Chapter V

MICRO FINANCE

Introduction

5.1 Micro finance is the provision of thrift,credit and other financial services andproducts of very small amounts to the poor forenabling them to raise their income levels andimprove their living standards. It has beenrecognised that micro finance helps the poorpeople meet their needs for small credit andother financial services. The informal andflexible services offered to low-incomeborrowers for meeting their modestconsumption and livelihood needs have notonly made micro finance movement grow at arapid pace across the world, but in turn hasalso impacted the lives of millions of poorpositively.

5.2 In the case of India, the banking sectorwitnessed large scale branch expansion afterthe nationalisation of banks in 1969, whichfacilitated a shift in focus of banking from classbanking to mass banking. It was, however,realised that, notwithstanding the wide spreadof formal financial institutions, theseinstitutions were not able to cater completely tothe small and frequent credit needs of most ofthe poor. This led to a search for alternativepolicies and reforms for reaching out to thepoor to satisfy their credit needs.

5.3 The beginning of the micro financemovement in India could be traced to the self-help group (SHG) - bank linkage programme(SBLP) started as a pilot project in 1992 byNational Bank for Agricultural and RuralDevelopment (NABARD). This programme notonly proved to be very successful, but has alsoemerged as the most popular model of microfinance in India. Other approaches like microfinance institutions (MFIs) also emergedsubsequently in the country.

5.4 Recognising the potential of microfinance to positively influence thedevelopment of the poor, the Reserve Bank,NABARD and Small Industries DevelopmentBank of India (SIDBI) have taken severalinitiatives over the years to give a further fillipto the micro finance movement in India.

5.5 The Chapter traces the evolution ofmicro finance movement in India, thesupporting policies and current status in thisregard. The Chapter is orgainsed into fiveSections. Section 2 discusses various microfinance delivery models in India. Section 3discusses the various policy initiativesundertaken by Reserve Bank, NABARD andSIDBI in the context of micro financemovement in India. Section 4 evaluates theprogress of micro finance in India and Section5 discusses impact of micro financemovement in India.

2. Micro Finance Delivery Models inIndia

5.6 The non-availability of credit andbanking facilities to the poor andunderprivileged segments of the society hasalways been a major concern in India.Accordingly, both the Government and theReserve Bank have taken several initiatives,from time to time, such as nationalisation ofbanks, prescription of priority sector lendingnorms and concessional interest rate for theweaker sections. It was, however, realised thatfurther direct efforts were required to addressthe credit needs of poor. In response to thisrequirement, the micro finance movementstarted in India with the introduction of SHG-bank linkage programme (SBLP) in the early1990s. At present, there are two models ofmicro finance delivery in India: the SBLP

197

Micro Finance

model and the MFI model. The SBLP modelhas emerged as the dominant model in termsof number of borrowers and loansoutstanding. In terms of coverage, this modelis considered to be the largest micro financeprogramme in the world. The Reserve Bank,NABARD and SIDBI have also taken a range ofinitiatives to provide a momentum to themicro finance movement in India. Thedevelopments relating to evolution of variousmodels of the micro finance movement aredetailed in the present section.

SHG-Bank Linkage Programme

5.7 The micro finance sector started gettingrecognition in India after the launch of the

SBLP. Internationally however, a lot ofgroundwork and consultative efforts had beenin progress since the 1980s, which set abackdrop for micro finance efforts in India. Thefield of micro finance is diverse and still evolving.There is no single approach or model that fits inall the circumstances. The concept of microfinance implies informal and flexible approachto the credit needs of the poor. As such, eachmodel has to be tailored according to thecircumstances and the local needs. It is in thiscontext that a study of different models of microfinance developed internationally becomesinteresting. One of the oldest and mostsuccessful models internationally has been theGrameen Bank Model in Bangladesh (Box V.1).

The Grameen Bank (GB) was launched as a project in avillage of Bangladesh in 1976 to assist the poor families byproviding credit to help them overcome poverty. In 1983, itwas transformed into a formal bank under a special lawpassed for its creation. It is owned by the poor borrowers ofthe bank who are mostly women. GB has reversedconventional banking practice by obviating the need forcollateral. It has created a banking system based onmutual trust, accountability, participation and creativity. Itoffers credit for creating self-employment, income-generating activities and housing for the poor, as opposedto consumption. It provides service at the doorstep of thepoor based on the principle that the people should not go tothe bank, but the bank should go to the people. In order toobtain loans, a borrower must join a group of borrowers.Although each borrower must belong to a five membergroup, the group is not required to give any guarantee for aloan to its member. The repayment responsibility solelyrests on the individual borrower, while the group and thecentre/branch oversee that everyone behaves in aresponsible way and none gets into repayment problem.There is no form of joint liability, i.e., group members arenot responsible to pay on behalf of a defaulting member.Loans can be received in a continuous sequence. New loanbecomes available to a borrower if her previous loan isrepaid. All loans are to be paid back in instalments (weeklyor fortnightly). The GB initially focussed on providing creditfacilities and paid little attention to voluntary depositmobilisation. This policy was changed in 2000, withincreased emphasis on deposit mobilisation.

GB currently offers four kinds of savings, namely personalsavings account, special savings account, Grameenpension savings and credit-life insurance savings fund.

After operating group lending for 25 years, the GB switchedto individual lending recognising that with repeated loancycles and greater credit exposure, homogeneity of thegroup would weaken as loan requirements vary withvariation in the levels of upliftment attained. Thus, themore flexible Grameen II is more appropriate for reachingthe poor because its products can be conveniently used foreveryday money management as well as formicroenterprises. GB II dispensed with the general loans,seasonal loans, family loans, and more than a dozen othertypes of loans. It also gave up the group fund; the branch-wise and zone-wise loan ceiling; fixed size weeklyinstalment; the rule to borrow for one whole year, evenwhen the borrower needed the loan only for three months.

The Government of Bangladesh has fixed interest rate forgovernment-run micro credit programmes at 11 per cent atflat rate, which amounts to about 22 per cent on adeclining balance basis. The interest rate charged by theGrameen Bank is lower than that fixed by the Governmentof Bangladesh. There are four interest rates for loans fromGrameen Bank: 20 per cent (declining balance basis) forincome generating loans, 8 per cent for housing loans, 5per cent for student loans, and 0 per cent (interest-free)loans for struggling members (beggars). All interests aresimple interest, calculated on declining balance method.This implies an annual interest rate of 10 per cent forincome-generating loan which is less than that (11 percent) fixed by the Government of Bangladesh. GB offersattractive rates for deposits ranging from 8.5 per cent to 12per cent. As of end-March 2008, it had 7.46 millionborrowers, 97 per cent of whom were women. With 2,504branches, GB provides services in 81,574 villages, coveringmore than 97 per cent of the total villages in Bangladesh.

References : Website of Grameen Bank; www.grameen-info.org. Reserve Bank of India, Report on Currency and Finance, 2006-08.

Box V.1: The Grameen Bank Model in Bangladesh

Report on Trend and Progress of Banking in India, 2007-08

198

5.8 As early as December 1984, the FifthGeneral Assembly of the Asia Pacific RegionalAgricultural Credit Association (APRACA) heldat Bangkok exhorted the agricultural andrural development finance institutions in theregion to mobilise savings from the rural areaswith the objective of providing loanable fundsfor agriculture and rural development. Theexperience in some of the countries whereinformal self help groups (SHGs) of ruralpeople which promoted savings amongmembers and used these resources formeeting their credit needs, were considereduseful innovations. Further, the ThirdConsultation on the Scheme for AgriculturalCredit Development (SACRED) held at Romein 1985 called for active promotion of linkagesbetween banking institutions and SHGs as amean of improving the access of low incomegroup to banking services. The ExecutiveCommittee Session of APRACA held at Seoulin October 1985 approved the holding of aSouth-East Asian sub-regional workshop todevise ways and means of improving suchlinkages. The APRACA Regional Workshopheld at Nanjing, China in May 1986recommended national level consultation andorganisation of national surveys of SHGs incollaboration with APRACA and otheragencies.

5.9 The Sixth General Assembly ofAPRACA held at Kathmandu, Nepal inDecember 1986 considered a project proposalon ‘promotion of linkages between bankinginstitutions and SHGs in rural savingsmobilisation and credit delivery to the ruralpoor’. It was decided that each membercountry would form a Task Force to conduct asurvey of SHGs and thereafter, formulatesuitable national level programmes.Consequent upon this, a Task Force was setup in India in the Ministry of Agriculture, toidentify the existing SHGs, undertake asurvey of the groups and draw a plan of action

for channeling the flow of savings and creditbetween the rural poor and banks throughSHGs and identify concrete projects for actionresearch in this field. Accordingly, in February1987, it was decided that a study team led byNABARD and comprising of representativesfrom various financial institutions, should beconstituted to undertake the survey. Thesurvey was undertaken in September 1987and the report discussed at the 18thExecutive Committee Session and 10thFoundation Anniversary of APRACA held atNew Delhi in November 1987. This surveyreport laid the foundation of the SHG-banklinkage programme in India launched as apilot project in 1992.

5.10 The pilot project was launched byNABARD after extensive consultations withReserve Bank, commercial banks and non-Governmental Organisations (NGOs) with thefollowing objectives: (i) to evolvesupplementary credit strategies for meetingthe credit needs of the poor by combining theflexibility, sensitivity and responsiveness ofthe informal credit system with the strength oftechnical and administrative capabilities andfinancial resources of the formal creditinstitutions; (ii) to build mutual trust andconfidence between the bankers and the ruralpoor; and (iii) to encourage banking activity,both on the thrift as well as on credit sides, ina segment of the population that the formalfinancial institutions usually find difficult tocover.

5.11 The SHGs were expected to facilitatecollective decision making by the poor andprovide ‘doorstep banking’, the banks aswholesalers of credit, were to provide theresources, while the NGOs were to act asagencies to organise the poor, build theircapacities and facilitate the process ofempowering them. It was expected that thepilot project would prove advantageous toboth banks as well as the SHGs. The banks

199

Micro Finance

would gain by a way of reduction in theirtransaction costs due to reduction in workrelating to appraisal, supervision andmonitoring of loans. The SHGs would benefitby getting access to a larger quantum ofresources, as compared to their meagercorpus generated through thrift. The bankswere expected to provide credit in bulk to thegroup and the group, in turn, wouldundertake on-lending to the members. Thequantum of credit given to the group by thebank would be in proportion to the savingsmobilised by the group and could vary from1:1 to 1:4. It was prescribed that the purposesfor which the group would lend to its membersshould be left to the common wisdom of thegroup. The rate of interest to be charged by theSHG to its members was also left to the groupto decide. The pilot project envisaged linkingof only 500 SHGs to banks. By the end ofMarch 1993, 225 SHGs were actually linked.With the figure reaching 620 at the end ofMarch 1994, the pilot project was a success.

5.12 The programme has since come a longway from the pilot project of financing 500SHGs across the country. It has proved itsefficacy as a mainstream programme forbanking with the poor, who mainly comprisethe marginal farmers, landless labourers,artisans and craftsmen and others engaged insmall businesses such as hawking andvending in the rural areas. The mainadvantages of the programme are timelyrepayment of loans to banks, reduction intransaction costs both to the poor and thebanks, doorstep “saving and credit” facility forthe poor and exploitation of the untappedbusiness potential of the rural areas. Theprogramme, which started as an outreachprogramme has not only aimed at promotingthrift and credit, but also contributedimmensely towards the empowerment of therural women.

5.13 Under the SBLP, the following threedifferent models have emerged:

● Model I: SHGs promoted, guided andfinanced by banks.

● Model II: SHGs promoted by NGOs/Government agencies and financedby banks.

● Model III: SHGs promoted by NGOs andfinanced by banks using NGOs/formalagencies as financial intermediaries.

5.14 Model II has emerged as the mostpopular model under the SBLP programme.Commercial banks, co-operative banks andthe regional rural banks have been activelyparticipating in the SBLP.

Micro Finance Institution Approach

5.15 While the SBLP model remains the mostwidely used model of micro finance in India, theMFI model has also gained momentum in therecent past. The MFI model in India ischaracterised by a diversity of institutional andlegal forms. MFIs in India exist in a variety offorms like trusts registered under the IndianTrust Act, 1882/Public Trust Act, 1920;societies registered under the SocietiesRegistration Act, 1860; Co-operativesregistered under the Mutually Aided Co-operative Societies Acts of the States; and non-banking financial companies (NBFC)-MFIs,which are registered under Section 25 of theCompanies Act, 1956 or NBFCs registered withthe Reserve Bank. These MFIs are scatteredacross the country and due to the multiplicityof registering authorities, there is no reliableestimate of the number of MFIs. The mostfrequently used estimate is that their numberis likely to be around 800. Attempts have beenmade by some of the associations of MFIs likeSa-Dhan to capture the business volume of theMFI sector. As per the Bharat Micro FinanceReport of Sa-Dhan, in March 2008, the 223

Report on Trend and Progress of Banking in India, 2007-08

200

member MFIs of Sa-Dhan had an outreach of14.1 million clients with an outstanding microfinance portfolio of Rs.5,954 crore.

Bank Partnership Model

5.16 Banks can use MFIs as their agent forhandling credit, monitoring, supervision andrecovery. In this model, the bank is the lenderand the MFI acts as an agent for handlingitems of work relating to credit monitoring,supervision and recovery, while the borroweris the individual. The MFI acts as an agent – ittakes care of all relationships with the client,from first contact through final repayment.

5.17 Another variation of this model iswhere the MFI, an NBFC, holds the individualloans on its books for a while, beforesecuritising them and selling them to thebank. Such refinancing throughsecuritisation enables the MFIs a greaterfunding access.

Banking Correspondents

5.18 In January 2006, the Reserve Bankpermitted banks to utilise the services ofNGOs, MFIs (other than NBFCs) and othercivil society organisations as intermediaries inproviding financial and banking servicesthrough the use of business facilitator andbusiness correspondent (BC) models. The BCmodel allows banks to do ‘cash in – cash out’transactions at a location much closer to therural population, thus addressing the lastmile problem. The BC model uses the MFI’sability to get close to poor clients – a necessityfor savings mobilisation from the poor – whilerelying on the financial strength of the bank tosafeguard the deposits. Pursuant to theannouncement made by the Union FinanceMinister in the Union Budget 2008-09, bankswere permitted to engage retired bankemployees, ex-servicemen and retiredgovernment employees as businesscorrespondents (BCs) with effect from April

24, 2008, in addition to entities alreadypermitted earlier, subject to appropriate duediligence.

3. Policy Initiatives in India

5.19 Several initiatives have been taken bythe Reserve Bank, NABARD and also SIDBIwith a view to giving a further fillip to themicro finance movement in India. A summaryof major initiatives is presented in the presentsection.

Policy Initiatives by the Reserve Bank

5.20 In January 1993, SHGs, registered orunregistered were allowed by the ReserveBank to open savings bank account withbanks. Further, to study the potential of themicro finance movement, the Reserve Bankconstituted in 1994 a ‘Working Group onNGOs and SHGs’ (Chairman: Shri S.K. Kalia).Based on its recommendations, banks wereadvised, inter alia, that financing of SHGsshould be included by them as part of theirlending to the weaker sections and that SHGlending should be reviewed at the State levelbanker’s committee (SLBC) level and by thebanks at regular intervals.

5.21 To further promote the SHGmomentum in the country, banks wereadvised by the Reserve Bank in 1998 thatSHGs which were engaged in promoting thesavings habits among their members would beeligible to open savings bank accounts andthat such SHGs need not necessarily haveavailed of credit facilities from banks beforeopening savings bank accounts. Subsequentto the Monetary and Credit Policyannouncement for the year 1999-2000, bankswere also advised that interest ratesapplicable to loans given by banks to microcredit organisations or by the micro creditorganisations to SHGs/ member beneficiaries,would be left to their discretion.

5.22 A Task Force on Supportive Policy andRegulatory Framework for micro finance was

201

Micro Finance

set up by NABARD in 1999 of which theReserve Bank was a member. The Task Forcelooked into the entire gamut of issues relatedto micro finance, particularly regulatoryissues. Recognising the growing importance ofmicro finance, the Reserve Bank constituted amicro credit special cell in the Bank in 1999 tosuggest measures for mainstreaming microcredit and accelerating flow of credit to MFIs.The special cell has since been converted intoa micro finance and financial inclusiondivision in the Reserve Bank.

5.23 Several non-banking financecompanies (NBFCs) and residuary non-banking companies (RNBCs) also startedentering the micro finance sector, graduallyrecognising the potential in the sector. Inorder to further facilitate the process, inJanuary 2000, all NBFCs and RNBCs wereadvised by the Reserve Bank that thoseNBFCs which were engaged in micro financingactivities, licensed under Section 25 of theCompanies Act, 1956, and which were notaccepting public deposits were exempted fromthe purview of Sections 45-IA (registration),45-IB (maintenance of liquid assets) and 45-IC(transfer of a portion of profits to ReserveFund) of the Reserve Bank of India Act, 1934.

5.24 Based on the reports of the special cellconstituted in the Reserve Bank and the TaskForce on Supportive Policy and RegulatoryFramework, the Reserve Bank issuedcomprehensive guidelines to banks inFebruary 2000 for mainstreaming micro creditand enhancing the outreach of micro creditproviders. These guidelines, inter alia,stipulated that micro credit extended bybanks to individual borrowers directly, orthrough any intermediary, would from thenonwards be reckoned as part of their prioritysector lending. Banks were given freedom toformulate their own model/s or choose anyconduit/intermediary for extending microcredit. Banks were also permitted to prescribetheir own lending norms so as to provide

maximum flexibility with regard to microlending. Such credit was to cover not onlyconsumption and production loans for variousfarm and non-farm activities of the poor, butalso include their other credit needs. Bankswere asked to delegate adequate sanctioningpowers to branch managers and to keep theloan procedures and documents simple forproviding prompt and hassle free micro credit.

5.25 The rapid development of the sectornecessitated addressing the various issuesassociated with the sector. In October 2002,the Reserve Bank set up four informal groupsto look into issues relating to: (i) structure andsustainability; (ii) funding; (iii) regulations;and (iv) capacity building of micro financeinstitutions. Taking into consideration therecommendations of the groups, banks wereadvised that they should provide adequateincentives to their branches for financing theSHGs and that the group dynamics of workingof the SHGs should be left to them.

5.26 Based on the recommendations of theAdvisory Committee on Flow of Credit toAgriculture and Related Activities from theBanking System (Chairman: Prof. V S Vyas),which submitted its final report in June 2004,it was announced in the Annual PolicyStatement for the year 2004-05 that in view ofthe need to protect the interest of depositors,MFIs would not be permitted to accept publicdeposits unless they complied with the extantregulatory framework of the Reserve Bank.However, as an additional channel forresource mobilisation, the Reserve Bank inApril 2005 enabled NGOs engaged in microfinance activities to access the externalcommercial borrowings (ECBs) up to US$ 5million during a financial year for permittedend use, under the automatic route.

5.27 In order to examine issues relating torural credit and micro finance, an internalgroup (Chairman: Shri H.R. Khan) was set upin 2005. Based on the recommendations of

Report on Trend and Progress of Banking in India, 2007-08

202

the group and with the objective of ensuringgreater financial inclusion and increasing theoutreach of the banking sector, banks werepermitted in January 2006 to use the servicesof NGOs/SHGs, MFIs (other than NBFCs) andother civil society organisations asintermediaries in providing financial andbanking services through business facilitatorand business correspondent models.

5.28 All Regional Directors of the ReserveBank were advised in April 2006 thatwhenever issues relating to micro financewere noticed in the areas under theirjurisdiction, they may offer to constitute acoordination forum comprisingrepresentatives of SLBC convenor banks,NABARD, SIDBI, State Government officials,and representatives of MFIs (includingNBFCs) and NGOs/SHGs to facilitatediscussion on the issues affecting theoperations in the sector and find localsolutions to the local problems.

5.29 In May 2006, a joint fact-finding studywas conducted by Reserve Bank and a fewmajor banks. It was observed during the studythat some of the MFIs financed by banks oracting as their intermediaries/partners werefocussing on relatively better banked areasand trying to reach out to the same set of poor,resulting in multiple lending andoverburdening of rural households. Further,many MFIs supported by banks were notengaging themselves in capacity building andempowerment of the groups to the desiredextent and banks did not appear to beengaging them with regard to their systems,practices and lending policies with a view toensuring better transparency and adherenceto best practices. Guidelines were, therefore,issued to banks in November 2006, advisingthem to take appropriate corrective action.

5.30 The Union Budget for the year 2008-09announced that banks would be encouragedto embrace the concept of total financialinclusion. The Government would request all

scheduled commercial banks to follow theexample set by some public sector banks andmeet the entire credit requirements of SHGmembers, namely: (a) income generationactivities; (b) social needs like housing,education, marriage: and (c) debt swapping.Consequent upon this, in April 2008, bankswere advised by the Reserve Bank to meet theentire credit requirements of SHG members,as envisaged in the Union Budget.

Recent Initiatives by NABARD

5.31 NABARD has been playing a crucialdevelopmental role for the micro financesector in India. NABARD has been organising/sponsoring training programmes andexposure visits for the benefit of bank officials,NGOs, SHGs and Government agencies toenhance their effectiveness in the field ofmicro finance. The best practices andinnovations with respect to the sector arewidely circulated among Governmentagencies, banks and NGOs. NABARD alsoprovides support for capacity building,exposure and awareness building of the SHGsand NGOs.

5.32 NABARD launched the ‘Micro-Enterprise Development Programme’ (MEDP)for skill development in March 2006. The basicobjective was to enhance the capacities ofmatured SHGs to take up micro enterprisesthrough appropriate skill upgradation. Theprogramme envisaged development ofenterprise management skills in existing ornew livelihood activities, both in farm and non-farm sectors. The duration of training can varybetween 3 to 13 days depending upon theobjective and the nature of training. During theyear 2007-08, 394 MEDPs were conductedcovering 9,182 SHG members on activities likebee-keeping, mushroom cultivation,horticulture and floriculture, vermi-compost/organic manure preparation and dairy. As onMarch 31, 2008, 674 MEDPs had beenconducted covering 16,761 participants.

203

Micro Finance

5.33 In 2005-06, a pilot project for‘promotion of micro-enterprises’ was launchedamong members of matured SHGs. This isbeing implemented by 14 NGOs acting as‘micro-enterprise promotion agency’ (MEPA)in nine districts, viz., Ajmer (Rajasthan),Chandrapur (Maharashtra), Kangra(Himachal Pradesh), Madurai (Tamil Nadu),Mysore (Karnataka), Panchmahal (Gujarat),24 north Pargana (West Bengal), Puri (Orissa)and Rae Bareli (Uttar Pradesh). The project isbeing implemented by each NGO in two blocksin each of the selected district. As on March31, 2008, 2,759 micro-enterprises wereestablished under the project involving bankcredit of Rs.238 lakh.

5.34 NABARD also provides marketingsupport to the SHGs for exhibiting theirproducts. During the year 2007-08, NABARDsupported three exhibitions of productsprepared by various SHGs at Bhopal, Chennai

and Navi Mumbai involving grant of Rs.3.8lakh. In addition, NABARD also providespromotional grant support to NGOs, RRBs,DCCBs, farmer’s clubs and individualvolunteers and assists in developing capacitybuilding of various partner agencies. NABARDhas been making efforts to increase thenumber of partner institutions as self-helppromoting institutions (SHPIs).

5.35 NABARD launched a pilot project inDecember 2003 to link post-offices with theSHGs with the objective of examining thefeasibility of utilising the vast network of postoffices in rural areas for disbursement ofcredit to rural poor on an agency basis (BoxV.2).

5.36 The SHG Federations are emerging asimportant players in nurturing SHG,increasing the bargaining power of groupmembers and livelihood promotion. Thefeatures and functions of SHG federation

Box V.2: SHG-Post office Linkage Programme

A pilot SHG-post office linkage programme was launchedby NABARD in December 2003. This programme envisagedcredit linking 200 SHGs in select 5 districts, viz.,Sivaganga, Pudukottai, Tiruvannamalai, Tanjavur andTiruvarur districts of Tamil Nadu. The objectives of the pilotprogramme were to (i) examine the feasibility of utilising thevast network of post offices in rural areas for disbursementof credit to rural poor on agency basis; and (ii) to test theefficacy of Department of Posts in providing micro financeservices to rural clientele. The salient features of thescheme are:

(i) Post offices open savings accounts in the name ofSHGs promoted by identified NGOs.

(ii) The SHGs with savings accounts in the post officeand which are six months old are provided loan bythe post office, in multiples of their savings, basedon the rating exercise on the lines of those adoptedby banks.

(iii) Post offices provide term loans to SHGs repayablewithin two years in 24 monthly installments.

(iv) Post offices charge an interest of 9 per cent perannum on the loans given to SHGs using a reducingbalance method.

(v) Post offices do not collect any loan processingcharges or any other charges from SHGs.

(vi) Project Implementation and Monitoring Committee(PIMCs) at district and State level are constituted bythe post office.

(vii) The district PIMC is responsible for smoothgrounding of the project, sorting out operationalissues and identification of appropriate NGOs. ThePIMC meets on a quarterly basis.

(viii) State level PIMCs review overall implementation ofthe project, suggest new initiatives and recommendrelease of funds by NABARD to the Department ofPosts.

(ix) Department of Posts maintain separate books ofaccounts for all transactions relating to utilisationand operations of Revolving Fund Assistance (RFA)from NABARD.

Under the project, NABARD would provide financialsupport for capacity building programmes of postalofficials. While loans are given at interest rates of 9 percent per annum to SHGs by post offices, post officeswould be allowed to retain an interest margin of 3 percent. The amount of actual interest collected from theSHGs would be shared between NABARD and post officesin the ratio of 2:1.

As at end-March 2008, an aggregate of 1,963 branch postoffices/sub post offices in the identified districts areimplementing the project. A total of Rs.100 lakh has beensanctioned as RFA to the post offices by NABARD. So far1,142 postal staff have been given training and Rs.49 lakhhas been released as loans to SHGs as of March 2008.Roll out of the pilot project in a few other States is underconsideration.

Report on Trend and Progress of Banking in India, 2007-08

204

models promoted in the country vary,depending on the promoting agencies.Recognising the growing role of the SHGFederations and their value addition to SHGfunctioning, NABARD, during the year 2007-08 decided to support the Federations on amodel neutral basis. Support is extended tothe Federation by way of grant assistance fortraining, capacity building and exposure visitsof SHG members. NABARD has alsoformulated the broad norms for deciding thegrant of financial assistance to SHGFederations. During the year 2007-08, grantassistance amounting to Rs 10 lakhs wassanctioned to two federations.

5.37 Recognising the role played by MFIs, inextending micro finance services in theunbanked areas, NABARD extends support tothese institutions through grant and loanbased assistance. NABARD has beenselectively supporting MFIs for experimentingwith various micro finance models such asreplication of Grameen Model, NGOnetworking (bigger NGOs supporting smallerNGOs), credit unions and SHGs federations,among others, to meet credit requirements ofthe unreached poor. NABARD provides loanfunds in the form of revolving fund assistance(RFA) on a selective basis to MFIs to be usedby them for on-lending to SHGs or individuals.This loan has to be repaid along with servicecharge, within a period of 5 to 6 years. Duringthe year 2007-08, RFA amounting to Rs.8crore was sanctioned to six agencies takingthe cumulative credit sanctioned to Rs.36crore covering 35 agencies.

5.38 In order to identify, classify and rateMFIs, NABARD introduced a scheme forcommercial banks and RRBs to enable themto avail the services of accredited ratingagencies for rating of MFIs. Banks can availthe services of credit rating agencies likeCRISIL, M-CRIL, ICRA, CARE and PlanetFinance for rating of MFIs and avail financialassistance by way of grant to the extent of 100

per cent of the total professional fees of thecredit rating agency, subject to a maximum ofRs. one lakh. The assistance is available forthe first rating of MFIs with a minimum loanoutstanding of Rs.50 lakh and maximum loanoutstanding of Rs.500 lakh. During the year2007-08, rating support amounting to Rs 3lakh to four agencies was provided.

5.39 Recognising the need for upscaling themicro finance intervention in the country, theUnion Finance Minister, in the budget for theyear 2000-01, announced creation of a MicroFinance Development Fund (MFDF). Theobjective of the MFDF is to facilitate andsupport the orderly growth of the microfinance sector through diverse modalities forenlarging the flow of financial services to thepoor, particularly for women and vulnerablesections of society, consistent withsustainability. Consequently MFDF with acorpus of Rs.100 crore was established inNABARD. The Reserve Bank and NABARDcontributed Rs.40 crore each to the fund,while the balance was contributed by elevenselect public sector banks.

5.40 As per the Union Budgetannouncement for the year 2005-06, theMFDF was re-designated as ‘Micro FinanceDevelopment and Equity Fund’ (MFDEF) withan increased corpus of Rs.200 crore. The fundis being managed by a board consisting ofrepresentatives of NABARD, commercialbanks and professionals with domainknowledge. The Reserve Bank is a member ofthe Advisory Committee of the MFDEF.

5.41 The MFDEF maintained by NABARD isused for promotion of micro finance throughscaling-up of the SHG-bank linkageprogramme, extending RFA and capitalsupport to MFIs and undertake variouspromotional initiatives. During 2007-08,Rs.27 crore was utilised from the fundtowards micro finance related activities(Box V.3).

205

Micro Finance

Box V.3: Micro Finance Development and Equity Fund (MFDEF)

The objective of the MFDEF, which was set up following theannouncement in the Union Budget 2005-06, is tofacilitate and support the orderly growth of the microfinance sector through diverse modalities for enlarging theflow of financial services to the poor, particularly to womenand vulnerable sections of the society consistent withsustainability.

Activities to be Supported Out of the MFDEF

The Fund would be utilised to support interventions toeligible institutions and stakeholders. The components ofassistance will include, inter alia, the following purposes :

Capacity Building

(i) Training of SHGs and other groups for livelihood, skillupgradation and micro enterprise development.

(ii) Capacity building of staff of institutions involved inmicro finance promotion such as banks, NGOs,government departments, NABARD, among others.

(iii) Capacity building of MFIs.

Funding Support

(i) Contributing equity/other forms of capital support toMFIs and service providers, among others.

(ii) Providing financial support for start-up and on-lending for micro finance activities.

(iii) Supporting self help promotion initiatives (SHPI) ofbanks and other SHPIs.

(iv) Meeting on a selective basis the operational deficit offinancial intermediary NGOs/MFIs at the start upstage.

(v) Rating of MFIs and self regulation.

Management Information Services (MIS)

(i) Supporting systems management with regard to MIS,accounting, internal controls, audits and impactassessment.

(ii) Building an appropriate data base and supportingdevelopment thereof.

Regulatory and Supervisory Framework

Recommending regulatory and supervisory frameworkbased on an on-going review.

Studies and Publications

(i) Commissioning studies, consultancies, actionresearch, evaluation studies, etc., relating to thesector.

(ii) Promoting seminars, conferences and othermechanisms for discussion and dissemination.

(iii) Granting support for research

(iv) Documentation, publication and dissemination ofmicro finance literature.

Others

Any other activities recommended by the AdvisoryBoard to Fund.

Eligible Institutions

The following types of structures, community basedorganisations and institutions, would be eligible forsupport from the Fund :

(i) Training: SHGs, community based organisations(CBOs), NGOs, banks, MFIs, NABARD, trainingestablishments, networks and service providers.

(ii) Funding Support : NGOs, CBOs, MFIs, Banks.

(iii) MIS : SHGs, NGOs/voluntary associations (VAs),Banks, MFIs, NABARD.

(iv) Regulatory and Supervisory Framework : Banks, MFIs,Self Regulatory Organisation (SROs), NGOs, MFINetworks, NABARD.

(v) Studies and Publications : Banks, MFIs, NABARD,training and research organisations, academicinstitutions and universities

(vi) Any other organisation as may be decided by theAdvisory Board from time to time.

Mode of Assistance

Mode of assistance from the Fund would include thefollowing :

(i) Promotional support for training and otherpromotional measures.

(ii) Loans and advances including soft loans.

(iii) Revolving Fund Assistance (RFA) to NGOs/ MFIs.

(iv) Equity and quasi equity support to MFIs.

(v) Administrative subsidies and grants.

(vi) Administering Charges.

Management of Fund

The Fund is being managed and administered by NABARD.The interest accrued/ income earned from the fund isploughed back to the fund. The administrative chargesincurred by NABARD in conduct of Advisory Board meetingand salaries, allowances of the NABARD staff involved inmicro finance programmes will be met out of the Fund onsuch basis as may be determined from time to time. As perextant practice, meetings of the banks contributing to theMFDEF will be convened from time to time in which theywill be informed regarding the status and utilisation offund.

Advisory Body to MFDEF

The Advisory Board guides and renders advice on thevarious aspects relating to the micro finance sector. TheBoard determines its own procedures for day-to-dayworking, including constitution of committees and taskforces, among others, for examination of various issues.The Advisory Board meets at such intervals as deemednecessary but in any case once in a quarter to review thestatus and progress of outflow and to render policy advicefor orderly growth and development of the sector.

Report on Trend and Progress of Banking in India, 2007-08

206

5.42 The North-Eastern Council (NEC),Shillong parked a fund of Rs.50 lakh withNABARD during the year 2007-08 forfacilitating miscellaneous trainingprogrammes involving Government/bankofficials, NGOs, SHGs from States in the NERand Sikkim. During the year 2007-08, 73programmes were sanctioned out of the fundinvolving a total grant assistance ofRs.45 lakh.

Micro Finance Initiatives by SIDBI

5.43 SIDBI launched its micro financeprogramme in February 1994 on a pilot basis.The programme provided small doses of creditfunds to the NGOs all across the country.NGOs acted as financial intermediaries andon-lent funds to their clients. Limited amountof capacity building grant was also provided tothe NGOs.

5.44 With a view to reducing the proceduralbottlenecks, expanding the outreach, meetingthe huge unmet demand of the sector andstriving towards its formalisation, SIDBIreoriented its policy and approach to create asustainable micro finance model that wouldsignificantly increase the flow of credit to thesector. To take the agenda forward, the SIDBIFoundation for Micro Credit (SFMC) wascreated in January 1999. SFMC’s mission is“to create a national network of strong, viableand sustainable Micro Finance Institutionsfrom the informal and formal financial sectorto provide micro finance services to the poor,especially women’’.

5.45 SIDBI was one of the first institutionsthat identified and recognised NGO/MFI routeas an effective delivery channel for reachingfinancial services to those segments of thepopulation not reached by the formal bankingnetwork. As a result of bulk lending fundsprovided, coupled with intensive capacitybuilding support to the entire micro financesector, it has come to occupy a significant

position in the Indian micro finance sector.Today, SIDBI is one of the largest providers ofmicro finance through the MFIs.

5.46 SIDBI’s pilot programme of 1994brought out one of the major shortcomings inmicro finance lending programme. It showedthat collateral-based lending does not workinsofar as micro finance is concerned. NGOs/MFIs acting as financial intermediaries do nothave tangible collateral to offer as security forthe loans. Doing away with collateral-basedlending in MF necessitated that a mechanismbe developed which would minimise the risksassociated with lending. With a view tocatering to this objective, SIDBI pioneered theconcept of capacity assessment rating (CAR)for the MFIs. As part of its developmentalagenda, SIDBI encouraged a private sectordevelopment consulting firm to develop arating tool for the MFIs which was rolled out in1999. Today, rating is a widely accepted tool inthis sector. SIDBI has also succeeded indeveloping a market for rating services. Twomainstream rating agencies, viz., CRISIL andCARE have also started undertaking microfinance ratings, besides M-CRIL. SIDBI hasalso adopted the institutional capacityassessment tool (I-CAT) of access developmentservices (ADS), a private sector consultingorganisation, for rating of start-up/small andmid-sized MFIs.

5.47 SIDBI introduced a product called‘transformation loan’ in 2003 to enable theMFIs to transform themselves from aninformal set up to more formal entities. Thisloan is a quasi-equity product with longerrepayment period and features for conversioninto equity at a later date, when the MFIdecides to convert itself into a corporateentity. Consequently, a number of MFIs wentahead with the transformation and some ofthem have now grown significantly and areserving millions of clients across severalstates. Recognising the need to offer the MFIs