CHAPTER-I

1.1INTRODUCTION
The Important finding of last three decades in the finance field is poor can save, can borrow and certainly repay loans. This is world of microfinance. A good definition of microfinance as provided by Robinson is, Microfinance refers to smallscale financial services for both credits and deposits that are provided to people who farm or fish or herd; operate small or micro enterprise where goods are produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individual and local groups is developing countries, in both rural and urban areas. In the Indian context terms like small and marginal farmers, rural artisans and economically weaker sections have been used to broadly define micro finance customers. The recent task force on Micro Finance has defined it as provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi urban or urban areas, for enabling them to raise their income levels and improve living standards. Microfinance services are provided by formal institutions such as rural banks and Cooperative; semiformal institutions such as non government organizations; and Informal sources such as moneylenders and shopkeepers. Institutional microfinance is defined to include microfinance services provided by both formal and semiformal institutions. Microfinance links long term development targets and economic thinking. Financial tools such as small loans, affordable savings accounts and low premium insurance policies help poor households and small businesses that do not typically have access to financial services. Microfinance institutions are defined as institutions whose business is the provision of microfinance services. At present, a large part of micro finance activity is confined to credit only. Women constitute a vast majority of users of micro credit and savings services. Self-help group (SHG) is an association of people belonging to similar socioeconomic characteristics, residing is the locality. The SHG concept is most appropriate and can succeed in

our country only if and when a holistic approach is imbibed in the promotion of SHGs as selfsustaining local organizations. However bank linkages of SHGs are at present driven more by annual targets than as a system. A SHG has an average size of about 15 people form a homogeneous class. They come together for addressing their common problems. They are encouraged to make voluntary thrift on a regular basis. They use this pooled resources to make small interest bearing loans to their members. The process helps them imbibe the essentials of financial intermediation including prioritization of needs, setting terms and conditioning, and accounts keeping. Post nationalization in India, commercial banks have been participating actively implementation of poverty alleviation programs of the government like the Integrated Rural Development Program (IRDP), Small Farmers Development Agency (SFDA) for the marginal farmers and agricultural labourers and the Drought Prone Area Program (DPAP). Experimenting with subsidized credit for the poor through these programs has resulted in one unpleasant and tangible outcome increased Non Performing Assets. Group based micro finance was introduced in the country in the early 1970s, but has not picked up momentum until recent times. Banks, over time have begun adopting models that have been tried and tested by Non Government Organizations (NGOs) and Micro Finance Institutions (MFI). These institutions had the clear vision to disprove the intuition of the formal bankers that banking with the poor was a risky affair. They have proved beyond doubt that banking with the poor is most certainly a profitable business. They have also popularized the concept of group lending through the formation and grooming of Self Help Group (SHGs). The objective of this research is to study the growth of microfinance sector in Karnataka. The analysis has been based on the secondary data obtained From NABARD and other published articles. The interest in microfinance has burgeoned during the last two decades: multilateral lending agencies, bilateral donor agencies, developing and developed country governments, and nongovernment organizations (NGOs) all support the development of microfinance. A variety of private banking institutions has also joined this group in recent years. As a result, microfinance services have grown rapidly during the last decade, although from an initial low level, and have come to the forefront of development discussions concerning poverty reduction. Despite this
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growth, as concluded in the recently completed Rural Asia Study, rural financial markets in Asia are ill-prepared for the twenty-first century. 1 about 95 percent of some 180 million poor households in the Asian and Pacific Region (the Region) still have little access to institutional financial services. Development practitioners, policy makers, and multilateral and bilateral lenders, however, recognize that providing efficient microfinance services for this segment of the population is important for a variety of reasons. a. Microfinance can be critical element of an effective poverty reduction strategy. Improved access and efficient provision of savings, credit, and insurance facilities in particular can enable the poor to smooth their consumption, manage their risks better, build their gradually, and develop their microenterprises. b. Microfinance services can also contribute to the improvement of resource allocation, promotion of markets, and adoption of better technology; thus, microfinance helps to promote economic growth and development. c. Without permanent access to institutional microfinance, most poor households continue to rely on meager self-finance or informal sources of microfinance, 3 which limits their ability to actively participate in and benefit from the development opportunities. d. Microfinance can provide an effective way to assist and empower poor women, who make up a significant proportion of the poor and suffer disproportionately from poverty. e. Microfinance can contribute to the development of the overall financial system through integration of financial markets. Today, Microfinance is playing a vital role in development of the economy in any Country. Moreover, microfinance has moved all beyond its roots in developing countries. Micro Finance is emerging as a powerful instrument for poverty alleviation in the new economy. Micro Finance for the poor and women has received extensive recognition as a strategy for poverty reduction and for economic and women empowerment. Micro finance means helping people in providing small financial assistance to poor families to strengthen their financial position and social status.

Meaning of Microfinance:Microfinance refers to small savings, credit and insurance services extended to socially and economically disadvantaged segments of society. Micro finance, a concept that is helping the poor to avail of and create economic growth opportunities.

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.

Definition:The important definitions of microfinance are as follows:According to International Labor Organization (ILO), Microfinance is an economic development approach that involves providing financial services through institutions to low income clients. In India, Microfinance has been defined by The National Microfinance Taskforce, 1999 as provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards. "The poor stay poor, not because they are lazy but because they have no access to capital."

History of the Microfinance Movement

In 1974, famine struck Bangladesh. At the time, Dr. Muhammad Yunus was a professor of economics at the University of Chittagong. Disillusioned by the elegant theories of economics that could not explain the thousands of poor people dying of starvation on the streets; he was determined to find a practical way to help the poor. During a visit to the nearby village of Jorba, he was astounded to find that a sum of $27 could radically change the lives of 42 people in the
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village. This was the sum of money they collectively needed to buy bamboo to make the stools they sold to make a living. He took $27 from his pocket and made 42 loans to the stool makers in this tiny village. They were able to pay him back with interest and take a step towards lifting themselves out of poverty. This simple idea that the poor could use credit to lift themselves out of poverty, led Dr. Yunus to create The Grameen Rural Bank in 1983. Since its inception, it has made over $8.96 billion in loans to over eight million borrowers. Its methodologies have become the cornerstone of the microfinance industry. In 2006, The Grameen Bank and Dr. Yunus were awarded the Nobel Peace Prize.

Explosive Growth
In the 1970s and 80s, inspired by Grameens success, social innovators and organizations around the world began to experiment with different programs to bring financial services to the poor. Microfinance institutions proved that it was actually possible to build viable businesses through lending to the poor. The number of microfinance institutions increased rapidly. The 2006 Microfinance Summit Campaign Report estimates that there are now more than 3,000 microfinance institutions, serving more than 100 million poor people in developing countries. The total cash turnover of these institutions world-wide is estimated at $2.5 billion and the potential for new growth is outstanding.

Micro Finance Global Scenario

The concept of microfinance is not new. Savings and credit groups that have operated for centuries include the "susus" of Ghana, "chit funds" in India, "tandas" in Mexico, "arisan" in Indonesia, "cheetu" in Sri Lanka, "tontines" in West Africa, and "pasanaku" in Bolivia, as well as numerous savings clubs and burial societies found all over the world. Formal credit and savings institutions for the poor have also been around for decades, providing customers who were traditionally neglected by commercial banks a way to obtain financial services through cooperatives and development finance institutions. One of the earlier and longer-lived micro credit organizations providing small loans to rural poor with no collateral was
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the Irish Loan Fund system, initiated in the early 1700s by the author and nationalist Jonathan Swift. Swift's idea began slowly but by the 1840s had become a widespread institution of about 300 funds all over Ireland. Their principal purpose was making small loans with interest for short periods. At their peak they were making loans to 20% of all Irish households annually. In the 1800s, various types of larger and more formal savings and credit institutions began to emerge in Europe, organized primarily among the rural and urban poor. These institutions were known as People's Banks, Credit Unions, and Savings and Credit Co-operatives. The concept of the credit union was developed by Friedrich Wilhelm Raiffeisen and his supporters. Their altruistic action was motivated by concern to assist the rural population to break out of their dependence on moneylenders and to improve their welfare. From 1870, the unions expanded rapidly over a large sector of the Rhine Province and other regions of the German States. The cooperative movement quickly spread to other countries in Europe and North America, and eventually, supported by the cooperative movement in developed countries and donors, also to developing countries. In Indonesia, the Indonesian People's Credit Banks (BPR) or The Bank Perkreditan Rakyat opened in 1895. The BPR became the largest microfinance system in Indonesia with close to 9,000 units. In the early 1900s, various adaptations of these models began to appear in parts of rural Latin America. While the goal of such rural finance interventions was usually defined in terms of modernizing the agricultural sector, they usually had two specific objectives: increased commercialization of the rural sector, by mobilizing "idle" savings and increasing investment through credit, and reducing oppressive feudal relations that were enforced through indebtedness. In most cases, these new banks for the poor were not owned by the poor themselves, as they had been in Europe, but by government agencies or private banks. Over the years, these institutions became inefficient and at times, abusive. Between the 1950s and 1970s, governments and donors focused on providing agricultural credit to small and marginal farmers, in hopes of raising productivity and incomes. These efforts to expand access to agricultural credit emphasized supply-led government interventions in the form of targeted credit through state-owned development finance institutions, or farmers' cooperatives
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in some cases, that received concessional loans and on-lent to customers at below-market interest rates. These subsidized schemes were rarely successful. Rural development banks suffered massive erosion of their capital base due to subsidized lending rates and poor repayment discipline and the funds did not always reach the poor, often ending up concentrated in the hands of better- off farmers. Meanwhile, starting in the 1970s, experimental programs in Bangladesh, Brazil, and a few other countries extended tiny loans to groups of poor women to invest in micro-businesses. This type of microenterprise credit was based on solidarity group lending in which every member of a group guaranteed the repayment of all members. These "microenterprise lending" programs had an almost exclusive focus on credit for income generating activities.

ACCION International, an early pioneer, was founded by a law student, Joseph Blatchford, to address poverty in Latin America's cities. Begun as a student-run volunteer effort in the shantytowns of Caracas with $90,000 raised from private companies, ACCION today is one of the premier microfinance organizations in the world, with a network of lending partners that spans Latin America, the United States and Africa.

SEWA Bank. In 1972 the Self Employed Women's Association (SEWA) was registered as a trade union in Gujarat (India), with the main objective of "strengthening its members' bargaining power to improve income, employment and access to social security." In 1973, to address their lack of access to financial services, the members of SEWA decided to found "a bank of their own". Four thousand women contributed share capital to establish the Mahila SEWA Cooperative Bank. Since then it has been providing banking services to poor, illiterate, selfemployed women and has become a viable financial venture with today around 30,000 active clients. Grameen Bank. In Bangladesh, Professor Muhammad Yunus addressed the banking problem faced by the poor through a programme of action-research. With his graduate students in Chittagong University in 1976, he designed an experimental credit programme to serve them. It spread rapidly to hundreds of villages. Through a special relationship with rural banks, he
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disbursed and recovered thousands of loans, but the bankers refused to take over the project at the end of the pilot phase. They feared it was too expensive and risky in spite of his success. Eventually, through the support of donors, the Grameen Bank was founded in 1983 and now serves more than 4 million borrowers. The initial success of Grameen Bank also stimulated the establishment of several other giant microfinance institutions like BRAC, ASA, Proshika, etc. Through the 1980s, the policy of targeted, subsidized rural credit came under a slow but increasing attack as evidence mounted of the disappointing performance of directed credit programs, especially poor loan recovery, high administrative costs, agricultural development bank insolvency, and accrual of a disproportionate share of the benefits of subsidized credit to larger farmers. The basic tenets underlying the traditional directed credit approach were debunked and supplanted by a new school of thought called the "financial systems approach", which viewed credit not as a productive input necessary for agricultural development but as just one type of financial service that should be freely priced to guarantee its permanent supply and eliminate rationing. The financial systems school held that the emphasis on interest rate ceilings and credit subsidies retarded the development of financial intermediaries, discouraged intermediation between savers and investors, and benefited larger scale producers more than small scale, low-income producers. Meanwhile, microcredit programs throughout the world improved upon the original methodologies and defied conventional wisdom about financing the poor. First, they showed that poor people, especially women, had excellent repayment rates among the better programs, rates that were better than the formal financial sectors of most developing countries. Second, the poor were willing and able to pay interest rates that allowed microfinance institutions (MFIs) to cover their costs. 1990s These two features - high repayment and cost-recovery interest rates - permitted some MFIs to achieve long-term sustainability. Another flagship of the microfinance movement is the village banking unit system of the Bank Rakyat Indonesia (BRI), the largest microfinance institution in developing countries. This stateowned bank serves about 22 million microsavers with autonomously managed microbanks. The

microbanks of BRI are the product of a successful transformation by the state of a state-owned agricultural bank during the mid- 1980s The 1990s saw growing enthusiasm for promoting microfinance as a strategy for poverty alleviation. The microfinance sector blossomed in many countries, leading to multiple financial services firms serving the needs of micro entrepreneurs and poor households. These gains, however, tended to concentrate in urban and densely populated rural areas. It was not until the mid-1990s that the term "microcredit" began to be replaced by a new term that included not only credit, but also savings and other financial services. "Microfinance" emerged as the term of choice to refer to a range of financial services to the poor, that included not only credit, but also savings and other services such as insurance and money transfers. ACCION helped found BancoSol in 1992, the first commercial bank in the world dedicated solely to microfinance. Today, BancoSol offers its more than 70,000 clients an impressive range of financial services including savings accounts, credit cards and housing loans - products that just five years ago were only accessible to Bolivia's upper classes. BancoSol is no longer unique: more than 15 ACCION-affiliated organizations are now regulated financial institutions. Today, practitioners and donors are increasingly focusing on expanded financial services to the poor in frontier markets and on the integration of microfinance in financial systems development. The recent introduction by some donors of the financial systems approach in microfinance which emphasizes favorable policy environment and institution-building - has improved the overall effectiveness of microfinance interventions. But numerous challenges remain, especially in rural and agricultural finance and other frontier markets. Today, the microfinance industry and the greater development community share the view that permanent poverty reduction requires addressing the multiple dimensions of poverty. For the international community, this means reaching specific Millennium Development Goals (MDGs) in education, women's

empowerment, and health, among others. For microfinance, this means viewing microfinance as an essential element in any countrys financial system.

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Examples of Recent Innovations in Financial Services for the Poor:

1. CCACN (Central de Cooperativas de Ahorro y Crdito Financieras de Nicaragua) is marketing its "Agriculture Salary" savings product to farmers. The goal of the product is to smooth the flow of income from the proceeds of an annual or semi-annual harvest. Each credit union works with its farmers to identify their individual expenses and determine a monthly "salary" (portion of harvest proceeds on deposit combined with an above-market interest rate) to be withdrawn from the credit union. In its infancy stage, the credit unions have noted an interest from agriculture-based clients in such a savings management program. 2. Caja los Andes in Bolivia offers four loan repayment options that fit the cash flow of various agricultural activities, including an end-of-term payment for both principal and interest that fits single crop activities, and unequal payments at irregular intervals for farmers that have planted several crops with different harvesting periods. Flexibility is also provided in loan disbursements, and farmers can receive the sanctioned loan amount in as many as three installments.

3. Prodem in Bolivia has introduced a combination of biometric fingerprint and Smart Cards to deliver financial services to its clients. Biometric technology measures an individual's unique physical or behavioral characteristics, such as fingerprints, facial characteristics, voice pattern, and gait, to recognize and confirm identity. Although the technology is still new, growing awareness of the importance of data security is increasing adoption steadily. Prodem's fingerprint verification has reduced fraud, error, and repudiation of transactions. Staff had not had to deal with forgotten PIN numbers or unauthorized use of cards and accounts so they have more time to provide personal service and advice to clients. 4. International Remittance Network (IRnet): In late 1999, WOCCU, in partnership with Vigo, a money transfer firm, launched IRnet. As of June 2003, 173 credit unions in Central America offer IRnet, expanding the possibilities for sending remittances through 800 US credit union points of service. The Central American credit unions distribute remittances primarily to rural clients. The distributing credit unions help to integrate remittance recipients into the formal
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financial sector through trained staff who cross-sell services. When a non-member enters a credit union to pick up a remittance, a staff person encourages this person to become a credit union member and save a portion of the remittance in an interest-bearing voluntary savings account. 5. Unibanka (Latvia): Prior to introducing credit scoring, Unibanka, a commercial bank, viewed microfinance loans as too costly to deliver. With the assistance of Bannock Consulting, Unibanka instituted a credit-scoring system based on qualitative client data because sufficient quantitative data was not available to develop a statistical model. Branch staff now uses scorecards to evaluate microfinance loan applications quickly, which has reduced the cost of review and made microfinance lending profitable for Unibanka. 6. Managed ASCAs: A number of local organizations in the Nyeri District of Kenya provide management services to group-based loan funds. The groups operate as Accumulating Savings and Credit Associations (ASCAs) and receive management services provided by ASCA Management Agencies (AMAs). The AMA model serves a wider client base than the mainstream donor funded MFIs who tend to focus their attention on micro and small entrepreneurs. The clientele of AMAs are also drawn from other socio-economic strata, including salaried workers such as nurses, teachers and civil servants as well as subsistence and semi-commercial farmers. Hence their reach into the rural areas is much greater than the MFIs. 7. Microenterprise Access to Banking Services (MABS) in the Philippines nurtures the expanded use of the credit bureau by rural banks, which was started in 2001 to minimize client over indebtedness and defaults. MABS has helped to integrate the rural banks' microenterprise loan clients into an existing national credit bureau, by creating an e-mail encryption program that allows rural banks to share information electronically at a low cost. 8. Credit, life, and funeral insurance: A WOCCU study on savings and credit cooperatives (SACCOs) in Kenya indicates that HIV/AIDS poses high levels of risk to rural finance institution soundness. The Cooperative Insurance Company (CIC), a professional insurance provider, insures over half of Kenya's more than one million credit union members who subscribe to policies through their credit unions.

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9. The National Microfinance Bank in Tanzania (NMB) was created to retain the extensive rural branch network of the National Bank of Commerce (NBC) when it was privatized in 1997. The key to making it commercially viable has been rigorous control of costs through drastic simplification of the business model and tight managerial oversight. Key initiatives have been correct pricing of products, particularly payments and remittance services, which had traditionally been cross-subsidized by other product lines, and the development of microfinance products, mainly small (average US $400) individual loans. 10. ADOPEM (Dominican Republic) thoroughly evaluated its PDA (Personal Digital Assistants) program and recorded dramatic improvements. Client retention improved significantly, and the number of days between application and disbursement dropped from five days to two days. Expenses for paperwork dropped by 60% and data entry expenses dropped by 50%. Loan officer caseloads and other productivity measures increased by about 35%. 11. The international NGO Technoserve has developed an inventory credit scheme in Ghana that enables farmers' groups to obtain higher value for their crops by providing post-harvest credit through linkage with a rural financial institution. Instead of selling all of their crop at harvest - when prices are lowest - in order to meet cash needs, small-scale farmers in the scheme store their crop in a cooperatively-managed warehouse and receive a loan of about 75-80% of the value of the stored crop, which serves as collateral. This loan permits them to clear their accumulated debts and satisfy immediate cash requirements. Then, when prices have risen in the off-season, the farmers either sell the stored crop or redeem it for home consumption. 12. Savings-based, Agriculture-oriented Rural Credit Unions - SICREDI - Brazil specializes in agricultural lending, primarily for the production of rice, wheat, beef, fodder, fish, vegetables and for agricultural equipment. Loan approvals are based upon the members' savings history and credit record, with the size limited to 50 percent of production costs and dependent upon the potential return of crop sale at harvest as well as household income and debt obligations. The borrower makes monthly interest payments and then a balloon payment of the principal at harvest time. In addition, SICREDI participates in the PROAGRO national crop insurance, for which a premium is added on the loan rate. PROAGRO pays 100% of the loan loss if the crop fails

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13. Producer Associations as Clients of a Financial Institution: GAPI and CLUSA in Mozambique: GAPI offers investment and working capital loans to fora (federations of associations) of small farmers and small and micro-enterprises. GAPI collaborates with CLUSA to set-up and register these fora. Loans are secured through a solidarity group-like guarantee between the participating fora. Each forum on-lends to its member associations, who collect the produce from their individual members and other area farmers and deliver it to the forum in return for the loan. About 80% of the profits from the sale of produce are handed back to the associations - the remaining 20% of the profits are kept by the forum as interest payments. 14. In South Africa, a network of 8,000 armored trucks equipped with thumbprint recognition and smart-card technology deliver pension payments of about $60 each month to 4.5 million South Africans. The potential of this vast infrastructure to offer pensioners other kinds of financial services is tremendous. 15. Banco Postal in Brazil, a joint venture between the Post Office and the largest private bank (Bradesco) has offered banking (and payment) services through its network of postal branches in remote and poor areas of the country since March 2002. 16.Tanzania Posts Corporation mini-buses offer passenger service along domestic regional routes. Postal outlets have become one-stop service centers that provide photocopying, telephone and money transfer services. They also sell stationery and newspaper and act as agents for others by accepting newspaper advertisements, selling lottery tickets, revenue stamps for radio stations, and tickets for boats between Dar es Salaam and Zanzibar 17. Equity Building Society (EBS) in Kenya has emerged as one of Kenya's leading microfinance institutions, with over 155,000 savings clients and 41,000 borrowers. Once insolvent, EBS transformed itself into a profitable financial-service provider by rigorously focusing on the needs of its clients - in particular, by developing a wide range of market-based financial products and services, including a mobile banking service.

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Indian scenario in Micro Finance

Traditionally, banks in India have not provided financial services, such as loans, to clients with little or no cash income. Banks incur substantial cost to manage a client account, regardless of how small the sums of money involved. The fixed cost of processing loans of any size is considerable as assessment of potential borrowers, their repayment prospects and security, administration of outstanding loans, collecting from delinquent borrowers, etc., has to be done in all cases. There is a breakeven point in providing loans or deposits below which banks lose money on each transaction they make. Poor people usually fall below that breakeven point. A similar equation resists efforts to deliver other financial services to poor people. It is then, the concept of micro finance institutions came into the picture. This has gained considerable importance in Indian Scenario. Approximately 665 million client accounts are maintained with over 3,000 institutions that are serving people who are poorer than those served by the commercial banks. Of these accounts, 120 million were with institutions normally understood to practice microfinance like the postal saving banks, development banks, cooperatives and credit unions and specialized rural banks. In India, Micro finance has fueled the efforts at rural development, woman empowerment and wealth generation by providing small scale savings, credit, insurance and any other financial services to poor and low-income households. Microfinance sector has traversed a long journey from micro savings to micro credit and then to micro enterprises and now entered the field of micro insurance, micro remittance and micro pension. This gradual and evolutionary growth process has given a great opportunity to the rural poor in India to attain reasonable economic, social and cultural empowerment, leading to better living standard and quality of life for participating households. Financial institutions in the country continued to play a leading role in the microfinance programme for nearly two decades now. They have joined hands proactively with informal delivery channels to give microfinance sector the necessary momentum. During the current year too, microfinance has registered an impressive expansion at the grass root level.

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Self Help Promoting Institutions (SHPIs), Revolving Fund Assistance (RFA) to MFIs, equity/ capital support to MFIs to supplement their financial resources and provision of 100 per cent refinance against bank loans provided by various banks for microfinance activities. Table : 1.1 Participating Banks in providing Micro finance Participating Banks Public sector commercial Banks Private sector commercial Banks Regional Rural Banks Co-Operative Banks Small Industries Development Bank of India Number 27 19 81 318 1

DIFFERENT MODEL OF MICRO FINANCE:1. SHG- Bank linkage model: This model involves the SHGs financed directly by the banks viz., Commercial Banks (Public sector and private sector), Regional Rural Banks and Cooperative Banks. 2. Micro Finance Institutions Bank linkage model: This model covers financing of MFIs by banking agencies for on lending to SHGs.

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SHGs- Meaning
SHG is a small, homogenous affinity group of rural poor agriculture labourers, marginal and small farmers and micro-enterprises which is voluntarily formed. It can be formal or informal. SHGs are formed by the members, of the members and for the members. They are encouraged to practice voluntary thrift on a regular basis. The SHG generally a minimum of 5 members and not exceeding 20 members. Members save and contribute to common fund from which small loans are met to needy member as per the decisions of the group.

There are four stages in SHG formation: Forming Storming Norming = 0-2 months = 2-3 months = 4-6 months

Functioning = 6-12 months

Objective of SHGs
To evolve a supplementary credit strategy for reaching the rural poor. To build mutual trust and confidence between banks and rural poor To encourage banking activities both thrift as well as credit in way to SELF HELP.

Methodology adopted
Direct or Indirect finance Maximum 4 times of Deposit Minimum 6 months of functioning
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100% NABARD Refinance on outstanding To open a SB account with Bank

Notable figures of Micro finance in India

Table 1.2

SHGs Savings linked with banks Total No.of SHGs Savings linked with banks Out of Total (of which) exclusive Women SHGs Total savings amount of SHGs with banks as on 31-3-10 Out of total savings of exclusive women SHGs Estimated number of families covered upto 31-3-2010 Source:- www.nabard.org Rs.69.53 lakh Rs.53.10 lakh Rs.6198.71 crore Rs.4498.66 crore Rs.97 million

Table 1.3 SHGs Credit linked with banks in the year 2009- 10 Total No.of SHGs credit linked during the year 2009-10 Out of Total linked Source:- www.nabard.org Rs.15.87 lakh

(of which) exclusive Women SHGs credit Rs.12.94 lakh

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Table 1.4 Loan amount disbursed and loan outstanding in the year 2009- 10 Total amount of loan disbursed to SHGs Out of Total loan disbursed exclusive to Women SHGs Rs.14453.30 crore Rs.12429.37 crore Total amount of loans outstanding against SHGs Out of total loans outstanding against women SHGs Average loan amount March 2010 Average loan amount outstanding per member as on 31-3-10 Source:- www.nabard.org Rs. 4,128 outstanding per SHG as on Rs.28038.28 crore Rs.23030.36 crore Rs. 57,795

Microfinance Institutions (MFIs):Microfinance Institutions are seen as key players in delivering financial services to the poor people. They are increasingly seen as a solution to the ever increasing problem of poverty and an indispensable toot to provide poor but entrepreneurial people with necessary finances to start their own businesses. These institutions play a key role in providing a whole range of financial services to the poor rural households that have been ignored till now by the mainstream financial institutions because of their inability to provide collateral. This article discusses the unique characteristics of the microfinance institutions and the challenges they have to face in order to survive and thrive in the future.

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A microfinance institution is generally defined as as an institution that provides financial services to the poor. These institutions play a crucial role in the economic empowerment of the poor people especially in the rural areas. These institutions generally include credit unions, cooperatives and financial NGOs. MFIs provide microfinance services to those people who are inability to produce guarantees that are required to gain credit from formal financial institutions.

Microfinance Institutions in India

Microfinance institutions (MFIs) have emerged over the past three decades to address this market failure and provide financial services to low-income clients. Most of the early pioneer organizations in the modern microfinance movement operated as non-profit, socially motivated non-governmental organizations (NGOs). They developed new credit techniques: instead of requiring collateral, they reduced risk through group guarantees, appraisal of household cash flow, and small initial loans to test clients. Experience since then has shown that the poor repay uncollateralized loans reliably and are willing to pay the full cost of providing them: access is more important to them than cost. More than 10,000 micro-lending organizations are today providing loans to 25 million poor people throughout the world, most of them women. The number of these organizations grew dramatically during the 1990s, spurred by the notion of Self help and a faith in the creditworthiness and entrepreneurial potential of the poor. Microfinance for the poor has emerged as an idea that appeals to several sections of people. In principle, even the worlds poorest people can acquire savings and investment if they have access to capital. The size and types of implementing NGOs range from very small to moderately big organizations involved in savings and/or credit activities for individuals and group. These NGOs adopt a variety of approaches, and tend to operate within a limited geographical range. A few like PRADAN, ICECD, MYRADA, SEWA operate on a larger scale and have been successful in replicating their experiences in other parts of the country, they also act as resource organizations. While a few lending organizations do lend directly to borrowers, most rely on SHGs to provide the linkage the borrowers.

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Table 1.5 Support from NABARD Capacity building of partner institutions in the year 2009- 10 Number of programme conducted during 2009-10 No, of Participants covered during 2009-10 Cumulative no. of participants trained upto March 2010 Grant support during the year 2009-10 Cumulative fund support upto March 2010 Source:- www.nabard.org 6804 Rs.2.54 lakh Rs.24.55 lakh Rs.9.92 crore Rs.45.02 crore

Table 1.6 Refinance Support from NABARD Refinance to banks during 2009-10 Cumulative refinance released upto 31-3-10 Source:- www.nabard.org Rs.3173.56 crore Rs.12861.65 crore

Micro Finance: Strategy adopted by NABARD

The National Bank for Agriculture and Rural Development (NABARD) have played a significant role in promoting micro finance. NABARD has been instrumental in facilitating various activities under microfinance sector, involving all possible partners at the ground level in the field. NABARD has been encouraging voluntary agencies, bankers, socially spirited individuals, other formal and informal entities and also government functionaries to promote and nurture SHGs. The focus in this direction has been on training and capacity building of partners, promotional grant assistance to Self Help Promoting With a view to developing a supplementary
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credit delivery mechanism to reach the poor in cost- effective and sustainable manner, the NABARD introduced in 1992 a pilot project for linking 500 SHGs.

NABARD is adopted the following strategies to spread the outreach of SHGBank Linkage programme: Widening spatial distribution and intensity of the Programme with district oriented planning and strategy. Evolving district- wise plan of action/ strategy in consultation with existing stakeholders aiming at promotion and linkage of a minimum of 500 SHGs per district every year. Training and exposure programmes for the staff of the stakeholders. Providing promotional assistance to partners for promoting and nurturing the SHGs generally on a add-on basis. Widening the range of SHG promoting agencies. Involving banks at their corporate level, organizing training programmes for the regional/ zonal managers of commercial banks in association with their central offices. Establishing the financing of SHGs as a business proposition for banks. Increasing the participation of the co-operative banks by encouraging them to finance SHGs as Financing cooperatives within the co-operative. Associating village communities, peoples institutions, rural volunteers and individuals to participate in the programme as SHG promoters. Increasing the quality of the exisiting SHGs by propagating Self- rating tools. Large- scale dissemination of the concept and approach among the rural masses. Encouraging NGOs to play an important role in correcting the regional imbalance in spread of SHG-Bank linkage programme.
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Supportive policies of RBI for linkage programmes

The SHG Bank linkage was further extended to Regional Rural Banks (RRBs) and cooperative banks in 1993 and is now permitted by the RBI as a component of priority sector lending. RBI extends full support to NABARDs initiatives in introducing and implementing the linkage programme. The supportive policies of RBI are: Interest rates of banks to the micro-credit institutions or by the micro-credit institution to SHGs or their members deregulated. Complete freedom to banks to choose their models. Freedom in designing, lending and savings products. Maximum flexibility provided in lending norms. Making micro finance an integral part of banks corporate credit plans. Mobilisation of savings.

Micro finance has been hailed as the best method of creating additional employment and for removing poverty. NABARD has been playing a catalytic role in terms of promotional support to NGOs and also in nurturing quality SHGs. Credit sanctioned by the Micro financial institutions have vast market in the rural as well as in the urban areas. Successful marketing of microfinance to SHGs will further strengthen the movement. The NGOs therefore needs to be given priority for standardizing the quality of service. Indian micro finance has recorded substantial achievements over the past few years. Indias leading MFIs are now highly regarded all over the world. Linking of SHGs with banks play a vital role for women development.

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CHAPTER-II

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1.1 RESEARCH OBJECTIVES: a. To analyze the year wise performance of SHG-linked by Commercial banks, Regional Rural banks and Co-operative banks in Karnataka. b. Progress under microfinance- bank loans disbursed to SHGs during 2009 -2010 by public sector banks and private sector banks in Karnataka. c. To examine the role by banks in terms of savings, loan disbursed and loans outstanding by commercial banks, RRBs and Co-operative banks in Karnataka. d. District wise break up of SHGs formed in 2008-09 and bank loan disbursed in the year 200809. e. To examine the role by banks in the development of SHGs in the realm of microfinance.

1.2 RESEARCH PROBLEM: Indian is the largest emerging market for microfinance. Over the past decade, them microfinance sector has been growing in India at a fairly steady pace. Though no microfinance institution (MFI) in India has yet reached anywhere near the scale of the Well- known- Bangladesh MFIs. The sector in India is characterized by a wide diversity of methodologies and legal forms. However, very few Indian MFIs have achieved sustainability yet. This research attempts to study the growth of microfinance in Karnataka and different state and evaluation of private and public sector banks in this field. 1.3 TYPE OF RESEARCH: This study is a descriptive study which aims to compare the growth of microfinance sector and contribution of banks in this field in Karnataka. This is based on the secondary data published by NABARD.

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1.4 SCOPE OF THE STUDY: The study aims at providing on in depth knowledge of microfinance, its operations and benefits. 1.5 SAMPLING TECHNIQUE: The technique is convenient sampling. The sample taken is the commercial banks, regional rural banks, cooperative banks and private banks. 1.6 RESEARCH TOOLS: Secondary data collection (literature survey) Sources: Publications of NABARD Library E-library Data analysis Averages, ratios Tables 1.7 RESEARCH LIMITATIONS: a. The study had limitations due to lack of time for the project. b. The study is limited to the secondary data.

1.8 NEED FOR STUDY: During 1988-1998, ADB approved 15 microfinance projects totaling about $350 million, 6 projects with microfinance components valued at about $53 million, and 34 technical assistance activities for about $18 million to support microfinance operations. ADB has, however, provided this assistance without a well-defined strategy and, as a result, has not been able to fully harness the potential of microfinance for poverty reduction. Once almost exclusively the domain of donor and experimental credit projects, institutional microfinance has evolved during the last decade into an industry with prospects for financial viability, offering a broader range of services and significant opportunities for expansion.
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The prospects for financial sustainability are revolutionizing the microfinance field and suggest that a large proportion of the millions of poor people can be provided access to institutional microfinance. This change has important implications for ADB. ADB needs to take cognizance of the challenges and prepare to effectively harness the opportunities in the DMCs. Given the diverse requirements in the sector, the competing demands for ADB funds, the increasing pressure on resources in the Asian Development Fund, and the growing complexities and challenges of improving the quality of life of over 900 million poor people in the Region, ADB must reinforce its emphasis on efficient allocation and use of resources at its command. A strategy is necessary to ensure the ADB addresses these concerns effectively and consistently within its objective of poverty reduction. A strategy can also a. Provide a clear and consistent link between ADBs microfinance operations and its overarching objective of poverty reduction. b. Facilitate promotion of a common approach to microfinance operations throughout ADB, which will also contribute to better coordination with other funding agencies. c. Provide a consistent basis for policy dialogue with the DMCs on microfinance and related issues; d. Assist ADBs ongoing efforts to improve the quality of project design, processing and implementation of microfinance operations; and e. Facilitate adoption of a longer term perspective than in the past in providing assistance for microfinance.

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CHAPTER-III

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Microfinance is often defined as financial services for poor and low-income clients. In practice, the term is often used more narrowly to refer to loans and other services from providers that identify themselves as microfinance institutions (MFIs). These institutions commonly tend to use new methods developed over the last 30 years to deliver very small loans to unsalaried borrowers, taking little or no collateral. These methods include group lending and liability, preloan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly. More broadly, microfinance refers to a movement that envisions a world in which low-income households have permanent access to a range of high quality financial services to finance their income-producing activities, build assets, stabilize consumption, and protect against risks. These services are not limited to credit, but include savings, insurance, and money transfers. 2.1 MICROFINANCE CLIENTS: Typical microfinance clients are poor and low-income people that do not have access to other formal financial institutions. Microfinance clients are usually self-employed, household-based entrepreneurs. Their diverse microenterprises include small retail shops, street vending, artisanal manufacture, and service provision. In rural areas, micro entrepreneurs often have small income-generating activities such as food processing and trade; some but far from all are farmers. Hard data on the poverty status of clients is limited, but tends to suggest that most microfinance clients fall near the poverty line, both above and below. Households in the poorest 10% of the population, including the destitute, are not traditional microcredit clients because they lack stable cash flows to repay loans, most clients below the poverty line are in the upper half of the poor. It is clear, however, the some MFIs can serve clients at the higher end of the bottom half. Women often comprise the majority of clients. Over the past decade, a few MFIs have started developing a range of products to meet the needs of other clients, including pensioners and salaried workers. Although little is known about the universe of potential clients, the number of households without effective access to financial services is enormous.

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2.3 KINDS OF INSTITUTIONS DELIVER MICROFINANCE: A range of institutions in public sector as well as private sector offers the micro finance services in India. They can be broadly categorized in to two categories namely, formal institutions and informal institutions. The former category comprises of Apex Development Financial Institutions, Commercial Banks, Regional Rural Banks, and Cooperative Banks that provide micro finance services in addition to their general banking activities and are referred to as micro finance service providers. On the other hand, the informal institutions that undertake microfinance services as their main activity are generally referred to as micro finance institutions (MFIs). While both private and public ownership are found in the case of formal financial institutions offering micro finance services, the MFIs are mainly in the private sector. Most MFIs started as not-for-profit organizations like NGOs (non-governmental organizations), credit unions and other financial cooperatives, and state-owned development and postal savings banks. And increasing number of MFIs are now organized as for-profit entities, often because it is a requirement to obtaining a license from banking authorities to offer savings services. Forprofit MFIs may be organized as non-bank financial institutions (NBFIs), commercial banks that specialize in microfinance, or microfinance departments of full-service banks. A range of institutions in public sector as well as private sector offers micro finance services in India. They can be broadly categorized into two categories namely, 1. Formal Institutions. 2. Informal Institutions. The former category comprises Apex Development Financial Institutions, Commercial Banks, Regional Rural Banks, and Cooperative Banks that provide micro finance services in addition to their general banking activities and are referred to as micro finance service providers. On the other hand, the informal institutions that undertake micro finance services as their main activity are generally referred to as micro finance institutions (MFIs). While both private and public ownership are found in the case of formal financial institutions offering microfinance services, the MFIs are mainly in the private sector. The micro finance service providers include

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apex institutions like National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and Rashtriya Mahila Kosh (RMK). The micro finance initiative in private sector can be traced to the initiative undertaken by Ms.Ela Bhatt for providing banking services to the poor women employed in the unorganized sector in Ahmadabad City of Gujarat State. NABARD during the early eighties conducted a series of research studies in association with MYRADA (a leading NGO from South India) and also independently which showed that despite having a wide network of rural bank branches that implemented specific poverty alleviation programs and self-employment opportunities through bank credit for almost two decades, a very large number of the poorest of the poor continued to remain outside the fold of the formal banking system. NABARD, however, also took a conscious decision to experiment with other successful strategies such as replicating Grameen, wholesaling funds through NGOMFIs. The dominant model of microfinance the group lending model pioneered by the Grameen Bank in Bangladesh socializes the costs of lending to poor women by providing them access to credit on the basis of Social Collateral obtained through membership in borrower groups. Here social capital helps correct for imperfect information about borrowers lacking in formal credit and employment histories and substitutes for collateral by ensuring against default through social sanction and peer enforcement. 2.3 MICROFINANCE SERVICE PROVIDERS: The micro finance service providers include apex institutions like National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and, Rashtriya Mahila Kosh (RMK). At the retail level, Commercial Banks, Regional Rural Banks, and Cooperative banks provide micro finance services. Today, there are about 60,000 retail credit outlets of the formal banking sector in the rural areas comprising 12,000 branches of district level cooperative banks, over 14,000 branches of the Regional Rural Banks (RRBs) and over 30,000 rural and semi-urban branches of commercial banks besides almost 90,000 cooperatives credit societies at the village level. On an average, there is at least one retail credit outlet for about 5,000 rural people. This physical reaching out the far-flung areas of the country to provide savings, credit and other banking services to the rural society is an unparalleled
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achievement of the Indian banking system. In the this paper an attempt is made to deal with various aspects relating to emergence of private microfinance industry in the context of prevailing legal and regulatory environment for private sector rural and micro finance operators. 2.4 PLAYERS IN MICROFINANCE SECTOR: The different actors on the basis of the roles they play in building of the rural financial structures depending on their needs and goals. i. The Rural Poor:

a. Perceive thrift as their strength as also as the bonding factor among themselves. b. Realize that timely and adequate credit was preferable and productive than subsidies and doles. c. They need hassle-free delivery mechanisms. ii. NGOs:

a. Act as catalysts of change b. Combine social and economic agenda with synergistic effect c. Recognize sustainability as the core factor in development. iii. Banking System

a. Accept SHG-bank linkage a cost effective means of reaching the poor b. Accept peer pressure as collateral substitute for excellent recovery of loans. iv. Government:

a. Formulate supportive policy framework b. Encourage routing of social programs through SHGs v. Reserve Bank of India:

a. RBI policy inputs on micro finance lead increased involvement of banks. b. Liberalize interest rates and deregulated interest rate structure for micro credit, leading to flexibility in lending rates. vi. NABARD

a. Provides inputs in capacity building for banks and partner agencies b. Promotes the idea of organizing thrift and credit groups among the NGOs as an add-on activity and encouraged linking them with banks.

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2.5 BASIC FACTS OF MICROFINANCE: a. Microfinance is the provision of financial services to poor households. b. The microfinance sector currently has an estimated total loan volume of 25 billion dollars. c. Economists estimate that around 250 billion dollars would be needed to satisfy demand. d. Loans usually start just below 100 dollars and can, over time, reach several time this amount. e. In Asia, shares of female debtors are as high as 99%.

2.6 Organizations Implementing Micro Finance Activities:

Organizations implementing micro-finance activities can be categorized into three basic groups. a. Organizations which directly lend to specific target groups and carrying out all related activities like recovery, monitoring, follow-up etc. some of these organizations are graduating to become exclusive MFOs, but such cases are few. b. Organizations that only promote and provide linkages to SHGs and are not directly involved in micro lending operations. c. Organizations which are dealing with SHGs and plan to start micro-finance related activities.

2.7 GOVERNMENT ROLE IN SUPPORTING MICROFINANCE: Government can contribute most effectively by: a. Setting sound macroeconomic policy that provides stability and low inflation. b. Avoiding interest rate ceilings when governments set interest rate limits, political factors usually result in limits that are too low to permit sustainable delivery of credit that involves high administrative costs-such as tiny loans for poor people. Such ceilings often have the announced intention of protecting the poor, but are more likely to choke off the supply of credit. c. Adjusting bank regulation to facilitate deposit taking by solid MFIs, once the country has experience with sustainable microfinance delivery.

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d. Creating government wholesale funds to support retail MFIs if funds can be insulated from politics, and they can hire and protect strong technical management and avoid disbursement pressure that force fund to support unpromising MFIs. The NABARD led Pilot Project commence with the support of the Central Bank of the country, i.e., Reserve Bank of India, from 1992 onwards aimed at promoting and financing 500 SHGs across the entire country, the SHG- bank linkage strategy has come a long way. However, NGOs and MFIs acted as a catalyst for change and helped in bringing about such paradigm shift. They were very successful in combining social and economic agenda with synergistic effect. They also recognized sustainability as the core factor in development. The statistics in this field are mind-blogging. During the period April 2003 to March 2004361,731 new SHGs were financed by banks to a tune of Rs 18.55 billion (US $ 412 million) by way of loans. Cumulatively, banks have lent Rs 39.04 billion (US $ 867 million) to banks during 2003-04 bring the cumulative refinance amount to Rs 21.24 billion (US $ 472 million). These successes have been achieved only due to strict monitoring and functioning of the NGOs and MFIs. For example, the Non Governmental Organizations (NGOs) and Microfinance institutions promoting SHGs must abide by the international best practices for microfinance, which suggests that good financial analysis is the basis for successful and sustainable microfinance operations leading to the success of the SHG concept. With this understanding of the world of MF, this research was carried out in accordance with the famous phrase If you want to evaluate the forest, look at the trees. Thus it is important to evaluate an institutions performance with regard to different areas of its operation i.e. product, service, delivery, etc. Microfinance as a developmental and economic tool has caught the imagination of banks and other financial institutions, and NGOs in India. NGOs newly involved in microfinance tend to point to high repayment rates as an indicator of their success. If there is one universal microcredit doctrine, it is that repayment rates of close to 100 percent are within reach if the microfinance institutions conduct their operations along Best Practice explanations for good repayments rates include high frequency collection schedules, tight controls, a good management information system, loan officer incentives, good follow up, and a quick jump on delinquency. On the borrowers side, the effects of peer
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pressure in group based schemes, and the attractiveness of products with relatively low transaction costs also explain good repayment rates. 2.8 ASSESSING A SELF HELP GROUP: The norms for SHG in a particular place may have to be developed keeping in view the local conditions. The above pattern is only a model and indicative one and could be used as the basis for developing suitable norms for financing SHGs is it banks or any other financing institution. A few proactive commercial banks, Regional Rural Banks and Cooperative Banks have already introduced their own norms and the same is being followed by the financing units. (This not may be read with NABARD circular letter dated February 2002, which also shares different formats for appraising a SHG for finance). For any financing institution, appraisal is very important for ensuring the utility of the loan and repayment of the loan. Bankers generally appraise the project and the borrower. In case of SHG financing, most of the project appraisal norms like assessing the cost benefit and profits will not be workable due to the peculiarities of SHG financing. For considering a loan application for financing the Financer has to evaluate the capacity and character of the prospective borrower. SHGs also being customers have to be appraised before extending credit facilities. But then assessment of creditworthiness of a SHG is very different from that of an individual. SHGs are not to be assessed in terms of Group dynamics like cohesion, vibrancy, and goal-oriented action, participation of members, democratic decision and collective leadership. The appraiser has to see whether the group is functioning, actually as a group, why the members have come together, whether it is for obtaining 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: a. 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 o0r economic status (which is critical). b. Savings first, credit thereafter c. SHGs should hold regular meetings
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d. SHGs should maintain record of financial and other transactions e. They should have norms regarding membership, meetings etc. f. Group leaders should be elected by members and rotated periodically g. Transparency in operations of the group and participatory decision taking h. Rates of interest on loans should be decided by the group i. 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 look into include:

1. Norms for functioning:

The SHG should have developed some kind of norms for its functioning the norms should be covering major areas of its functioning as well as the decision making processes, leadership etc., Norms generally relate to a. Membership. b. Meetings time, periodicity c. Savings amount, periodicity, rate of interest (return) d. Credit procedure for sanction, ceiling amount, purposes, rate of interest to be charged, repayment period etc. e. Fines in case of default in attending meetings, savings and credit repayment. Group may also levy any fines for any deviant behavior etc. f. Leadership election or nomination of leaders, rotation of leaders etc. g. Personal/social improvement minimum literacy level to be achieved, social work to be done etc. 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 aspects to be looked into are: 1. How norms evolved, whether by the consensus of the whole group. 2. Whether the members are aware of the norms (even if they are oral) and understand them, 3. Whether the norms are implemented.
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2. 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 about groups functioning. Therefore a financer should see whether. a. The meetings have been held regularly b. The attendance in the meetings c. The members are punctual and stay till the end of the meeting d. Are there any sanctions for the delinquent members? The financier can use his observations during the meetings and the meeting registers to get data on this appraisal aspect.

3. 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 criterion 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. Financer has to verify: 1. Whether details of meetings, proceedings, and attendance are maintained. 2. Whether member-wise records of saving and credit are maintained. 3. Whether the records are up to date. 4. Whether all members are kept informed of their savings and credit balances from time to time. 5. In case of illiterate groups whether what is the system followed, does the group verify the books maintained by NGO/outsider. 6. Whether systems have been developed to ensure safe custody of cash.

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4. 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 taking 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)

5. Participation and Awareness of Group Members:

Are the Members aware of the purpose of group formation, the operations and activities of the group viz? The savings and the credit of the group as well as the individual members savings and credit details. a. Do they participate in group discussions and decision making. b. Do they help solve the problem that are raised in the meetings. c. Do they work cohesively and have transparent dealings. 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.

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6. Savings:
The group decides on the amount of savings as also its periodically. 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.

7. Credit:
The following aspects to be looked into while assessing the credit function of the group: a. The decision making process of selecting loaners. b. The system followed in assessing credit requirement of individual members and the amount to be sanctioned. c. The system of monitoring the credit. d. The repayment performance of members and incidence of defaults besides the effectiveness to deal with such defaults; whether the concept of peer pressure is working.

8. Self Reliance of the Group:

Can the group function on its own without the support of the NGO is an important criterion for assessment? The level of dependency on the NGO/promoter of the group and impact of withdrawal of NGO/promoter on the group is to be assessed. SELECTION CRITERIA OF SHG FOR LINKAGE TO BANK LOAN: a. SHG scoring more than 12 marks out of maximum of 150 marks could be chosen for credit linkage. b. SHG scoring less than 120 marks will have to be further developed before linkage.

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2.9 NABARD and MICROFINANCE NABARDs Vision and Mission Vision: To facilitate sustained access to financial services for the unreached poor in rural areas through various micro finance innovations in a cost effective and sustainable manner. Mission Accomplished: Provision of financial access to 16.7 million poor families through formation and credit linkage of 1,079,091 self help groups as on 31st march 2009. Mission-Ahead Formation and credit linkage of 585,000 new self help groups by the year 2009 with 60% of them coming from 13 priority underdeveloped states of the Country. Facilitate mature SHGs to graduate from microfinance for consumption or production credit to microenterprises. Micro Finance-NABARDs Strategy Overall Strategy a. Forming and nurturing small, homogeneous and participatory self-help groups (SHGs) of the poor has today emerged as potent tool for human development. This process enables the poor, especially the women form the poor households, to collectively identify and analyze the problems they face in the perspective of their social and economic environment. It helps them to pool their resources, human and financial, and priorities their use for solving their own problems. b. The emphasis on regular thrift collection and it use to solve immediate problems of consumption and production not only helps to meet their most urgent needs, but also trains them to handle larger financial resources more skillfully, prudently and with a more lasting impact. c. Encourage SHGs to become a forum for many social sector interventions.
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2.10

SHG-BANK LINKAGE PROGRAM:

Facilitating SHGs to access credit from formal banking channels. SHG-Bank Linkage Program has proved to be the major supplementary credit delivery system with wide acceptance by banks, NGOs and various government departments. Region-specific Initiatives a. NABARD has intensified its efforts for roping in new partners for promotion and linkage of groups in regions where the growth of groups has not been commensurate with potential. b. Priority has been assigned to awareness-building and for identification of NGOs and other partners in 13 priority states, which account for 70% of rural poor in the country. Capacity Building Initiatives: 1. NABARD has supports/ sponsors capacity building programs for various partners in the field of microfinance to sensitize and equip them with concept and nuances of SHG bank linkage program. Up to the end of March 2004 about 687,000 persons have been trained by us through our regional offices, training establishments, resource NGOs and partner agencies. 2. NABARD provides training inputs on SHG financing to training establishments of participating banks, to help them to internalize the training requirements at their level. 3. NABARD gives technical support to banks to evolve suitable intermediate structures like Farmers Clubs (Vikas Volunteer Vahini Program of the National Bank) to increase the outreach of their branches in promotion and linking SHGs. 4. NABARD supports and helps banking institutions (especially RRBs and cooperative banks) to take on the role of Self Help Promoting Institutions (SHPIs). Support to Governments: a. Necessary assistance is provided to the governments by NABARD for dovetailing mf practices with the poverty alleviation programs. b. NABARD also encourages the association of Panchayati Raj Institutions (RIs) in adopting group processes for maximization of empowerment.
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c. NABARD, in association with Lal Bahadur Shastry National Academy of Administration, Mussoorie conducts tailor made exposure program on self help group and microfinance for senior and middle level officers of Indian Administrative Services (IAS) who were posted as district collectors/ Chief Executives Offices of local administrative set ups (Zilla Parishad) Support to NGO Partners: a. Several steps have been taken by NABARD for capacity building of NGOs which partner in promotion and nurturing of SHGs. The emphasis is on involving a large number of NGOs. Special focus is on those NGOs participating in watershed development, health, literacy and women development, to encourage them to take up promotion nurturing and linkage of SHGs as an ad-don activity. b. NABARD has a scheme of part-financing the cost of promotion of groups by NGOs. c. NABARD has developed specialized programs for use by CEOs of NGOs for appropriately Envisioning this as an add-on concept. Separate programs have also been designed for NGO field staff to appreciate the nuances of SHG functioning. Alternate MF Practices: a. The NGOs and other local bodies at village, block and district levels in the North Eastern States are encouraged to take up alternative micro-credit delivery mechanisms through direct funding. b. Formation and operation of SHG Federations in supported and encouraged by NABARD. Similarly, networking of NGOs is also encouraged. Coordinating MF Efforts in India: NABARD coordinates the MF activities in India at international/ national/ state/ district levels. These include organizing international/national Workshops, Seminars; etc for experience sharing, Organizing National and State level meets of Bankers and NGOs etc. Monitoring and Review: Block/district/state level review meetings are organized and/or organized by NABARD. The relative documentation and database is also carried out by NABARD. In addition, periodical
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Monitoring studies are conducted through NABARD/Bank Officers. Internal Impact Studies and are conducted by NABARD periodically.

2.11 MF-Regulation and Supervisory Aspects:

This section looks at the emerging requirements for regulation and supervision of microfinance institutions in India and introduces the issues and policies related to it. A. Emerging Microfinance Institution (MFIs): Banks provide MF service as one of the many services provided by them, along with their other conventional business. Therefore, banks can be classified as MF service providers. There are other agencies and institutions which provide MF service for the poor, as a predominant activity. These institutions are called microfinance institutions (MFIs). NGOs have, over the past two decades, started financial intermediation as an add on activity, to enhance acceptability of their social welfare programs. Over the years they have emerged as the major microfinance institutions, although most of them continue with their social sector interventions. Three broad categories of MFIs are: a. Not for Profit MFI, comprising NGOs, Trusts and Not-for-Profit companies; b. Mutual Benefit MFIs, mostly State and National level Cooperatives; and c. For-Profit MFIs, which are classified as Non Banking Financial Companies. It is estimated that more than 500 NGOs are providing MF services to the poor at present. Similarly, 2155 NGOs have participated in SHG-credit linkage program till march 2005. A task force was set up by NABARD to look into the entire gamut of MF and MFIs to catalyze their growth. B. Transformation of Donar ship into Ownership of MFIs: Recognition of NGO-MFIs Although not legally recognized as such, the role of NGO as providers of financial services has been accepted by Government of India and RBI. There are however, certain inherent restrictions in the financial activities of the NGO-MFIs as regards.
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 Mobilization of savings. Lack of equity concept for leveraging bank loan. Uncertain status as regards taxation on interest earned. Inability to transfer resources to form a new company. With a view to professionalizing MF, certain NGOs have promoted exclusive Non-Banking Financial Companies for MF. Entry of Foreign Capital into MF: a. At present, certain restrictions are imposed on entry of foreign equity into rural credit and microfinance. b. The minimum capital requirement even for an MF-NBFC is Rs. 20 million, the same as for any other company. Areas for transformation of MFIs: a. Development of systems for Resource Mobilization by the MFIs in a sustainable manner. b. Building managerial competence and creating qualified manpower. c. Managing transition from a subsidy-dependent culture to a commercial culture. d. Provision of sufficient protection in the laws for non-profit organizations.

C. Organization and Economics of Supervisions: a. Banks as MF service providers are supervised by RBI and NABARD as part of their overall banking business. b. The MF activities of the NGO MFIs are unregulated and unsupervised. c. Only MFIs registered as Cooperatives and NBFC are presently regulated.

2.12

NEED FOR REGULATION:

a. Savers with MFIs are legally not members of the MFIs, but only clients. b. Protection of the savings of the poor is needed. c. Infusion of financial discipline into the credit activities of MFIs is necessary.

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Task Force on MF considers formation of Self Regulatory Organizations (SROs) to be the best suited for regulation of MFIs. Such SROs will have to emerge from suitable associations of MFIs.

2.13 Innovative Pilot Projects:

The phenomenal growth rate of microfinance sector, especially the SHG bank linkage program has posed number of issues and challenges which need immediate attention. In response to this NABARD has initiated a number of innovations basically as an investment for posterity. At the core of these innovations is a desire to improve the outreach and sustainability of the program. Some of the pilot projects and initiated recently are summarized here. 2. Introduction of Smart Cards-Application of IT in SHG Bank Linkage Program: There are now many branches of Commercial Banks and Regional Rural Banks that service more than 200 SHG accounts which were hitherto considered impossible. Howsoever welcome the trend may be, the burgeoning numbers have also brought to the fore a host of issues relating to tracking, monitoring and adequately servicing SHG accounts. It was felt that the best way to deal with huge numbers would be to take recourse to new technologies available. Also in general, the branch manager in the rural areas is hard pressed for time and as a result does little for developing the business of the branch or for scouting for new business opportunities for the branch. It was felt that use of Information Technology in the form of processor/memory cards for SHGs and other clients coupled with automation in a branch would serve to solve these vexed issues and leave adequate time for business development work. NABARD has therefore decided to experiment with about five branches per RRB in different regions of the country. Introducing Processor/Memory Cards for active clients and SHGs and automation of book keeping in SHGs is expected to reduce paper work, save time and thus improve the efficiency of the field worker. This is also expected to reduce the scope of manipulation, reduce unintended leakages and also maintain up to date books at SHG level. The first pilot project on smart cards has been launched with Sri Visakha Grameena Bank in Andhra Pradesh, which has been one of the front-runner banks in financing SHGs. It is expected that with enhanced use of rural-oriented technology, the bank would be able to provide value
45

addition to services being offered to the rural clients and further expand it outreach in a sustainable manner. The users of processor/memory cards would include SHGs and other good customers of the bank who are its regular customers. About 500 such customers, who would perform all banking transactions on a fast track, would be selected in each bank branch; Time taken for banking by these regular good clients is likely to be reduced considerably. Use of processor/memory cards by SHG customers also adds another set of advantages like effective book keeping, tracking and monitoring of SHGs, reducing the hassles of illiterate SHG members seeking the assistance of the NGO / promoter / local book writer to perform these functions. In addition to prompt upkeep of books by SHGs, auditing of books of accounts, computing interest, could be consolidated at branch office to generate MIS reports, which the branch staff could effectively use to track the functioning of SHGs, ensure prompt credit linkages and recovery. This coupled with automation of back office operations of the branch would ease the branch manager of a lot of time spent on routine matters and they could use the spare time to build new customers and enhance business relations. 3. Pilot Project for linking SHGs with Post Offices: With more than one and a half lakh outlets, more or less evenly spread all across the country, the outreach of the post offices is unmatched. Add the neighborhood friend image that the ubiquitous postmen enjoy-especially in the rural areas and you have a near project doorstep credit delivery channel-waiting to be tapped. On the other hand, there are many bank branches / PACS, which are either ill equipped in terms of their financial soundness/ infrastructure or unwilling to take up the linkage banking program. Another internationally acclaimed channel of providing micro finance i.e. MFIs, is yet to prove that in our country they are capable of attaining the out reach of the formal institutions in a medium term or even long term time frame. This has prompted NABARD to take up a pilot project on linking SHGs through post offices. A Revolving Fund Assistance (RFA) of Rs. 34 lakh has been sanctioned to select post offices in Kancheepuram and Pudukottai districts in Tamil Nadu for providing loans to 200 SHGs promoted by NGOs. Grant assistance has also been sanctioned under the project for meeting
46

initial expenditure on publicity and awareness creation. The rate of interest, which would be shared between NABARD and the post office in the ratio of 2:1, would be 9% .The project would run up to March 2009. The project would test the efficacy of the Department of Posts in providing micro finance services to rural clientele and help NABARD in deciding the future strategy for expansion of the linkage program. 4. Joint Liability Groups The pilot project on financing Joint Liability Groups aims at developing effective credit products for mid segment clients, which reduce risk and transaction costs for the banker and also introduce a great degree of flexibility for the credit user to determine his/her needs and priorities. This middle segment, which predominantly performs agriculture related activities, often requires quantums of credit larger than micro-credit, it also requires credit for longer durations-it is also at times linked to seasons, repayments are normally met the end of harvest seasons only. In essence, it is about hassle-free credit for agriculture and other rural enterprises. A Joint Liability Group (JLG), proposed to be established under the pilot project, is and assembly of 5-10 member clients (new or existing) for a bank, informally recognized by the bank as a group. The JLG members offer an undertaking to the bank that enables them to jointly receive such amounts as deemed eligible by the bank for pursuing any individual or joint activities-as found suitable by the group. The main purpose of JLG is to facilitate mutual loan guaranteeing and execution of joint liability agreement making them severally and jointly liable for payment of interest and repayment of loan obtained from the bank. The management of the JLG is to be kept simple with little or no financial administration within the group. There could be different functional models of JLGs that could be formed based on the need of the clients as also the comfort level and understanding of the bank about its success. Thus the JLG approach could be either credit-led or saving-led. The project could be piloted in five/ ten banks located in diverse agro-climatic belts/states. It will be implemented through five branches of each participating RRB or cooperative bank. An average of 20 accounts of JLGs will be implemented per branch and experimented to cover about

47

500 borrowers/bank (or about 100 per branch) as the first stage testing of this product and also refining its design and operational details. The guidelines have been kept flexible giving the partner banks enough freedom to implement the pilot, keeping the ground realities and context in perspective. National Bank will provide, as grant assistance, Rs. 3.00 lakh for operational cost, during implementation of the project. As an arrangement for the pilot project a special line of credit limit by way of refinance will be made available to the participant banks. 5. Project on Computer Munshi a self-sustaining mechanism to manage SHG account and MIS: Quality and regularity of book keeping is the aspect of linkage banking, which is most affected because of the widespread illiteracy amongst the poor SHG women. If ignored for a long time, this has the potential to endanger the sustainability of the Groups. Another related issue of almost equal importance is the MIS, which means passing on the relevant information about the functioning of the SHGs to the concerned stakeholders like SHPIs and banks. PRADAN, and NGO, which has promoted more than 4000 SHGs, very strongly felt that sustaining the groups would be a major problem if a proper accounting system and an stronger MIS and were not put in place urgently. They therefore came up with the idea of Computer Munshies. The idea involves identification of skilled rural youth for the task of higher order accounting by providing training as Computer Munchies (CM). The trained individuals would be equipped with a computer and software to serve 100 to 300 SHGs. The SHG level meeting transaction statement will be send to the CM after every meeting, which will be keyed in by the trained individual using the software which would generate outputs like trial balance, member savings and loan balances. The SHG promoter and the banker could also access data about SHGs from the CM on payment of a fee. The software (McFinancier) for the project has been developed by PRADAN with the help of a Delhi based agency. It captures all the essential data financial and nonfinancial. The software also generates number of useful reports including 19 different ratio analyses. The data could be aggregated at the cluster or block level to make assessment of the functioning of the groups in a specific geo-span. It also facilities financial analysis, drawing a trial balance, balance sheet,
48

portfolio analysis, member level impact by capturing the base line data etc. The outputs generated could be useful to all related stakeholders including bankers, social intermediaries and the SHG themselves. To test the idea, NABARD has sanctioned a grant assistance of Rs. 6.10 lakh to PRADAN for establishment of 10 Computer Munshi Units in the states of Jharkhand and Orissa. PRADAN would measure the effectiveness of the idea and the commercial viability of the project, based on which the future strategy will be decided. If the experiment works out well NABARD could consider financing establishment of MF call centers with computers, which could be financed by banks. This experiment could also be able to give us a lead as to whether this could serve as fundable revenue model. Alternatively the individual being trained for the purpose (SHG accounting) could use the services of the local internet caf or computer unit for completing the task and generating print outs of the account sheets.

2.14 Grain Banks and SHGs:

The tribal population in some parts of the country is known to use the concept of Grain Banks (Grain Golas) for saving the grains during the harvesting seasons and using them to meet their consumption requirements during the lean / dry periods. They also use the arrangement for borrowing the grains for seed purposes at the time of sowing. In the past also, some of the state and central government interventions in these backward regions had attempted to create the infrastructure of Grain Banks. Currently, the need for evolving a participatory food security system for backward tribal regions is being actively debated. The strong emphasis on group savings in kind and borrowing in kind under the Grain Bank approach has significant similarities with the SHG Bank Linkage Program; the difference being that the savings and loans are in kind. The issue, therefore, is how to facilitate monetization of the savings and loans in kind and integrate the traditional approaches into the monetized microfinance system. Such integration would enable the poor tribal population to access need based financial services and also address the issues of food and seed securities. These considerations have led to the launch of the pilot project on Grain Banks. The Pilot Project, sanctioned to An today an experienced NGO, is proposed to be implemented in 17 villages in Thaumul Rampur Block Kalahandi district in KBK region of Orissa state. It
49

involves promotion of 25 SHGs and formation of 3 Grain Banks. There would be one Grain Bank for every 100 households. Apart from the savings in cash, monetization of the savings-inkind, as also to SHGs against their stock of grains, would be considered by the Bank. Members would save and draw loan both in cash and / or kind, depending upon their convenience. The Kalahandi Anhalik Gramin Bank would extend loans to the SHGs against the stock of Grain banks and cash savings of the Groups. The SHGs would utilize the bank to procure grains when the price is low and for repayment of loan taken from Grain Bank. In due course the Grain Banks could be linked with PDS and other Govt. Programs. 2.15 SHG-BANK LINKAGE PROGRAM IN KARNATAKA:

Karnataka, a pioneer in SHG-Bank linkage program continuous to maintain its leading status in promotion and credit linkages of SHGs. While NGOs and Women and Child Development Department (WCDD, GoK) have been actively involved in promotion of majority of the SHGs in the state, all the banks have taken the responsibility of linking these groups with formal banking system. Over a period of time, some of the Regional Rural Banks and Cooperative Banks in the state have developed the skill in promoting SHGs on their own and assumed the mantle of Self Help Promoting institutions (SHPIs). The SHG-Bank linkage program registered its progress in the state of Karnataka by leaps and bounds during the year 2003-2004. 2.16 ROLE OF GOVERNMENT OF KARNATAKA:

The state government through it women and child development department (WCCD) as its implementing agency, continued its mission of empowering rural poor women in the state through its stree shakthi program. With the active involvement of the anganwadi Workers in the state, the government realized its goal of promotion of a curative ONE LAKH SHGs during the year. The state through capacity building of the SHGs in coordination with NABARD and other reputed NGOs in the state. The Swashakthi programme, which is implemented in select districts of the state through Karnataka State Women Development Corporation (KSWDC), played its role in strengthening the women groups promoted under the program. As on 31st March 2004, 2,120 SHGs have been promoted and 1599 SHGs have been credit linked under the program.

50

2.17

ROLE OF MICRO-FINANCE IN ALLEVIATING POVERTY:

Hunger is complex in its causes and solutions. It cuts across religious lines, language, borders and gender. Through self-employment opportunities to people both men and women, hunger can be reduced. But the two are not always related, meaning the poor are not necessarily unemployed and all unemployed are not poor. The relationship depends on the level of productivity and earnings that employment carries. The relationship between gender specific employment and poverty is further complicated by the fact that while employment is phenomenon related to an individual, poverty is a household phenomenon. It was found that the creation of women self-employment opportunities through micro-finance has impacted on the poverty and related characteristics of the household than the employment of the men. It was also found that women tend to utilize their earnings more on basis needs of the household and particularly, on improving the well being of their children. This however assumes that women have greater control over their earnings and its utilization. The most promising aspects of micro-finance programs especially with small savings and credit groups of women, has been a demystification of the age old image of poor as 26 on credit worthy and a confirmation of the power of collective action (Mosely 2002). Since early 90s, micro-finance has emerged as a major plank of donor poverty alleviation strategies. It is also increasingly getting feminize as more and more people argue for female targeting and an emphasis on facilitating womens access to financial services. Micro-Finance is moving from just a subsidy dependent activity to a serious business proposition. The challenge ahead is to build and strengthen the limited institutional capability of the retailers. 2.18 MICRO-FINANCE AND POVERTY REDUCTION:

The sources of demand, products and services and characteristics of demand for microfinance are explained below. 1. Source of demand Households poorest (Rural and Urban): Products and Services and characteristics of demand Convenient access to safe and liquid deposit services, Passbook savings with unlimited withdrawal facility, Strong demand for
51

consumption and emergency loans with no collateral, Small size loans for livelihood activities, Occasional loans for finance lumpy expenditures such as schools fees, Services outlet and close proximity, Simple procedures, Low transaction costs. 2. Source of demand Poor (Rural and Urban) Products and Services and characteristics of demand Convenient access to safe, liquid deposit facilities, Return on savings, Passbook savings with easy withdrawal facilities, Term deposits with small denominations and regular interest payments, Money transfer services, payment services, Insurance services for livestock, Consumption and emergency loans, Small loans for livelihood activities, Loans to finance lumpy expenditures, Low transaction costs. 3. Source Enterprise Micro-farms (Rural): Products and Services and characteristics of demand small loans for working capital (fertilizer, seeds), small loans for fixed capital (purchase Products and Services and characteristics of demand of simple tools, land improvements etc), below informal market interest rates, easy access and minimal transaction costs, seasonal demand, deposit facilities (Safe, Liquid, Convenient), return on deposits. 4. Source- Fisheries, Livestock and Poultry (Mainly Rural): Products and Services and characteristics of demand working capital loans for feed, fixed capital loans (tools, purchase of chicks), small loan size, substantial demand from livestock sector, deposit services (safe, liquid and convenient), insurance services. 5. Source Non 5 farm (Rural and Urban): Products and services and characteristics of demand deposit services (safe, liquid and convenient), money transfer, payment services, insurance and leasing services, a wide range of enterprises, demand for loan is not seasonal, demand is large for working capital loans, relatively large loans within the confines of micro-credit, minimal transaction costs and easy access.

52

CHAPTER-IV

53

ANALYSIS AND INTERPRETATION Microfinance has been growing in India but needs to grow a lot. The study shows that the public sector banks are playing a very good role. The thought of past the poor are less reliable and cant repay the credit has been proved wrong as there is 95-100% recovery of microfinance loans. It is one of the reasons that the banks are willing to expand the horizon of operations and working towards achieving growth. The private sector banks are now beginning to enter the microfinance sector, the lead being taken by HDFC bank. The banks in all the sectors-public, private, commercial, regional rural banks and district cooperative banks have been taking initiatives in enlarging the scope of microfinance the apex authority NABARD has been issuing guide lines for effective implementation of the various programs in the realm of microfinance. Various steps taken such as introduction of smart cards, linking of SHGs with post offices, creation of joint liability groups, project on computer munshi to make SHG self sustainable have all yielded fruitful results which can be seen in the form of improved status of the poor. Government is playing the role of a catalyst by proving support to various programs of NABARD and providing incentives to banks which excel in this field. The government of Karnataka has taken initiatives in this field through its women and child development department, sthree shakthi program and is continuously making efforts to make poor more self reliant and in empowering women.

54

TABLE-1 SHGs LINKED BY COMMERCIAL BANKS IN KARNATAKA Year (as on No 31 march) SHGs of Bank of Loan % increase in the % increase in the (Rs In Lakhs) SHGs over previous loan disbursed over year the previous year

2002 2003 2004 2005 2006 2007 2008 2009 2010

1,425 2008 2974 4829 6395 14425 20987 35912 47982

206.00 297.27 473.61 1017.60 1452.00 2426.24 4539.58 10227.38 38187.90

137.81 140.91 148.10 162.38 132.43 225.56 145.49 171.11 133.60

144.05 144.31 159.31 214.86 142.68 167.09 187.10 225.29 373.38

55

Chart 1: SHG LINKED BY COMMERCIAL IN KARNATAKA

60000 50000 40000 30000 Bank of Loan (Rs In Lakhs) 20000 10000 0 1 2 3 4 5 6 7 8 9 % increase in the SHGs over previous year Year (as on 31 march)

No of SHGs

INTERPRETATION: The commercial banks have shown 373% growth in the disbursement of loan in the previous year which depicts the reach of the commercial banks in Karnataka. Commercial banks are performing well in linking SHGs and in the disbursement of loan to SHGs in Karnataka. From 2002-2010 there was a considerable increase in both member of SHGs formed and loan disbursed to SHGs by commercial banks in Karnataka.

56

Regional Rural Banks (RRBs):

The Regional Rural Banks financed SHGs significantly during 2003-2004 in the State. All the 13 RRBs in the State participated in the SHG Bank Linkage Program. The achievement of RRBs as a percentage to the total registered an impressive increase in terms of SHGs linked, bank loan disbursed and refinance availed from NABARD. The highest number of SHGs has been linked by Malaprabha GB (2,981) in the State, followed by Cauvery GB (2,087) The other RRBs showing significant increase were Tungabhadra GB, Krishna GB kalpataru GB. TABLE-2 SHGs LINKED BY RRBs IN KARNATAKA Year (as on No 31 march) SHGs of Bank of Loan % increase in the % increase in the (Rs In Lakhs) SHGs over previous loan disbursed over year 2002 2003 2004 2005 2006 2007 2008 2009 2010 1022 1528 2417 4735 8334 13279 23473 38631 40852 186.65 314.57 513.34 1000.20 1647.70 3021.70 6048.29 10947.28 38621.40 155.31 149.51 158.18 195.90 176.00 159.33 176.76 164.57 105.74 the previous year 205.04 168.53 163.18 194.84 164.73 183.38 200.16 180.99 352.79

57

Chart2: SHG LINKED BY RRBs IN KARNATAKA

45000 40000 35000 30000 25000 20000 15000 10000 5000 0 1 2 3 4 5 6 7 8 9 % increase in the SHGs over previous year Bank of Loan (Rs In Lakhs) No of SHGs Year (as on 31 march)

INTERPRETATION: The regional rural banks have shown considerable increase in the promotion of self help groups.

58

CO-OPERATIVE BANKS: All the 21 DCCBs in the State have involved themselves prominently in the SHG-Bank Linkage Program. The major contributors were Hassan, Bidar, South Canara, Tumkur and Mandya DCCBS in the order. TABLE-3 SHGs LINKED BY CO-OPERATIVE BANKS IN KARNATAKA Year (as on No 31 march) SHGs of Bank of Loan % increase in the % increase in the (Rs In Lakhs) SHGs over previous loan disbursed over year the previous year

2002 2003 2004 2005 2006 2007 2008 2009 2010

5 54 201 1046 3890 9328 17718 29323 23406

0.50 13.50 68.25 212.30 576.80 1951.70 3973.05 7346.63 16315.36

1080 372.22 520.39 371.89 239.79 189.94 165.49 79.82

2700 505.55 311.06 271.69 338.36 203.56 184.91 222.07

59

Chart 3: SHG LINKED BY CO-OPERATIVES IN KARNATAKA

35000

30000

25000

Year (as on 31 march) 2002

No of SHGs 5 20000 Bank of Loan (Rs In Lakhs) 0.5 15000 % increase in the SHGs over previous year 10000 % increase in the loan disbursed over the previous year -

5000

0 1 2 3 4 5 6 7 8

INTERPRETATION: The contribution by Co-operative banks in this sector has been appreciable. There has been a decrease to below 100% in the formation of new SHGs by Cooperative banks but increase in disbursement of loans above 200%. In 2010 the number of SHGs formed has been decreased to below 100% but the rate of loan disbursed has been increased these shows the Co-operative banks effort in reaching SHGs in terms of disbursement of loan.

60

Table-4: PROGRESS UNDER MICROFINANCE-BANK LOANS DISBURSED TO SHGs DURING 2009-2010 BY PUBLIC SECTOR COMMERCIAL BANKS AND PRIVATE SECTOR COMMERCIAL BANKS IN KARNATAKA Bank NO OF SHGs Bank loan disbursed in

2009-2010 (Rs. In lakh) Public Sector Private Sector 47419 563 37540.25 647.65

CHART 4: BANK LOANS DISBURSED BY PUBLIC BANKS AND PRIVATE BANKS IN KARNATAKA

50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 No.of SHGS Bank loan disbursed in 2009-2010 Public sector private sector

61

INTERPRETATION: Public Sector banks have grown tremendously in this field in year as in this field in the year 2009-2010 the loan disbursed are as much as 98.3% of total disbursements in the year 2010, where as private sector banks amount for only 1.7% of total loan disbursed in Karnataka. Public sector banks are also playing a prominent role in formation of SHGs the total number of share was 98.83% and the rest 1.17% was made by private sector banks. From the above data it is clear that public sector banks are playing tremendous role in Karnataka.

62

To examine the role played by commercial banks, RRBs and cooperative banks in terms of savings, loan disbursed and loan outstanding in Karnataka in the year 2009-2010. TABLE-5: SAVINGS OF SHGs WITH BANKS IN KARNATAKA NAME OF THE BANK NO OF SHGs SAVING AMOUNT (Rs. In Lakhs COMMERCIAL BANKS RRBs CO-OPERATIVES TOTAL 1,95,345 1,48,137 1,40,894 4,84,376 10,523,63 12,307.83 16,017.61 38,849.06

Figure 5: SAVINGS OF SHGs WITH BANKS IN KARNATAKA AS ON 31 st MARCH 2010

4500000 4000000 3500000 3000000 2500000 2000000 1500000 1000000 500000 0

NO OF SHGs SAVING AMOUNT (Rs. In Lakhs

INTERPRETATION: From the above data it is clear that commercial banks are well in the field than the RRBs and Co-operative banks in Karnataka. Both in number of SHGs formation and savings of SHGs the lead taken by commercial banks and in formation of SHGs in 20092010 the second place taken by RRBs, but in terms of savings Co-operative banks have done well than the RRBs.

63

TABLE-6 BANK LOAN DISBURSED TO SHGs IN KARNATAKA NAME OF THE BANK NO OF SHGs BANK Lakhs) COMMERCIAL BANKS RRBs CO-OPERATIVES TOTAL 47982 40852 23406 112240 38187.90 38621.40 16315.36 93124.66 LOANS (Rs. In

Figure 6: BANK LOAN DISBURSED TO SHGs IN KARNATAKA AS ON 31 st March 2010

120000 100000 80000 60000 40000 20000 0 NO OF SHGs BANK LOANS (Rs. In Lakhs)

INTERPRETATION: From the above information it is clear that RRBs are playing well in terms of loan disbursement to SHGs than the commercial banks and Co-operative banks in Karnataka and commercial banks are also well in the field compared to Co-operative banks in 2009-2010 Karnataka.

64

TABLE-7: BANK LOAN OUTSTANDING AGAINST SHGs IN KARNATAKA NAME OF THE BANK NO OF SHGs BANK Lakhs) COMMERCIAL BANKS RRBs CO-OPERATIVES TOTAL 72,968 1,17,147 41,518 2,31,633 63,094.22 60,400.98 15,462.53 1,38,957.73 LOANS (Rs. In

CHART 7: BANKS LOAN OUTSTANDING AGAINST SHGs IN KARNATAKA AS ON 31st MARCH 2010
80000 70000 60000 50000 40000 30000 20000 10000 0 63,094.22 60,400.98 63,094.22 60,400.98 63,094.22 60,400.98

INTERPRETATION: In terms of loan outstanding commercial banks are placed first and then followed by RRBs and Co-operatives banks.

65

District wise break up of SHGs formed in 2008 2009 and bank loan disbursed in the year 2008 -2009 in Karnataka District No. of SHGs formed in year Bank Loan Disbursed in year 2008-09 Bagalkot Bangalore ( R ) Bangalore ( U ) Belgaum Bellary Bidar Bijapur Chamarajanagar Chikmaglur Chitradurga Dakshin Kannada Davangere Dharwad Gadag Gulbarga Hassan Haveri 576 1,152 304 1,480 1,774 1,577 518 877 664 1.842 6,925 577 795 527 1,993 2,941 618 2008-2009 19.79 41.12 16.87 61.99 61.99 81.61 17.33 37.70 20.74 59.40 217.71 11.50 20.89 11.69 46.76 87.59 19.44

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Kodagu Kolar Koppal Mandya Mysore Raichur Shimoga Tumukur Udupi Uttara kannada Total

682 1,533 605 1,891 2,601 831 1,033 2,943 3,427 982 41668

18.98 40.24 6.38 52.45 85.61 18.42 82.18 79.74 134.57 43.36 1,396.04

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CHART 8: DISTRICT WISE SHGs FORMED AND BANK LOAN DISBUSED IN THE YEAR 2008-2009
50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 Bagalkot Bangalore ( U ) Bellary Bijapur Chikmaglur Dakshin Kannada Dharwad Gulbarga Haveri Kolar Mandya Raichur Tumukur Uttara kannada

Bank Loan Disbursed in year 2008-2009 No. of SHGs formed in year 2008-09

INTERPRETATION: On an average every district has 1544 new SHGs in the year 2008-2009 and disbursed a loan of 51.7 Million.

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Overall Progress under Microfinance

(Rs.crores)

Particulars

Units

2008-2009

2009-2010

Savings Accounts of NO. SHGs with

4,160,584 (9,56,317)

5,009,794 (12,03,070)

Banks as on 31 March

Amount

3512.71 (757.50)

3,785.39 (809.51)

No. Banks Loans

11,05,749 (1,88,962)

12,27,770 (2,46,649)

disbursed to SHGs Amount During the year 6570.39 (1,411.02) 8,849.26 (1,857.74)

Bank

Loans NO.

28,94,505 (6,87,212)

36,25,941 (9,16,978)

outstanding with

SHGs as on 31 March

Amount

12,366.49 (3,273.04)

16,999,90 (4816.87)

NO. Bank Loans disbursed to MFIs During the year Amount

334

518

1151.56

1,970.15

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NO. Bank outstanding with MFIs as on 31 march Amount loans

550

1,109

1584.48

2,748.84

Note: a. Figures in brackets indicate the share of SHGs covered under Swarnjayanti Gram Swarozgar Yojna (SGSY) b. Actual number of MFIs provided with bank loans would be lower as several MFIs have availed loans from more than one bank. To examine the role played by commercial banks, RRBs and Co-operative bank in terms of savings, loan disbursed and loan outstanding in INDIA in the 2009 2010.

SAVINGS OF SHGs WITH BANKS IN INDIA NAME OF THE BANK NO OF SHGs AMOUNT OF SAVINGS

(Rs. IN Lakhs) COMMERCIAL BANKS RRBs CO-OPERATIVES TOTAL 28,10,750 13,86,838 8,12,206 50,09,994 2,07,773.45 1,16,648.83 54,116.67 3,78,538.94

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SAVINGS OF SHGs WITH BANKS IN INDIA AS ON 31st MARCH 2010

25000000 20000000 15000000 10000000 5000000 0 NO OF SHGs AMOUNT OF SAVINGS (Rs. IN Lakhs)

INTERPRETATION: In terms of savings and formation of SHGs in INDIA Commercial banks are playing good role and next was followed by RRBs and then Co-operative banks in 20092010.

BANKS LOAN DISBURSED TO SHGs in INDIA NAME OF THE BANK NO OF SHGs AMOUNT OF LOAN (Rs. IN Lakhs) COMMERCIAL BANKS RRBs CO-OPERATIVES TOTAL 7,35,119 3,27,650 1,65,001 12,27,770 5,40,390.35 2,65,184.14 79,351.75 8,84,926.24

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BANKS LOAN DISBURSED TO SHGs IN INDIA AS ON 31st MARCH 2010

100000000 90000000 80000000 70000000 60000000 50000000 40000000 30000000 20000000 10000000 0

NO OF SHGs AMOUNT OF LOAN (Rs. IN Lakhs)

INTERPRETAION: From the above data it shows that in terms of loan disbursed to SHGs in INDIA in 20090-10 commercial banks are playing prominent role than the RRBs and Cooperative banks.

BANK LOAN OUTSTANDING AGAINST SHGs in INDIA NAME OF THE BANK NO OF SHGs AMOUNT OF O/S LOANS (Rs. IN Lakhs) COMMERCIAL BANKS RRBs CO-OPERATIVES TOTAL 23,78,847 8,75,716 3,71,378 36,25,941 11,47,546.99 4,42,104.54 1,10,339.13 16,99,990.66

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BANKS LOAN OUTSTANDING AGAINST SHGs IN INDIA AS ON 31st MARCH 2010

4000000 3500000 3000000 2500000 2000000 1500000 1000000 500000 0 NO OF SHGS AMOUNT OF LOANS

INTERPRETATION: In terms of loan outstanding in INDIA in the year 2009-2010 major portion was taken over by commercial bank and then RRBs and at last are Co-operative banks.

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CHAPTER-V

74

Findings:
a. Commercial banks are performing well than the RRBs and co-operative banks. b. Public sector banks are performing well than the private sector banks in terms of microfinance provided. c. There has been a considerable increase in the reach to the poor and amount of disbursements by banks. d. MYRADAs process of building partnerships with the National Bank for Agricultural and Rural Development (NABARD) and the Reserve Bank of India (RBI); e. The reason for the need for an alternate credit system. f. Three kinds of alternate credit systems that emerged from peoples initiatives; g. Affinity groups / SHGs as the founts of autonomy; h. The process of forming SHGs, including when the interveners should withdraw; i. Various non SHGs groups and the necessity for them to gradually evolve into SHGs; j. The manner in which a common fund is built and managed; k. A case study of a participatory exercise in credit. l. The rationale behind linking groups with banks; m. Guidelines for banks, NGOs and SHGs; n. Incentives for bankers; o. Obstacles to the linkage process; p. Apex bodies as financial intermediaries; q. The state level meeting of SHGs organize3d by NABARD; r. There are many women SHGs; s. Monitoring systems and guidelines for SHGs; t. There was a Grading criterion for SHGs.

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SUGGESTIONS: a. Though microfinance sector has been growing, there still exists huge untapped potential. Banks with help of NGOs and SHGs need to grow in terms of geographic reach. b. Private Banks need to grow and reach the poor. c. Delivery of additional financial services; e.g. life insurance to SHG members through banking channel will give more security to the poor. d. Further surveys/studies needed to understand better impact. e. Banks, before providing loans they must see the background of customer to reduce the default rate. f. Co-operative banks have to take some steps to improve their performance.

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CONCLUSION: Microfinance has a huge potential to grow. Microfinance is moving from just a subsidy dependent activity to a serious business proposition. The challenges ahead is to build and strengthen the limited institutional capability of retailers. Microfinance has been growing enormously is the past few years and will continue to grow as now the potential has been well understand by the government, institutions of finance and the biased thought of inability of poor to repay has broken. The well formed chain of SHG, NGOs and the banks have been great success.

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BIBLIOGRAPHY a. Srinivasan R and Sriram M S, Round Table Microfinance in India: Discussion, IIMB Management Review, Volume 15, No. 2, June 2003. b. Robinson, Marguerite S, Microfinance: the Paradigm Shift From credit Delivery to Sustainable Financial Intermediation, in Mwangi S Kimenyi, Robert C Wieland and J D Von Pischke (eds), 2003, strategic issues in microfinance, Ashgate Publishing: Aldershot. c. Self help groups and bank linkage: R.K Mukherjee, The Economic Times, May 26 1999. d. Finance for the poor Microfinance Development Strategy. e. www.nabard.org/roles/mcid/microfinance.htm f. Publications by NABARD: Progress and perspectives of SHGs in Karnataka in 2002 2009 Progress of SHG-Bank linkage in India 2008-2009

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ANNEXURE Questionnaire A Study on Microfinance Sector in Karnataka.

Personal Profile: 1) Name: -----------------2) Age: -------------------

3) Designation: ----------------

1) Department: --------------------

2) Qualification: a) Diploma [ ] b) Engineer[ ] c)Graduate[ ]

d) Post Graduate [ ]

3) Since how long you have been working here a) Less than 5 year[ b) 5 - 10 years[ c) 10 20 years [ ] ] ] ]

d) More than 20 years [

4) SHGs linked by commercial banks in Karnataka a) No of SHGs[ b) Bank of loan[ ] ] ] ]

c) Percentage increase in the SHGs over previous year[

d) Percentage increase in the loan disbursed over the previous year[ 81

5) SHGs linked by regional rural banks in Karnataka a) No of SHGs[ b) Bank of loan[ ] ] ] ]

c) Percentage increase in the SHGs over previous year[

d) Percentage increase in the loan disbursed over the previous year[

6) SHGs linked by co-operative banks in Karnataka a) No of SHGs[ b) Bank of loan[ ] ] ] ]

c) Percentage increase in the SHGs over previous year[

d) Percentage increase in the loan disbursed over the previous year[

7) Progress under microfinance-bank loans disbursed to SHGs during 2009-2010 a) Public sector[ b) Private sector[ ] ]

8) To examine the role played by banks in terms of savings, loan disbursed and loan outstanding in Karnataka in the year 2009-2010. a) Commercial banks [ b) Regional Rural banks[ c) Co-operative banks[ d) Total[ ] ] ] ]

9) Bank loan disbursed to SHGs in Karnataka a) Commercial banks [ b) Regional Rural banks[ c) Co-operative banks[ d) Total[ ] ] ] ]

10) Bank loan outstanding against SHGs in Karnataka a) Commercial banks [ b) Regional Rural banks[ c) Co-operative banks[ ] 82 ] ]

d) Total[

11) District wise SHGs formed and bank loan disbursed in the year 2008-2009 a) Bangalore[ b) Mandya[ ] c) Bellary[ d) Gulburga [ ] ] ]

12) Are the study on microfinance sector in Karnataka Effective a) Yes [ ] b) No [ ]

13) What are the benefits you have received after studying on microfinance sector in Karnataka? a) Improvement over Knowledge & Skill [ b) Change of Attitude & Self-confidence [ c) Improve the working relationship with others [ ] ] ]

14) How do you rate you Job Knowledge and Skills? Before the study on microfinance sector in Karnataka a) Below Average [ b) Average [ c) Good [ ] ] ] ]

d) Outstanding [

After the study on microfinance sector in Karnataka a) Below Average [ b) Average [ c) Good [ ] ] 83 ]

d) Outstanding [

84