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IJM, Volume 3, Spl. Issue 1 (April, 2016) e-ISSN: 1694-2299 | p-ISSN: 1694-240X

Challenges of Microfinance Sector in IndiaDr. Harpreet Singh1, Ramneet Kaur21Professor & Dept. Head of Commerce, Govt. Bikram College of Commerce, Punjab, India2Research Scholar (Commerce) Punjabi University, Punjab, India2rim.sidhu12@gmail.com

AbstractMicrofinance refers to small savings, credit and insurance services extended to socially andeconomically disadvantaged segments of society. Microfinance includes micro credit. Micro creditis a provision of credit services to poor clients. Microfinance can play vital role in providingfinancial services to the poor and deprive segments of the society.Microfinance may literally meanproviding small size loan or microcredit to the needy or people with small means. This researchpaper is an attempt to find out the challenges and issues relating to microfinance. The prospect ofmicrofinance is dominated by SHGs ( Self Help Groups)- Bank Linkage Program and MicrofinanceInstitutions (MFIs). Its main aim is to provide a cost effective mechanism for providing financialservices to the poor. Finally the paper concludes with practicable suggestions to overcome theissues and challenges associated with microfinance in India.IntroductionThe history of micro financing can be traced back as long to the middle of the 1800s when thetheorist Lysander Spooner was writing over the benefits from small credits to entrepreneurs andfarmers as a way getting the people out of poverty. But it was at the end of World War II with theMarshall plan the concept had a big impact.The today use of the expression microfinancing has its roots in the 1970s when organizations,such as Grameen Bank of Bangladesh with the microfinance pioneer Mohammad Yunus, wherestarting and shaping the modern industry of microfinancing. Another pioneer in this sector isAkhtar Hameed Khan. At that time a new wave of microfinance initiatives introduced many newinnovations into the sector. Many pioneering enterprises began experimenting with loaning to theunderserved people. The main reason why microfinance is dated to the 1970s is that theprograms could show that people can be relied on to repay their loans and that it´s possible toprovide financial services to poor people through marketbased enterprises without subsidy.Shorebank was the first microfinance and community development bank founded 1974 inChicagolIn India the growth of micro finance and micro finance institutions can be traced back to 1972when in Ahmedabad district of Gujrat, a self-motivated group of women entrepreneur started amovement for economic independence. To promote the economic independence an organisationnamed “SEWA’’ (Self Employed Women Association) was being set up under the trade. Theobjective was to press for their right to improve the income levels, self -employmentopportunities and social security. In brief, it can be explained that advisory help, promotingsaving habits, providing backward and forward linkages etc, the seed was sown for the evolutionof concept of microfinance.Microfinance ConceptMicrofinance is the provision of financial services tolow-income, poor and very poor self-employed people. Microfinance can be explained as the small scale financial services that involvemainly savings and credit services to the poor. Microfinance is the loan of self- help programme

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which will provide poor people to earn money and survive in the society, apart from giving loansome other facilities can be provided like storage facilities, training, etc. Microfinance is theextension of very small loans to unemployed persons, to poor entrepreneurs, to households, tofarmers and to other living in poverty who are often left out of formal banking system, because ofseveral reasons, their inability to provide collateral, the high risk in lending to them, the rigidformalities that are part of formal lending system.The definition of Microfinance as provided by Robinson is, ‘Microfinance refers to small scalefinancial services for both credit and deposits that are provided to people who farm or fish orherd; operate small or microenterprise where goods are produced, recycled, repaired, or traded;provide services; work for wages or commissions; gain income from renting out small amounts ofland, vehicles, draft animals, or machinery and tools; and to other individuals and local groups indeveloping countries in both rural and urban areas’ (Robinson, Marguerite S, ‘ Microfinance: TheParadigm Shift from Credit Delivery to Sustainable Financial Intermediation)Microfinance is much wider term which focuses on providing range of financial services orproducts like savings or investment products, insurance services like collection and transfer offunds, including the much needed seasonal credit. In brief, it can be said that the concept ofMicrofinance is helpful to manage all probable ‘Risks’ of small borrowers. Microfinance is simplydefined as credit advanced to the poor who normally do not have collateral to pledge.Microfinance is type of banking services that is provided to unemployed or low incomeindividuals or groups who would otherwise have no other means of gaining financial services. Itinvolves the provision of financial services via microfinance institutions (MFIs) either to workingpoor or those people who rely on their small businesses for income and who are not consideredbankable because they lack collateral to be pledged as security or are considered high risk bymainstream or traditional banking sector.Besides, many MFIs undertake social intermediation servicessuch as group formation,development of self-confidence, andtraining in financial literacy and managementcapabilitiesamong members of a group. Thus, the concept of microfinanceoften includes bothfinancial and social intermediations.In India, Microfinance has been defined by “TheNationalMicrofinance Taskforce, 1999” as “provision ofthrift, credit and other financial services andproducts of verysmall amounts to the poor in rural, semi-urban or urban areasfor enabling themto raise their income levels and Improveliving standards Microfinance is a term used to refer totheactivity of provision of financial services to Clients who areexcluded from the traditionalsystem on account of their lowereconomic status. The financial services will most commonlytakethe form of loan and savings by removing collateralrequirement and creating banking systemwhich is based onmutual trust. (www.wikipedia.org)Need of the StudyMicrofinance plays a vital role in extending services to socially andeconomically disadvantagedsegments of society. Bangladesh hasbeen acknowledged as the pioneer in the field ofmicrofinance.The Indian economy and government of Indiaauthorities should realize theconsequences of awarenessevolution to the economic growth and betterment of poorpeople inIndia. More microfinance evolution and growth inmaking their standard of living better, helpsalso in making thesociety better as a whole. The micro-finance has povertyreduction andemployment generating tool and act as catalyst,for poor people. Microfinance is to spreadfinancial services to the weaker section ofpoor people for their upliftment of society. Financialservicesinclude savings and credit provision for poor in every aspect. The overall need of thisstudyis microfinance evolution and growth in IndiaObjectives of the StudyIn India so many micro lending institutions are working. Some are in good condition in terms oflending, training to their clients for saving and small level entrepreneurship. Some are in bad

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condition and struggling for their existence. The present study is conducted to know followingobjectives related to MFIs in India.• The main objective of study is to identify main problems prevailing in microfinance inIndia.• The other objective of study is to find solution of problems faced by MicrofinanceInstitutionsSelf Help Groups (SHGs)A Self Help Group (SHG) is a registered or unregistered group of micro entrepreneurs havinghomogeneous social and economic background, generally not exceeding 20 members voluntarilyand coming together to save small amounts regularly and to mutually agree to contribute to acommon fund and have collective decision making to meet their emergency needs on mutual helpbasis. It is a democratic institution where members come forward and collectively take efforts tohelp each other financially. SHGs can be defined as financial intermediaries owned by the poor.When the SHG is formed, then couple of group meetings are held and SHG can open a saving bankaccount with the nearest Commercial Bank or Regional Rural Banks or Cooperative Banks. This ishelpful to keep the monies of SHGs safely and to improve the transparency lends of SHGstransactions.Role of Self Help Group in MicrofinanceThe microfinance services provided through SHGs is one of the best approach to help the poor inrural and semi urban areas to raise their standard of living. Lending through SHGs has emerged asa strong mainstream business proposition and the microfinance has gained the importance of itsown. SHGs help the poor in availing the large amounts of loans directly from the banks. SHGscomprises of poor people who don’t have access to formal financial institutions. They act as thefirm for the members to provide support to each other. The formulation of SHGs adoption schemeat bank level is going to be a transaction cost and efficiency of lending system.Microfinance InstitutionsMicrofinance Institutions is a financial institution specialising in banking services for low incomegroups or individuals. A microfinance institution provide account services to small balanceaccounts that would not normally be accepted by traditional banks and offer transaction servicesfor amounts that may be smaller than the average transaction fee charged by mainstreamfinancial institutions.The role of MFIs provides credit access and financial services needed to develop incomegenerating business along with the self-employment opportunities.Different Forms of Micro Finance Institutions in IndiaMicrofinance Institutions are financially viable, self-sustaining and play a integral role to thecommunities in which they operate and they have a potential to attract the resources and expandservices to the clients. The financial intermediaries that provide services and generate domesticresources must have capacity to meet high performance standards. They must build towardsoperating and financial self-sufficiency and provide access to the clients. In order to do so, MFIsneed to find the way to cut down the administrative cost and broaden the resource base. MFIs canbroaden their resource base by mobilising saving, accessing capital markets and effectiveinstitutional development support.An increasing number of MFIs are being set up to mobilise the traditional capital markets, clearlytargeted to the commercial investors. The most commercially oriented investment funds investalmost exclusively in debt instruments of MFIs whereas the funds promoted by developmentoriented institutions have a greater mixture of investments with equity as well as debt products.

Microfinance Models in India

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• SHG –Bank linkage Model: This model involves Self Help Groups which are financeddirectly by the Commercial Banks in the Public and Private Sector, Regional Rural Banksand Cooperative Banks (statecooperative, NABARD, District cooperative banks). The SHGscreate the corpus which is supplemented by revolving cash credit from the banks.• MFIs Bank linkage Model: In this model MFIs banking agencies receive financing foronward lending to SHGs and other small borrowers in microfinance sector. Here MFIs actas the bank guarantors and thereby bolster the creditworthiness of the poor.

New Models to be Implemented in India• Bank Partnership Model: In this model the MFIs act as agents and custodian who take careof all the relationships with the bank and the borrowers, from end to end. This modelenables them to operate with a relatively small equity base and increase the disbursementof loans significantly.• Banking Correspondent Model: This model evolved to increase the savings in MFIs. Theagents collect the savings from poor on behalf of the banks; however, one drawback is thatthey are not allowed to collect money for Term Deposits.• Service Company Model: This model, developed by ACCION, was used in some LatinAmerica Countries. In it, banks form their own MFIs and work together to provide loansand other services.

Issues and ChallengesOver the years, the SHG-Bank Linkage programmehas emerged as a viable model forfinancialinclusion of hitherto unreached poorhouseholds particularly in rural hinterlands.Despitethe laudable achievements, there areissues like skewed growth, inadequate outreach,poor creditoff take and delay in creditdispensation, etc. Major issues and challengesmay be listed as follows:• Against the estimated potential for promotionof about 67.81 lakh SHGs, we have anexistingstock of about 74 lakh SHGs. Foursouthern states of Andhra Pradesh, Karnataka,Kerala andTamil Nadu account forabout 36 lakh SHGs out of 74 lakh SHGssavings linked, so far.Resource poor stateslike Madhya Pradesh, Uttar Pradesh, Bihar,Jharkhand, Chhattisgarh,Rajasthan accountfor more than 42% of the estimated potentialfor formation of SHGs, butaccount foronly 18% of the SHGs formed. To addressthe observed skew ness and theregional imbalancesthe programme has witnessed in favourof southern states, greater focusof theprogrammes is required in lesser-endowedregions.• Large variation in average amount of loandisbursed per SHG was observed during thelastyear. The variation ranged from Rs. 2.15lakh per SHG in Andhra Pradesh to Rs.0.50lakh perSHG in West Bengal.• A sizeable number of the poor families ofthe country continue to be out of the coverageofthe programme. The Committeeon Financial inclusion (2008) which had attemptedananalysis of the district wise gapsin financial inclusion suggested that criticalexclusion (interms of credit) is manifest in256 districts in the country, spread across17 States, wherethe credit gap is of 95% andabove. Thus, poor households continue toface challenges forseeking financial servicesfrom banks because of the continued riskperception and doubtabout their bankability.• The thrust on promoting SHGs for the sake 16National Micro Finance Conclave – 2014ofgetting various benefits under Governmentschemes like SGSY, interest subvention/waiver, subsidized finance in certain states,and non-availability of required handholdingsupport to SHGs in certain area, have resultedin ‘Pancha Sutras’ of SHG promotion(regularmeeting, regular saving, internal lending,timely repayment, proper book keeping)notbeing followed in promotion of SHGs. This resultedin instances like misutilisation ofbankcredit, default in loan repayments, rise in NPA,etc. in certain area.

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• Even though NABARD has scaled up its traininginterventions at retail level, due to lackofadequate thrust from the Management,the controlling offices and branches of banksdo notperceive SHGs as a business propositionfor the bank. Besides, frequent shifting ofbankbranch officials posted in rural areas hasresulted in poor banker interface with ruralclientsand lack of sensitivity to their financialneeds.• Financial inclusion efforts have improvedthe outreach of banks in the rural areas. Still,thebanks are not able to serve the SHGs adequately,mainly because of lack of adequatebankstaff, lack of proper attitude and inabilityto use the BC/BF outlet properly for thepurpose.• The availability of Bulk customers for microfinancein the form of MFIs, which are atparwith the SHG-BLP both in respect of Prioritysector status and availability ofrefinancefrom NABARD, is gradually making SHGBLPless attractive to bank.• The information technology could not beleveraged to the desired extent so as toimprovethe quality of service to the SHGs,their book keeping and also monitoringsystem.Interventions in this front have beensporadic without any serious efforts forupscaling.17National Micro Finance Conclave – 2014• Lack of scope for pursuing income generatinglivelihood opportunities, has not helpedthegrowth of income level of the majority ofSHG members.• The issue of sustainability of SHGs has attractedattention in recent past. Exit ofinitialsupport mechanism has resulted in severalSHGs failing to get further creditsupportfrom banks - more so after the transfer ofbank staffs initially connected in theirlinkages.Several NGOs/ projects have experimentedwith the mechanism of federationsofSHGs as their exit strategy; however, evenafter the creation of such federations, SHGshavefailed to maintain sustained credit linkageswith the banks.• The sustainability of SHGs had further beenaffected by the Government sponsoreddevelopmentprogrammes like SGSY, whichrequired specific proportion of BPLfamiliesinthe SHGs forcing the existing SHGsto disintegrate and form new ones tocomplywith the guidelines. The restructuringof SGSY into National RuralLivelihoodMission (NRLM), a flagship programme ofMoRD, GoI, from 201-12, has yet tomakeany concrete impact, except implementationof Interest Subvention Scheme incertaindistricts/ states from 2013-14. In manystates like Uttar Pradesh, the NRLM hassofar been almost non-starter.

Suggestions And ConclusionsAccess to finance for India’s rural poor, to meet their diverse financial needs (savings,credit,insurance against unexpected events, etc.) presents a formidable challenge in a country. Buttheopportunities, too, are plentiful. Government should come forward in a manner to providequickdelivery of microfinance to the poorer and needed people. A legal and regulatoryenvironment isneeded as per the requirements of the stakeholder of microfinance. InMicrofinance theappropriate products and services to be launched, to cater the needs of smallentrepreneurs,. Astrong focus on the quality of SHGs by their NGO promoters is a key factor in thesuccess of theSHG Bank Linkage model in its pilot phase. Government should check the groupquality and offinancial sustainability of MFIs.Referenceswww.microfinanceinfo.com/history_of_microfinance/www.journalijdr.com/sites/default/files/Download%201755.pdfwww.nabard.org/pdf/NMF_Conclave_Papers_2014.pdfwww.indusedu.org/IJRIME/vol3issue7/2.pdf