Research Paper on CONTRIBUTION OF MICROFINANCE TOWARD INCLUSIVE GROWTH

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THIS PAPER IS ABOUT CONTRIBUTION OF MICROFINACE COMPANIES TOWARDS INCLUSIVE GROWTH IN INDIA.FINANCIAL ANALYSIS HAS BEEN DONE OF THE SELECTED MICROFINANCE COMPANIES BY ANALYSING THEIR FINANCIAL REPORTS.

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<p>1 CONTRIBUTION OF MICROFINANCE TOWARDS INCLUSIVE GROWTH Mr. Maurya Rambali R. M.COM., M.PHIL., LLB., NET(COMMERCE) rammaurya28@gmail.com 9769539813 c/109. Kunal kutir A, Navghar Road, Bhayandar(E),Mumbai-401105 ABSTRACT Growthisinclusivewhenitcreateseconomicopportunitiesalongwithensuringequal accesstothem.TherearesupplysideanddemandsidefactorsdrivingInclusive Growth. Banks and other financial services players largely are expected to mitigate the access to the financial system.Microfinance institutions are the significant contributors in economic development of a country.TheaimofthispaperistoenrichthegrowthandregulationofMicrofinance Institutions(MFI)inIndia.Italsohighlightsthecomponentsofassetsandliabilitiesof theseinstitutions.Thisisalsoanattempttojudgethefinancialandoperational performanceoftheseinstitutionsfromtheyear2008-2012.Inthepresentstudy statistical tools like, trend analysis, ratios, percentages, mean, standard deviation will be usedfordescriptiveanalysis.Toaccomplishtheresearchobjectives,datahasbeen minedfromMIXmarket(www.mixmarket.org)a(Non-ProfitOrganization),NABARD, Sa-Dhan, CGAP. Data regarding financial performance various ratios and variables are takenintoconsideration.ThisworkconcludesthattheperformanceofMFIsinthe periodunderthestudyissignificantandMFIscontributessignificantlyforinclusive 2 growthinIndia.Thestudyconsidersselectedvariablesandratios,therearescopeto expandthestudybyconsideringremainedvariablesandratiosforanalyzingfinancial performances. Here only financial performances of MFIs are studied. More research is neededontheperformancesofMFIbyconsideringothervariableandratiosand analysisofsocialperformanceisalsorequired.Thispaperwillbeusefulforfinancial institutions,portfoliomanagers,wealthmanagersandotherinvestorsaswellas regulatorswhowishtohavebetterunderstandingofMFIsandthiswill assistMFIsto improve their financial performance. Key words: Microfinance Institutions, Financial performance, Ratio, Inclusive Growth Paper type: Research paper 3 1.INTRODUCTION Inclusive growthis a concept which advances equitable opportunitiesfor economic participants duringtheprocessofeconomicgrowthwithbenefitsincurredbyeverysectionofsociety.The definitionofinclusivegrowthimpliesdirectlinksbetweenthemacroeconomicand microeconomicdeterminantsoftheeconomyandeconomicgrowth.Theinclusivegrowth approach takes a longer-term perspective, as the focus is on productive employment as a means ofincreasingtheincomesofpoorandexcludedgroupsandraisingtheirstandardsofliving.Inclusivegrowthfocusesoneconomicgrowthwhichisanecessaryandcrucialconditionfor poverty reduction. It should also be inclusive of the large part of the countrys labor force, where inclusivenessreferstoequalityofopportunityintermsofaccesstomarkets,resourcesand unbiasedregulatoryenvironmentforbusinessesandindividuals.Inclusivegrowthfocuseson productiveemploymentratherthanincomeredistribution.Hencethefocusisnotonlyon employment growth but also on productivity growth. Inclusive growth is not defined in terms of specifictargetssuchasemploymentgenerationorincomedistribution.Thesearepotential outcomes, not specific goals. Theterm"microfinance,"onceassociatedalmostexclusivelywithsmall-valueloansto thepoor,isnowincreasinglyusedtorefertoabroadarrayofproducts(includingpayments, savings,andinsurance)tailoredtomeettheparticularneedsoflow-incomeindividuals.People livinginpoverty,likeeveryoneelse,needadiverserangeoffinancialservicestoruntheir businesses,buildassets,smoothconsumption,andmanagerisks.Microfinanceisasourceof financialservicesforentrepreneursandsmallbusinesseslackingaccesstobankingandrelated services. The two main mechanisms for the delivery of financial services to such clients are: (1) relationship-basedbankingforindividualentrepreneursandsmallbusinesses;and(2)group-based models, where several entrepreneurs come together to apply for loans and other services as a group. Amicrofinanceinstitutionacquirespermissiontolendthroughregistration.Eachlegal structure has differentformation requirements and privileges.Microfinanceinstitutionsin India are registered as one of the following five entities:4 onGovernmentOrganizationsengagedinmicrofinance(NGO-MFIs),comprisedof Societies and Trusts-level cooperative acts, the national level multi-statecooperativelegislationAct(MSCA2002),orunderthenewstate-levelmutually aided cooperative acts (MACS Act)-for-profit)-profit Non-Banking Financial Companies (NBFCs)-MFIsFor some,microfinanceis amovement whose object is "a worldin which asmany poor andnear-poorhouseholdsaspossiblehavepermanentaccesstoanappropriaterangeofhigh qualityfinancialservices,includingnotjustcreditbutalsosavings,insurance,andfund transfers."[1]Manyofthosewhopromotemicrofinancegenerallybelievethatsuchaccesswill help poor people out of poverty, including participants in the Microcredit Summit Campaign. For others,microfinanceisawaytopromoteeconomicdevelopment,employmentandgrowth throughthesupportofmicro-entrepreneursandsmallbusinesses.Microfinanceisabroad categoryofservices,whichincludesmicrocredit.Microcreditisprovisionofcreditservicesto poor clients. Theinclusivegrowthapproachtakesalongertermperspectiveasthefocusison productiveemploymentratherthanondirectincomeredistribution,asameansofincreasing incomesforexcludedgroups.Inclusivegrowthis,therefore,supposedtobeinherently sustainableasdistinctfromincomedistributionschemeswhichcanintheshortrunreducethe disparities,betweenthepoorestandtherest..Growthisinclusivewhenitcreateseconomic opportunitiesalongwithensuringequalaccesstothem.Apartfromaddressingtheissueof inequality,theinclusivegrowthmayalsomakethepovertyreductioneffortsmoreeffectiveby explicitly creating productive economic opportunities for the poor and vulnerable sections of the society. Theinclusivegrowthbyencompassingthehithertoexcludedpopulationcanbringin several other benefits as well to the economy.There are supply side and demand side factors driving Inclusive Growth. Banks and other financial services players largely are expected to mitigate the supply side processes that prevent 5 pooranddisadvantagedsocialgroupsfromgainingaccesstothefinancialsystem. Accessto financialproductsisconstrainedbyseveralfactorswhichinclude:lackofawarenessabout the financialproducts,unaffordableproducts,hightransactioncosts,andproductswhicharenot convenient, inflexible, not customized and of low quality. Financial Inclusion promotes thrift and developscultureofsavingandalsoenablesefficientpaymentmechanismstrengtheningthe resourcebaseofthefinancialinstitutionwhichbenefitstheeconomyasresourcesbecome available for efficient payment mechanism and allocation. If we are talking of financial stability, economicstabilityandinclusivegrowthwithstability,itisnotpossiblewithoutachieving FinancialInclusion.Thusfinancialinclusionisnolongerapolicychoicebutisapolicy compulsion today. And banking is a key driver for inclusive growth.However, we must bear in mind that apart from the supply side factors, demand side factors, such as lower income and /or assetholdingsalsohaveasignificantbearingoninclusivegrowth.Owingtodifficultiesin accessing formal sources of credit, poor individuals and small and macro enterprises usually rely ontheirpersonalsavingsorinternalsourcestoinvestinhealth,education,housing,and entrepreneurial activities to make use of growth opportunities. 2PROBLEMS OF THE STUDY Theproblemofthisresearchpaperistoenrichthegrowthandcontributionof Microfinance Institutions (MFI) in inclusive growth of India, during the year 2008 to 2012. 3OBJECTIVES OF THE STUDY The objectives of the present study are as follows: 1)To analyze the financial performance and growth of MFIs in India. 2)To examine contribution of MFIs towards Inclusive Growth in India. 4.HYPOTHESIS OF THE STUDY The following are hypotheses related to present study.Hypothesis 1 H0: Thereisno significance difference between the ratios of MFIfrom theyear 2008 to 2012 in India. H0:ThereissignificancedifferencebetweentheratiosofMFIfromtheyear2008to 2012 in India. 6 5.RESEARCH METHODOLOGY OF THE STUDY The research methodology of the study consists of: a)Sample frame b)Selection of the sample c)Data required d)Sources of Data e)Research Variables for analysis f)Statistical tools a)SAMPLE FRAME: The sample frame is the list of target population. The sample frame in this study is all Micro financial institutions in India. b)SELECTION OF THE SAMPLE:Forthepurpose ofthestudyresearcherhastaken17MFIworkinginIndia.For the present study researcherhas obtained thenames of theMFIfromMixmarket website,anorganisationwhichhasreliableandauthenticsourceofinformation relating to MFIs of different countries.c)DATA REQUIRED: Study is empirical in nature because it depends upon the collected data, therefore researcher require such data which shows the financial performance like financial statements,BalanceSheet,ProfitandLossAccount,financialreportsetc.ofthe sample MFIs. d)SOURCES OF DATA: Secondary source: Studies of overall composition of MFIs are based on:- i.Mixmarket website, Sa-Dhan website ii.AnnualreportsofNABARD(NationalBankforAgricultureand Rural Development) iii.Report on Status ofmicrofinancein Indiafrom 2007-08 to 2012-13 published by NABARD. iv.Magazines- Bank Quest, IIBF vision, Yojana etc.7 v.Research papers related to microfinance and inclusive growth. vi.Reference books related to MFI and inclusive growth. vii.Newspaper articles. e)RESEARCHVARIABLES AND ANALYSIS: Research variables:Variablesaretheobjectsoftheresearchthatcanbe measured.Therearesomevariableswhichwillbeusedforanalysistomeasure financial performance and growth of MFIs by the researcher. Those variables are as follows:01 Capital Asset Ratio (CA) 02 Debt to Equity Ratio (DE) 03 Gross Profit Margin (PM) 04 Number of active borrowers (NOAB) 05 Return on Asset Ratio (ROA) 06 Return on Equity Ratio (ROE) 07 Operating Expenses / Loan Portfolio Ratio (OELP) Researchvariablesareanalyzedinordertoaccomplishtheobjectivesofthe study. Variousstatistical toolsare used to test the hypothesisframed.In order to examinethecontributionofMFItoInclusivegrowthitwillbeseenthatifthe ratios are significantly differs during the period of study that is 2008to 2012 then it canbe understood that MFIscontributionissignificantin Inclusive growthin India.Sincetheratioswhichareselectedareindictoroffinancialviabilityand shows the performance of MFIs in India, therefore if these ratios are significantly differduringtheperiodofstudyitmeanstheyarefinancialviableandhelpsto increase financial inclusion which is one of the factor for inclusive growth. f)STATISTICAL TOOLS:Forthepurposeofanalysis,forvariousratiosmentionedbelow,averageoffive yearsratioi.e.2008to2012isfoundforeachgroupseparately.Toexamine whethertheseratiosdiffersignificantlybetweendifferentyears,Oneway 8 Analysis of Variance (ANOVA)is applied.In addition of thisKrushkal-Wallies test is also applied in order to overcome the precondition of normal distribution in case of ANOVA. 6.SIGNIFICANCE OF THE STUDY:The present study is significant because of the following reasons: 1)This study and its outcomes will be a tool for the MFIs. a)Tohaveaclearviewaboutitscurrentperformanceandrisk(strengthand weaknesses). b)To motivate the entire institutions towards performance improvement. c)To follow up its development, assess progress in achieve sustainability. d)To present itself to potential funders. 2)It might be a tool for investor: a)To identify potential investment. b)To follow up the MFIs they are investing into. 3)Itmightbeatoolforthegovernmentwhileframingregulationregardingoperationof MFIs. 7.SCOPE OF THE STUDY The scope of the present studyis restricted to India. Under the present studyfewMFIs are considered for the accomplishment of research objectives. For the purpose to analyses andexaminingfinancialperformanceandgrowthofMFI,selectedvariablesaretaken into consideration. 8LIMITATIONS OF THE STUDY: Despite all sincere efforts in order to collect relevant information and data there will be some limitations such as: 1.Due to limitation of time and money, study covers only 17 MFI in India. 9 2.The study reveals only financial performances of MFI and social performances of MFIs are excluded. 3.Under the study researcher has taken only 6 (six) of the ratios of sample MFIs. 9. ANALYSIS Inferential Analysis: With a view to accomplish the stipulated set of hypothesis of the study parametric test ANOVA andnonparametrictestKruskal-WallisTestisused.TheANOVAandKruskal-Wallistestsdo notidentifyspecificsignificantcomparisons.Thestatisticaltestsindicatewhetheratleastone group mean is statistically significantly different from the mean for the other group(s). If the F-value(orChi-square)issignificant,thenweutilizestatisticalcomparisonteststoidentify individualsignificantdifferences.Wetestthedifferencesamongthefiveyears(2008,2009 2010, 2011 AND 2012) using ANOVA as well as Kruskal-Wallis tests. Both the tests applied for each parameter separately. The results are presented in Tables 2 and 3. Table 2 ANOVA Test Results Capital/asset ratio Debtto equity ratio Numberof active borrowers Return on assets Return on equity Profit margin Operating expense/loan portfolio F-value 0.8660.990.370.540.990.620.50 P value 0.48790.41950.89030.71090.42130.64710.7353 Difference Insignificant Insignificant Insignificant Insignificant Insignificant Insignificant Insignificant (Working note is given in appendix) 10 Table 3 Kruskal-Wallis Test Results Capital/asset ratio Debtto equity ratio Number ofactive borrowers Return on assets Return on equity Profit margin Operating expense/loan portfolio H 0.6452.8943.1382.7902.2611.8120.682 P -value 0.95800.57570.53500.59360.68790.77030.9535 Difference Insignificant Insignificant Insignificant Insignificant Insignificant Insignificant Insignificant (Working note is given in appendix) 10. FINDINGS AND CONCLUSIONS: In table 2 we report the ANOVA test result for each parameter. From the table 2 it is found that p valueforeachparameterisgreater thanthelevelofsignificanceat0.05.Thisindicatesthatall theselectedratiosforthisstudydifferinsignificantlybetweenvariouscategories.Hencewe failed reject the null hypothesis for each parameter. To overcome the assumption ofnormaldistributionincase ofANOVA,KruskalWallis testisalsoapplied.Intable3wereport theKruskal-Wallistestresultforeachparameter.Itis interestingtonotethatbyapplyingboththetechniquesallratiosnullhypothesisisaccepted. Fromtheabovediscussionitfollowsthatfordifferentcategories;thereexistsinsignificant difference in various ratios. On the basis of the study, it can be concluded that there exists an insignificant difference in the ratios of MFIs when all categories are takentogether;nullhypothesisis accepted forall theselectedratiosindicatingtherebythattheredoesnotexistasignificantdifference.We conclude that group means are statistically insignificant. Hence there is no significance difference between the mean values of ratios of MFI from the year 2008 to 2012 in...</p>