Ncrd’s Sterling Institute of

Management Studies
A
Project on:
Research methodology
Report On:
Microfinance : a tool for rural
development in india
(Topic taken from Pratiyogita Darpan )

AAuthor: C.P Chandan

Submitted By:
Rajni Kant Kumar
MMS – 1st Year
Roll No. (81 – B)
Submitted To:
 Prof
. Rajiv Wad
Microfinance: A tool for rural development in India
India is a country of 593643 villages as 70% 0f its population resides in rural area and the rural
sector provides livelihood to about 72 % of the total population. They depend upon the
agriculture. In addition to providing food and fodder to large population of human beings and
livestock, respectively agriculture is the main source of raw material for several key industries
do.

Rural people find it difficult to access financial services through the formal sector because of
the cumbersome procedure of a financial institution. They do not have any collateral to source a
loan though they have small savings, and they resort to the informal sector which includes the
moneylenders, merchant, traders, contractors, commission agents and rotating credit and savings
associations are constituents of informal credit markets.

The formal financial institutions have not been able to reach the poor households, and
particularly women, in the unorganized sector. Structural rigidities and overheads lead to high
cost of making small loans. The problem has been compounded by low level of influence of the
poor either about their credit worthiness or their demand for savings services.

Microfinance institution in India (2008)

1. Total no. of microfinance institutions in India 134

2. Gross loan portfolio (US $) 2.1 billion

3. Average loan balance per borrower (US $) 109.1

4. Total assets (US $) 3.0 billion

5. No. of active borrowers 16.1 million

6. Total deposits (US $) 88.6 million

7. No. of depositors 1.2 million

Indian model of microfinance delivery

Microfinance is not simply banking, it is a development tool. These programs are currently being
promoted as a key strategy for simultaneously addressing both poverty alleviation and women’s
empowerment. Where financial service provision leads to the setting up or expansion of micro-
enterprises, there are a range of potential impacts including:
 a. Increasing women’s income levels.

b. Access to networks and markets giving wider experience of the world.

c. Enhancing perceptions of women’s contribution to household income.

Credit

i. Loan amount

ii. Loan term

iii. Repayment installment

iv. Collateral

Savings

i. Amount deposited

ii. Withdrawals

iii. Interest paid

Insurance

I. Life

II. Animal

Microfinance institutions

National bank for agriculture and rural development (NABARD)

Scheduled commercial bank (SCB)

Regional rural bank (RRB)

State agriculture cooperative banks (SACB)

Primary agriculture cooperative societies (PACS)

Empowerment of women through microfinance

Women empowerment is a social action process that promotes participation of women,

organization and communities in gaining control over their lives in their community.

Small loans make good business sense among the women. Women in particular stand to
gain a lot from microfinance because it gives them an independent means of generating wealth
and self reliant in a society that does not offer them much scope of entrepreneurship. Since, it is
women who run the household; a higher standard of living for women ensures better governance
and a healthier and more prosperous future for the children and a better future for a nation.

Summary
Rural people find it difficult to access financial services through the formal sector because
of the cumbersome procedure of a formal institution. Microfinance is seen as provision of
financial service to mostly low income people, especially poor and very poor who are without
tangible assets.

There are two major models under microfinance namely self-help group –bank linkage
(SHG-BL) and microfinance institution. In India NABARD initiated SHGs in 1986-87. But real
effort was made after 1991-92 from the linkages of SHGs with banks. The main aim of the
program is to tap the potential of the SHG concept so as to bring banking services to the door
step of the poor, and now the microfinance institution gotten incredible success in fulfilling the
need of poor.
Problem faces by microfinance institution:
1. The poor’s inability to offer marketable collateral for loans
-Microfinance clients are either very small businesses or poor individuals who
usually have few assets, non-existent credit histories, and low income levels.
This is a problem because it means these clients have cannot offer any
collateral to microfinance providers against loans. As a result, microfinance
institutes (MFIs) may either raise their interest rates or turn down hundreds
of applications

2. Poor institutional viability of micro enterprises- Poorly constructed

business ideas with a lack of consideration of demand and costs render the
micro venture unsustainable, and microfinance may incorrectly get the blame
for it. For instance, in the case of micro crop farming, farmers often fail to
account for their personal consumption between the sowing and harvesting
periods and realize they face a shortage of money.

As a result, they often end up using the loan for personal matters. The
problem arises when its time to pay back the loan – the farmer is forced to
take up a second loan to pay the original loan. This may lead to a vicious
cycle where the farmer gets inundated with debt. You may want to see how
this problem was addressed as a challenge by Micro-Crop Loans in
Philippines.

3. Lack of knowledge about microfinance services-Many micro entrepreneurs live in far

off rural areas, often remote villages, and have little formal education which lead to two
issues:

• a lack of knowledge about the existence of financial services for the poor,
• little access to microfinance services offered by MFIs.

This issue was also mentioned in the post about challenges faced by microfinance
institutions because a natural consequence of this is that loan providers face difficulty in
targeting these potential clients.

4. Shortages of Financial Capital – Or Misallocation-Under 10 million of the 500

million people who run micro and small enterprises have access to financial support for
their businesses. Data Snapshot, the Virtual Library on Microcredit.

As a result of the above three problems, a fourth problem arises for micro entrepreneurs –
a lack of funds. Without credit, the micro ventures may not grow or quickly take
advantage of opportunities. Since, 20% of the world’s population accounts for 86% of
 consumption, one can deduce that the problem isn’t related to the shortage, but
rather, miss-allocation of funds.

Research question in this article:

1. We have to research on the interest rate charged by microfinance. Is it

really a reasonable interest rate for the poor people?

2. Microfinance that is known to every student. But the real aim of

microfinance to focus more on the poor. And I think most of the poor in
villages don’t know about microfinance and its services.

3. We have painted all microfinance through a common brush, but not

everybody and every organization is providing services for helping the
poor.