Business Ethics

A

Project Report

On

Banker To The Poor

By – MuhumadYunus

Submitted to –

Prof. Piya Mukherjee

Group Members

ManishaAsnani 05

Tripthi Bajaj 08

PramodDhawan 31

RoshniJethani 43

RohanKulkarni 52

RenukaMahashabde 59

Acknowledgement

At this final phase of our project, we would like to express our gratitude to all without whose assistance and support, the completion of this project would not have been possible.

We wish to express our gratitude to Prof. Piya Mukherjee of Vivekanand Education Society’s Institute of Management Studies and Research for giving us an opportunity to carry out this project and for their immense co- operation & guidance.

We would like to thank Mr. Anand Balaji (AVP – Operations, Suryoday Microfinance Pvt. Ltd.) and Mr. Swapnil Abhyankar (Officer, Microfinance Division, Saraswat Bank) for their valuable insights which has helped us to widen our knowledge base in the area of Micro-Finance.

Index

INTRODUCTION

Nobel laureate Milton Friedman said "The poor stay poor, not because they are lazy but because they have no access to capital.” this is the reason because of which concept of microfinance comes into picture. Microfinance, a financial innovation, originated in Bangladesh by Prof. Mohammad Yunus in 1976 when he started the Grameen bank. Nobel laureate, Prof. Mohammad Yunus changed the lives of millions of people around the world by creating the concept of microloans. He gave $27 as the first loan from his pocket to a villager living near to his university campus and discovered that villagers are quickly repaying the money by selling their goods in the market and there evolved the concept of microfinance with the establishment of Grameen bank in 1976.

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”. Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, which traditionally lack access to banking and related services. The principles of Micro Finance are founded on the philosophy of cooperation and its central values of equality, equity and mutual self-help. At the heart of these principles are the concept of human development and the brotherhood of man expressed through people working together to achieve a better life for themselves and their children. It includes financial product like micro-credit, micro-saving, micro-insurance.

Various forms of Micro Finance in India

Self help group Joint liability group Bank guarantee

Community Banking/ Grameen Bank/ Village Banking Cooperatives Credit Unions Non-Governmental Organizations (NGOs) Rotating Savings and Credit Associations (ROSCAs) Intermediaries

CHALLENGES FACED BY DR. MUHAMMAD YUNUS

1) Unwillingness by banks to offer loans to the poor

Dr. Muhammad Yunus was strongly moved by the famine faced by his country in 1974.  Dr. Muhammad Yunus used his excellent wealth of knowledge to draft a plan that sought to offer small loans (micro-credit) to the poor. The banks argued that it wasn’t economically feasible to advance loans to the poor since there was an extremely high repayment risk. The traditional lending banks strongly dismissed Yunus’ plans.

2) Conservative approach

Dr. Muhammad Yunus plans to give priority for the small loans to women faced major opposition from the clergy. This elicited stiff opposition from the conservative Muslim clergy who threatened to deny women who borrowed loans from the bank a Muslim burial. This served to make women extremely skeptical about seeking loans from Grameen bank since they were dreadful of such kinds of consequences. Dr. Muhammad Yunus had to act exceptionally in trying to convince the conservative people of the benefits of lending out loans to womenfolk.

3) Lack of backing from the Government

The Bangladesh government made it harder for Dr. Muhammad Yunus and his colleagues to realize their targets by failing to adequately support his ideas. The government failed to sanction commercial banks to approve loans for the poor and this played a major role in challenging Dr. Muhammad Yunus plans. 

4) The International Monetary Fund

 The International Monetary Fund lacked interest in advancing donor-funding to the country and Muhammad Yunus was highly critical of this. He strongly argued that his country qualified for funding from this giant organization but the IMF was not convinced.

5) Rigid Legal Framework

The Bangladesh legal system served to provide stiff opposition to Muhammad Yunus’ ideas and plans in that it did not adequately cater for the rights of the poor. As such, Muhammad Yunus could not base his plans to advance loans to the poor on the law since there existed loopholes that would ultimately bring him back. The country’s rigid legal system acted as an obstacle towards Muhammad Yunus plans for poverty alleviation or reduction in Bangladesh.

MUHAMMAD YUNUS LEADERSHIP

Dr. Muhammad Yunus demonstrated exceptional leadership ability in tackling and overcoming the obstacles highlighted above. He possesses unique leadership skills.

1) VisionDr. Muhammad Yunus excellently transformed his vision into practical application. A good leader must have the ability to inspire his or her people through vision but then again, few are able to translate vision into action. But for the case of Muhammad Yunus, his sheer vision enabled him to tackle the numerous obstacles that he encountered and this enabled him to accomplish extraordinary success. His vision for the poor was that he was so determined to get them out of their predicaments; as such, he strongly defended his micro-credit plan even when he faced major opposition from banks that refused to advance loans to the poor.

2) InnovativeWhen Dr. Muhammad Yunus failed to obtain loans for the poor from commercial banks in Bangladesh, he developed and initiated a plan whereby through the Grameen bank that he founded, loans would be given to the poor in terms of groups. These solidarity groups helped to act as collateral for the loans and the repayment was never an issue. Dr. Muhammad Yunus innovativeness also helped him design the three share farm experiment so as to advance farming inputs to farmers after the catastrophic famine that hit Bangladesh in 1974. The experiment was a major success and went a long way in boosting the country’s food production. 

3) SelflessnessDr. Muhammad Yunus selflessness helped him realize his dreams of changing the lives of millions of poor people. Muhammad Yunus used part of the prize money that he won to initiate a company that sought to produce affordable nutritious food for the poor; he channeled the rest towards building a sate of the art eye hospital that attended to the poor in Bangladesh. 

4) InspiringDr. Muhammad Yunus’ style of leadership enabled him to inspire and inject hope into the lives of millions of poor people not only in his home country but also in numerous countries around the world. His economic plans that are geared towards alleviation of poverty have been applied in many developing countries around the world and most

notably, even the United States of America has borrowed the micro-credit mechanism from Muhammad Yunus. 

5) Ability to convince and mobilizeIn the wake of stiff opposition from all quarters, Muhammad Yunus managed to convince the populace about his ideas more so with regard to the conservative clergymen who vehemently stood against him when he suggested that loans would be offered to women. He also managed to convince the International Monetary Fund of the importance of awarding funding to Bangladesh and this even led to the giant organization revising its policies.

“The poor themselves can create a poverty-free world. All we have to do is to free them from the chains that we have put around them!”

-Muhammad Yunus

“I’m encouraging young people to become social business entrepreneurs and contribute to the world, rather than just making money. Making money is no

fun. Contributing to and changing the world is a lot more fun.” ― Muhammad Yunus

“We prepare our students for jobs and careers, but we don't teach them to think as individuals about what kind of world they would create.” 

― Muhammad Yunus

ADHERENCE TO PRINCIPLES

Right from the start, Yunus created a culture of hard work, integrity and simplicity for all his employees. He mentions in the book how his branch managers go out into villages and talk to people about their problems and not just about their business. Simplicity is evident in Grameen branches all over Bangladesh. The pay is minimal to the employees and they have to undergo a training living with the poorest. He created the Sixteen Decisions, which asked borrowers to modify their traditional ways of living. The 16 decisions are –

1. We shall follow and advance the 4 principles of the Grameen Bank – discipline, unity, courage, and hard work – in all walks of our lives.

2. Prosperity we shall bring to our families3. We shall not live in a dilapidated house. We shall repair our houses and work toward

constructing new houses at the earliest opportunity.4. We shall grow vegetables all year round. We shall eat plenty of them and sell the surplus.5. During the plantation season, we shall plant as many seedlings as possible6. We shall plan to keep our families small. We shall minimize expenditures. We shall look

after our health.7. We shall educate our children and ensure that they can earn to pay for their education.8. We shall always keep our children and the environment clean9. We shall build and use pit latrines10. We shall drink water from tube wells. If they are not available, we shall boil water or use

alum to purify it.11. We shall not take any dowry at our sons’ weddings; neither shall we give any dowry at our

daughter’s wedding. We shall keep the center free from the curse of the dowry. We shall not practice child marriage.

12. We shall not commit any injustice, and we will oppose anyone who tries to do so.13. We shall collectively undertake larger investments for higher incomes14. We shall always be ready to help each other. If anyone is in difficulty, we shall all help him

or her.15. If we come to know of any breach of discipline in any center, we shall all go there and help

restore discipline16. We shall introduce physical exercises in all our centers. We shall take part in all social

activities collectively.

These principles, along with the credit from Grameen, empowered the villagers day after day to live up the vision of Muhammad Yunus of a poverty free future.

On Field Experience

Mr. Swapnil Abhyankar, Saraswat Bank

Since inception the cause of the Small Man lay at the core of Bank’s heart. Bank has grown manifold but basic values have remained the same. Saraswat Bank has therefore launched a scheme for self-help groups so as to help them raise the income levels and improve living standards of their members’ .The Bank aims at teaching the members of these groups to save and to borrow responsibly.

Micro finance as a means of financial inclusion

RBI introduced no frills accounts where it is not necessary to maintain the minimum balance criteria and requires almost no paper work. This ensures that more and more people open their bank accounts and thus can be bought under the purview of financial inclusion programme. This step is taken mainly to inculcate the saving habit in the unbanked sectors of India where majority of the population are daily wage workers, farmers, etc. most of them being illiterate and exploited by private money lenders. Thus RBI’s policy is to make such people self-reliant and to ensure more transparency in this regard. Micro finance can play a major role in attaining these objectives.

Initiative by Saraswat Bank:

Canara bank and Punjab national bank are the pioneers in the area of micro finance. As far as Saraswat bank is concerned, the microfinance division started in the year 2008. It started with targeting women Self-Help Groups (SHG) popularly known as Mahila Bachatgat. The bank in order to connect with its' target customers started with awareness campaigns explaining how the banking system works, what are the benefits of saving and so on.

As per the bank’s policy any SHG who wish to get credit has to open a savings bank account with the bank initially and this account is monitored for a period of six months. After they find it functioning satisfactorily, then loan is extended of an amount of 2 lakhs per group, each group consisting of minimum 10 members and maximum of 20 members. Each group has to appoint its' own chairman, treasurer and a secretary within the group. Know your customer (KYC) norms are taken very strictly to ensure there is no misuse of funds. Thus the bank has been successful in ensuring that the poorest of the poor can become self reliant, earn for them and have a sustainable livelihood. The bank has pioneered its presence in the rural areas of Sangli and Konkan region where it extents loans to farmers for their agriculture related allied activities.

Challenges that they faced:

In its' effort to bring more and more poor people in the purview of banking, Saraswat bank’s microfinance division had to face a lot of challenges. Some of these are:

1. Lack of proper documentation: The rural and the poor population of India do not possess the basic documents that are required to get access to banking services and to comply with the KYC norms. Thus the bank found it very difficult to actually find a way out of this problem and still achieve its' objective.

2. Fear of unknown / lack of knowledge: Majority of the people in rural areas are unaware of what banking actually is , how it is beneficial to them and so on. They do get enlightened when they are explained about it but at when it comes to taking action there is a wide gap. Thus it requires a lot of patience and conviction to persistently make them aware, keep follow up and ensure that they actually avail the services. Also the bank majorly targets women SHGs and most of the families in rural areas are dictated by husbands, again causing a hindrance.

3. Political influence: When any political party notices something has been done for the poor, immediately it becomes a great political issues and the entire purpose is lost. They start influencing their power on the poor people and this acts a major roadblock.

4. Exploitation by private money lenders: Private moneylenders have become an integral part of rural finance. They have such a strong base and control in these areas that it becomes very difficult to break their network, convince the rural people, the farmers and divert people towards banking services.

5. Lack of confidence of bankers: Many bankers themselves are not confident for venturing into rural areas, one the major reasons being the fear of Non Performing Assets (NPAs).In Saraswat Bank particularly, in order to monitor this problem, the students from the respective villages (college students especially) were encouraged to actively participate to tackle this issue. Every group of students was allotted 10 groups to monitor and in case of default, cater to their problems, understand the reason and take suitable actions. Bankers also fear that there is no profitability in this sector. The people in these areas are very loyal and the very issue of default is a matter of pride for them. Therefore the bank has been in a position to achieve almost zero NPAs in the regions where it functions. It

requires a great deal of conviction and a change in the approach on the part of bankers in dealing with these people.

6. Regulatory issues: Microfinance as an institution is at a very nascent stage in India and thus regulatory issues often come up. NABARD has issued certain guidelines and regulations in this regard. After the recent Andhra Pradesh fiasco (SKS Microfinance), the Malegaon committee is working on this and may come with more stringent regulations. Due to this fiasco, Saraswat Bank has withdrawn from financing directly the Micro finance institutions and instead focuses only on SHGs.

Micro Finance: Self Help Groups (BachatGhat) - Saraswat Bank

The Bank caters to the self-help groups who are involved in following activities:

Selling fruits, vegetables, milk, fish, etc.  Making of brooms, basket weavers, and other bamboo products, etc.  Any other activities viz. plumbing, hairdressing, electrician including

flowers/vegetable growers, spices and papad making etc.

Eligibility

Minimum- 10 members; Maximum- 20 members 

(Operative Savings A/C for minimum 6 months.)

Quantum of FinanceUpto 3 times the amount in savings account Or Maximum 2 lacs per group

Interest Rate PLR-1%

Security Guarantee of Group Members

Repayment period Not more than 36 months

Processing Fees Reasonable

Shareholding Nominal Membership

Mr K.Anand Balaji, Suryoday Micro-finance Pvt. Ltd

Suryoday Micro Finance Pvt. Ltd is a registered Non-Banking Finance Company, engaged in providing loans to women from Economically Weaker Sections, Below Poverty Line and the Marginal Poor who do not have access to traditional banking, with an objective to reduce poverty in its area of operation.

Micro-finance as a means of financial inclusion

Micro Finance Institutions have gained lot of momentum in the recent years and they hold a significant position in the NBFC’s category as stipulated by the RBI. They have been instrumental in providing finance to the economically weaker sections of the society who do not have access to routine banking facilities in the normal course of their living. It is done through a very systematic and efficiently monitored process of lending which happens in the forms of various cycles in which the customer falls. The MFI’s have been regulated by very stringent RBI norms that make them more authentic in terms of their operations and audit. Also, they have been helping the left out or the ignored section of the society in achieving their dreams and goals and finally making them literate and capable enough to approach a bank to meet their financial requirements.

Challenges faced by for providing Micro-finance services

Some of the challenges faced by the micro finance institutions are:

1. Compliance with stringent procedures: The kind of customer base that they cater requires very stringent and strict procedures to be complied with in terms of their credit verification, authenticity of documents, and other routine checks and audit.

2. Handle politely: Also, when there are instances of overdue and defaults with regards to repayments or collections, and we cannot be harsh or rude with them, but politely and tactfully explain them the case.

3. Sourcing funds: While approaching the banks or financial institutions for funds, there are a lot compliances to be taken care of while making the proposal, which often pose an issue for getting money.

4. Legal compliances: Also, with regards to the RBI, there are lot of stringent norms to be complied with on a regular basis, i.e. quarterly, half yearly and yearly reports.

Various products and Terms and policies in relevance to credit given:

We have "One family one loan” policy and hence a de-duplication process is carried out on existing data base to ensure that the member who has approached us for loan has not availed any loan from us and the same is live.

Credit Process Validation rejects data- to eliminate negative profile customers Credit bureau reject data (Defaulted clients only) - to eliminate customers with bad history

Credit Norms: Criteria

New Customer Existing Customer

Number of Loans Maximum 1 MFI loan/s at the time of application

Maximum 2 MFI loans at the time of application (Including Suryoday loan)

Loan Amount Maximum of Rs. 50000 including proposed loan

Maximum of Rs.50000 including proposed loan

Default/OD No overdue or default with any other institutions

No overdue or default with any other institutions

Loan Products

Suryoday currently has the following Loan Products for Income Generating Activity:

• Rs 15000 Monthly Repayment

• Rs 15000 Fortnightly Repayment

• Rs 18000 Monthly Repayment

• Rs 18000 Fortnightly Repayment

• Rs 20000 Monthly Repayment

Interest RateThe Rate of Interest on a Reducing Balance basis is

• Rs 15000 Monthly Repayment      = 26%

• Rs 15000 Fortnightly Repayment  = 26% 

• Rs 18000 Monthly Repayment      = 27%

• Rs 18000 Fortnightly Repayment  = 27%

• Rs 20000 Monthly Repayment      = 27%

Processing Fees 

• Rs 15000 : Rs 149.52 + Service Tax

• Rs 18000 : Rs 179.78 + Service Tax

• Rs 20000 : Rs 199.36 + Service Tax 

Insurance Premium

Insurance Cover of Rs 20000 each to Member and Guarantor:

• For 18 Month Tenor - Premium Rs 260

• For 24 Month Tenor - Premium Rs 350

Micro Finance Model for a Social Entrepreneur

Stakeholders in the proposed Micro Finance Model

MFI

CUSTOMERS

NGO’S / TRUSTS

BANKS / NBFCS

LOCAL AUTHORITIES

HEALTH CARE CENTERS

EMPLOYEES

Our Model

Phase 1 – Joint liability group

A Joint Liability Group (JLG) is an informal group comprising preferably of 4 to10 individuals coming together for the purposes of availing bank loan either singly or through the group mechanism against mutual guarantee. In the joint liability group all borrowers are liable for each other’s debts. Even if an individual project fails and some of borrowers are unable to repay, the group as whole might still be able to do so. In this sense joint liability serves as a substitute for collateral.

Phase 1Joint Liability Group

Phase 2 Start Up Funding

Phase 3 Financial Inclusion

Feature of JLG

1. JLG have 4-10 members2. The group should be either all male or female only in exception cases can there be mixed

group.3. Members within the group should have similar turnover/profit and group should be

economically homogenous.4. The group members should be well known to each other5. The group member should have their own business6. Lending may start from group size of not less than three members

AMOUNT OF LOANMaximum amount of loan may be restricted to Rs.50000/- per individual.

RATE OF INTERESTInterest rates ranges from 1.50% to 2.50% below BPLR for various limits.

SECURITYNo collaterals may be insisted upon against the loans to JLGs except mutual guarantee offered by the JLG members.

REPAYMENT Repayment period based on the activities undertaken by members.

Phase 2 - Start up funding

After few years of initial phase, say after 2-3 years when the institution will build up sufficient corpus it will venture into start up funding. That is the institution will function on the similar lines like a venture capitalist.

We have planned of tying up with local hospitals and medical health care centers who have a wide presence in rural areas. Advantages of this will be –

- They will act as an effective channel to connect with the people in rural areas.

- They have the maximum reach

- They are the best people to convince the target market

- Most importantly they are trustworthy and would bridge the gap between organization and the community.

The purpose

People in rural areas innovate new farming equipments or any other innovative products, but they do not have the necessary funds so this VC will cater to those needs.

Features

- Maximum amount that can be invested will range between Rs. 5000-Rs. 150000

- This will also provide the necessary guidance to the start up businesses and will exit when the business becomes fully functional.

The Revenue model

a. Once the start up organization is analized for its viability and its future prospects, funds are disbursed to those individuals.

b. We would monitor the venture periodically and will start recovering our investments in the following manner

i. No recovery will be made until and unless the clients’ variable cost is recovered.

ii. Once the income surpasses the surpasses the variable cost 20 % would be recovered over the amount after deducting variable cost.

iii. This would continue upto we recover our initial investment.

Advantages

a. No burden (0% burden) on the clients, as he is able to recover the variable expenses.b. 20% of the profits wont actually disturb the client because he is able to recover the

variable cost.c. Quite good ratio for us to create a win-win scenario.

Phase 3- Financial Inclusion-

At present MFIs are not allowed to collect deposit from the public. On a broader perspective, to implement the Financial Inclusion policy of the Government, MFIs can have a tie up with the local banks and for every new child born in this region a bank account will be opened with a minimum deposit of Rs 200. The amount accumulated can be withdrawn only when the child attains the age of 15. This will act as an incentive for the poor to frequently access banking services and develop habit of savings.

(This concept is an adaptation of a financial inclusion model which is still under process and is not yet implemented named Financial access@ birth.)

This can be launched as a pilot project based on the said model.

Conclusion

MFIS have the potential of reducing global poverty and they should try to seek an optimal level of achieving social and financial goals. There is no specific tradeoff between financial stability and poverty alleviation. They must focus on their clients. They should try and bring about a delegate balance between financial sustainability and client welfare.

Micro finance is not a tool of poverty alleviation but it acts as a tool for improving the standard of living of the people.

Microfinance, thus, gives the unemployed and the poor some opportunities, hope and self-esteem. Being employed (whether self-employed or by an employer) gives a person a significant boost to his/her sense of self-respect and dignity. Furthermore, microcredit allows people to signal their creditworthiness. If their success makes banks more willing to lend them larger sums and leads to even more economic activity, then that should help reduce poverty in the long run.

The fight to elevate poverty is a great task for anyone or any organization to tackle it alone as a recognized leader in this mission; microfinance can serve as a bridge beyond banking and development. It can act as a link that brings together the services and products available today to the people who need them the most.

“I believe that we can create a poverty-free world because poverty is not created by poor people. It has been created and sustained by the economic and social systems that we have designed for ourselves; the institutions and concepts that make up that system; the policies

that we pursue.” ― Muhammad Yunus

Annexure-I

Questionnaire

1. What is the name of your institution/ organization / company & who is the founder?

2. What are your objectives behind founding this body?

3. Do you provide micro-finance at affordable costs to the low income segments of the society?

4. How do you explain the acceptance of micro-finance as a means of financial inclusion?

5. What is the rate of interest charged on the lending made in the form of micro-finance?

6. What are your terms and policies in relevance to credit given to any individual or an organization?

7. What is your Revenue Model? How do you earn out of this process?

8. What are the various Govt. regulations that you need to comply with?

9. What are the challenges faced by bodies providing Micro-financial help?

THANK YOU

References

1. Banker to The poor – Dr. Muhammad Yunus

2. How effective is Microfinance as a Poverty Reduction Tool? By Anis Chowdhury

3. Microfinance as a Tool for Development by Marc-André Roy March 5th, 2003.

4. http://www.goodreads.com/author/quotes/1254841.Muhammad_Yunus

5. http://www.sumit4all.com/life/five-values-exemplified-in-the-book-banker-to-the-poor-by-muhhamad-yunus.

6. www.suryodaymf.com

7. www.saraswatbank.com