1. Microfinance in India Issues,Challenges and Policy OptionsBy
Rajaram Dasgupta
and
K Dinker Rao
National Institute of Bank Management,Pune

2. Financial Needs
Life Cycle - Birth to Death
Emergencies - Personal and Impersonal
Economic Opportunities
Working Capital
Agriculture
Industry
Trade and Services
Investment Capital
Existing Units
New Units

3. Meeting of the Financial Needs
Current Income
Accumulated Income Through Savings
Sale of Asset
Credit from FFI
Accessing Capital Market ( Economic Opportunities)

4. Microfinance Micro Quantity for Micro People Savings Credit Insurance
Any other necessary Financial Services

5. Weaker Section Credit
Small Credit
Mandatory Credit and government sponsored Schemes
Poverty Alleviation
(DRI,IRDP,SGSY etc.)
Social Banking
Low rate of interest
Supply -led credit
Credit Alone
Microfinance
All financial services
Savings,credit, insurance etc.
Improving access to FFI (Financial inclusion)
Commercial banking
Market rate of interest
Demand-led credit
Credit Plus to Improve productivity of credit

6. Problems in Microfinance
High Transaction Cost
Travel
Ledger
Manpower
High Risk
Information Gap
- Person to Person
Borrower & Lender
- Person to Environment
Lender & Local Environment
Borrower & Production Environment
(Technology, Market, Infrastructure, Skill, etc.)

7. Status of Microcredit
* Forty per cent of rural credit through informal system - RBI, 2000
* Share of informal market in rural areas increased in 1991 after declining in 1981
* Rs.2116 per capita outstanding credit
* Not `True’ but `Restricted’ Demand

8. Status of FFI Resource
Liquidity - Plenty
Microcredit - Scarcity

9. Demand - Supply Gap
Lack of awareness about micro-financial need
Absence of perspective on microfinance
Mismatch between demand and supply structure of credit
Dearth of risk-taking attitude and urge to experiment at corporate level
Lack of appropriate policy and strategy

10. Requirement for Microfinance Business
Linking of informal and formal system
Principles of informal system
Service at doorsteps
Anytime service
Deposit of any amount
Credit of any amount
Credit for any purpose
Simple formalities
Mutual trust
Full information
Full cost +

11. Formal System Large Capital Cheaper Capital
Better Knowledge of Global Environment

12. People’s Participation
Microfinancing
Individualistic
Cooperation
Directly
People’s Participation
Indirectly
Institutions
Solidarity group
Money
Lenders
Others
Grameen Group
Common Goal Group
Self Help
Groups
Cooperatives
Cluster
Federation
Joint
Liability
Group

13. Individualistic Approach
Two Customers are independent of each other
Competition between two customers is invisible to the customers

14. Cooperation
A group of customers dependent on each other for financial decisions
The competition between two customers is visible which is resolved through both logic and compassion by the contenders themselves

15. Agent Approach (UCB, SMGB)
Participatory Banking ( MRCP, AGB, PGB, AUGB )
Intermediation through money lender ( Indian Bank )
Onlending through intermediary ( BASIX )

16. Approach To Self Help Group

17. SHGs Credit Linked
Till March,2002
During
PSB 55%
RRB 38%
Cooperatives 8%
FFI  NGO  SHG (NGO) %
FFI  SHG (Bank) 16%
FFI  SHG (NGO) %

18. Innovations in SHG Formation
CGB -
PGB -
AGB -
AVGB
Trained own staff who formed groups
VVV - socially conscious villagers formed by RRB  SHG
VDC at village
FC at branch  SHG

19. Innovation in product for SHG
Chitradurga Grammen Bank
Flexible savings scheme (All members)
- Insurance to cover risk
- Earn more interest
Recurring deposit (A few members)
- Specific life cycle needs
Pre-printed cash certificates
- To meet investment needs
- Long term savings
SHGs to sell certificates to other SHGs

20. Federation: (Why)
SHGs Have
Limited ability to access external fund
Limited ability to manage larger fund
Limited skill of management of group
Vulnerability of internal group tensions
Low visibility as a pressure group

21. Federation : Objectives and Roles
Financial
- Accessing and managing external funds
- Providing larger credit to members
- Auditing SHG accounts
Non-Financial
- Strengthening existing SHGs
- Forming new SHGs
- Facilitating inter-group exchange of information
- Linking with other agencies
- Advocacy for members
- Helping members in backward and forward linkages
- Acting as interest group for collective bargaining
- Providing a larger platform for the members to address various issues
- Bring men and women SHGs in a common platform

22. Federation - Structure
Two tier
SHG - Federation
Three tier
SHG Cluster - Federation

23. Cost of Formation of SHG Formation in the Same Village
CGB (DSK Rao)
Formation in the Same Village
1st SHG Rs.2300
4th SHG Rs. 700

24. Cost of SHG Operation

25. Grameen Group
* NGO/MFI
- ADITHI, Bihar
- ASA, Tamilnadu
- RDO, Manipur
- SHARE, Andhra Pradesh
* PSB
- Oriental Bank of Commerce, Uttaranchal, Rajasthan, Bihar

26. Progress of OBC
States
Branches
Villages
Groups
Members
Savings (Rs.000)
Disbursement (Rs.000)
Repayment (Rs.000)

27. Other Solidarity Groups
Common Goal Groups - Annapurna, Pune
Joint Liability Groups - BASIX, Andhra Pradesh

28. SHG and GBG SHG SHG has Own Fund
SHG is a micro micro micro---micro Bank
Bank---> SHG---> Individual
SHG Tends to become Self sufficient
Smaller size of Group creates Fund Constraint
GBG
GBG not a Financial Institution
Bank--->Individual(Directly)
Small size does not create Fund Constraint
GBG Members Tend to be “Perpetually” dependent on Banks

29. SHG and GBG from Members’ Angle
Fund Management
Loan Sanctioning
Mutual Gurantee
Higher level of financial skill Required
More Mutual Trust Required
Short term High Interest
Long Term Low Interest
Forced Savings
GBG
No Fund Management
LoanRecommendation
Mutual Guarantee
Lower level of financial skill Required
Less Mutual Trust Required
Short Term Low Interest
Long Term High Interest
Savings Potential Less

30. SHG and GBG from Bank’s Angle
Formation and Maintenance Cost Externalized
Otherwise Higher Cost
Dependence on NGO
Short term Business relationship?
In search of new SHGs continuously
GBG
Banks have to form Groups
No role of NGO
Easier to Form GBG
Less Costly
Not much skill requirement
Long term Business relationship

31. Federation and Cooperatives
X X X X X X X X X X X
X X X X X X X X X X
Cooperative
Federation
X Members X X
SHG
Management
Group

32. Attitudinal Constraints in Microfinance
Social obligation not commercial proposition
Microfinance Perceived
As income generating programme
Not as financial inclusion programme

33. Institutional Constraints in Microfinance
* Absence of Microfinance Institutions
Income tax
Banking Acts
Cooperative Regulations and Bureaucratic Control
Policy on use of Deployable Resources

34. Policy Issues
Official definition of microfinance
Ensuring the microfinance services
Approach to subsidy
Banking policies
Management information system
Legislation process