Problems faced by Borrowers

1. Coercion
One of the most important moral issues being raised in relation to microfinance is that of coercion. After 54 people killed themselves in the state of Andhra Pradesh in October 2010, Indian authorities placed microfinance institutions (MFI) under a microscope, and drafted new rules the MFI companies must follow. The farmers were reportedly deep in debt to microfinance institutions (MFIs). "Microfinance institutions charge exorbitant interest rates. The poor are driven to take their own lives because of their burden of debt and the brutal methods used to call in the loans".

2. Brutal and Aggressive Debt-Collection Tactics

The people calling in the loans are often not aware of the code of conduct of the MFIs. Many of the MFIs have been resort to brutal methods for collection of debt from these borrowers. News items like the one below are quite common in India. Unable to repay Rs. 235, Farmer kills self MFI Loan Suicide, Hyderabad News A farmer committed suicide by consuming pesticides, allegedly after being harassed by the collection agents of a microfinance institution at in Nalgonda district, Andhra Pradesh.

3. Joint Microfinance
Joint microloans are granted to a group of people who are jointly responsible for repaying the loan. Individual failures to pay (due to illness or a bad week) are avoided and group pressure serves as a strong incentive in ensuring responsible behavior by making loans to individuals within a lending circle. The individuals meet regularly, ostensibly creating a self-help group. In reality, all the borrowers in the group are responsible for making the loan repayment if a member defaults, so peer pressure is a very strong factor. However, in case of default either due to business failures, unproductive expenditure or greed to consume more, all members are troubled.

4. High Interest Rates

Many in the urban centres would commit suicide if the banks start charging us 24 per cent rate of interest. Even at 8.5 per cent rate of interest, those who have drawn housing loans, find it difficult to make monthly EMI payments. Imagine the stress and threat under which the poor in the rural areas are being made to borrow at 24 per cent rate of interest. Whatever the justification for charging 24 per cent rate of interest, how can human beings exploit a hungry stomach in the name of a successful business model?

5. Not aimed at lifting people out of poverty

Micro finance serves not to lift people out of poverty but, assist those near or slightly above the poverty line. Money is given to those people who have a possibility of returning the principle amount. This leads to the fact that lending money to these people is feasible and sustainable, while lending to the poorest of the poor is not.

6. Poverty alleviation mission has now been reduced to a Money making tactic of

MNCs
Micro finance has now, become a weapon for multinational companies to sell their products, by collaborating with such institutions. This in turn, is destroying the spirit of micro credit. For instance: Recently a mobile phone manufacturer offered a micro financing scheme on a pilot basis in Andhra Pradesh and Karnataka, to sell their handset to the poorest. Under this project, the company was offering an easy payment scheme of Rs 100 per week over a period of time. Andhra Pradesh has promulgated an ordinance to check malpractices in microfinance institutions (MFIs). The state should not throw out the baby with the bathwater: it should check malpractices without checking MFI growth. Globally, MFIs have expanded at phenomenal rates largely because they lend without loan scrutiny to groups of women, and peer pressure of the group keeps defaults below 2% despite the absence of any collateral or legal procedures for loan recovery. MFIs are, in effect, benevolent moneylenders, charging interest rates of around 30% to cover high operational costs. They are a great improvement on moneylenders charging 60% and using force to seize assets. However, the AP media accuse some MFIs of using force too, and claim that some

suicides have been caused by such coercion. Proving the connection is difficult: Persons commit suicide for several reasons, ranging from psychological to financial issues. The global suicide rate is 14 per lakh persons, it is even higher in rich countries like Finland and Japan which have no MFIs. No rules or regulations can end suicides. But rules should certainly be framed to stop forcible loan recovery. The top MFIs agree on the need to ensure there is no coercion, and have adopted a code of conduct on this. But while bad apples among MFIs must be dealt with firmly, care must be taken not to create new regulations that encourage corruption or crimp legitimate and desirable MFI lending. Proposals to prevent members of self-help groups from borrowing from MFIs are terribly wrong, and will penalise poor borrowers and hit financial inclusion. People should be free to borrow from all sources, and members of self help groups should not require a noobjection certificate before applying for an MFI loan it will be one more avenue for corruption and harassment. The use of force is an issue that must not be mixed up with the separate question of how the RBI should regulate MFIs. MFIs have reached 20 million people in a few years, a success owing something to light regulation that facilitated much innovation and experimentation. Some MFIs have become large institutions, and large ones need tougher regulation. But care should be taken to give MFIs, especially smaller ones, continued scope for innovation and experimentation.

Problems faced by Lenders

1. Sustainability
The first challenge relates to sustainability. MFI model is comparatively costlier in terms of delivery of financial services. An analysis of 36 leading MFIs by Jindal & Sharma shows that 89% MFIs sample were subsidy dependent and only 9 were able to cover more than 80% of their costs. This is partly explained by the fact that while the cost of supervision of credit is high, the loan volumes and loan size is low. It has also been commented that MFIs pass on the higher cost of credit to their clients who are interest insensitive for small loans but may not be so as loan sizes increase. It is, therefore, necessary for MFIs to develop strategies for increasing the range and volume of their financial services.

2. Lack of Capital
The second area of concern for MFIs, which are on the growth path, is that they face a paucity of owned funds. This is a critical constraint in their being able to scale up. Many of the MFIs are socially oriented institutions and do not have adequate access to financial capital. As a result they have high debt equity ratios. Presently, there is no reliable mechanism in the country for meeting the equity requirements of MFIs. The IPO issue by Mexico based Compartamos was not accepted by purists as they thought it defied the mission of an MFI. The IPO also brought forth the issue of valuation of an MFI

3. Financial service delivery

Another challenge faced by MFIs is the inability to access supply chain. This challenge can be overcome by exploring synergies between microfinance institutions with expertise in credit delivery and community mobilization and businesses operating with production supply chains such as agriculture. The latter players who bring with them an understanding of similar client segments, ability to create microenterprise opportunities and willingness to nurture them, would be keen on directing microfinance to such opportunities.

This enables MFIs to increase their client base at no additional costs. Those businesses that procure from rural India such as agriculture and dairy often identify finance as a constraint to value creation.

Such businesses may find complementarities between an MFIs skills in manag ement of credit processes and their own strengths in supply chain management.

E-CHOUPAL MODEL OF ITC:

ITC Limited, with its strong supply chain logistics, rural presence and an innovative transaction platform, the e-choupal, has started exploring synergies with financial service providers including MFIs through pilots with vegetable vendors and farmers. Similarly, large FIs such as Spandana foresee a larger role for themselves in the rural economy ably supported by value creating partnerships with players such as Mahindra and Western Union Money Transfer. ITC has initiated a pilot project called pushcarts scheme along with BASIX (a microfinance organization). Under this pilot, it works with twenty women head load vendors selling vegetables of around 10- 15 kgs per day. BASIX extends working capital loans of Rs. 10,000/- , capacity building and business development support to the women. ITC provides support through supply chain innovations by:

1. Making the Choupal Fresh stores available to the vendors, this avoids the hassle of bargaining and unreliability at the traditional mandis (local vegetable markets).

2. Continuously experimenting to increase efficiency, augmenting incomes and reducing energy usage across the value chain. For instance, it has forged a partnership with National Institute of Design (NID), a pioneer in the field of design education and research, to design user-friendly pushcarts that can reduce the physical burden.

3. Taking lessons from the pharmaceutical and telecom sector to identify technologies that can save energy and ensure temperature control in push carts in order to maintain quality of the vegetables throughout the day. The model augments the incomes of the vendors from around Rs.30-40 per day to an average of Rs.150 per day. From an environmental point of view, push carts are much more energy efficient as opposed to fixed format retail outlets .

Models of Microfinance in India

1. Self Help Group (SHG) Bank Linkage Model: The microfinance movement started in India with the introduction of the SHG-Bank Linkage Programme in the 1980s by NGOs that was later formalized by the Government of India in the early 1990s. Pursuant to the programme, banks, which are primarily public sector regional rural banks, are encouraged to partner with SHGs to provide them with funding support, which is often subsidized. A self help group, or SHG, is a group of 10 to 20 poor women in a village who come together to contribute regular savings to a common fund to deposit with a bank as collateral for future loans. The group has collective decision making power and obtains loans from the partner bank. The SHG then loans these funds to its members at terms decided by the group. Members of the group meet on a monthly basis to conduct transactions and group leaders are responsible for maintaining their own records, often with the help of NGOs or government agency staff. The main characteristics of SHGs are as follows: The ideal size of an SHG is 10 to 20 members. (In a bigger group, members cannot actively participate). From one family, only one member. (More families can join SHGs this way).

The group consists of either only men or of only women. (Mixed groups are generally not preferred). Womens groups are generally found to perform better. Members have the same social and financial background. (Members interact more freely this way).

Functions of SHGs
The amount may be small, but savings have to be a regular and Continuous habit with all the members. Savings first-Credit later should be the motto of every group member. The savings to be used as loans to members. The purpose, amount, rate of interest, etc. to be decided by the group itself. Enabling SHG members to attain loans from banks, and repaying the same.

Every meeting, the group will discuss and try to find solutions to the problem faced by the members of the group.

NABARD is presently operating three models of linkage of banks with SHGs and NGOs:

Model 1:
In this model, the bank itself acts as a Self Help Group Promoting Institution (SHPI). It takes initiatives in forming the groups, nurtures them over a period of time and then provides credit to them after satisfying itself about their maturity to absorb credit. About 16% of SHGs and 13% of loan amounts are using this model (as of March 2002).

Model 2:
In this model, groups are formed by NGOs (in most of the cases) or by government agencies. The groups are nurtured and trained by these agencies. The bank then provides credit directly to the SHGs, after observing their operations and maturity to absorb credit. While the bank provides loans to the groups directly, the facilitating agencies continue their interactions with the SHGs. Most linkage experiences begin with this model with NGOs playing a major role. This model has also been popular and more acceptable to banks, as some of the difficult functions of

socialdynamics are externalized. About 75% of SHGs and 78% of loan amounts are using this model.

Model 3:
Due to various reasons, banks in some areas are not in a position to even finance SHGs promoted and nurtured by other agencies. In such cases, the NGOs act as both facilitators and microfinance intermediaries. First, they promote the groups, nurture and train them and then approach banks for bulk loans for on-lending to the SHGs. About 9% of SHGs and 13% of loan amounts are using this model

SHG MODEL

2. Micro Finance Institution (MFI) Model:

The MFI model has gained significant momentum in India in recent years and continues to grow as the viable alternative to SHGs. In contrast to an SHG, an MFI is a separate legal organization that provides financial services directly to borrowers. MFIs have their own employees, record keeping and accounting systems and are often subject to regulatory oversight. MFIs require borrowers from a village to organize themselves in small groups, typically of five women, that have joint decision making responsibility for the approval of member loans. The groups meet weekly to conduct transactions. MFI staff travel to the villages to attend the weekly group meetings to disburse loans and collect repayments. Unlike SHGs, loans are issued by MFIs without collateral or prior savings. MFIs now exist in a variety of legal forms, including trusts, societies, cooperatives, non-profit NBFCs registered under Section 25 of the Companies Act, 1956, or Section 25 Companies, and NBFCs registered with the RBI. Trusts, cooperatives and Section 25 companies are regulated by the specific act under which they are registered and not by the RBI. A range of institutions in public sector as well as private sector offers the micro finance services in India. Based on asset sizes, MFIs can be divided in to three categories: 5-6 institutions which have attracted commercial capital and scaled up

dramatically within last five years. The MFIs which include SKS, SHARE and Grameen Style program but after 2000, converted into for-profit, regulated entities mostly Non-Banking Finance Companies (NBFCs). Around 10-15 institutions with high growth rate, including both News and recently form for-profit MFIs. Some of MFIs are Grameen Koota, Bandhan and ESAF. The bulk of Indias 1000 MFIs are NGOs struggling to achieve significant growth. Most continues to offer multiple developmental activities in addition to microfinance and have difficulty accessing growth trends.

Private MFIs in India, barring a few exceptions, are still fledging efforts and are therefore unregulated. They secure micro finance clients with varying quality and using different operating models. Regulatory framework should be considered only after the sustainability of MFIs Model as a banking enterprise for the poor is clearly established.

Attempts have been made by some of the associations of MFIs like Sa-Dhan to capture the business volume of the MFI sector. As per the Bharat Micro Finance Report of Sa-Dhan, in March 2009, the 233 member MFIs of Sa-Dhan had an outreach of 22.6 million clients with an outstanding microfinance portfolio of INR 117 billion (USD 2.5 billion).

The estimated number includes only those MFIs, which are actually undertaking lending activity. Adapted from www.nabard.org

Swarnajayanti Gram Swarozgar Yojna (SGSY) Model

Swaranjayanti Gram Swarozgar Yojana was launched during the year 1999-2000. This Yojana is a holistic package covering all aspects of self employment such as organization of poor into self help groups, training, credit, technology, infrastructure and marketing. The beneficiaries under this scheme are called as Swarozgaries. This scheme is a credit-cum-subsidy programme. Subsidy under SGSY is uniform at 30 percent of the project cost subject to a maximum limit of Rs. 7,500/-. In respect of SCs/STs and disabled persons, subsidy has been fixed 50 percent or maximum ceiling of Rs.10000/-respectively. For groups of Swarozgaries (SHGs), the subsidy is 50 per cent of the project cost, subject to per capita subsidy of Rs.10, 000 or Rs. 1.25 lakh whichever is less. The basic objective of the SGSY is to bring the assisted poor families (Swarozgaris) above the poverty line by providing them income-generating assets through a mix of bank credit and governmental subsidy. The program aims at establishing a large number of micro enterprises in rural areas based on the ability of the poor and potential of each area.

Physical progress under Swarnajayanti Gram Swarojgar Yojana (SGSY):

Financial progress under Swarnajayanti Gram Swarojgar Yojana (SGSY):

SGSY MODEL

Non Government Organizations (NGO) Model:

A non-governmental organization (NGO) is a legally constituted, non-governmental organization created by natural or legal persons with no participation or representation of any government. In the cases in which NGOs are funded totally or partially by governments, the NGO maintains its non-governmental status by excluding government representatives from membership in the organization.Unlike the term "intergovernmental organization", "non-

governmental organization" is a term in general use but is not a legal definition. In many jurisdictions, these types of organization are defined as "civil society organizations" or referred to by other names.

Objectives are as follows: To promote Information collaborations and Constructive communication between NGOs, to develop effective partnership with each other. Networking for the access, sharing and dissemination of information. Collaboration and Partnerships between NGOs themselves and with other organizations. Electronic Net-working to strengthen community organizations by boosting its knowledge base and its ability to share information and experiences with strategic allies and other partners in relevant field. Capacity building of grass root level NGOs, social workers through free online resources and information on a single platform. To serve non-profit organizations, charities, grassroots and community groups, educational and research institutions. Sharing of ideas among NGOs and development agents. Avail free, easy and instant access to information.

The Non Government Organizations involved in promoting SHGs and linking them with the Formal Financial Agencies (FFAs) perform the following functions: Organizing the poor people into groups. Training and helping them in the organizational, managerial and financial matters. Helping them access more credit and linkage with formal financial agencies. Channelizing the group effort for various development activities. Helping them in availing opportunities, widening the options available for economic development. Helping them in sustaining the group effort independently even after withdrawal of the NGO.

NGO MODEL

Bank Partnership Model

This model is an innovative way of financing MFIs. The bank is the lender and the MFI acts as an agent for handling items of work relating to credit monitoring, supervision and recovery. In other words, the MFI acts as an agent and takes care of all relationships with the client, from first contact to final repayment. The model has the potential to significantly increase the amount of funding that MFIs can leverage on a relatively small equity base.A sub - variation of this model is where the MFI, as an NBFC, holds the individual loans on its books for a while before securitizing them and selling them to the bank. Such refinancing through securitization enables the MFI enlarged funding access. If the MFI fulfils the true sale criteria, the exposure of the bank is treated as being to the individual borrower and the prudential exposure norms do not then inhibit such funding of MFIs by commercial banks through the securitization structure.

CASE STUDIES
Jaswinder Kaur D/o Sh. Gulwant Singh, VPO Mehna, Moga, Punjab ================================================================ Miss Jaswinder Kaur after completion of 8th standard could not continued her studies as her father was not able to continue her study due to family problems. Meantime, she became a member of a Self Help Group i.e. Bibi Nanaki Self Help Group. Her father is a chowkidar in their village. His monthly income is only Rs. 3000/- per month and it was not possible to sustain with four daughters (including Jaswinder Kaur) and one son. Therefore, there was an urgent need to create another source of income. Miss Jaswinder Kaur as youngest daughter of Shri Gulwant Singh took initiatives to fulfill her dream to create an another source of income. She had visited DRDA office and under the guidance of DRDA she formed a Self Help Group named Bibi Nanaki. She had detailed discussion with PSBRSET Director & after selection, she joined the MEDP. She attended the programme very sincerely and after completing of MEDP, she decided to start her own venture but simultaneously she was losing the confidence to start her own unit. To have more experience in the line, she joined one beauty parlour shop in for On-the-Job training in her village for about three months. After getting experience, she decided to start her own unit as independently. She started her own unit of beauty parlour in her house with an investment of Rs. 25000 (Rupees twenty five thousand only) out of which Punjab & Sind Bank has sanctioned Rs. 15000.00 as DRI loan. Now Jaswinder Kaur is very happy. Presently, she is earning approx Rs. 4000/- to 6000/- per month. During festival months, the income raised to Rs. 8000/-. Now, her father Shri Gulwant Singh, who is working as chowkidar in the village is very much aware of the importance and concept of Self Help Groups. He inspired other women in the village to from Self Help Groups and he formed more than 20 SHGs in the village. Shri Gulwant Singh was honoured by Deputy Commissioner, Moga on the recommendation of PSB RSETI.

Mrs. Manjit Kaur W/o Sh. Sewak Singh, R/O VPO Bilaspur ================================================================ Mrs. Manjit Kaur, has studied up to 6th standard. Her husband named Shri Sewak Singh is a laborer at Bricklin. His monthly income is only Rs. 6000/- per month. Mrs. Manjit Kaur is having two daughters. Father-in-law and Mother-in-law are also dependant. There were always need of medicines for old aged parents in law. And with a small family income of Rs. 6000/- it was not possible to fulfill basic needs of entire family. Even Karyana shop keepers stopped to give grocery items to Mrs. Manjit Kaur on credit. This was the reason that she was suffering from depression. Meantime, she heard about Self Help Groups concept from one of her relatives. Her relative told to enquire from the Bank Branch of her village regarding whole procedure to form SHG. Accordingly she visited the Bank Branch of Punjab and Sind Bank. The Branch Manager helped her in formation of Self Help group. Finally she formed a SHG named Ekta Self Help Group. This Self Help Group was sanctioned Rs. 5.00 lakhs out of which Rs. 50000/- was sanctioned to Smt. Manjit Kaur. Manjit Kaur being a president of SHG approached Branch Manager to impart training to the members of SHG. Branch Manager has requested to RSETI. Director RSETI discussed the issue with the undersigned (DDM) and finally MEDP on Dairy farming was sanctioned by NABARD. DRDA, Dairy Development Department and Animal Husbandry Department helped to provide the training. During the training programe Smt. Manjit Kaur realized the important of self employment and she was very much motivated to start something of his own. RSETI has also arranged several motivational session for trainees. Smt. Manjit Kaur has purchased a buffalo. Now her mother-in-law also helped her to take care of buffalo. Staff of Animal Husbandry also helped her time to time. Her daughters joined the school in the village. Smt. Manjit Kaur is very much happy by selling milk to some of the customers in the village. Now she is planning to purchase two more buffalos in near future. Presently she is earning approx. Rs. 5000/- to 7000/- per month. She and her family was thankful to NABARD and RESTI for their right support to import her practical training in Diary Farming under the guidance of experienced and qualified trainer. This has totally changed her life and way of living in her village.

Mrs. Harjit Kaur W/o Shri Jaswinder Singh R/O VPO Chotian Khurd ================================================================ Mrs. Harjit Kaur has studied upto matric. Her huband is a laborer in a workshop in the village. Her husband is earning only Rs. 3500/- per month. It was not possible to meet out basic needs of family. Mrs. Manjit Kaur is having two daughters and one son. Father and Mother in-law are also dependant on her husband. Mrs. Manjit Kaur wanted to start a separate independent work to earn additional income. Meantime, she came to know about the concept of Self Help Group, but she was not aware of procedure to from SHG. DDM NABARD with the help of NGOs conducted a workshop for women awareness camp during 2009-10 in which Mrs. Manjit Kaur also participated. During the workshop, APO-DRDA and representatives of NGOs highlighted the all the formalities of formation of SHGs. Manjit Kaur was very much motivated and after reaching in the village she started efforts to form a SHG. Most of women in her friend circle in the village were convinced. Finally, she was succeeded to form a Self Help Group name Mata Ganga Self Help Group and get it credit linked from Punjab & Sing Bank. Meantime on the request of Branch Manager of Punjab & Sind Bank a training programme of Tailoring and Stitching was arranged under MEDP scheme of NABARD by PSBRSETI. After completion of training she started the work of stitching in her house. Now she is very happy and started earning of Rs. 3000/- per month. Mrs. Manjit Kaur started her own work. Presently she is earning approx Rs. 2000/- to 4000/per month. Her parents-in-law were thankful to NABARD and RSETI for their right support to their daughter-in-law by imparting practical training in tailoring and stitching. Manager of Punjab and Sind Bank is very kind hearted person. He has credit linked near about 30 SHGs with his branch office. He arrange various awareness camps in the village regarding SHGs/Farmers clubs in which DDM-NABARD, Director-RSETI, APO-DRDA were also invited to explain the concepts. Manager of Punjab & Sind Bank, Himmatpura branch discussed the training needs of Bibi Nanaki Self Help Group before credit linkage of SHG. Accordingly, RSETI submitted a proposal of MEDP of tie/dye. This Self Help Group was selected to import training. It is also mentioned her that during the training Shri Arshdeep Singh Thind, Deputy Commissioner visited and interacted the participants. After completion of training Smt.

Mandeep Kaur started the work in her own house. She got all the family support. Mandeep Kaur is very happy now a day. She is able earn Rs. 4000/- to Rs. 5000/- per month. Her eldest daughter got-readmission in school.