PROJECT PROPOSAL

TITLE OF THE PROJECT

MICRO FINANCING THE ROAD
AHEAD

SUBMITTED TO: MR. SHREEKANT IYENGAR

SUBMITTED BY: YASH SOLANKI (55)

DATE: - 13th October, 2010

Forbes brought a special issue on microfinance in December 2007 wherein it said:

"microfinance has become a buzzword of the decade, raising the provocative notion
that even philanthropy aimed at alleviating poverty can be profitable to institutional
and individual investors." This revolutionary and pro-poor economic activity has
been recognized worldwide as an efficient tool to combat poverty, create jobs and
generate income. Above all, it has been regarded as a tool of financial inclusion
that is, including masses in the progress of mankind.

ABSTRACT
In any country the house holds which are poor face lot of constraints when it
comes to investing, saving and protecting their livelihood. The financial
intermediation from a third party is very significant for them and a good
amount of time is devoted to find a considerable solution to this problem.
There are many low financial solutions available to low income groups
around their local area, though most of it charge sky high interest rates and
requires an asset as a mortgage. But many families who do not own personal
property cannot access this route. The micro finance sector trying to match
the convenience and flexibility of informal sector which is unmatched by the
formal sector. The key 'mantra' of 1980's and 1990's women , groups ,
graduation , micro enterprises and micro credit are now making way for
convenient , reliable , continuous and flexible range of services in the new
century . In my study I am doing detailed analysing of the current micro
financing sector in India and comparing Indian micro financing with the best
practices of the world.

INTRODUCTION
According to Yaga Venugopal Reddy, India and the Global Financial Crisis:
Managing Money and Finance (1997) Since the early national plans,
independent Indias government has emphasized the link between improving
access to financial markets and reducing poverty, a stance that has had
influence globally. The early strategy gave the lead role to state-run banks,
who were charged with loosening the grip of traditional informal-sector
moneylenders through the use of targeted low-priced loans
There are newer approaches in India like which includes partial deregulation
of interest rates, new cooperatives with an institutional form which have a
focus on intermediating their own members opportunities. The users of micro
financing now mainly includes small scale farmers who need financial
support for irrigation, crop cultivation and growing live stock. In 1990's there
was a gradual shift to financing women, who came forward to avail the
financial opportunities with the help of self help groups. Earlier the men were
the main benefactors. Now a typical beneficiary of micro financing is defined
as either men or women from poor house holds who seek a variety of savings
and financial services for a diverse set of consumption activities.
Since independence, various governments in India have experimented with a
large number of grant and subsidy based poverty alleviation programmes.
These programmes were based on grant/subsidy and the credit linkage was
through commercial banks only. As a result, these programmes became
unsustainable, perpetuated a dependant status on the beneficiaries and
depended ultimately on the govt. employees for delivery. This not only led to
misuse of both credit and subsidy but banks never looked at it as a profitable
and commercial activity as well.
Hence was adopted the concept of micro-credit in India. Success stories in
neighboring countries, like Grameen Bank in Bangladesh, Bank Rakiat in
Indonesia, Commercial & Industrial Bank in Philippines etc, gave further
boost to the concept in India in the 1980s. India thus adopted the similar
model of extending credit to the poorest sector and took a no. of steps to
promote micro-financing in the country.

MICRO FINANCE DEFINED

According to Robinson (2001) micro finance as small-scale financial
servicesprimarily credit and savingsprovided to people who farm, fish or
herd and adds that it refers to all types of financial services provided to lowincome households and enterprises
Good Micro Finance
Microfinance is the provision of financial services to low-income clients,
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 FINANCIAL OUT LOOK OF POOR

The poor household consider the financial intermediation as a day to day
activity not as a reward or privilege for being engaged in certain behaviour .
They look at the financial providers as partners at work not as patrons. They
have no gender barriers when it comes to availing the finance, or does not
seek to invest only in micro finance. They expect that the financial
intermediation should not only come through a group but to individuals and
not part of any social development projects. They also do not seek to obtain
the finance from only one partner but are used to a variety of multiple
portfolios.

MICRO FINANCING IN INDIA

The understanding of India's economy , growing gap between the rich and
poor , and the growth will help to make a reasonable discussion on

commercial micro financing and the impact of micro finance sector in rural
India.

ECONOMY
India is home to more than 1.3 billion people in 2008 and constitutes one
sixth of the world population. India has worlds largest democracy and an
emerging economic super power. The countries growth is also strong with
real GDP expected to grow around 8.3 % in 2010. The situation in India is
that the wealth which is created increasingly is not availed by all citizens.
The micro financing is one progressive approach for the poor people to
achieve improvement in livelihood, which is also the goal of national and
international communities, so that they get some benefit of the countries
growth.

POVERTY
In order to analyse the costs and benefit of micro financing includes
understanding the environment where they live. The main purpose and
motive behind the micro financing is poverty reduction .More than quarter of
the population in India is below poverty line. There are significant disparity
between the rich and poor as the wealth is concentrating more on corporate
sector. The government of Indias poverty reduction strategy concentrates on
improving infrastructure, social development and rural livelihood.

LITERATURE REVIEW
According to Morduch The Economics of Micro finance 2000
Three
questions have taken important place in academic discussions while talking
about micro-finance. The first question is whether micro-Finance a
phenomenon of rural society? When we talk about micro-finance, the popular
perception is that it is a phenomenon of rural society. The second question is
whether micro-finance a phenomenon of developing countries? The third
question is whether micro-finance an industry of social sector?
According to Christen et al., (1995). Micro finance has existed, although
mostly in the shadows and unseen by casual observers, since the rise of
formal financial systems, and indeed probably pre-dates them. It has only
been within the last four decades, however, that serious global efforts have
been made to formalize financial service provision to the poor. This process
began in earnest around the early to mid-1980s and has since gathered an
impressive momentum. Today there are thousands of MFIs providing
financial services to an estimated 100 - 200 million of the worlds poor
The evolution and rise of micro finance industry is a remarkable achievement
in the eradication of poverty. It has shown that eradicating poverty through
self financing the poor and even turning a profit out of it is possible. The
interest of scholars has always lagged behind the development of micro
finance sector. There is very little publication of scholarly articles about micro
financing.
According to Morduch (2000) unlike formal sector financial institutions, the
large majority of MFIs are not "sustainable," where sustainability is equated
in micro finance literature and parlance with financial self-sufficiency.4
Instead, most MFIs are able to operate without covering their costs due to
subsidies and gifts from governments and other donors. Notwithstanding,
the micro finance industry is dominated by an institutionalise paradigm
According to Nourse (2001), Woller (2002a) MFIs provide similar products
and services to their customers as formal sector financial institutions. The
scale and method of delivery differ, but the fundamental services of savings,
loans, and insurance are the same. Notwithstanding, to date most efforts to
formalize micro finance have focused on enterprise lending (loans for
enterprise formation and development) which remain by far today the
dominant product offered by MFIs. This, however, has slowly begun to

change. Increasingly today MFIs have begun to offer additional products,

such as savings, consumption or emergency loans, insurance, and business
education.

According to Chauhan 1951 before we understand the concept of microfinance, it would be worthwhile to understand the term micro-credit as the
two terms are closely related to each other. Poor people need micro credit
for various and different purposes. It may be to meet the major household
expenses; emergency needs or even basic livelihood support. There are two
main systems of micro credit One is formal financial institutions, banks and
co-operatives, which provide micro-credit to the poor people under different
schemes for livelihood support or helping them to start micro-enterprises.
The other is informal system comprising traditional moneylenders,
pawnbrokers and trade specific lenders. Both the systems have their own
positive and negative aspects.

RESEARCH METHODOLOGY
The tools that are used for studying the micro finance organizations are
mainly same as that used for studying the commercial banks. This is because
most of the MFI have now turned to work with the structure of a commercial
bank. However the main intention of micro financing is to eradicate poverty
and not business development the proper analysis is a mix of traditionally
used methods for assessing the commercial banks and assessing the
poverty. The analysis is basically done with indicators such as financial,
strategic and social strength of MFI

PRIMARY RESEARCH
The primary research has following components

Interview
Questionnaires
Participant Observation
Non-Participant Observation

In this research the primary research will be conducted through interviews

with the beneficiaries of the micro financing and with key personnel in the
field. There will be minor amount of non-participant observation where the
facts and figures collected are observed for reliability and validity.
Advantages
The personal interviews will result in fewer refusal of response and have
more validity. We can also obtain good qualitative data from small sample.
However the interview method may result in more personal bias . The nonparticipant observation is used to clarify and validate the data and have the
advantage of an independent opinion. However this may also result in
personal bias. The interview conducted will be structured and all the
participants will be faced with same questions.

SECONDARY RESEARCH
The data base formed using published reports (financial), journals on the
concerned subject, websites and direct enquiry . Financial analyses of the
some MFI are done using normal ratio and other financial analysis
techniques. Though most of the study is structured in a qualitative manner
sufficient quantitative data are provided to support the qualitative
hypothesis.

TIMELINE
4 Months

BENEFECIARIES

Financial institutions
Banks
People who want micro-finance

TENTATIVE CONTENTS

Introduction to Micro finance.

Evolution of Micro finance.
What is Micro Finance?
Micro Finance in India
Micro finance- models, initiatives & institutes.
SWOT Analysis of Micro finance.
Challenges.
Criticisms
Future of Micro finance.
Conclusion.
References.

BIBLIOGRAPHY

www.ifmr.ac.in
www.google.com
www.microfinanceinsight.com
www.investopedia.com
www.books.google.com
www.thaindian.com
www.authorstream.com
www.knowledge.allianz.com
www.indiamicrofinance.com