A Report on the Prospects and limitation of microfinance institutions in Indian farming sector Submitted to: Mr. Anup Singh (C.E.O.) Sonata Finance Private Limited 1/1 A, Rai Bahadur Ram, Charan Das Road Balrampur house, Allahabad (UP) -211002 Submitted by: Vinay Kumar Mishra MBA-Rural Development 3 rd semester Govind Ballabh Pant Social Science Institute, Allahabad (A constituent Institute of University of Allahabad) 1
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A Report on the Prospects and limitation of microfinance institutions in Indian farming sector
Submitted to:
Mr. Anup Singh (C.E.O.)
Sonata Finance Private Limited
1/1 A, Rai Bahadur Ram, Charan Das Road
Balrampur house, Allahabad (UP) -211002
Submitted by:
Vinay Kumar Mishra
MBA-Rural Development 3rd semester
Govind Ballabh Pant Social Science Institute, Allahabad
(A constituent Institute of University of Allahabad)
Contents
1
Topic name Page no.
Acknowledgement 3
Executive Summary 4
Introduction 5-6
Literature Review 7-12
Objective of the study 13
About the organization 14-19
Research methodology 20
Questioner used for survey 21-25
Findings 26-31
Case studies 32-33
Conclusion 34-35
Suggestions 36-37
Summary 38
Acknowledgement
2
This evaluation study is a humble effort to understand the concept of Joint liability Group in
Micro Finance Institution. The study would not have been completes without the priceless
support of those involved in the study.
It was essentially programme to find Prospective and limitation of microfinance institution in
Indian farming sector. First, I would like to express my deepest gratitude to Mr.Anup Singh of
Sonata Finance Private Limited (Allahabad) for their continual involvement in our work. I
extend my highest indebtedness to Mr. Ashish Kumar Area manager. I am also thankful to other
staff member of Sonata Finance Private Limited for support whenever we needed it.
I would like to thanks Professor Pradeep Bhargava Director Govind Ballabh Pant Social Science
Institute, Allahabad for his motivational and guiding support during the period of summer
internship.
I also like to thank Dr.Sunit Singh Co-ordinatotar MBA (Rural Development), G.B.Pant Social
Science Institute Allahabad, whose valuable academic guidance and suggestions have always
been helpful to me during the internship period. I am grateful to Mrs. Rewa Singh for scheduling
our visit to Sonata Finance Private Limited.
My heartfelt thanks to all volunteers who gave their time and support in our endeavor to collect
information. Indeed, without their support tasks would not have been complete. In the Last but
not the least, I would like to thanks Mr. Ajay Singh Branch Manager (Phoolpur) who
accompanied me and provided Cooperation & necessary support in smoothly conduct of study.
Executive Summary
3
Three out of four poor people live in rural areas, and the majority of rural inhabitants depend on
agriculture. Access to appropriate financial services is a critical factor for agricultural
development in the India Yet, due to the specific constraints that come with financing agriculture
(reaching isolated rural areas, working with highly seasonal activities, agro-climatic risks, price
variations, etc.) The financial sector seeks to increase impact on agricultural finance by adapting
microfinance “models” (cooperatives, village banks, self-help groups and solidarity guarantees)
to the specificities of agriculture, by developing innovative products and methodologies that help
reduce vulnerability of rural households improve the management of agricultural risks and
encourage agricultural investment.
Efficient financial systems are vital for the prosperity of community and nation as whole. To
ensure that poor people are included in the benefits of development, it is necessary that these vast
numbers have consistent access to financial services, access that can translate into a key element
of economic growth and poverty alleviation. My study tried to find Prospects and limitation of
Microfinance Institutions in Indian Farming sector. In our endeavor, we found that it has become
one of the most important tools for increased the production of crops. Microfinance Institution
provides the loan in every season during the year so farmers fulfill their requirement in right
time. Microfinance Institution is doing well for women empowerment. The element of
participation, Kinship and peer-group control over group proceedings were something that poor
always believed.
Introduction
4
Microcredit is the extension of very small loans to the unemployed, to poor entrepreneurs and to
others livening in poverty who are not considered bankable. These individuals lack collateral,
steady employment and a verifiable credit history therefore cannot meet even the minimal
qualifications to gain access to traditional credit. Microcredit is a part of microfinance, which is
the provision of a wider range of financial services to the very poor.
The concept of sustainability has viewed from broader perspective and multiple dimensions.
These include eco-social and political Micro Enterprise with various sub-systems for balanced
development. Eradication of poverty is ultimate goal of sustainable ultimate goal of sustainable
development. Poverty stems from numbers of factors, which are region specific and linked to
socio-economic conditions and contextual dimensions. Strategy towards poverty incorporates
multiple initiatives that require a comprehensive framework encompassing physical, structural,
economic, social and political aspects. There is growing evidence across the globe regarding the
role of rural financial services for alleviation of food insecurity and poverty.
Joint liability Groups (JLG`s) based on “capitalization of honesty “has been defined as “small
and informal association of poor having preferably of similar socio-economic background and
who come together to realize some common goals based on principle of self- help and collective
responsibility”. JLG`s becomes relevant because of following reasons:
A JLG`s working on the principle of solidarity helps the poor together to pool their
savings and access credit facilities.
A JLG`s is important tool for empowering the women members.
The participation in JLG`s and access obtain to savings and credit can play a transformational
role for women, socially and economically. The continued participation in JLG`s is further
likely to enhance the awareness, skills and other abilities of women resulting in building of
individual self-esteem and in getting due social recognition .Essentially JLG is based on
unleashing the energy of its people and get them to perform. Sonata started out as a facilitating
agency for empowering poor rural communities by operating watershed projects. Sonata has
continued it is in member villages resulting in improvement of agriculture activities on marginal
lands and the reclamation of wastelands. Sonata quickly observed that savings and credit
programs held the greatest potential for improving the economic status of large number of rural
women and they made this their main program activity. Sonata now focused to provide
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individual loan. Rural households that are partially or entirely reliant on agricultural income face
many risks. Climatic (drought, flooding, cyclones, etc.) and market risks (price instability,
payment conditions at harvest time) are among those that render rural households particularly
vulnerable. They can be individual or covariant, i.e. they can effect an entire population in a
given zone simultaneously. Individual risks include unforeseen events (sickness, marriage, death,
travel) that compromise the proper functioning of agricultural operations or expose the
household to extraordinary expenses. For farmers, these kinds of incidents or accidents translate
into reduced harvests, cash flow difficulties, and loss of production tools, hunger or even famine.
Farmers and rural institutions in general have always sought out strategies to reduce these rises
to limit their negative effects on income. The strategies may be preventive, withdrawing children
from school, borrowing money formal or informal moneylenders. While these forms of risk
management can be effective in some situations, they are rarely effective when confronted with
covariant risks. This Study aims to better understanding of the vulnerability of rural households.
It will analyze the difficulties that come with setting up insurance systems and assess the
potential of existing agriculture insurance products to help improve the risk management of
southern farm
Literature Review
6
Microfinance: Microfinance services are financial services that poor people desire and are
willing to pay for, the term also refers to the practice of sustainably delivering those services.
More broadly, it refers to a movement that envisions “a world in which many poor and near poor
house holds as possible has permanent access to an appropriate range of high quality financial
services, including not just credit but also savings, insurance, and fund transfers.”
1. How can microfinance services are better organize to respond to the specificities of
agriculture?
The growth of microfinance has emerged out of the failure of development financial institutions
and national commercial banks to sustainable meet the needs of poor rural populations in
developing Countries. Conventional banks have thus far proven unable to finance agriculture and
rural activities due to difficult Micro Enterprise environments where small transaction size
combined with insufficient institutional and physical infrastructure increase transaction costs.
While all microfinance institutions share the characteristic of small-scale transactions, their
organizational structures and level of formality widely vary: from mutuality models, saving and
credit cooperatives, Self-Help Groups and non-government organizations that have transformed
into formal financial institutions.
Each of these approaches has strengths and weaknesses in terms of targeting the poorest, offering
adequate products and covering operational costs. Hence, financial cooperatives and mutuality
Entities often federate to offer a wider range of services and reduce costs, for had better reach
more populations that are isolated. In light of such diversity, is it possible that one particular
institutional model is better adapted to financing agricultural activities than another? For
example, does the concentration of mutuality systems in agricultural contexts offer a key for
better understanding the specificities of financing? Agriculture and overcoming the difficulties
inherent to this sector, nevertheless is the institutional focus relevant? Isn’t it better to enlarge the
focus towards to the adopted approach (agro Micro Enterprise, faire trade, etc) or according to
developed interactions with others actors in agriculture (such as farmers organizations) as well as
according to financial products’ quality?
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2. Respond to agricultural finance Needs through innovation:
Financing family farms and producer organizations involves many particularities: unreliable
harvests, low profitability of activities financed, climactic risks, epidemics and unstable selling
conditions (“Imperfect” market conditions, price variations that depend on local economic agents
and international markets).
The financing required for agricultural activities is highly diversified in terms of amounts and
terms. Seasonality of activities and income flows makes financing even more difficult, since the
monetary income for reimbursement is irregular. This requires financial agents to adapt their
credit procedures to the agricultural calendar. Finally, assessing repayment capacity of a
borrower is often challenging, given lack of separation between the farm and household finances.
In light of these difficulties, the microfinance and agriculture sectors are innovating to better
respond to the specific needs of agriculture. This study seeks to demonstrate their creativity and
will address the potential for different forms of innovation to better-fit farmer’s needs, including
1. Products and procedures
2. Non-financial tools such as marketing, communication information systems, etc.
3. What agriculture-related non-financial services would increase the impact of
microfinance?
The profession of farming involves combining a variety of factors to produce one or more
outputs, and to add value to the resulting products. The economic result of this activity,
fundamental for the Farmer depends largely on his or her capacity to access simultaneously and
coherently these factors. These factors include such as technical expertise management capacity,
information and economic techniques. the physical, such as land, equipment and inputs; the
organizational such as mutual organizations to purchase, sell and manage equipment; and finally,
financial factors which are somewhat particular since they directly and/or indirectly effect access
to most of the other factors, and the access conditions to the other factors determine the financial
factors’ own effectiveness.
Indeed, access to finance is not enough to make these other factors both available in quantity and
quality and efficient. This observation raises the following questions: Must microfinance limit
itself to financing or should it consider non-financial services that are appropriate to enhance its
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own effectiveness? What are the limitations and/or strengths of microfinance that justify the
choice?
4. What are the roles of professional agricultural organizations in microfinance?
The gradual reduction of state intervention over the last twenty years has considerably
diminished support services for agriculture (input provision, commercialization, advisory,
financing, information, etc. Consequently, professional agricultural organizations (PAOs) have
emerged in force in most southern countries with a dual mission: to defend the interests of
agriculture and provide the support Services farmers need to develop and modernize their
operations. Access to adequate financial services continues to be a major problem for most
PAOs. The demand for such services is particularly complex as it is two fold: PAOs are not only
confronted with the financial needs of their members, but their own (financing input stocks,
working capital for commercialization activities, equipment, buildings, etc.).
Despite twenty years of “rural financial market” development, the agricultural sector in general
and agricultural organizations in particular has yet to integrate fully into these markets. How do
formal financial intermediaries currently assess this demand? Has the gradual consolidation of
rural microfinance finance institutions, the increasing interest of commercial banks in the rural
sector and the “rebirth” of development and solidarity banks created a new forum for
partnerships with PAOs?
5. What public policies can expand the role of Microfinance in agriculture?
This part will discuss the public policies necessary to developing efficient agricultural
microfinance.
Three aspects will be address.
1) Public policies that enables for the development of efficient financing for agriculture via
microfinance.
2) The role of national and international public authorities and funds in reducing interest rates on
agricultural loans, often poorly adapted to the real profitability of agricultural activities.
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3) The role of government has changed considerably since the paradigm of financial
liberalization has emerged, accompanied by the growth of microfinance. Public authorities are
increasingly implementing programs designed to compensate for market failures in the name of
“financial inclusion”, by encourage private players namely microfinance institutions to broaden
outreach (rural areas, family farming, etc.).Sometimes, governments would like to go even
further, establishing direct or indirect public intermediaries. However, will this new generation
of solidarity and agricultural development banks learn the lessons from the agricultural bank
failures of the 1970-80s?
6. Under what conditions is agricultural Microfinance financially viable?
Agricultural activities present many particularities: considerable volumes of financing,
seasonality that leads to cash flow problems, high production risks (due to climate) and sales
risks (due to unstable Price & markets). The risk of borrower default is particularly high. In
addition, financing agricultural activities engenders contextual constraints and costs: the
inaccessibility of rural areas, insufficient Infrastructure, low population density, etc. At the same
time, the low profitability of agricultural activities makes it difficult for financial institutions to
apply sustainable interest rates that cover costs and moderate the high risks of agricultural
lending. Yet interest rates should not be a burden to micro-entrepreneurs nor wear away profit
margins excessively. The microfinance sector’s emphasis on sustainability challenges
agricultural finance providers to adopt strategies that will ensure financial viability, so as not to
pollute the financial sector with inefficient institutions. This study will analyze the conditions
necessary for microfinance institutions financing agriculture to achieve sustainability.
Participants will present and analyze the strategies used to confront the various risks discussed.
The different forms of financing adopted by “agricultural” microfinance institutions will be
assess.
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7. Institutions moving into rural finance for Agriculture:
Microfinance institutions (MFIs) have tended to avoid less densely populated or diversified rural
areas, and financing of seasonal or long enter crop and livestock activities. However, a few
innovative MFIs have recently led the way in adapting their operations and products expand into
agricultural lending. Techniques used have included tailoring procedures and products to