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INTRODUCTION
OF
MICROFINANCE IN INDIA
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Meaning of Microfinance
Microfinance is a term used to refer to the activity of provision of financial
services to clients who are excluded from the traditional financial systems on account
of their lower economic status. These financial services will most commonly take the
form of loans (see micro credit) & savings, through some microfinance institutions
will offer other services such as insurance & payment services. The Microfinance is
changing the landscape of banking across the world. It has changed the ivies of people
& revitalized communities in the worlds poorest as well as richest countries. The
microfinance is a better targeted financial help to a clientele that is poorer &
vulnerable than traditional bank clients. The broad classification of microfinance
includes rural credit through specialized banks traditional informal microfinance like
loans from friends & relatives money lenders etc.
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In particular, the ability to borrow, save & earn income reduced economic
vulnerability for women & their households, increased financial & food security can
bring a new confidence & hope which often translates to a greater sense of
empowerment to a person.
Nonetheless, microfinance is not a panacea. Even the most innovative & participative
programmes can lead to unwanted negative impacts. Microfinance has in many cases
been shown to benefit the better off poor more than the truly destitute. Many early
impact studies on microfinance showed increasing income levels, but more recent &
better designed studies have shown that in many cases the impact varies per income
group. In most cases the better off benefit more from micro credit, due to their higher
skills level, better market contacts & higher initial resource base. Lower income
groups may be more risk-averse & benefit more from saving & micro insurance.
Many microfinance & micro credit programmed target women in particular, largely
due to their (generally) higher repayment rates, but in many cases this is mixed
blessing. If a programmed excludes men, particularly in areas where access to
financial services is limited, the man may require his wife to get the loan for him.
Others have argued that exclusive access for women actually increases her bargaining
power within the household. While inspiring examples abound of women taking loans
& then using the income from their business to provide employment to others, feed
their childrens send them to school, & become empowered members of their
community & their household, many more examples exist of vivacious circles of debt,
family violence & increased workloads.
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the development of microfinance & they will continue to do so. But what is really
needed-to reach both further & deeper-is a whole range of institutions that will jostle
& compete with one another to serve poor people & to innovate to reach more & more
poor people.
Sustainable Microfinance
Microfinance is unique as a development tool because of its potential to be selfsustaining. Successful microfinance institutions have proven that providing financial
services to the poor can be an effective means of poverty reduction & be a profitable
business. Dozens of institutions have proven that financial services for poor people
can cover their full costs, through adequate interest spreads, relentleless focus on
efficiency & aggressive enforcement of repayment. A large & growing proportion of
todays microfinance services are being provided by institutions that are profitable
even after adjusting for subsidies that they may have recd.
There will never be enough aid funding available to make an appreciable client the
scale of poverty that still exists around the world. The financial viability of institutions
is what will ultimately guarantee the long term provision of financial services for poor
people and today theres greater consensus than even before on what is needed to
make microfinance sustainable.
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Womens empowerment
The Indian School of Microfinance for Women, an organization based in
Ahmadabad, is a unique initiative in the discipline of Microfinance. The School has
been set up with the purpose of addressing the huge capacity building gap that exists
in the Microfinance sector.
Launched on 4th October 2003, The Schools aim is to strengthen and spread
Microfinance as a strategy for poverty alleviation through development of knowledge
and skilled human resources. It believes that microfinance is an effective tool for the
alleviation of poverty and betterment of the lives of women. It looks to bring the
realities of the lives of women to organizations and people working with microfinance
to help them reach the women better in turn. Promoted by SEWA Bank, FWWB (I),
and Coady International Institute, Canada, The School brings together the best of the
indigenous knowledge and expertise from around the world to a common platform
from where it could be disseminated and made utilitarian for the Microfinance sector.
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Challenges Ahead
The real challenge facing the microfinance industry today is scaling up
services to reach the estimated three billion people in developing countries will still
lack access to formal financial services. Successful microfinance institutions have
proven that providing financial services to the poor can be an effective means of
poverty reduction & be a profitable business. A major bottleneck to the development
of sustainable microfinance is limited institutional & managerial capacity at the level
of retail microfinance institutions, as reflected in inadequate man information system,
poor strategic planning, & high operating costs. This is also a marked storage of
organizations that can provide safe saving facilities for the poor & that can sustainably
mobilize these domestic savings for on-lending.
Many of the necessary elements needed to scale up microfinance are already in place.
A great deal of knowledge about the requirement of sustainable microfinance already
exists. High-performing microfinance institutions have developed methodologies to
extend credit, saving & other services to the poor clients. A no. of banks & other
institutions with nationwide distribution system are beginning to take defective
interest in reaching poorer clients. Advances in information technology have the
opportunity to lower the cost & risk of providing microfinance to the poor. The
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challenge is to mobilize this knowledge & apply it on a much vaster scale, creating
financial systems that work for the poor & boost their contribution to economic
growth.
One approach is to tap into developed capital market through microfinance investment
funds enable individual investors & portfolio managers to allocate a part of their
equity or fixed income investment to microfinance as an asset class.
The microfinance is changing the landscape of banking across the world. It has
change the ivies of people & revitalized communities in the worlds poorest as well as
richest countries. The microfinance is a better targeted financial help to a clientele that
is poorer & vulnerable than traditional bank clients. The broad classification of
microfinance includes rural credit through specialized banks traditional informal
Microfinance like loans from friends & relatives money lenders etc. BANK-NGO
partnership based on microfinance, non NGO, non collateralized microfinance,
Garmin bank type microfinance etc. anyone who can access to saving, credit,
insurance other financial services is more resilient & better able to deal with everyday
demands. Microfinance helps the poor & low income clients deal with such basic
needs, like with access to micro insurance which is a part of microfinance, poor
people can cope with sudden expenses associated with serious illness or loss of assets.
It also provides them access to formal saving accounts & thus an incentives to save.
Clients who join & stay in microfinance programmed have better economic condition
than no clients.
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The micro financial institutions are today, no doubt, acquiring the status of
moment in the banking sector. Its importance can be gauged from the fact that United
Nations has designated year 2005 as the international year of micro credit. Today
effective micro finance is seen as solution to many of the existing social and emotive
problems ranging from rural employment to empowerment. The various micro finance
institutions models are quite effective in dispensing the much needed credit to the
targeted clients. However, there exists certain weakness in existing micro finance
institution models. There is enough space of more efficiency and better results in
credit disbursement through micro finance institutions.
If we look back, it is found that Garmin Bank type micro finance institution model is
one of the most successful models in micro finance. The bank has successfully served
the rural people in Bangladesh with on physical collateral relying on group
responsibility to replace the collateral requirements. This model, like other model, has
also some weaknesses. It involves too much of external subsidy which is not
replicable. Garmin Bank has not oriented itself towards mobilizing peoples resources.
The repayment system of 50 weekly equal installments is not practical because poor
do not have a stable job and have to migrate to other places for job. The communities
are agrarian during lean seasons it becomes responsible for them to repay the loan.
Pressure for high repayment drives members to money lenders.
Most of the existing micro finance institutions are facing problems regarding skilled
labor, which is not available for local level accounting. Drop out of the trained staff is
very high. Also most of the models do not lend for agriculture.
The four pillars of micro finance credit systems are
Supply of credit
The end goal of any such basic model is accessibility of finance to poor.
The new model calls for exploiting the latent rural human resource by talent
spotting and training them as per their, for example, the graduates can be trained in
accounting or as Self Help Group leaders. The awareness campaign regarding various
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rights, subsidies, and incentives given by various micro finance schemes may be
disseminated by involving local rural youth, which may very well connect to the local
based on similarity in dialect, living ways and culture.
It envisages the CENTRE as the hub of all activities. It is a place where all funding,
responsibility and accountability, is concentrated. This will ensure efficiency, better
control and reduced cost of interfacing between dispenser and taker of credit. The
CENTRE
system would be based on number of years client has been attached with any of the
micro finance institutions and its positive track in repaying the loans, including the
condition that at least one amount of the loan was greater than rupees 5000.
The criteria for grading are:
A>=12 years attached with any MFI, subject to the conditions above.
B>=10 years attached with any MFI, subject to the condition above.
C>=7 years attached with any MFI, subject to the condition above.
D>=5 years attached with any MFI, subject to the condition above.
E>=3 years attached with any MFI, subject to the condition above.
The client of A, B and Consumption can take loan directly from the CENTRE, other
conditions for eligibility being the same. These are persons who have successfully
came out of the vicious circle of poverty, cycle and are aspiring to grow big and still
bigger, comparatively.
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SEWA (Self Employed Womens Association) Sahakari Bank was set up in 1974 by
registering it as a Urban Cooperative Bank. Since then, the bank is providing banking
services to the poor self-employed women working as hawkers, vendors, domestic
servant etc. As on March 2003, the mFI had a membership of 30,000, seventy per cent
of whom are from urban area. The deposit and loan portfolio stood at Rs 623.9 million
($ 13.86 million) and Rs133.6 million ($2.97 million) respectively. Though the mFI is
making profit, yet the SEWA bank model of mFI has not been replicated elsewhere in
the country.
In the midst of the apparent inadequacies of the formal financial system to cater to the
financial needs of the rural poor, NABARD sponsored an action research project in
1987 through an NGO called MYRADA. For this purpose a grant of Rs. 1 million
($22,222) was provided to MYRADA for an R&D programme related to credit
groups. Encouraged by the results of field level experiments in group based approach
for lending to the poor, NABARD launched a Pilot Project in 1991-92 in partnership
with Non-governmental Organizations (NGOs) for promoting and grooming self help
groups (SHGs) of homogeneous members and making savings from existing banks
and within the existing legal framework. Steady progress of the pilot project led to the
mainstreaming of the SHG-Bank Linkage Programme in 1996 as a normal banking
activity of the banks with widespread acceptance. The RBI set the right policy
environment by allowing savings bank accounts of informal groups to be opened by
the formal banking system. Launched at a time when regulated interest rates were in
vogue, the banks were expected to lend to SHGs at the prescribed rates, but the RBI
advised the banks not to interfere with the management of affairs of SHGs,
particularly on the terms and conditions on which the SHGs disbursed loans to their
members.
The uniqueness of the micro finance through SHG is that it is a partnership based
approach and encouraged NGOs to undertake not only social engineering but also
financial intermediation especially in areas where banking network was not
satisfactory. The rapid progress achieved in SHG formation, which has now turned
into an empowerment movement among women across the country, laid the
foundation for emergence of MFIs in India.
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With the current phase of expansion of the SHG Bank linkage programme
and other mF initiatives in the country, the informal micro finance sector in India is
now beginning to evolve. The MFIs in India can be broadly sub-divided into three
categories of organizational forms as given in Table 1. While there is no published
data on private MFIs operating in the country, the number of MFIs is estimated to be
around 800. However, not more than 10 MFIs are reported to have an outreach of
100,000 micro finance clients. An overwhelming majority of MFIs are operating on a
smaller scale with clients ranging between 500 to 1500 per mFI. The geographical
distribution of MFIs is very much lopsided with concentration in the southern India
where the rural branch network of formal banks is excellent. It is estimated that the
share of MFIs in the total micro credit portfolio of formal & informal institutions is
about 8 percent.
MFIs: There are a large number of NGOs that have undertaken the task of financial
intermediation. Majority of these NGOs are registered as Trust or Society. Many
NGOs have also helped SHGs to organize themselves into federations and these
federations are registered as Trusts or Societies. Many of these federations are
performing non-financial and financial functions like social and capacity building
activities, facilitate training of SHGs, undertake internal audit, promote new groups,
and some of these federations are engaged in financial intermediation. The NGO
MFIs vary significantly in their size, philosophy and approach. Therefore these NGOs
are structurally not the right type of institutions for undertaking financial
intermediation activities, as the byelaws of these institutions are generally restrictive
in allowing any commercial operations. These organizations by their charter are nonprofit organizations and as a result face several problems in borrowing funds from
higher financial institutions. The NGO MFIs, which are large in number, are still
outside the purview of any financial regulation. These are the institutions for which
policy and regulatory framework would need to be established.
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Mutual Benefit MFIs: The State Cooperative Acts did not provide for an
enabling framework for emergence of business enterprises owned, managed and
controlled by the members for their own development. Several State Governments
therefore enacted the Mutually Aided Co-operative Societies (MACS) Act for
enabling promotion of self-reliant and vibrant co-operative Societies based on thrift
and self-help. MACS enjoy the advantages of operational freedom and virtually no
interference from government because of the provision in the Act that societies under
the Act cannot accept share capital or loan from the State Government. Many of the
SHG federations, promoted by NGOs and development agencies of the State
Government, have been registered as MACS. Reserve Bank of India, even though
they may be providing financial service to its members, does not regulate MACS.
Capital Requirements
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Foreign Investment
Foreign investment by way of equity is permitted in NBFC MFIs subject to a
minimum investment of $500,000. In view of the minimum level of investment, only
two NBFCs are reported to have been able to raise the foreign investment. However, a
large number of NGOs in the development - empowerment are receiving foreign fund
by way of grants. At present, over Rs.40, 000 million ($ 889 million) every year flows
into India to NGOs for a whole range of activities including micro finance. In a way,
foreign donors have facilitated the entry of NGOs into micro finance operations
through their grant assistance.
Deposit Mobilization
Not for profit MFIs are barred, by the Reserve Bank of India, from mobilizing
any type of savings. Mutual benefit MFIs can accept savings from their members.
Only rated NBFC MFIs rated by approved credit rating agencies are permitted to
accept deposits. The quantum of deposits that could be raised is linked to their net
owned fund.
Borrowings
Initially, bulk of the funds required by MFIs for on lending to their clients
were met by apex institutions like National Bank for Agriculture and Rural
Development, Small Industries Development Bank Of India, and, Rashtiya Mahila
Kosh. In order to widen the range of lending institutions to MFIs, the Reserve Bank of
India has roped in Commercial Banks and Regional Rural Banks to extend credit
facilities to MFIs since February 2011. Both public and private banks in the
commercial sector have extended sizeable loans to MFIs at interest rate ranging from
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8 to 11 per cent per annum. Banks have been given operational freedom to prescribe
their own lending norms keeping in view the ground realities. The intention is to
augment flow of micro credit through the conduit of MFIs. In regard to external
commercial borrowings (ECB) by MFIs, not-for-profit MFIs are not permitted to raise
ECB. The current policy effective from 31 January 2004, allows only corporate
registered under the Companies Act to access ECB for permitted end use in order to
enable them to become globally competitive players.
Interest Rates
The interest rates are deregulated not only for private MFIs but also for formal
banking sector. In the context of softening of interest rates in the formal banking
sector, the comparatively higher interest rate (12 to 24 per cent per annum) charged by
the MFIs has become a contentious issue. The high interest rate collected by the MFIs
from their poor clients is perceived as exploitative. It is argued that raising interest
rates too high could undermine the social and economic impact on poor clients. Since
most MFIs have lower business volumes, their transaction costs are far higher than
that of the formal banking channels. The high cost structure of MFIs would affect
their sustainability in the long run.
Collateral requirement
All the legal forms of MFIs have the freedom to waive physical collateral
requirements
from their clients. The credit policy guidelines of the RBI allow even
the formal banks not to insist on any type of collateral and margin requirement for
loans up to Rs 50,000 ($1100).
MFIs except for those that are registered as NBFCs. As a result, MFIs are not required
to follow standard rule and it has allowed many MFIs to be innovative in its approach
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particularly in designing new products and processes. But the flip side is that the
management and governance of MFIs generally remains weak, as there is no
compulsion to adopt widely accepted systems, procedures and standards. Because the
sector is unregulated, not much is known about their internal health. Following
Committees have examined the road map for regulation and supervision of MFIs
Task Force (appointed by NABARD) Report on Regulatory and Supervision.
Framework for MFIs, 1999. (Kindly see publications Section for a complete report
Working Group (constituted by Government of India) on Legal & Regulation of
MFIs, 2002
Informal Groups (appointed by RBI) on Micro Finance which studied issues relating
to (i) Structure & Sustainability, ii) Funding (iii) Regulations and (iv) Capacity
Building, 2003
Advisory Committee (appointed by RBI) on flow of credit to agriculture and related
activities from the Banking System, 2004
To address the issue of need for a differential regulatory framework, the latest
committee sought answers to the following questions and concerns facing private
MFIs in the Country:
(i) Is non-existence of a separate differential regulatory framework a critical
bottleneck hindering the growth of the sector?
(ii) Will MFIs be sustainable in medium term? If so, will they continue to focus on the
poor?
(iii) Is access to public / member deposit the key issue for their sustainability?
(iv)Can MFIs finance loans for income generation at interest rates, which are
sustainable by the rural poor?
(v) Is it possible to evolve commonly agreed standards for MFI sector covering
performance, accounting and governance issues,
which can open up possibilities of self-regulation?
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(vi) Has the sector reached a critical mass where regulation becomes important?
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massive scale necessary to respond to the urgent needs of those living on less than $1
a day, the Worlds poorest.
Microfinance consists of making small loans, usually less than $200, to individuals,
usually women, to establish or expand a small, self-sustaining business. For example,
a woman may borrow $50 to buy chickens so she can sell eggs. As the chickens
multiply, she will have more eggs to sell. Soon she can sell the chicks. Each
expansion pulls her further from the devastation of poverty.
Microfinance, the Garmin way, includes several support systems that contribute
greatly to its success. Microfinance institutions offer business advice and counseling,
while clients provide peer support for each other through solidarity circles. For
example, if a client falls ill, her circle helps with her business until she is well. If a
client gets discouraged, the support group pulls her through. This contributes
substantially to the extremely high repayment rate of loans made to microfinance
entrepreneurs.
An equally important part of microfinance is the recycling of funds. As loans are
repaid, usually in six months to a year, they are re-loaned. This continual reinvestment
multiplies the impact of each dollar loaned.
Microfinance has a positive impact far beyond the individual client. The vast majority
of the loans go to women because studies have shown that women are more likely to
reinvest their earnings in the business and in their families. As families cross the
poverty line and micro-businesses expand, their communities benefit. Jobs are
created, knowledge is shared, civic participation increases, and women are recognized
as valuable members of their families and communities.
What is microfinance?
To most, microfinance means providing very poor families with very small
loans (microcredit) to help them engage in productive activities or grow their tiny
businesses. Over time, microfinance has come to include a broader range of services
(credit, savings, insurance, etc.) as we have come to realize that the poor and the very
poor who lack access to traditional formal financial institutions require a variety of
financialproducts.
Microcredit came to prominence in the 1980s, although early experiments date back
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30 years in Bangladesh, Brazil and a few other countries. The important difference of
microcredit was that it avoided the pitfalls of an earlier generation of targeted
development lending, by insisting on repayment, by charging interest rates that could
cover the costs of credit delivery, and by focusing on client groups whose alternative
source of credit was the informal sector. Emphasis shifted from rapid disbursement of
subsidized loans to prop up targeted sectors towards the building up of local,
sustainable institutions to serve the poor. Microcredit has largely been a private (nonprofit) sector initiative that avoided becoming overtly political, and as a consequence,
has
outperformed
virtually
all
other
forms
of
development
lending.
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have a far more limited market scope than, say, a more diversified range of financial
services which includes various types of savings products, payment and remittance
services, and various insurance products.
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"affordable" to the poor. Many do. However, the institution then depends on
permanent subsidy. Subsidy-dependent programs are always fighting to maintain their
levels of activity against budget cuts, and seldom grow significantly.
Evidence shows that clients willingly pay the higher interest rates necessary to assure
long term access to credit. They recognize that their alternativeseven higher interest
rates in the informal finance sector (moneylenders, etc.) or simply no access to credit
are much less attractive for them. Interest rates in the informal sector can be as high
as 20 percent per day among some urban market vendors. Many of the economic
activities in which the poor engage are relatively low return on labor, and access to
liquidity and capital can enable the poor to obtain higher returns, or to take advantage
of economic opportunities. The return received on such investments may well be
many times greater than the interest rate charged.
the
dwelling-burial-weddings.
These informal ways that people save are not without their problems. It is hard to cut
off one leg of a goat that represents a family's savings mechanism when the sudden
need for a small amount of cash arises. Or, if a poor woman has loaned her "saved"
funds to a family member in order to keep them safe from theft (since the alternative
would be to keep the funds stored under her mattress), these may not be readily
available when the woman needs them. The poor need savings that are both safe and
liquid. They care less about the interest rates that they can earn on the savings, since
they are not used to saving in financial instruments and they place such a high
premium on having savings readily available to meet emergency needs and
accumulate-assets.
These savings services must be adapted to meet the poors particular demand and their
cash flow cycle. Most often, the poor not only have low income, but also irregular
income flows. Thus, to maximize the savings propensity of the poor, institutions must
provide flexible opportunities--- both in terms of amounts deposited and the frequency
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of pay ins and pay outs. This represents an important challenge for the microfinance
industry that has not yet made a concerted attempt to profitably capture deposits.
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tend to have a broader client base than the financial NGOs and already consider
themselves to be part of the formal financial sector. It varies from country to country,
but many poor people do have some access to these types of institutions, although
they tend not to reach down market as far as the financial NGOs.
growth
in
the
numbers
of
clients
can
be
achieved.
Others worry that an excessive concern about profit in microfinance will lead
MFIs up-market, to serve better off clients who can absorb larger loan amounts. This
is the crowding out effect. This may happen; after all, there are a great number of
very poor, poor, and vulnerable non-poor who are not reached by the banking sector.
It is interesting to note that while the programs that reach out to the poorest
clients perform less well as a group than those who reach out to a somewhat better-off
client segment, their performance is improving rapidly and at the same pace as the
programs serving a broad-based client group did some years ago. More and more MFI
managers have come to understand that sustainability is a precursor to reaching
exponentially greater numbers of clients. Given this, managers of leading MFIs are
seeking ways to dramatically increase operational efficiency. In short, we have every
reason to expect that programs that reach out to the very poorest micro-clients can be
sustainable once they have matured, and if they commit to that path.
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rare
when
compared
to
its
rural
counterpart.
Now that microfinance has become quite popular, governments are tempted to use
savings banks, development banks, postal savings banks, and agricultural banks to
move microcredit. This is not generally a good idea, unless the government has a clear
acceptance of the need to avoid the pitfalls of the past and a clear means to do so.
Many governments have set up apex facilities that channel funds from multilateral
agencies to MFIs. Apex facilities can be quite complicated and there are few
successful examples in microfinance. Successful apex organizations in microfinance
tend to be built on the backs of successful MFIs, not the other way around. Finally,
governments can also get involved in microfinance by concerning themselves with the
regulatory framework that impinges on the ability of a wide range of financial actors
to offer financial services to the very poor. This topic is treated below.
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have been made poor. Microcredit programs directed at these types of situations
rarely work. Credit requires a 98% hit rate to be successful. This means that 98% of
recent vocational school graduates or returning refugees would need to be successful
in establishing a microenterprise for repayment rates to be high enough to allow for a
program's overall sustainability. This is simply unrealistic. Running a program with
substantial default rates undermines the very notion of credit and destroys credit
discipline among those who could repay promptly but who look foolish given that
many do not. Microcredit serves best those who have identified an economic
opportunity and who are in a position to capitalize on that opportunity if they are
provided with a small amount of ready cash. Thus, those poor who work in stable or
growing economies, who have demonstrated an ability to undertake the proposed
activities in an entrepreneurial manner, and who have demonstrated a commitment to
repay their debts (instead of feeling that the credit represents some form of social revindication), are the best candidates for microcredit.
What are the terms & conditions for accessing micro credit?
Banks have been given freedom to formulate their own lending norms keeping in
view ground realities. They have been asked to devise appropriate loan and savings
products and the related terms and conditions including size of the loan, unit cost, unit
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size, maturity period, grace period, margins, etc. Such credit covers not only
consumption and production loans for various farm and non-farm activities of the
poor but also include their other credit needs such as housing and shelter
improvements.
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1,316=00 per family. As regards model-wise linkage, while Model I, viz. directly to
SHGs without intervention/facilitation of any NGO now accounts for 16%, Model II,
viz. directly to SHGs with facilitation by NGOs and other formal agencies amounts to
75% and Model III, viz. through NGO as facilitator and financing agency represents
09% of the total linkage. While 488 districts in all the states/UTs have been covered
under this programmed, 444 banks including 44 commercial banks (including 17 in
the private sector), 191 RRBs and 209 co-operative banks along with 2,155 NGOs are
now associated with the SHG-bank linkage programmed.
While the SHG-bank linkage programmed has surely emerged as the dominant micro
finance dispensation model in India, other models too have evolved as significant
micro finance purveying channels.
The other successful models that have emerged are:
(a) An Intermediate Model that works on banking principles with focus on both
savings and credit activities and where banking services are provided to the clients
either directly or through SHGs;
(b) There is also a Wholesale banking Model where the clients comprise NGOs, MFIs
and SHG Federations. This Model involves a unique package of providing both loans
and capacity building support to its partners; and
(c) Further, there is an Individual Banking-based Model that has its clients as
individuals or joint liability groups. While programmed management and client
appraisal in this Model may be a challenge, it is best suited to lending to enterprises.
Keeping these validated models for delivery of credit to the poor and the unorganized
sector in view, RBI is moving towards a systems perspective for providing effective
policy support not only because a number of different institutions, viz. banks, MFIs,
NGOs & SHGs are involved, but also because these institutions have very different
institutional goals. With this in view, a series of initiatives is being planned in the
coming months for putting in place a more vibrant micro finance dispensation
environment in the country where complementary and competitive models of micro
finance delivery would be encouraged to co-exist.
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Govt. of India vide their notification dated August 29, 2011 have included Micro
Credit/Rural Credit in the list of permitted non-banking financial company (NBFC)
Activities for being considered for Foreign Direct Investment (FDI)/Overseas
Corporate Bodies (OCB)/Non-Resident Indians (NRI) investment to encourage
foreign participation in micro credit projects. This covers credit facility at micro level
for providing finance to small producers and small micro enterprises in rural and
urban areas.
How many types of micro credit providers are there in India and
what is the present legal framework governing them ?
The position is as under:
Categories of Providers
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Trusts, etc.
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collective wisdom and peer pressure to ensure proper end-use of credit and timely
repayment thereof. In fact, peer pressure has been recognized as an effective substitute
for collaterals.
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loan from bank or the group sees other purposes, what is the group discipline and
whether it is sustainable.
The basic principles on which the SHGs function are:
The members of the groups should be residents of the same area and must
have an affinity. Homogeneity of relationship could be in terms of
caste/occupation/gender or economic status (which is critical).
Group liability and peer pressure to act as substitutes for traditional collateral.
For assessing a Self Help Group the important aspects that a financer should
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The above norms may be written or oral. They may be decided in the initial meetings
or they may evolve over a period of time depending upon the need of the group. The
important aspect to be looked into are:
Whether the members are aware of the norms (even if they are oral) and
understand them.
Meetings
The group decides the periodicity of the meetings i.e., weekly, fortnightly or monthly.
They also decide on the time of the meeting. Decision on time and periodicity helps in
regular conduct of meetings. The regularity in the holding of the meeting and the
attendance during meeting gives an indication bout groups functioning. Therefore a
Financer should see whether.
The members are punctual and stay till the end of the meeting.
The Financier can use his observations during the meetings and the meeting register to
get data on this appraisal aspect.
Maintenance of Books
Whether group is maintaining the basic books that will give details of its functioning
and accounts of the group is an important criterion to be judged. The books should
give the details of number of meetings held, decisions taken in the meetings, amount
of savings of the members and credit availed, the total savings of the group and
repayments. Who maintains these books is another important criteria for judging the
group. Do members maintain it, if not are they making efforts to achieve basic
numeracy or literacy so that they can start doing it themselves.
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Leadership
Two or three group members are elected as leaders/ book-writers. Initially the opinion
leaders may be the leaders and over a period of time they are expected to be take
turns. The group leaders are expected to a) regularly convene and conduct the
meetings, b) help the group members in taking decisions, c) resolve conflicts, d)
maintain books of account and e) approach bank branch for operation of accounts.The
aspects that are to be seen are :
Whether the leaders have been elected and rotated.
Whether they help in democratic functioning of the group.
Whether there is a conscious attempt to groom other members to take up leadership
Are they marginalizing the benefits (especially loans)
Do they help solve the problem that are raised in the meetings?
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The democratic character of the group may be judged by attending one or two
meetings and talking to individual members. The awareness level of members helps
in healthy functioning of the group and resolution of conflicts within the group.
Savings :
The group decides on the amount of savings as also its periodicity. It has to be seen
whether the saving, as decided upon, is regularly made, how the defaults are dealt
with and whether the system is modified as per the requirements of the members.
Credit:
The following aspects to be looked into while assessing the credit function of group:
Decision
making
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Financial
services
services,
viz.
Savings,
consumption
credit,
ary
to
formal
banking
Cutting
costs
NPA Savvy
Peerpressue
as collateral
as collateral substitute.
Quality
clients
Client
preparation
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Social
agenda
Exclusive
poor focus
No-subsidy-
dependence
syndrome
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Bank of America, merger of Chase Manhattan and Chemical Bank, the sale of First
Fidelity to First Union, and Bank of Bostons acquisition to Bay Bank.
Mr. Gandhi received his B. Com from the University of Bombay and an MBA from
the Harvard Business School, where he was designed a Baker Scholar. He is also a
qualified Chartered Accountant.
Susan Davis, Member
Susan serves as the Vice President and Director of Global Academy for Social
Entrepreneurship. She oversees expansion to the Middle East and Central Asia region.
Susan also acts as an advisor to the International Labor Organization and
Environmental Defense. In 1997, she helped to found and now chairs the board of the
Grameen Foundation. She also serves on the boards of Project Enterprise and Aid to
Artisans. Susan is a member of the Positive Futures Network and serves on the
Human Rights Advisory Council of the Ethical Globalization Initiative. Susan lived in
Bangladesh from 1987-1991 where she worked for the Ford Foundation and was
responsible for the organizing the donor consortia to scale up Grameen Bank, BRAC
and Proshika. She also started Ashoka's program in Bangladesh and was its first
volunteer representative. She was educated at Georgetown, Harvard and Oxford
universities.
RobertEichfeld,Member
During a 33-year career with Citigroup, Mr. Eichfeld managed many of
Citibank's country and regional activities in postings throughout the Caribbean,
Brazil, India, Indonesia, New Zealand, Pakistan and Saudi Arabia. While abroad, he
also served on the boards of several business and community affairs organizations
including chairing various school boards. Since 2011, he has continued to use the
unique business and cultural awareness skills that arise from having lived in or
traveled to over 100 countries. He has advised a de-novo venture capital fund in
Dubai, and with other investors, helped to set up a new Islamic bank in Bahrain. He
advised Harvard Business School when it established its executive training program
for the Middle East and he is currently a member of the Global Advisory Council at
his alma mater, the Garvin School of International Management at Thunderbird. He
also remains active in Rotary, particularly with Rotarys international microfinance
and other social development programs and is a member of the International
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Executive Services Corps and the Financial Services Volunteer Corps. . Bobs other
interests include international current affairs, tennis, hiking, rafting, extensive travel.
Jim Greenberg, Member
Chairman and CEO of DevCorp International, Greenberg developed and
managed two large joint venture companies in Saudi Arabia as General Manager. In
1995 he became the founding partner of DevCorp International E.C., a GCC based
venture development and investment company with active projects spanning shrimp
farming, petrochemicals, light manufacturing, and telecoms/IT. Jim is a 1968
Graduate of West Point and holds advanced degrees from Harvard Business School,
the University of Southern California, and the Industrial College of the Armed Forces.
Elke Ward-Smith, Member
Elke Ward-Smith, a multilingual German citizen, started her 20 year banking
career at Citibank NY with assignments in Latin America, Europe and Asia. These
assignments typically involved building new structured finance business and taking
US financial expertise to emerging markets and helping multinationals raise
liquidity in an environment of debt crises and strict capital controls. Elke later joined
Chase Manhattan Asia, Ltd in Hong Kong to set up an Asian Structured Finance Unit,
then moved onto UBS in Zurich and London to add her international tax expertise to
Project and Leveraged Finance. Most recently Elke structured and closed tax efficient
cross border transactions for the German HypoVereinsbank working out of its
London, Munich and New York offices.
Deepak Amin, Member
Deepak is the co-founder and CEO of Covelix, Inc, a Seattle and India based software
consulting company. Prior to Covelix, Deepak was the Senior Vice-President at
Streamserve, heading its next generation web services products division. Prior to
Streamserve, Deepak was the founder and CEO of vJungle, Inc, a web services
integration and deployment platform company. Deepak also worked at Microsoft for
many years as a technical lead in Microsoft Works and Windows95 Networking teams
and was a senior engineer in the original Internet Explorer team at Microsoft,
Redmond-USA.
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Vision
Empowerment of rural poor by improving their access to the formal credit system
through various mF innovations in a cost effective and sustainable manner.
Mission
To extend financial services to one third of India's unreached and underserved rural
poor numbering nearly 100 million through one million SHGs with focus on women
during a ten year period through various microFinance interventions
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Region-specific Initiatives
NABARD has intensified its efforts in identifying potential districts in the Southern
Region and for enlarging its partner spread.
Priority has been assigned to awareness- building and for identification of NGOs and
other partners in Eastern and North Eastern Regions.
Support to Governments
Necessary assistance is provided to the governments by NABARD for dovetailing mF
practices with the poverty alleviation programmed.
NABARD also encourages the association of Panchayati Raj Institutions ( PRIs ) in
adopting group processes for maximization of empowerment.
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LITERATURE
REVIEW
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These literatures include books written on the subject by experts and also journals,
manuals etc. In fact, there are very few literatures available, regarding socioeconomic, political and entrepreneurial development of women. Philanthropic views
and ideas of great people also reviewed. Most of the studies are more general in
nature and some are more scientifical. The habit of looking upon marriage as the soul
economic refuge for women will have to go before women can have any freedom.
Freedom depends on economic conditions, even more than political, and even if
women is not economically free and self earning she will have to depend on the
husband
or
someone
else,
and
dependents
are
never
free
(Jawaharlal
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needed hope for achieving the Millennium Development Goals especially relating to
poverty reduction. IFAD along with Food and Agriculture Organization (FAO) and the
World Food Programmed (WFP) declared that it will be possible to achieve the eight
MDGs by the established deadline of 2015 if the developing and industrialized
countries take action immediately by implementing plans and projects, in which
micro credit could play a major role (Alok Mishra,2006).
BANCOSOL:
THE
CHALLENGE
OF
GROWTH
FOR
MICROFINANCE ORGANIZATIONS
BancoSol shows outstanding success in terms of breadth, depth, and quality of
outreach and in terms of sustainability. It is the microfinance organization with the
largest number of clients in Latin America and it reaches poor clients who could never
expect to gain access to conventional financial institutions. The paper discusses the
incentive structure associated with a lending technology that has resulted in low loan
arrears and the cost- effective supply of small loans. Success is explained by a strong
concern with financial viability, development of a lending technology appropriate for
the market niche, a long learning period, and upgrading into a formal intermediary. As
it grew, BancoSol had to face a reduction of revenues as a proportion of productive
assets and an increase in the average cost of funds, which combined reduced its
operating margin by 13 percentage points. This challenge was fully met by reducing
operating expenses as a proportion of productive assets.
David Hulme
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This paper reviews the methodological options for the impact assessment (IA) of
microfinance. Following a discussion of the varying objectives of IA it examines the
choice of conceptual frameworks and presents three paradigms of impact assessment:
the scientific method, the humanities tradition and participatory learning and action
(PLA). Key issues and lessons in the practice of microfinance IAs are then explored
and it is argued that the central issue in IA design is how to combine different
methodological approaches so that a fit is achieved between IA objectives, program
context and the constraints of IA costs, human resources and timing.
Jonathan Morduch
Leading advocates for microfinance have put forward an enticing win-win
proposition: microfinance institutions that follow the principles of good banking will
also be those that alleviate the most poverty. This vision forms the core of widelycirculated best practices, but as a general proposition the vision is fully supported
neither by logic nor by the available empirical evidence. Recognizing the limits to the
win-win proposition is an important step toward reaching a more constructive
dialogue between microfinance advocates that privilege financial development and
those that privilege social impacts
GARY M. WOLLER
Although the word of finance in the term of microfinance in core value & the core
element of microfinance are those of the finance discipline has yet to break into the
mainstream & entrepreneur finance literature. The purpose of this article is to
introduce the finance academic community to the discipline of microfinance &
microfinance institutions.
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Models of Microfinance
Microfinance Institutions & Poverty Elimination
A MFI is an organization that provides the financial service targeted to the
poor. Its clients are generally poor & low income people. They may be female head of
household, pensioner, artisans or small farmers. It obtains finance from banks & in
turn provides small scale credit & other financial services to low income household &
other informal business. The microfinance works around the concept of group lending
where it allows a no. of individuals to provide collateral or guarantee a loan through a
group repayment pledges. The incentives to repay are based on peer pressure if on
person in the group default; the other group members make the payment. It is
powerful tool to reducing poverty as it makes capital available to the unbaked poor at
reasonable rates. A survey by ABN AMRO bank clients has shown that 58% of those
who have used microfinance for four years experience a significant reduction in
poverty & 41% have come right out of it. The microfinance institutions aim primarily
to empower people to manage their resources on their own & build sustainable
livelihoods. Development of local indigenous skills & vocational training to foster
employment opportunities are integral part of the objectives, with the ultimate goal to
alleviate poverty.
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The microfinance was not popular before seventies. It was in late eighties & early
nineties that it started showing exemplary results in the field of poverty alleviation.
The pioneering effort in this direction was done by Muhammad Yunus of Bangladesh.
Today Garmin Bank has over 1000 branches a branch covers around 25-30 villages
with 12 lakh borrows with over 90% women. The most important feature of the
recovery rate of the loans, which is as high as 98% yet another interesting feature of
this bank is advancing credit without any collateral security.
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a fund base of US 800 million dollars. The fund is a provident saving fund and a
housing credit system for the wage earners. Its objectives are:
1) To promote self reliance and self determination among the workers though the
memberships in an integrated nation-wide saving system.
2) To invest provident saving of its members taking into account the provident
benefits upon the termination of their membership in fund.
3) To promote home ownership through the establishment of an affordable and
adequate housing credit system for its members.
4) To promote small & short loans & other benefits to its members.
Savings and housing are closely related and the first step was to take care of the
members basic need of housing. The fund instituted a systematic, regular and
easy saving system and tapped new groups of savers who could not be reached by
the commercial banks and became a major source of funds for developing the
economy. Thus, PAG IBGI helps every Filipino to have his own house by pooling
the savings of its members and channeling them for the long term financing
requirement of housing.
HDFC MODEL
HDFC has been making continuous and sustained efforts to reach the lower
income groups of the society especially the economically weaker sections, thus
enabling then to realize their dreams of possessing the house of their own. Its
response to the need for better housing & living environment for the poor, both the
urban & rural sectors materialized in its collaboration with kreditanstalt fur
wiederaufbau (KFW), a German development bank. KFW sanctioned DM 55
million to HDFC for low cost housing projects in India.
For the purpose of actual implementation of the low cost housing projects, HDFC
collaborates with the organization, both government and non-government. Such
organization act as coordinating agencies for the projects involving a collective of
individuals belonging to economically weaker sections.
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The project work is done to fulfill the requirement of our M.B.A degree course. It is
an integral part of the curriculum of this program
To know about the various institutions that is doing the job of promoting
microfinance in India.
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Time Constraint:- This study has been carried out in the period of 2 months, so
the results & interpretation will only be valid till said period.
Lack of resources required:- Another major constraint of the study is that the
resources that had been required for its successful completion were not available at all
the time when required.
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RESEARCH
METHODOLOGY
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Research Methodology
Type of Research
The type of research that is being used in this report is the descriptive one as in
this particular type of research the researcher doesnt have any control over the
present scenario of the things that are being studied & we can only study the factors
such as HOW,WHO,WHEN,WHAT etc.
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mail addresses. Provision is made in the questionnaire to complete the form online
and return it to the researcher. The following advantages are obvious:
Greater speed of delivery.
Higher speed of receiving responses.
Tremendous cost savings over regular mail.
SIZE OF SAMPLE
The population of the sample would be 50 respondents.
Internet.
Newspaper.
Magazines.
Journals.
Publication.
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DATA ANALYSIS
&
INTERPRETATION
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S.No.
Result
No. of respondent
Percentage
Yes
88
88
No
12
12
Interpretation
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From the above graph, we interpretative that 88% people aware about the
microfinance & 12% people who unaware about the microfinance.
Q2- If yes, does Microfinance provides the better service than traditional bank
service?
S. No.
Result
No. of respondent
Percentage
Yes
65
74
No
23
26
26%
74%
Interpretation
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From the above graph, we interpretative that 73.86% people consider that
microfinance provides the better service & 26.14% people consider the traditional
system of bank service is better.
S. No.
Purpose
No. of
respondent
Percentage
Small business
25
28.41
Tiny/cottage industry or
15
17.04
Artisan activity
12
13.63
20
22.73
16
18.18
service activity
4
5
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Small Businees
Artisan activity
Interpretation
From the above graph, we interpretation that 18% people take the loan for the purpose
of transport sector activity, 23% people take the loan for the agricultural & allied
activity, 14% people take the loan for the artisan activity, 17% people take the loan for
the tiny/cottage industry & 28% people take the loan for the purpose of small
business.
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50000 or more
More then
50000
100000
75000
100000
15
12
25
48
Interpretation
From above graph we can easily interpreted that mostly people take the loan more
then 100000.
Q5- Do you feel that you become more self dependent after taking the
loan through Microfinance?
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S. No.
Result
No. of respondent
Percentage
Yes
75
85.23
No
13
14.77
Yes
No
Interpretation
From the above graph, we interpretation that 85% people consider that microfinance
become the people more self dependent while 15% people consider that microfinance
does not helpful to become the people more self dependent.
Result
No. of Respondent
Percentage
Yes
77
87.50
No
11
61
12.5
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Interpretation
From the above graph, we interpretative that 87% people consider that services of
microfinance are easily accessible while 13% people consider that services of
microfinance are not easily accessible.
Result
No. of Respondent
Percentage
Yes
89
89
No
11
11
Yes
No
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Interpretation
From the above graph, we interpretation that 89% people are aware about the SHGs
while 11% people are unaware about the SHGs.
Result
No. of Respondent
Percentage
Yes
82
82
No
18
18
Yes
No
Interpretation
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From the above graph, we interpretative that 82% people who are the member of SHG
while 18% people who are not member of SHG.
Q9- Does the SHGs have provided any training for effective use of
loan?
S. No.
Result
No. of Respondent
Percentage
Yes
70
85.37
No
12
14.63
1st Qtr
2nd Qtr
Interpretation
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From the above graph, we interpretation that 85% people consider that SHGs provide
training for effective use of loan while 15% people consider that SHGs do not
provide training for effective use of loan.
FINDINGS
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SUGGESTION
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CONCLUSION
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References
Daley-Harris, S. (2005), State of the Microcredit Summit Campaign Report 2005,
Washington: Microcredit Summit Campaign.
Dasgupta, R. (2005), Microfinance in India. Empirical Evidence, Alternative Models
and Policy Imperatives, Economic and Political Weekly, 60(12): 1229-1237.
Fisher, T. and Sriram, M.S. (2002), Beyond micro-credit: Putting development back
into micro-finance, New-Delhi: Vistaar Publications.
Guerin, I. and Palier, J. (2005), Microfinance challenges: Empowerment or
disempowerment of the poor?, Pondicherry: French Institute of Pondicherry.
Herman, J. (2002) [1897], A Classified Collection of Tamil Proverbs, London:
Routledge.
Hulme, D. (2011), Is Micro debt Good for Poor People? A note on the Dark Side of
Microfinance, Small Enterprise Development, 11(1): 26-28.
Littlefield, E. and Rosenberg, R. (2004), Microfinance and the Poor: Breaking down
walls between microfinance and formal finance, Finance and Development, 41(2):
38-40.
Montgomery, R. (1996), Disciplining or protecting the poor: avoiding the social costs
of peer pressure in microcredit schemes, Journal of International Development, 8(2):
289-305.
Mosley, P. and Hulme, D. (1998), Microentreprise finance: Is there a conflict
between growth and poverty alleviation, World Development, 26(5): 783-790.
Rao, S. (2005), Womens Self-Help Groups and Credit for the Poor: A Case Study
from Andhra Pradesh, in V. K. Ramnachandran and M. Swaminathan (eds.),
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Financial Liberalization and Rural Credit in India, New-Delhi: Tulika Books (204237).
Sidney, R., Hashemi, S.M. and Riley, A. (1997), The influence of womens changing
roles and status in Bangladeshs fertility transition: Evidence from a study of credit
programmes and contraceptive use, World Development, 25 (4): 563-575.
Tsai, K. S. (2004), Imperfect Substitutes: The Local Political Economy of Informal
Finance and Microfinance in Rural China and India, World Development, 32(9):
1487-1507.
Websites:
http://www.indiastat.com/
http://www.manfromindia.com/search/label/Microfinance
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APPENDIX
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QUESTIONNAIRE
Dear respondent,
_____________________________________________
18-25
25-40
SEX:
Male
Female
40 & above
QUALIFICATION:
OCCUPATION:
ANNUAL SALARY/INCOME:
b) No
Q2- If yes, does Microfinance provides the better service than traditional bank
service.
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a) Yes
b) No
c) Artisan Activities.
c)75000 and above but less then 100000 d) More then 100000
Q5- What rate of interest is to be given at the loan.
a)0-3 % b) 3-6% c) 6-9% d) 9% and above
Q6- Do you feel that you become more self dependent after taking the loan
through Microfinance.
a)Yes
b) No
b) No
b) No
b)No
Q10- Does the Microfinance Institute have provided any training for effective use
of loan.
a) Yes
b)No
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