equity capital so as to adequately capitalise them, SIDBI set up a fund of Rs. 50 crore which was christened as SIDBI Growth Fund for MFIs. The fund takes care of equity investment in large corporate MFIs, as also equity capital in start-up/smaller institutions, along with quasi-equity support for MFIs on the verge of transformation.

5.48 SIDBI also supports incubation of potential local community based organisations through two-tier/umbrella NGOs/MFIs. The approach not only helps SIDBI to increase its outreach through double intermediation but also enables it to channelise finance to smaller NGOs that otherwise may not meet the criteria for availing direct assistance from SIDBI.  SIDBI has also been able to nurture and develop a few new intermediaries set up by experienced professionals. Another approach in this direction involves incubation of new start-up MFIs promoted by first-generation development/micro finance professionals. The incubation support is either given through well-reputed management institutes or through institutions specialising in capacity building and technical support services.

5.49 As at March 31, 2008, the SIDBI had 58 partners in the underserved States, out of its total partner base of 104. The increased thrust on development of underserved States has also resulted in the share of these States going up from 19 per cent (Rs.38 crore) in the total outstanding micro finance portfolio of SIDBI in the financial year 2005 to over 31 per cent (Rs.299 crore) in the financial year 2007-08.

5.50 Substantial growth of the micro finance sector would be possible only if the capacities of all stakeholders are built up adequately. SIDBI has taken some initiatives in this direction. One such initiative has been in the area of human resources where SIDBI has tried to address the issue both from the demand and supply side factors. On the demand side, MFIs are encouraged to hire young management/accounting graduates from reputed institutes through campus placement and SIDBI provides partial salary support for these young professionals (YPs) for a period of two years. Additionally, MFIs are also provided grant funds for hiring trained and experienced professionals as second line managers. This helps in bringing and retaining the talent in the micro finance sector. On the supply side, some of the management training institutes have been provided support in the form of training and exposure visit of their faculty members to reputed national and international training programmes and other MFIs across the world. Besides, SIDBI was instrumental in bringing international experts to lend support to these institutes for developing a course on micro finance that has been incorporated as an elective in their rural management courses.

5.51 Other major initiatives towards capacity building of the sector comprised developing the capacities of consultants and technical service providers (TSPs), developing a common chart of accounts for the sector, creating gender and environment awareness, promoting innovations and action research on emerging concepts.

Regulation of Micro Finance Institutions

5.52 The rapid growth of the micro finance sector and varied number of micro finance providers influencing the lives of millions of clients have necessitated the need for regulating the sector. In India, micro finance is provided by a variety of entities. These include banks (including commercial banks RRBs and co-operative banks), primary agricultural credit societies, SHGs linked to banks and MFIs that include NBFCs, Section 25 companies, trusts and societies as also co-operatives (under MACS).  Currently, banks and NBFCs fall under the regulatory purview of the Reserve Bank. Other entities are covered in varying degrees of regulation under the respective State legislations. There is no single regulator for this sector. In this context, for the orderly growth and development of the sector, the Government of India has proposed a legislation and formulated a Micro Financial Sector (Development and Regulation Bill), 2007 which is under consideration of the Parliament. The Bill envisages NABARD to be the regulator and provides that all micro finance organisations desirous of offering thrift services may get registered with NABARD.The legislation, however, is yet to be enacted (Refer Chapter II, para 2.219).

5.53 In the meantime, formulation of a code of ethics has been formulated by Sa-Dhan in 2007, to be followed by their member institutions (Box V.4).

Micro Insurance

5.54 Social security in the form of micro insurance can be a boon for the poor, when the income raising ability of the bread winner is impaired. In India, the micro insurance schemes are mostly implemented by the MFIs as a compulsory element along with the micro credit provided. Micro insurance schemes can be considered as a stepping stone to social protection. One of the best examples of micro insurance scheme is the one which is linked to the Grameen Bank scheme in Bangladesh. Grameen established a separate organisation called Grameen Kalyan (village welfare) which uses the women groups for the collection of annual premiums for micro insurance.

5.55 With the recent arrival of a number of private insurance companies in India, there has been significant innovation in new product development, as well as delivery in the insurance sector. Several MFIs are entering the domain of micro insurance. However, the sector is still in its early days and evolving rapidly. More than half of the 83 MFIs that responded to a Sa-Dhan study in 2005 were offering insurance, with life insurance being more widespread than non-life insurance. Insurance Regulatory Development Agency (IRDA)’s micro insurance regulations of November 2005 formally recognised NGOs, SHGs and MFIs as “micro insurance agents” for acting as intermediaries between insurance companies and beneficiaries. The Committee on Financial Inclusion (Chairman: Dr. C. Rangarajan), which submitted its report in January 2008, highlighted the importance of micro insurance and made wide ranging recommendations in this regard (Box V.5).

5.56 Generally, micro insurance schemes cover health care, life, accident expenses, maternity protection and disability. Both the public sector and private sector insurance companies have tied up with various MFIs in the country to offer micro insurance schemes. One of the difficulties in the implemention of micro insurance scheme is that poor have a lesser understanding of risk pooling and are often reluctant to join schemes where payments have to be made with no immediate returns.

4. Progress of Micro Finance in India

5.57 The micro finance movement has come a long way since its inception in the early 1990s and has assumed enormous significance in the delivery of credit to the hitherto excluded sections of the population. While the SBLP has emerged as the most dominant model, the MFI model has also been gaining importance.

SHG-Bank Linkage Programme Approach

5.58 The SBLP has made considerable progress since its inception in the early 1990s, both in terms of the number of SHGs credit linked with banks as also the bank loans disbursed by SHGs. The cumulative number of SHGs credit linked with banks increased sharply from 33,000  in 1992-99 to 264,000 in 2000-01 and further to 2,239,000 in 2005-06. During the above period, the cumulative bank loans disbursed to SHGs also witnessed a sharp increase from Rs. 57 crore in 1992-99 to Rs.481 crore in 2000-01 and further to Rs.11,398 crore in 2005-06 (Table V.1 and Chart V.1).

5.59 The provisional data available so far indicates that during the year 2007-08, 552,992 new SHGs were provided with bank loan and 186,883 existing SHGs with repeat loans. Total bank loans disbursed during the year were at Rs.4,228 crore, of which repeat bank loans to existing SHGs were at Rs.1,686 crore. The growth of number of SHGs has decelerated in recent years, particularly in the southern region, where rapid progress was made earlier. The scheme is catching up slowly in the northern region. The MFIs have also expanded their operations, which might have impacted the growth of the SBLP to some extent.

5.60 In terms of relative shares of different agencies, commercial banks continued to account for the largest share, both in terms of number of SHGs credit linked and bank loans disbursed, followed by regional rural banks and co-operative banks (Table V.2). Among the commercial banks, public sector banks accounted for the largest share of loans disbursed to SHG sector (88.8 per cent) in 2006-07. Out of the total loans disbursed by the commercial banks, 86.9 per cent of the loans were disbursed exclusively to women SHGs (Appendix V.1).

5.61 Under the SBLP, as on March 31, 2007, 2.9 million SHGs had outstanding bank loans of Rs.12,366 crore (Table V.3).
5.62 Of the three models under the SBLP, the Model II, viz., SHGs promoted by NGOs/ Government agencies and financed by banks has emerged as the most dominant model in the case of India (Table V.4).

5.63 The region-wise pattern of SHGs linked to banks showed greater concentration in the southern region, although the spatial disparity has declined in the last few years with some increase in the share of other regions, particularly the eastern region (Table V.5).

5.64 In order to scale up efforts and reduce the regional imbalances in outreach, 13 non-south Indian States (Assam, Bihar, Jharkhand, Gujarat, Himachal Pradesh, Maharashtra, Madhya Pradesh, Chattisgarh, Orissa, Rajasthan, Uttar Pradesh, Uttaranchal and West Bengal) with high incidence of rural poverty and where the micro finance movement had not taken roots were identified by NABARD. Special efforts by NABARD resulted in an increase in the number of SHGs credit linked in these States from 100 thousand as on March 31, 2002 to 1.4 million as on March 31, 2007. Thus, the spread of the programme in the 13 States led to a significant decline in the share of the southern States in SHGs linked to banks.

5.65 As on March 31, 2007, the number of SHGs maintaining savings bank accounts with the banking sector was 4.2 million with outstanding savings of Rs. 3,513 crore, thereby covering more than 58 million poor households under the programme. Commercial banks had the maximum share of the SHG’s savings (53.9 per cent), followed by RRBs (32.9 per cent) and co-operative banks (13.2 per cent) (Table V.6). Among the commercial banks, the public sector banks accounted for the largest share of savings (95.9 per cent), while private sector banks accounted for marginal share (4.1 per cent). It is noteworthy that around 87.3 per cent of the savings were by exclusive women SHGs (Appendix V.2).

5.66 About 37 per cent of banks reported recovery of above 95 per cent under the programme, 36 per cent banks reported recovery in the range of 80-94 per cent and another 20 per cent banks reported recovery in the range of 50-79 per cent. Some differences were observed in recovery rates of commercial banks, co-operative banks and regional rural banks (Table V.7).  While the recovery rate of public sector banks varied between 52 per cent and 99 per cent, the same of private sector banks varied between 60 per cent and 100 per cent. Out of the 26 private sector banks, the recovery rate of four banks was 100 per cent (Appendix V.3).

5.67 Many groups promoted under various Government sponsored programmes also constituted a part of the SBLP. As on March 31, 2007, the number of SHGs having outstanding bank loans under the were at 700 thousand constituting 23.7 per cent of the total SHGs under the SBLP. The loan amount outstanding under these SGSY loans were Rs.3,273 crore which constituted 26.5 per cent of the total amount outstanding under the SBLP.


Swarnjayanti Gram Swarozgar Yojana (SGSY)

MFI Approach

5.68 The emerging role of MFIs as institutions other than banks engaged in providing financial services to the poor is being recognised and the banking sector has been extending loans to MFIs for on-lending to SHGs. During the year 2006-07, bank loans amounting Rs. 1,152 crore were disbursed to 334 MFIs, taking the total loans outstanding to Rs.1,584  crore to 550 MFIs as on  March 31, 2007 (Table V.8 ).

5.69 The Reserve Bank carried out a survey of MFIs in 2007, which revealed that most of the MFIs have a good recovery rate. Commercial banks remained the most important source of funds for almost all the MFIs. Even though some complaints regarding high interest rates and forcible loan recovery were registered in some parts of the country, most of the borrowers reported that it was easy or very easy to get a loan from MFIs  (Box V.6).

5. Micro Finance in India - Impact

5.70 There are several instances of experiments of SHGs that have made a positive impact on the income and employment situation of the poor (Box V.7).

5.71 A few assessment studies have been carried out on the impact of the SBLP in India at the grassroot level. Puhazhendi and Satyasai (2000)1 observed a shift towards higher income slabs between pre and post-SHG situation. About 74 per cent of the sample households were below an annual income level of Rs.22,500 during pre-SHG situation. The proportion declined to 57 per cent in the post-SHG situation indicating increased income levels. Further, involvement in the group significantly contributed to improving the self-confidence of the members. The communication with other group members also improved after association with the SHGs. The members were relatively more assertive in confronting with social evils and problematic situations. 5.72 In another assessment, Puhazhendi and Badatya (2002)2 found that availing loans from moneylenders and other informal sources with higher interest rates was significantly reduced due to SHG intervention. It was also observed that consumption oriented loans were replaced by production oriented loans during post-SHG situation.

5.73 Some studies have also indicated that the size of the loans is small and is often not sufficient to take up income generating activities. As a result, the loans are utilised for consumption purposes or for taking up subsistence-income generating activities.

5.74 The study conducted by EDA Rural Systems and APMAS (2006) brought out that a significant proportion of sampled groups (40 per cent) had a weak record of account keeping.The study pointed out that financial statements are not being regularly prepared by the SHGs. Only 28 per cent of the SHGs (22 per cent in the South and 35 per cent in the North) prepared an income and expenditure statement and  an equal number of SHGs prepared a balance sheet and portfolio information. While members were usually able to provide approximate figures of total savings and total SHG loans outstanding, they were not able to provide information about profits earned or loan outstanding to banks. Further, the SHGs do not have a clear policy on how to deal with defaults or with dropouts, which formed about 10 per cent of membership.

5.75 The study also observed that 30 per cent of SHGs in the sample were involved in community actions. These involved improving community services (43 per cent of the total actions, including water supply, education, health care, veterinary care, village road), trying to stop alcohol sale and consumption (31 per cent), contributing finance and labour for new infrastructure (12 per cent), protecting natural resources and acts of charity (to non-members). The most common type of action taken up by SHGs was the attempt to close down local liquor outlets.

5.76 The study also pointed out that such community actions inculcated a new boldness and confidence amongst women, often putting pressure on the authorities (panchayat, district officers and police) to do their jobs, whether through petitions or by staging rallies and blockades.

5.77 Some of the States like Andhra Pradesh are trying to implement various developmental and poverty alleviation schemes through SHGs.

5.78 To sum up, micro finance has come of age in India. Although it is not a panacea for the poor, it has now developed into an important delivery mechanism for reaching the poor and achieving financial inclusion. Studies have brought out the positive impact of micro finance on participating clients. As such, its role in enhancing human capital in the long-term would be considerable. It has particularly helped women to become owners of assets, have an increased say in decision making and take up leadership positions. The challenges facing the sector are being addressed on a continuing basis, in consultation with all stakeholders.