing a diversified micro finance sector where different type of

organizations, NGO, MFIs and formal sector banks all should have gender policies adapted to

the needs of their particular target groups/institutional roles and capacities and collaborate and

work together to make a significant contribution to gender equality and pro-poor development.

There have undoubtedly been women whose status in the household has improved,

particularly where they have become successful entrepreneurs. Even where income impacts have

been small, or men have used the loan, the fact that micro-finance programmes have thought

women worth targeting and women bring an asset into the household may give some women

more negotiating power.

Savings provide women with a means of building up an asset base. Women themselves

also often value the opportunity to be seen to be making a greater contribution to household well-

being giving them greater confidence and sense of self-worth

Micro-finance has also been strategically used by some NGOs as an entry point for wider

social and political mobilisation of women around gender issues. For example SEWA in India,

CODEC in Bangladesh and CIPCRE in Cameroon, indicate the potential of micro-finance to

form a basis for organization against other issues like domestic violence, male alcohol abuse and

dowry.

Women‘s choices about activity and their ability to increase incomes are seriously

constrained by gender inequalities in access to other resources for investment, responsibility for

household subsistence expenditure, lack of time because of unpaid domestic work and low levels

of mobility, constraints on sexuality and sexual violence which limit access to markets in many

cultures.

The feminist empowerment paradigm did not originate as a Northern imposition, but is

firmly rooted in the development of some of the earliest micro-finance programmes in the South,

74

including SEWA in India. It currently underlies the gender policies of many NGOs and the

perspectives of some of the consultants and researchers looking at gender impact of micro-

finance programmes

Here the underlying concerns are gender equality and women‘s human rights. Women‘s

empowerment is seen as an integral and inseparable part of a wider process of social

transformation. The main target group is poor women and women capable of providing

alternative female role models for change. Increasing attention has also been paid to men's role in

challenging gender inequality.

Micro-finance is promoted as an entry point in the context of a wider strategy for

women‘s economic and socio-political empowerment which focuses on gender awareness and

feminist organization. As developed by Chen in her proposals for a sub sector approach to micro

credit, based partly on SEWA's strategy and promoted by UNIFEM, microfinance must be:

Part of a sectoral strategy for change which identifies opportunities, constraints and

bottlenecks within industries which if addressed can raise returns and prospects for large

numbers of women.

Possible strategies include linking women to existing services and infrastructure,

developing new technology such as labor-saving food processing, building information

networks, shifting to new markets, policy level changes to overcome legislative barriers

and unionization.

However there is no necessary link between women‘s individual economic

empowerment and/or participation in micro-finance groups and social and political

empowerment. These changes are not an automatic consequence of microfinance per se.

9.4.1 Why target women?

Seventy percent of the world‘s poor are women. Yet traditionally women have been

disadvantaged in access to credit and other financial services. Commercial banks often focus on

men and formal businesses, neglecting the women who make up a large and growing segment of

the informal economy. Microfinance on the other hand often targets women, in some cases

75

exclusively. Female clients represent eighty-five percent of the poorest microfinance clients

reached. Therefore, targeting women borrowers makes sense from a public policy standpoint.

The business case for focusing on female clients is substantial, as women clients

register higher repayment rates. They also contribute larger portions of their income to household

consumption than their male counterparts. There is thus a strong business and public policy case

for targeting female borrowers. Children of women microfinance borrowers also reap the

benefits, as there is an increased likelihood of full-time school enrolment and lower drop-out

rates. Studies show that new incomes generated from microenterprises are often first invested in

children‘s education, particularly benefiting girls.

Households of microfinance clients appear to have better health practices and nutrition

than other households. Positive environmental impact is also achievable as microfinance

programmes may support green jobs and renewable energy systems. Microfinance therefore

makes a strong contribution to the realization of the Millennium Development Goals.

9.4.2 AVOIDING UNDESIRED CONSEQUENCES Although the positive impact of microfinance on women‘s empowerment is evident,

microfinance providers must also be cautious to avoid possible negative outcomes. Studies have

shown that women sometimes have little or no control over their loan, with the husband or male

family member making all decisions. Moreover, differences in literacy, property rights and social

attitudes about women may limit impact outside of the immediate household. Residents of rural

areas specifically continue to have difficulties in accessing microfinance. Women may also

struggle with the heavier workload created by the responsibility for loan repayment.

76

CHAPTER 10

ANALYSIS OF

QUESTIONARIE

77

1O.1 INTRODUCTION

The objective here is to study the purpose of taking loan, awareness regarding SHG

and JLG and their readiness to take loan from formal institutions. Moreover how much is their

savings and are they regular in the repayment of loan are the questions considered here. Various

villages are being considered for the survey which was selected by Banas dairy. These villages

are the ones in which dairy has its collection center for milk.

The following villages have been visited by me for the survey

Jagana

Navasamanva

Fatehpura

Deesa

Dhanera

Dantiwada

The people being illerate were not able to fillup the questionnaire themselves so

the questions were asked to them and as per their answers the options were chosen. Sample size

is 100. It consists of people of different profession like farmers, tenant farmers and labourers.

1. Purpose for which you borrow credit?

78

Crop loan 45

minor irrigation 15

Land development

0

Mechanization 7

Cattle purchase 15

Others 18

Majority of the loan was taken for the purpose of crop loan. No loan was taken the area

of land development. So banks have a lot of scope in the area of land development,

various schemes can be included as to promote this area. Here others include loans for

renovation of house and non productive uses like marriage or at the time of festival etc.

45%

15%0%

7%

15%

18%

PURPOSE OF LOAN

crop loan

minor irrigation

landdevelopment

mechanization

cattle purchase

others

79

2. Which credit schemes are you aware of?

Kisan credit card 22

Swarojgar credit card 0

others 78

There was very little awareness as to the various schemes launched by government

regarding the credit. Most of the farmers purchase on the Kisan credit card. Mostly it was

purchased from Dena bank under the scheme of Dena Kisan Credit Card (DKCC). The others

here include various scheme related to horticulture, cattle purchase, rural artisans scheme, micro

business scheme etc.

22%

0%

78%

AWARENESS FOR CREDIT SCHEMES

kisan credit card

swarojgar credit card

others

80

3. What is the interest rate which you currently are paying?

Less than 4% 60

4%-8% 8

8%-10% 2

Greater than 10% 30

Here in the previous question we found out that maximum loans were taken for the

crop purpose and so the interest rate for the crop was 4% or below 4% and so maximum interest

that was paid is below 4%. Whereas the mechanization loans and minor irrigation loan have

interest greater than 10%

60%

8%

2%

30%

INTEREST RATE

less than 4%

4%-8%

8%-10%

greater than 10%

81

4. What are your annual savings?

Less than 5000

41

5000-7000 18

7000-9000 7

9000 and above 34

Majority of farmers do not have savings because they have agriculture as their

major resource of earning income and agriculture depends on rain. If the rains are good then they

do have savings but if the crop is not proper they loose on the income, saving being a distant

matter than. 34% people have their savings above 9000 was due to the dairy. The milk which

they give at the collection center gives them a regular income on which they can rely upon.

Savings between Rs.5000-7000 is from the people who were daily wages laborer.

41%

18%

7%

34%

ANNUAL SAVINGS

less than 5000

5000-7000

7000-9000

9000 and above

82

5. What is the time period for which you generally borrow?

Short term (upto one year)

78

Long term (greater than one year) 22

The crops loan which were taken in majority from Dena bank are of a short term

nature i.e. upto one year. Farmers generally take loan at the time of cultivating the crop and once

the crop is reaped and sold into the market the loan is repaid. Other loan like machine loan or

vehicle (tractor ) and minor irrigation loan is taken for a year of around 3 years and so it is

covered under the head of long term loan.

78%

22%

TIME PERIOD

short term loan

long term loan

83

6. How frequently do you borrow loans?

As per requirement 21

Once in a year 79

The cart depicts that 79% of people use loan only once in a year. As most of the

loans are for the purpose of crop so they were available on once in a year. Other than that loans

which are taken for the purpose of non productive use like renovation of house or marriage of

children were taken as per the requirement. But not more than once loan can be taken for the

same purpose.

21%

79%

FREQUENCY

as per requirement

once in a year

84

7. What is the amount of borrowing?

Less than 50000 28

50000-100000 12

100000-300000 41

Greater than 300000 19

Minimum amount to be borrowed is 50000 but most of the borrowings were

for the crop loan around 1,40,000. In case of mechanization or minor irrigation the amount in

most of the cases exceeds 3,00,000. Most of the farmers, on yearly basis opt for crop loan so

mostly the amount lies between 1 lac and 3 lac. The banks can reduce interest on these loans so

that the repayment is regular and minimum default takes place. That would reduce the

transaction as well as collection cost of the banks. The risk would also decrease to a considerable

extent.

28%

12%

41%

19%

BORROWING

Less than 50000

50000-100000

100000-300000

Greater than 300000

85

8. Do you prefer loans from finance institution to other methods of informal money generation?

yes

59

no 41

59% i.e. more than half of the farmers in the surveyed villages prefer formal

system of credit to money lenders. This shows that there was a lot of scope for the banks who

approach these villages for new savings account and for loan. The basic reason as to why they

prefer banks is that the interest rate is lower than the money lenders and banks are trusted as they

have government approval and backup. Further there was an approach in the village that if some

leader or a trusted and educated person opts for banks the remaining entire village will prefer to

choose for that option.

59

41

0

10

20

30

40

50

60

70

yes no

yes no

86

9. If no to the above questions what are the reasons?

Complexity involved in the

process

20 48.78%

Fear of land hypothecation 2 4.87%

Time period 2 4.87%

Flexibility of repayment 10 24.39%

Service provided by bank 7 17.07%

Total 41 100

The major reason why people opt for informal way of credit or saving is because of

the complexity involved in the process of loan. In most of the cases the bank does have its

branch at each and every village so each tie there is a work; people need to go to the bank.

Moreover people in these villages do not have sufficient level of literacy so various documents

and all becomes a dilemma for these poor and illiterate farmers. Flexibility is with regards to the

repayment of loan.

48.78%

4.87% 4.87%

24.39%17.07%

0

10

20

30

40

50

60

complexity involved in the

process

fear of land hypothecation

time period flexibility services provided by bank

87

10. Are you satisfied with the current schemes of govt. related to the development of

microfinance?

Extremely satisfied 0

Satisfied 85

Neutral 5

Dissatisfied 10

Extremely dissatisfied 0

Majority of the people were satisfied with the schemes of the government regarding

the micro credit and other microfinance schemes. 10% are not satisfied because the schemes

introduced by government do not fulfill their need to a great extent or have certain loopholes and

defects. If survey is carried out by banks and certain relevant schemes are customized according

to the different groups then it would lead to better satisfaction.

0

85

510

00

10

20

30

40

50

60

70

80

90

extremely satisfied

satisfied neutral dissatisfied extremely dissatisfied

88

11. Are you aware of SHGs and JLGs? If yes are you a part of any group?

SHG(sakhee mandal) 10

JLG 6

None 84

Only 10% of people are aware of SHGs .That was quite surprising as SHG bank

linkage model is considered to be the most successful and approachable model. When the people

were not aware of the very concept of micro finance and the basic model of SHG then it becomes

all the more necessary to spread the awareness regarding it as their saving does not become a

part of the formal financial system

10%

6%

84%

SHG(sakhee mandal)

JLG

none

89

12. Which bank do you prefer for taking micro credit? Why?

The most preferred bank as we can see from the survey is Dena bank. The

basic reason as to why it was the most preferred bank was the branches of Dena bank are easily

accessible from each village. Most of the people who preferred Dena bank had the reason of it

being near to their village. Dena bank being the lead bank also acts as a mediator between people

and government representatives and so is more aware of the situation of people in villages,

providing them better array of schemes other than the cooperative banks. Others here includes

different teachers mandali and wholesalers mandali.

57%

14%

29%

MOST PREFFERD BANK

dena bank

cooperative bank

others

Dena bank 57

Cooperative bank 14

Others 29

90

13. Are you satisfied with the current loan schemes provided to the banks?

Yes 58

No 42

58% of the people surveyed were satisfied with the schemes of loans which

were provided by the banks. Here various variables were looked upon in the area of satisfaction

as well as dissatisfaction which will be further covered.

58%

42%Yes

No

91

14. If yes what is the reason?

Majority of people availing the loan facilities are satisfied with the bank due to

the interest rate. For crop loan interest is lower than 4% and for irrigation and mechanization

loans are available for around 10%. These rates are lower than income which is generated from

their savings so it is satisfied the basic purpose of the farmers. Loans are available easily

whenever the requirement is generated. One year for the credit scheme is believed to the idle

time for farmers in the sense of repayment

58.62%

27.58%

13.79%

0

10

20

30

40

50

60

70

interest rate easy loan avilabity whenever needed

time period

Interest rate 34 58.62%

Time period

16 27.58%

Easy loan availability

whenever needed

8 13.79%

Total 58 100

92

15. If No than what are the reasons?

Repayment method

5 11.9%

Interest rate 21 50%

Vagueness regarding the

entire loan repayment

structure

10 23.8%

Lack of guidance given by

banks

6 14.28%

Total 42 100

The survey concludes that those who are not satisfied with the credit scheme is

basically due to the effective interest rate. When the bank explains them the credit the rate is

different but when it comes to actually payment the amount is much higher and this is not being

informed at the time of taking the loan. Some people are dissatisfied with the annual repayment

they prefer monthly repayment. Some banks do not proper explain the schemes due to which

there arises dissatisfaction.

11.90%

50%

23.80%14.28%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

repayment method

effective Interest rate

Vagueness regarding the

entire loan repayment structure

Lack of guidance given by banks

93

16. Are you satisfied with the repayment system? What are the actions taken if you default to

repay

This was the open ended question which showed that majority of people were

satisfied with the repayment system. If they default to repay a loan amount then notice was

sent to them even after that duration mentioned in the notice they were unable to pay then

legal notice was given and they were called in the bank and asked as to what the reason

behind not repaying the loan installment.

Some people also complained that the bank official did not treat them properly and

abused them infront of entire crowd when they visited the banks for complaints or explaining

them as to why the delay in repayment.

Upto the date no land or collaterals have been hypothecated by Dena bank.

94

17. Annual income

Maximum people have annual income less than 100000 on an average. It is on

majority cases between 25000-75000. Due to the weather uncertainty agriculture income is not

stagnant but it keeps on changing. Very few farmers have annual income more than 3 lacs. The

level of poverty is depicted by this.

<100000 74

100000-300000 21

>300000 5

95

HYPOTHESIS (CHI –SQUARE TEST)

1. Savings and Income

H0 : saving amount is independent to the income of the farmer.

H1 : saving amount is dependent to the income of the farmer.

Level of significance = α

Degrees of freedom= DOF

At 5% level of significance, the value of tabulated 2

is given by:

α =0.05

DOF = (4-1) (3-1) =6

2 (tabulated) = 12.36

SAVINGS

ANNUAL

INCOME

Less than

5000

5000-

7000

7000-

9000

>9000 Total

Less than 100000 30 8 7 29 74

100000 to 300000 10 10 0 1 21

More than

300000

1 0 0 4 5

Total 41 18 7 34 100

96

OBSERVED EXPECTED

FREQUENCY

(O)

FREQUENCY

(E)

30 30.34 0.12 0.003

10 8.61 1.93 0.22

1 2.05 1.10 0.53

8 13.32 28.30 2.12

10 3.78 38.68 10.23

0 0.9 0.81 0.9

7 5.18 3.31 0.64

0 1.47 2.16 1.47

0 0.35 0.12 0.35

29 25.16 14.74 0.58

1 7.14 37.69 5.28

4 1.7 5.29 3.11

25.46

2 (calculated) = 25.46

2 (calculated) >

2 (tabulated)

Interpretation: Here, H0 is rejected.

It means that saving and income of a farmer are interrelated or dependent on each other.

2)( EOE

EO 2)(

97

2. Amt of borrowing and method of money generation

H0 : amt of borrowing has no relation with the method of money generation.

H1 : amt of borrowing has relation with the method of money generation.

At 5% level of significance, the value of tabulated 2

is given by:

α =0.05

DOF = (4-1) (2-1) =3

2 (tabulated) = 7.815

MEANS OF BORROWING

AMOUNT OF

BORROWING

FORMAL

MEANS

INFORMAL

MEANS

TOTAL

Less than 50000 18 10 28

50000 to 100000 7 5 12

100000 to 300000 24 17 41

Greater than

300000

10 9 19

TOTAL 59 41 100

98

OBSERVED EXPECTED

FREQUENCY

(O)

FREQUENCY

(E)

8 16.52 2.19 0.13

7 1.2 33.64 28.03

24 24.19 0.036 0.00

10 11.21 1.46 0.13

10 11.48 2.19 0.19

5 4.92 0.0064 0.00

17 16.81 0.0361 0.00

9 7.79 1.4641 0.19

28.68

2 (calculated) = 28.68

2 (calculated) >

2 (tabulated)

Interpretation: Here, H0 is rejected.

So we can say that borrowing amount and the channel of borrowing i.e. formal and informal

are interrelated and dependent.

2)( EOE

EO 2)(

99

Chapter 11

Findings

100

11.1 FINDINGS

The following are some of the core findings

Majority of the loans taken by farmers are for the crop purpose.

There are no loans or minimum loans taken for the purpose of land development or

agricultural land cultivating ( e.g. certain type of soil testing which determines which

ingredient is not present or abundantly present in the soil, certain fertilizers which are very

costly)

People prefer banks to the informal institution of financial transaction, credit and savings if

the following factors are taken care of:

1. Keep bank representative from the village itself rather than any outsider appointed

by the banks

2. Explain the entire loan structure to the people in a lucid manner

3. Regularly update them about the new schemes

4. Treat people in a good manner when they approach the bank

5. Solve their doubts even after once the loan is given out.

Farmers mostly are aware of Dena Kisan credit card (DKCC) scheme for working capital

loan or short credit as we say in financial terms. Other than that no schemes are much heard

about by the farmers

Those who are farming also in most of the cases have cattle also so their major income for

livelihood is earned from agriculture but they do not solely depend on it

Trends are changing due to irregularity of whether farmers are shifting from agriculture to

cattle keeping for milk as dairy industry is developing by leaps and bounds and one can be

sure of earning big amount sitting at home

101

The loans which are taken in certain cases are not used for the productive purpose for which

they are actually taken but for certain non productive uses like marriage and renovation of

their house.

SHG bank linkage being the most successful model in other parts of India is not preferred for

by the farmers in the villages surrounding Palanpur where Banas dairy has its milk collection

centers.

In certain villages like Navasamanva there are Sakhee Mandals running other than that

majority of the villages there are no initiative taken by NGOs or banks for the SHG.

Illiteracy is one of the major factors which hold back people from taking loans and taking

initiatives as to the SHG formation

People lack insight as to the formation of micro enterprise in the villages. They just rely upon

the dairy and farming incomes. Laborers also are found working on others farm as tenant

farmers but they lack the guidance needed to come together to form a independent micro

enterprise

The major reason as to the dissatisfaction from the credit scheme is the effective interest

rates .E.g. during the survey people of Jagana village had problems regarding the repayment

of loan. At the time of giving loan banks had told the interest to be 6 % but then at end of the

loan period the interest was calculated at 14% to which the entire village united and did not

pay the principal as well as the interest.

Majority of the tenant farmers do not have savings because of the low annual income

Dena bank is preferred by the people for the reason it has a good penetration except the

Jagana village

There is no customization in schemes leading to non availability of ideal microfinance

products

102

There are noticeable number of cases where in there was rejection from formal banking

system which lead people to turn to informal banking system

Easy availability of timely and doorstep services from money lenders/informal sources

which boosts the informal money system

There are also farmers who said the hassle involved in documentation and procedures in the

formal banking system pinches them to move to the money lenders.

Lack of flexibility of repayment of loan is also another factor. Banks have annual interest

whereas moneylenders now have monthly interest or flexible repayment system where in the

month in which farmers has savings can repay certain amount and then interest would be

counted on remaining amount thereon.

Joint liability groups are found at a lower side in certain village

103

CHAPTER 12

SUGGESTIONs and

recommendations

104

FOR BANAS DAIRY

SHG is found to be the ideal product and SHG bank linage model is considered to be

ideal model for the development of microfinance and upliftment of livelihood in these

villages but according to the survey very few people are aware of existence of SHG.

In most of these villages Banas dairy has its collection center for milk. Banas dairy sends

its staff in these villages to provide them knowledge as to the cleanliness of milk, cattle,

and ways of increasing the quantum of milk. Banas dairy thus has a touch with the local

farmers in these areas,

Along with the other knowledge Banas dairy can tie up with MFI or NGO in order to

provide them the required education about SHG and how it can develop a successful

SHG bank linage model.

Basically banks are not interested in giving loans to SHG because they do not get much

of money generation in the same but if the NGO which takes care of the particular SHG

is strong then banks would be bound to give them loans.

Banas dairy being a strong pillar in Banaskatha district can take the initiative of including

these remote villages into the formal financial system through microfinance. Banas dairy

is very trusted name in the Banaskantha district so it takes initiative it will be open

hearted invited and accepted by the villages.

Due to operations of Banas dairy, women empowerment is strengthening but still if SHG

is practiced amongst the women of these villages it would become a more powerful tool

for women upliftment. Motivating them for microenterprise is also another initiative

which can be taken by Banas dairy with help of NGO.

105

Microenterprise would not only make the villages and its people more self sufficient and

confident but will also help with the development of infrastructure as more and more will

commute with these villages.

FOR BANKS

Banks should find out as to which villages want these loan and other saving facilities and

accordingly build a branch in each village (e.g. people of Jagana village told that they

would like Dena bank to reopen their branch in the village as now the branch is not

functioning so they have to go commute a long way which prevent them having a saving

account

Moreover village people have habit that if a knowledgeable person has saved in a

particular bank from their village, they all would save in that particular bank only.

So bank must keep a representative from each village so that trust of people is intact and

bank also does have to spend time regularly visiting the village for any dispute or

complaint

Bank can also tie up with Banas dairy as to better penetrate with the people in these

remote villages as such Banas dairy acts as a garunter for the societies which provide

milk to Banas dairy.

For SHG bank linage model many times SHG are not strong enough to repay leading to

bad debt and high cost to the bank. The following are some of the points which should be

considered at the time of giving loans to SHG.

1. Meetings held in a year

106

2. Average attendance of the members in the meetings in the months preceding to

the month of grading

3. Saving pattern of members of group

4. Utilization of savings / corpus of the group for the purpose of internal lending to

the members

5. Recoveries of internal loans (installments of loans and interest on due dates)

6. Maintenance of books.

Each of these points can be given weight according to the policy of bank and then ratings

can be given for each point. Minimum score must be predecided and then those SHG

should be financed.

Credit scoring for microfinance is another area on which banks should focus upon.

Scoring relies fundamentally on quantitative information kept in the computers of a

lender.

Credit scoring model can be used for the same where in a formula that puts weights on

different characteristics of a borrower, a lender, and a loan. The formula produces an

estimate of the probability or risk that an outcome will occur.

Credit model for all the banks cannot be same. They first need to ponder upon the degree

of risk they are ready to take and decided the probability and the factors which they want

to include into the model.

All microfinance lenders who want to use scoring—even those who already have large,

comprehensive data bases—should start to quantify and record the subjective assessments

of loan officers.

107

The banks must collect this data which would help them to classify the loan takers

individuals as well as SHGs into different categories and reduce the risk of default of

loan as probability would have been counted for the risk part.

Of course, estimating profitability does not imply that lenders must reject all unprofitable

clients; it merely helps them to know better the trade-offs between profits and depth of

outreach.

Managers and board members must understand the strengths and weaknesses of scoring

so that they can commit to support its adoption and integration in the organization.

Otherwise, a scoring model might sit unused; an unused model serves no purpose, and a

misused model might be worse than no model at all.

108

CHAPTER 13

CONCLUSION

109

From the survey we can conclude the following points

Awareness regarding SHG in this area is negligible. If provision is made to provide

knowledge and train them regarding microfinance and SHG then a lot of scope is seen in the

development and poverty eradication in these villages.

Banas Dairy plays an important role in making the people from villages earn their

livelihood.

Dairy industry is very important player in the penetration of microfinance in smaller village.

Women empowerment is possible through Dairy industry. This is only one business in

which inspite of women staying at home only can earn her livelihood by keeping cattle and

providing raw milk at the collection center

Dairy industry provides the basic necessity of the population and so with the ever increasing

population dairy industry has a certain future

Banas dairy can become a bridge between banks, MFIs, NGO or any govt. initiative in

strengthening the microfinance structure.

MFI should see to it that Banas dairy being the largest dairy in Asia has a huge no of

farmers who also supply raw milk connected with them can thus give them a huge market

for microcredit and micro saving.

Current model of SHG bank linage also has many loopholes as it does not cover all the

aspects of microfinance.

Microfinance has not actually reached to the ultra poor people who actually should be the

beneficiary of the same.

MFIs and NGO need to work for the awareness of SHG, especially in certain part of

Gujarat.

110

Informal structure / channel of financial credit still prevail to a great extent due to the

prompt give and take of money and flexibility which needs to be reduced.

The basic human development index factor literacy is a major bottleneck which is

decreasing the enhancing speed of spread of awareness of microfinance

c

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CHAPTER 14

REFRENCES

112

REPORTS

MICROFINANCE STATUS 2009-2010 , NABARD.

ANNUAL REPORT, BANAS DAIRY

MISSION MANGALAM, GUJARAT LIVELIHOOD CORPORATION LTD, 2010

BOOKS & JOURNALS

JACKSON ,C., 1995, ‗RESCUING GENDER FROM POVERTY TRAP ‗, GENDER ANALYSIS IN

DEVELOPMENT SERIES.NO.10

NEERA BURRA, JOY DESKMUKH, RAJANI MURTHY, MICRO-CREDIT, POVERTY AND EMPOWERMENT,

2008, 5TH

PRINTING, SAGE PUBLICATIONS INC.

J U Ahmed, D Bhagat & G. Sangria - NEHU, Microfinance in India-Issues & Challenges,

Hardback. August 2010, Hardback.

Kim Wilson, Malcolm Harper & Mathew Griffith, financial promise poor-how groups build

microsavings, paperback. June 2010.

Frances Sinha, Microfinance Self-Help Groups in India: Living Up to Their Promise?,

Paperback. Ocyober 2009

K.G. KARMAKAR , MICROFINANCE IN INDIA, SAGE INDIA, FEBRUARY , 2008

WEBSITES

WWW.MICROFINANCEGATEWAY.ORG

WWW.WIKEPEDIA.COM

WWW.MICROFINANCE.COM

WWW.NABARD.ORG

WWW.BANASDAIRY.COOP

WWW.MICROCREDITSUMMIT.ORG

WWW.RBI.ORG.IN

WWW.NDDB.ORG

WWW.AMUL.COM

WWW.GCMMF.COM

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Chapter 15

ANNEXURE

114

Questionnaire for farmers/tenant farmers/laborers

1. Purpose for which you borrow credit?

a. Crop loans b. minor irrigation

c. Land development d. mechanization

e. cattle purchase f. others

2. Which credit schemes are you aware of?

Kisan credit card

Swarojgar credit card

Others

3. What is the interest rate which you currently are paying?

a. <4 % b. 4-8%

c. 8-10 % d. >10%

4. What are your annual savings?

a. < Rs.5000 c.Rs.5000-Rs.7000

b.Rs. 7000- Rs.9000 d.Rs.9000 and more

5. What is the time period for which you generally borrow?

a. short term(upto one year) b. long term(more than one year)

6. How frequently do you borrow loans?

a. As per requirement

b. once in a year

7. what is the amount of borrowing ?

a.< Rs.50000 b. Rs.50000 –Rs.100000

c.Rs.100000- Rs.300000 d. >Rs. 300000

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8. Do you prefer loans from finance institution to other methods of informal money generation?

Yes

no

9. If no to the above questions what are the reasons?

Complexity involved in the process

Fear of land hypothecation

Time period

Flexibility

Services provided by bank

10. Are you satisfied with the current schemes of govt related to the development of micro

finance?

Extremely satisfied

Satisfied

Neutral

Dissatisfied

Extremely dissatisfied

11. Are you aware of SHGs and JLGs? If yes are you a part of any group?

13. Which bank do you prefer for taking micro credit? Why?

Dena bank

Cooperative banks

14. Are you comfortable with the repayment method? If you default once or more than once

what are actions taken?

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15. Are you satisfied with the current loan schemes provided to the banks? Yes than what are the

reasons

Interest rates

Time period

Easy Loan availability when needed

16. if no to the above question what are the reasons?

Repayment method

Interest rate

Vagueness regarding the entire loan repayment structure

Lack of guidance given by banks

Name:

gender

profession:

Age:

Village:

Annual income: