A Summer Internship Project Report On MAINSTREAMING MICROFINANCE (SHGs):CHALLENGE S AND ISSUES In Partial fulfillment for the requirement of two

year course of Master of Busin ess Administration Programme Gujarat Technological University Submitted to: Prof. Rajsee Joshi Submitted By: NIYATI DAVE (107350592019) Submitted On: 23RD July 2011 N.R. Institute of Business Management Ahmedabad

MAINSTREAMING MICROFINANCE (SHGs): CHALLENGES AND ISSUES

N. R. Institute of Business Management (GLS-MBA) Certificate This is to certify that Mr. Niyati Dave Enrolment No. 107350592019 student of N. R. Institute of Business Management (GLS-MBA) has successfully completed his Su mmer Project on MAINSTREAMING MICROFINANCE (SHGs): CHALLENGES AND ISSUES at Banas da iry in partial fulfillment of the requirements of MBA programme of Gujarat Techno logical University. This is his original work and has not been submitted elsewhe re. _______________ Dr. Hitesh Ruparel Director ____________________ Prof. Rajsee Joshi Assistant Professor & Project Guide Date: _________________ Place: _________________

Declaration I, NIYATI DAVE (107350592019) student of N R Institute of Business Management he reby declare that I have successfully completed this project on MAINSTREAMING MIC ROFINANCE (SHGs): CHALLENGES AND ISSUES in the academic year 2010-2011. I declare that this submitted work is done by me and to the best of my knowledge ; no such work has been submitted by any other person for the award of degree or diploma. I also declare that all the information collected from various seconda ry and primary sources has been duly acknowledged in this project report.

Preface Experience is the best teacher the saying has played a guiding role in the infus ion of the summer internship as a part of Master of Business Administration (M.B .A.) program of the N.R.INSTITUTE OF BUSINESS MANAGEMENT(GLS), Ahmedabad under t he GTU guideline. Mere theoretical knowledge does not help us in real life situa tion so the summer internship is devised in the syllabus where in management stu dents learn how to handle the actual situation. In every professional course, pr actical project is an important factor. Professor gives students theoretical kno wledge of various subjects in the college but they are practically exposed of su ch subjects when they get knowledge of the actual operations of functions of man agement in the organization. The main objective behind this project is to picture microfinance and study its various model and loopholes of the same so that a better model can be devised an d suggested to the company and banks involved in the process of microfinance. Ba nas dairy has developed itself over a period and today is apex milk producing da iry in Asia. GCMMF stared white revolution, with Banas dairy playing an important role in the fulfillment of the same. Suppliers of raw milk to Banas dairy are those farmers who lack knowledge as to microcredit, savings and SHGs. I have tried to study the reasons and give sugges tions as to how dairy can become a bridge to poverty eradication and women empow erment and financial inclusion of these villages from which the dairy gets its r aw milk. The report is supported by figures and data wherever necessary with a view to as sist the reader in developing a clear cut understanding of the topic. I

ACKNOWLEDGEMENT The success I have got in the accomplishment of this project work is not only du e to my efforts. I would like to thank N R Institute of Business Management (GLS ), Ahmedabad and Banas Dairy, Palanpur I would also like to thank Mr. Sangramsig h Chaudhary (M.D., Banas dairy) , Mr. Ishwar Patel and all the employees who hav e helped me a lot in this project and provided encouragement directly and indire ctly . I also would like to thank Prof. Rajsee Joshi for providing her valuable time an d guidance; otherwise it would have been difficult to keep the constant high spi rit of work. I also thank her for her extensive help and for providing valuable information, suggestions and inputs at various stages of work. I would also like to thank Mr. Patel (Dena bank), Dr. Suran (General Manager NAB ARD, Ahmedabad), Mr.A.K.Sharma (Bank of Baroda) for giving their invaluable insi ghts and time for guiding me in this project. At last, I feel greatly obliged and take the pleasure to thank Dr. Hitesh Rupare l, Dierctor of N.R.I.B.M for giving me such an opportunity to widen my spectrum of knowledge through this project. Though it has not been possible for me to inc lude the names of all those people who had supported and encouraged me during th e course of the project through this study in no way reduces the value of all th at they had shared. II

EXECUTIVE SUMMARY Microfinance is today becoming the most fund allocated sector as far as state an d central government is concerned. Even RBI is keenly focusing upon the developm ent of microfinance and all the wings of it like micro credit, micro savings, an d micro insurance. India consists of 70% of rural population. These rural popula tion have credit requirement for their spending. They generally take credit by i nformal means i.e. moneylenders or village heads. It was found that formal struc ture of credit and savings would boost up the rural economy. For this reason it was necessary to include rural economy into the entire financial structure. Thus microfinance is now given a boost by the government. Government has taken vario us initiatives regarding the upliftment of the rural economy. More over various micro credit schemes have been also put forth by government like Sakhee mandal, Mission Mangalam (Gujarat only). Etc. Employment schemes like SGSY (Swarnim Gram Swarojgar Yojna) and SJSRY ( Swarn Jayanti Sehri Rojgar Yojna) have also been i mplemented. There are various models of microfinance amongst which the model of SHG bank linage model is considered to be the most reliable and contributing to microfinance. I have also shown how each SHG is rated and which factors are cons idered while loan is provided to SHGs. Banaskantha District Cooperative Milk Pro ducers' Union Limited known as Banas Dairy is a cooperative organization establi shed in the year 1969 under the Gujarat Co-operative societies Act 1961 with the support of NDDB as a part of their Operation Flood Program launched to bring ab out white revolution in the country. Today it is Asias largest milk producing dai ry and has great contribution in GCMMF. Banas dairy acts as a garunter for the s ocieties that provides milk to the dairy. The people which provide milk to the d airy also have farming as another means of earning income. This is why Micro fin ance has close linkage with the dairy industry. I have surveyed the villages in which Banas dairy has a collection center and tried to study their lifestyle and loan purpose III

and their awareness about the SHGs. My survey has shown mostly people take loan for the porpose of farming i.e. crop loan. People also have issues of the effect ive interest rate provided by the banks at the time of loan and for the repaymen t the effective interest rate is higher. There is also very little awareness reg arding the SHGs except the Sakhee Mandal in which women participate for taking t he micro credit. No farmers have yet awareness as to the SHGs inspite of the fac t that SHG is a very reliant model. I have studied the model and its weaknesses and have tried to suggest a different model which can overcome some of the weakn esses. IV

index SR. No. 1. Particulars Introduction 1.1 Introduction to Research Methodology 1.2 Statement of Problem 1.3 Objective 1.4 Literature Review 1.5 Research Design 1. 6 Research instrument 1.7 Scope 1.8 Sample Size 1.9 Sample Technique 1.10 Data S ources 1.11 Research Analysis 1.12 Classification and Tabulation of Data 1.13 St atistical Analysis of Data 1.14 Limitations 1.15 Beneficiaries Industry Profile 2.1 Introduction 2.2 Industry Segment 2.3 Advantages of Milk Industry Gujarat Co operative Milk Marketing Federation Ltd. (GCMMF 3.1 History and Management 3.2 O verview 3.3 Amul Models 3.3.1 Supply Chain Model 3.3.2 Organizational Management Model Company Profile 4.1 Introduction 4.2 Finance at Banas Dairy 4.3 Process a nd Vehicle for Milk Storage 4.4 SWOT Analysis Microfinance 5.1 Introduction 5.2 Principles at G8 Summit 5.3 Value Attributes of Microfinance Page No. 2 2 2 2 5 5 5 5 5 6 6 6 6 7 7 9 9 10 2. 3. 13 14 15 15 16 18 20 22 25 27 28 29 4. 5.

6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 5.4 Why Microfinance? 5.5 Microfinance in India 5.6 Microfinance in Gujarat 5.7 NABARD Microfinance Models 6.1 Models 6.2 SHG Bank Linkage Model 6.3 Highlights of SHG Bank Linkage Model 2010 6.4 Status of Microfinance in India NABARD Report 6.5 SHG Bank Linkage Model Statistics 6.6 Structure of Microfinance in India Mi crofinance Products 7.1 Microfinance Products 7.2 SHG Model 7.2.1 Calculation fo r Cash Credit Limit 7.3 JLGs 7.4 Difference between SHG and JLG Microfinance Loo pholes 8.1 Introduction 8.2 Loopholes 8.3 Problems Challenges in Microfinance 9. 1 Financial Inclusion 9.2 Relation between Financial Inclusion and Development I ndicators 9.3 SHG & Financial Inclusion 9.4 Empowering women with microfinance 9 .4.1 Why Target Women? 9.4.2 Avoiding Undesired Consequences Analysis of Questio nnaire Findings Suggestions and Recommendations Conclusions References Annexures 30 31 33 33 38 41 46 46 47 48 51 52 55 56 58 60 61 64 69 70 71 72 74 75 77 100 1 04 109 112 114

CHAPTER 1 RESEARCH METHODOLOGY 1

1.1 INTRODUCTION TO RESEARCH METHODOLOGY Research methodology is a methodology for collecting all sorts of information & data pertaining to the subject in question. The objective is to examine all the issues involved & conduct situational analysis. The methodology includes the ove rall research design, sampling procedure & fieldwork done & finally the analysis procedure. The methodology used in the study consistent of sample survey using both primary & secondary data. The primary data has been collected with the help of questionnaire as well as personal observation and interviewing the people bo ok, magazine; journals have been referred for secondary data. The questionnaire has been drafted & presented by the researcher. The Survey is carried for farmer s, tenant farmers and laborers who take loan either from bank or any other infor mal method of finance. Various topics like the purpose for loan, savings, which bank do they prefer and for which reason etc. have been surveyed and found out. Suggestions have been given so that Banas dairy can help with the development of microfinance 1.2 STATEMENT OF PROBLEM To help Banas dairy find a model where in they can help their raw milk suppliers connect to microfinance and its various areas To suggest refined model of micro credit which minimizes defaulters To find why villages in Palanpur and surroundi ng do not prefer SHG 1.3 OBJECTIVES To understand the role of Banas Dairy in empowering the people associated with t hem specially women empowerment To understand the applicability of SHG 2

To find out the purpose of taking loan by famers, tenant farmers and laborers To determine the level of awareness about SHG and JLG among famers, tenant farmers and laborers To know their readiness to take loan from financial institutions. To make recommendations how Banas Dairy can help further in women empowerment & microenterprise. 1.4 LITERATURE REVIEW Literature review shows which articles or journals or research reports were refe rred to during the project report as a source of secondary report. This topic ha s been covered on a later stage. Major highlights of literature review are as fo llows: 1. Self-Help Groups as Financial Institutions: Policy Implications Using a Financial Model Authorg: R. Shrinivasan (professor and coordinator of the Fina nce & Control Area at the Indian Institute of Management, Bangalore This paper uses a spreadsheet financial model to identify key financial policy p arameters that influence the performance of self-help groups (SHGs) whose primar y activity is microfinance. The focus is on long-run (ten-year) performance. The re is bad news for those policy makers and practitioners who focus unduly on gro wth as measured by loan activity. A conservative financial policy that does not inject external funds into the SHG in the initial years and, when it does, does so with moderation, seems appropriate in the long run. Additionally, a high loan interest rate policy produces SHGs that are strong financial institution. 2. Self Help Group Bank linkage model and financial inclusion in India Author: S mita Nirbachita Badajena(a Research Scholar in Economics at IIT, Bombay.) .Prof. Haripriya Gundimeda (Associate Professor in Economics at IIT, Bombay.) This paper talks about Micro-finance being the provision of thrift, credit and o ther financial services and products of very small amounts to the poor for enabl ing them to raise 3

their income levels and improve their living standards (RBI, 2005). Microfinance is one of the most remarkable socio-economic developments in the present era. T he micro finance sector started getting recognition in India after the launch of the self help group linkage model in the year 1992. Self Help group linkage mod el is one of the indigenously developed and successfully operated models of Micr o-finance in India. Under this model, the SHGs are financed by bank without any collateral, peer group pressure is considered as collateral by the lenders. SHG led micro finance approach also helps to reduce the burden of heavy transaction cost faced by formal financial institution in India. 3. SHG-Bank Linkage Program in India Author: Hema Bansal( Assistant professor at M.S.University, baroda) This study attempts to review the spread of credit link ages between self-help groups (SHGs) and banks across credit delivery models ada pted by the Reserve Bank of India (RBI) and the National Bank for Agriculture an d Rural Development (NABARD). It further examines the spread of credit linkages across different regions and states of India. It also reviews the participation of commercial banks, regional rural banks, and cooperatives in the SHG-Bank Link age Program across different states in India.The analytical section of the paper is divided in five parts. The first section reviews the spread of self-help gro up linkages to banks across three different models that have been adopted by the National Bank to route credit to SHGs. The second 4. Self-Help Groups: A Keystone of Microfinance in India - Women empowerment & s ocial security Author: C.S.Reddy (APMAS,CEO) Microfinance has evolved over the past quarter century across India into various operating forms and to a varying degree of success. One such form of microfinan ce has been the development of the self-help movement. Based on the concept of se lf-help, small groups of women have formed into groups of ten to twenty and opera te a savings-first business model whereby the members savings are used to fund lo ans. The results from these self-help groups (SHGs) are promising and have becom e a focus of intense examination as it is proving to be an effective method 4

of poverty reduction. This paper examines the SHG operating model, the state of SHGs today, their impact on civil society and how they need to be supported goin g forward. The rise of SHGs and more formal SHG Federations coupled now with SHG Bank Linkage 1.5 RESEARCH DESIGN This is a descriptive research, which will be conducted on a sample size of 100 respondents. Following which the analysis has been carried out on the data colle cted to understand the various reason for preferring loan from banks to informal system of credit and awareness regarding SHG. 1.6 RESEARCH INSTRUMENT Research instrument used is specifically a questionnaire including mostly closee nded questions which can be coded and hence analyzed for the study and to reveal important required information. For certain questions face to face interviews w ere also undertaken. 1.7 SCOPE The scope of my survey is limitsed to the villages in which Banas dairy has its collection center. 1.8 SAMPLE SIZE Sample of 100 customers was taken into study, and their data was collected. Farm ers who take loan form sample size 1.9 SAMPLING TECHNIQUE To study the project, a judgmental and convenience sampling technique was used. 5

1.10 DATA SOURCES Primary data The primary data source was through questionnaire survey and interv iew with the people associated to microfinance .to Secondary data Various microf inance journals and reports have been referred to along with data available on i nternet 1.11 RESEARCH ANALYSIS The collected data has been edited, coded, tabulated, grouped and organized acco rding to the requirement of the study. Tool specifically that will be used will be Excel. Analysis will be done specifically by studying each and every question . Further statistical methods like ChiSquare, Z-Score, trend analysis and trend forecasting on basis of some parameters will be used in order to justify the nee d of information. Also, charts and plots can be used to depict better picture of information sorted from the survey. 1.12 CLASSIFICATION AND TABULATION OF DATA The data thus collected were classified according to the categories, counting sh eets & the summary tables were prepared. The resultant tables were one dimension al 1.13 STATISTICAL ANALYSIS OF DATA Out of the total respondents, the respondents who responded logically were taken into account while going into statistical details & analysis of data. The tools that have been used for analyzing data & inference drawing are mainly statistic al tools like percentage, averages, etc. 6

1.14 LIMITATIONS The major limitation faced during the survey was time constraint. Moreover the p eople in these villages were not aware about loan due to illiteracy prevailing i n these area. 1.15 BENEFICIARIES The beneficiaries from this internship and survey would be Banas dairy, Banks of Banaskatha district, Various NGOs and the people in the villages of Banaskatha. 7

CHAPTER 2 INDUSTRY PROFILE 8

2.1 INTRODUCTION 13% of the total production of the milk is contributed by India. The large veget arian sector of the India feed upon the dairy products of India. This part of th e industry has helped the Indian economy in better possible ways. Some of the gl aring problems of the economy are dealt with much ease. The unemployment and the rates of poverty have diminished as this sector has provided ample scope to the se fields. The industry has seen rapid growth in recent years. The best possible technologies are undertaken and the resources are used in fullest extent so tha t the sector reaches the booming phase. India houses the largest livestock in the world. 50% percent of the buffalo and 20 % the cattle are present in India in respect to world. Moreover the milk and the milk products of India are highly acclaimed in different parts of the world. It ranks first in producing dairy products in India. Some of the past reports o f the past year found that when the production of milk was 72 million then the d emand reached 80million. So the country under the regulatory bodies have gone fa r to increase the production of milk and other milk products to higher extent. The preset production of milk as marked in the year 2009- 2010 is 112mt which fo llows a growth rate of 4%. But the recent research confirmed that by 2012-21 the growth rate must increase to 5.5% where the quantity produces should be 180mt. this is only due to higher the consumption rate. More over the country is stress ing on the milk product industries to increase their production rate, all the pu blic and the private sector s of milk production are taken into grant. The per capita availability of milk is 253grams/day. The government is trying ha rd to increase these rates too. Because of the increase in population there aris es a need that the milk production must increase in order to meet the demands of rising poplation. 9

The rate of milk production: In 1950 the production of milk was 17 million tonne s In 1996 the production of milk was 70.8 million tonnes In 1997 the production of milk was 74.3 mT In the recent years from 2009-2011 the production is 112mt T he Projected rate of production of milk in 2020 would become 240 mT population H owever so as to meet the rising demand of the consumer the production is expecte d to rise up to 220- 150 mt by 2020. If the above figures are achieved then Indi a would be able to contribute to 30-35% to world's milk production. 2.2 INDUSTRY SEGMENTS: Cheese is growing at 15% per annum Ice-creams are growing at 15 % per annum Choc olates this mark as the 4% of the total sweet confectionary consumed by the peop le Biscuits- this cover a wide range of production and contribute a huge in the industry Bread and bakery products share a 37% and a 75% of the industries share . Fluid milk- the annual growth rate from 2010-2013 is 6.8 % Some of the other d airy products are like curd, ghee, khoa, powdered milk and soon that is much in demand in India and is widely consumed. 2.3 ADVANTAGES OF MILK INDUSTRY IN INDIA: Due to high production of milk the scope of milk processing would also increase There is a improved purchasing power of the consumer The transport facilities ar e easy and are readily available The manufacture instruments of high quality are coming along Apart from the cooperative and public milk sectors there are certa in upcoming private sectors 10

There is highly trained and wide recourse of man power The natural resource of t he country is such wide that it gives scope for further widening. Besides, growt h in milk production is likely to continue at the present rate of 4.4% in the ne ar future. Demand for milk, at current rate of income growth estimated to grow a t 7% per annum. Interestingly, demand for milk is expected to grow steadily over the next two decades as the low income rural and urban families who have higher expenditure elasticity would also increase their income due to new economic env ironment With the World Trade Organization (WTO) coming into effect, from 01 April 2001 a nd the imports and exports getting liberalized in the global economy, the dairy industry, which includes dairy products, faces both an opportunity 11

CHAPTER 3 GUJARAT COOPERATIVE MILK MARKETING FEDERATION LTD. (GCMMF) 12

3.1 HISTORY AND MANAGEMENT Gujarat Cooperative Milk Marketing Federation Ltd. (GCMMF), is India's largest f ood product marketing organisation with annual turnover (2010-11) US$ 2.2 billio n. Its daily milk procurement is approx 12 million lit (peak period) per day fro m 15,712 village milk cooperative societies, 17 member unions covering 24 distri cts, and 3 million milk producer members. It is the Apex organisation of the Dairy Cooperatives of Gujarat, popularly know n as 'AMUL', which aims to provide remunerative returns to the farmers and also serve the interest of consumers by providing quality products which are good val ue for money. Its success has not only been emulated in India but serves as a mo del for rest of the World. It is exclusive marketing organisation of 'Amul' and 'Sagar' branded products. It operates through 47 Sales Offices and has a dealer network of 5000 dealers and 10 lakh retailers, one of the largest such networks in India. Its product range comprises milk, milk powder, health beverages, ghee, butter, cheese, Pizza cheese, Ice-cream, Paneer, chocolates, and traditional In dian sweets, etc GCMMF is India's largest exporter of Dairy Products. It has been accorded a "Tra ding House" status. Many of our products are available in USA, Gulf Countries, S ingapore, The Philippines, Japan, China and Australia. GCMMF has received the AP EDA Award from Government of India for Excellence in Dairy Product Exports for t he last 13 years. For the year 2009-10, GCMMF has been awarded "Golden Trophy' f or its outstanding export performance and contribution in dairy products sector by APEDA. For its consistent adherence to quality, customer focus and dependability, GCMMF has received numerous awards and accolades over the years. It received the Raji v Gandhi National Quality Award in1999 in Best of All Category. In 2002 GCMMF ba gged India's Most Respected Company Award instituted by Business World. In 2003, it was awarded the The IMC Ramkrishna Bajaj National Quality Award - 2003 for a dopting noteworthy quality management practices for logistics and procurement. G CMMF is the first and only Indian organisation to win topmost International Dair y Federation Marketing Award for probiotic ice cream launch in 2007. 13

The Amul brand is not only a product, but also a movement. It is in one way, the representation of the economic freedom of farmers. It has given farmers the cou rage to dream. To hope. To live. 3.2 GCMMF - AN OVERVIEW Year of Establishment Members 1973 17 District Cooperative Milk Producers' Union s (13 Members & 4 Nominal Members) 3.03 Million 15,712 13.67 Million litres per day 3.45 billion litres No. of Producer Members No. of Village Societies Total Milk handling capacity pe r day Milk Collection (Total - 201011) Milk collection (Daily Average 9.2 million litres (peak 12 million) 2010-11) Mil k Drying Capacity Cattlefeed manufacturing Capacity Sales Turnover -(2010-11) 64 7 Mts. per day 3690 Mts. per day Rs. 9774 Crores (US $2.2 Billion) 14

3.3 MODELS OF AMUL 3.3.1 SUPPLY CHAIN MODEL 15

3.3.2 ORGANIZATIONAL MODEL The Amul model has helped India to emerge as the largest milk producer in the wo rld. More than 13 million milk producers pour their milk in 1,28,799 dairy coope rative societies across the country. Their milk is processed in 176 District Cooperative Unions and marketed by 22 State Marketing Federations, ensuring a bett er life for millions. 16

CHAPTER 4 COMPANY PROFILE 17

BANAS DAIRY-AN OASIS IN DESSERT 4.1 INTRODUCTION Banaskantha District Cooperative Milk Producers' Union Limited known as Banas Da iry is a cooperative organization established in the year 1969 under the Gujarat Co-operative societies Act 1961 with the support of NDDB as a part of their Ope ration Flood Program launched to bring about white revolution in the country. BA NAS manufactures a large number of dairy products under AMUL, SAGAR and BANAS brands. thier product range includes Amul Pasteurised Milk, Amul longer Shelf Life Milk, Amul Butter, Amul Ghee, Sagar Ghee, Amulya Powder, Saga r Tea and Coffe Whitner, Sagar SMP, Amul SMP, Amul Shakti Powder, a wide range o f Amul Ice Creams, Banas Peda, Banas Tea etc. The products of dairy are marketed through Gujarat Cooperative Milk Marketing Federation, Anand. We also provide a large number of technical inputs to over 1.8 lac farmer households, which are o rganized through 1200 odd Village level Cooperative Milk Societies. 18

This is the administrative office at Banas dairy. Moreover Banas dairy along wit h the milk collection also provides knowledge regarding the cleanliness of milk and mixing of water with the milk. There is a milk collection center in each of the villages and one person is appointed as chairman of the milk collection cent er from the village itself. They also have 24 hours vet services in which any pe rson from the societies which contribute to the milk production can ask for vet services and they have emergency mobile vet vans also. Thus Banas dairy not only collects the milk from each milk center but also provides the skills and method of increasing the quantity of milk and also the quality of milk. Banas dairy fo llows an open door policy as to the complaints and suggestions of the employees and the societies itself. Moreover the dairy also does social responsibility wor k. It has a plant within the campus where it has a water treatment plant in whic h the waste water which is removed by the plants in the process of pasteurizing milk and cleaning the vessel is transferred to this treatment plant which is lat er on used again to water plants and maintain garden. 19

4.2 FINANCE AT BANAS DAIRY Banas also acts as a garunter for the societies who want to take agriculture loa ns and therefore facilitates the working of disbursement of micro credit. Banas does all its financial dealings via Dena bank and Bank of Baroda. These banks ar e also involved with the dealings of micro finance and are very active partners of government of Gujarat for micro finance. Banas dairy has its finance in a ver y organized manner. The payment to the societies which provide milk to the dairy is done via banks on every fortnight. Banas has route predefined covering all t he societies which provide milk. In each society they have a dairy in which all the people fill milk which is then brought to Banas dairy. The following are som e of the financial highlights of Banas dairy for the financial year 2010-2011 Total no of milk societies contributing milk 1368 Milk production( in thousand kg) Milk sales in Rs. 717663 2265.13 Net period 15,20,28,850 General reserve 99769718 NDDB operation flood fund 74955023 20

Banas dairy recently started with the Banas 3 plant which is fully automated and is for the production of ice cream. It was inaugurated by chief minister Narend ra Modi. It is also planning to development Banas 4 and Banas 5 plants which wou ld also be fully automated. Plant 5 will be for the production of cheese. So the capacity for milk would increase to 150 cr. Of the milk federation Banas dairy has largest output has far as tetra milk production is concerned. This milk is e xported to various countries like Nepal, Bangladesh. The tetra pack is most sent to the border countries for the army. The milk power AMULYA is one produced in huge quantities. Milk power is used in various bakery products and for this reas on is consumed in huge quantities. 21

4.3 PROCESS AND VEHICLE FOR MILK STORAGE These are the storing vessels for milk. The milk which comes is stored here and then transferred to the place of pesturizing and t in the palnt as per the requi rement. All the palnt have different requirement as to the quality and quantity of milk. For e.g. for butter the cream needs to be seprated from milk first and for this the milk via pipes transferred to the butter producing plant and from t here the machines which are installed gets the cream separeted and the low fat m ilk is again tranfered to other plant to produce either Amul Kool or paneer.Ther e are laboratory which on a regular interval test the milk and the contents of m ilk. The end product i.e. butter of Amul Kool is also tested and then only sent for loading into the trucks. There is batch production. There are 4 shifts at Ba nas Dairy. The production is 24 hours. The workers who are at the lowest level i n factory who work in shifts are paid on daily wages bases. 22

These are the dairy trucks which carry the milk from different collection center to the dairy. The amount of milk which they bring is generally fixed. There are weighing machines through which these loaded trucks have to pass through before they wait till the milk is sucked by the pipes. The routes of these are predefi ned on which they go for milk collection. Banas is now expanding to Jaipur also. Entry passes have been provided to each of the trucks. 23

In the above diagram you can see the when the turn of the particular vessel come s there is a small opening at the end of the vessel from where the milk is sucke d by the pipe. This pipe is connected with the huge storage vessel shown earlier and once the entire vessel is emptied then the vessel is cleaned via machine be fore it leaves the area. There are computers inside the control room which provi des the person with all the details regarding the weight of the truck, the quali ty of milk and also various details as to the thickness of the milk and the fat content in the milk whether the milk is of cow or of buffalo etc. so the milk is transferred according to the plant. 24

4.4 SWOT ANALYSIS OF BANAS DAIRY STRENGTHS WEAKNESS Experienced workforce Infrastructure Huge production capacity A good R&D increased amount of diversification raw material has very short life THREATS Local dairy owners and milk producers Decision making authority in the h ands of GCMMF OPPURTUNITIES Huge amount of uncovered market Milk being the basic necessity wil l be demand forever Raw material can be covered in many other forms and has huge exporting options as India has huge amount of livestock 25

CHAPTER 5 MICRO FINANCE 26

5.1 INTRODUCTION India has christened as a developing country with its characteristic demographic unction's and skewed distributed income structure certainly a rip case for impl ementing it and so it has happened albeit, on the national scale. Microfinance i s the provision of financial services to low-income clients or solidarity lendin g groups including consumers and the self-employed, who traditionally lack acces s to banking and related services. More broadly, it is a movement whose object i s a world in which as many poor and near-poor households as possible have perman ent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers. Those who prom ote microfinance generally believe that such access will help poor people out of poverty. The term Micro literally means small . But the task force has not defined a ny amount. However as per Micro Credit Special Cell of the Reserve Bank Of India , the borrowable amount is upto the limit of Rs.25000/- could be considered as micro c redit products and this amount could be gradually increased up to Rs.40000/- ove r a period of time which roughly equals to $500 a standard for South Asia as per international perceptions Microfinance is a broad category of services, which i ncludes microcredit. Microcredit is provision of credit services to poor clients . Although microcredit is one of the aspects of microfinance, critics often atta ck microcredit while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Poor people borrow from informal moneylenders and save with inf ormal collectors. They receive loans and grants from charities. They buy insuran ce from state-owned companies. They receive funds transfers through formal or in formal remittance networks. It is not easy to distinguish microfinance from simi lar activities. It could be claimed that a government that orders state banks to open deposit accounts for poor consumers, or a moneylender that engages in usur y, or a charity that runs a heifer pool are engaged in microfinance. Ensuring fi nancial services to poor people is best done by expanding the number of financia l institutions available to them, as well as by strengthening the capacity of th ose institutions. In recent years there has also been increasing emphasis on exp anding the diversity of institutions, since different institutions serve differe nt needs. Microfinance presents a series of exciting and acknowledged 27

possibilities for extending market thereby reducing poverty, gender empowerment and promoting social change. 5.2 PRINCIPLES AT THE G8 SUMMIT Some principles that summarize a century and a half of development practice were encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endors ed by the Group of Eight leaders at the G8 Summit on June 10, 2004: 1. Poor peop le need not just loans but also savings, insurance and money transfer services. 2. Microfinance must be useful to poor households: helping them raise income, bu ild up assets and/or cushion themselves against external shocks. 3. "Microfinanc e can pay for itself."Subsidies from donors and government are scarce and uncert ain, and so to reach large numbers of poor people, microfinance must pay for its elf. 4. Microfinance means building permanent local institutions. 5. Microfinanc e also means integrating the financial needs of poor people into a country's mai nstream financial system. 6. "The job of government is to enable financial servi ces, not to provide them." 7. "Donor funds should complement private capital, no t compete with it." 8. "The key bottleneck is the shortage of strong institution s and managers."] Donors should focus on capacity building. 9. Interest rate cei lings hurt poor people by preventing microfinance institutions from covering the ir costs, which chokes off the supply of credit. 10. Microfinance institutions s hould measure and disclose their performance both financially and socially. 28

Microfinance is considered as a tool for socio-economic development, and can be clearly distinguished from charity. Families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan, shou ld be recipients of charity. Others are best served by financial institutions. A small initiative which started in 1976, as experimental lending to poor househo lds in the village Jobra (Bangladesh) which later came to be known as Garmin Ban k is a widely acclaimed example which bring forth a methodology that brought a p aradigm shift breaking the preoccupation of banking channels thus demonstrating the possibility of eradicating poverty and having enormous implications. 5.3 VALUE ATTRIBUTES OF MICROFINANCE First, microfinance is something that is done by the alternative sector not the government, and or the commercial sector (later we shall see that there is an alt ernative commercial sector as well). Therefore by definition, a small loan given by a commission agent to a small borrower is not seen as microfinance. However w hen a Non-Governmental Organization (NGO) gives a similar loan (and on similar i nterest rates and terms) it is hailed as microfinance. We should understand this clearly, so that we are able to identify the value attributes. It is assumed th at microfinance is done with a laudable intention and has institutional as well as non-exploitative connotation. In this case we are unable to define microfinan ce by the size and the purpose of the loan. Second, microfinance is something done exclusively or predominantly with the poo r. Again, the banks do not qualify to be MFOs because they do not exclusively or predominantly cater to poor. However, to the extent that the banks have got int o the business of linking SHGs, they are considered as providers of finance to M FOs and in some cases promoters of microfinance, but not as players of microfina nce. Third, microfinance grows out of developmental roots. This is what can be termed as alternative commercial sector. This encompasses the first two points the organ isations are promoted by the alternative sector, and targeting the poor. However the new organizations growing out of these roots need not necessarily be develop mental in the form of incorporation. 29

There are MFOs that have been offshoots of NGOs run on commercial lines. There a re also instances where new MFOs are promoted on commercial lines. People who ha ve worked with NGOs in the past and have developmental credentials usually promote such MFOs. The lendingand related activities done by such MFOs are usually unde rstood to be microfinance. Very rarely do we find commercial organisations setti ng up microfinance businesses . The other area where microfinance could happen is in the co-operative banking se ctor. The cooperative banks have lower entry norms as compared to the mainstream banks. SEWA bank is one example as to how an NGO was able to promote a co-opera tive bank to offer an array of services. However, we do not have many other exam ples, though this option was always available to the microfinance sector. One re ason why the entire banking option has not gained popularity is because of the u rban focus that the banks might get. While there are several co-operative societ ies in the rural areas, banking has been restricted to the urban sector. However , recently there have been a series of bankruptcies in this sector and therefore it is likely that there might be regulatory tightening. 5.4 WHY MICROFINANCE? Subsidies are not the solution to eliminate poverty. More than subsidies poor pe ople need access to credit and opportunity to exploit their talent. Absence of a ny recognized employment and hence absence of collateral make them non bankable, thus reducing the opportunities to access credit. In developing countries like India, lack of loans from any bank leaves them with no other option but to borro w money from local moneylenders, who charge them huge interest rates. To counter this and many such problems, various financial institutions have come in to exi stence in the recent years. The main idea behind microfinance is that poor people, who can provide no collat eral, should have access to some sort of financial services. Microfinance is oft en considered one of the most effective and flexible strategies in the fight aga inst global poverty. In many cases, microfinance institutions are sustainable an d the concept can be implemented on the massive scale necessary to respond to th e urgent needs of those living on less than $1 a day, the 30

official poverty line. A lot of microfinance focuses on providing relatively sma ll loans to poor people who have no access to formal banking services. This prov ides the poor a platform to start profit oriented projects or small scale busine ss. Apart from giving loans, savings are also a very important part of microfinance services. According to the United Nations, microfinance institutions can be broa dly defined as provider of small-scale financial services such as savings, credi t and other basic financial services to poor and low-income people. The term micr ofinance institution now refers to a wide range of organizations dedicated to pro viding these services and includes nongovernmental organizations, credit unions, co-operatives, private commercial banks, nonbank financial institutions and par ts of State-owned banks. Microfinance is a dynamic field and there is clearly no best way to deliver services to the poor and hence many delivery models have be en developed over a period of time. Each delivery model has its share of problem and success. In India, various delivery models have been adopted by microfinanc e institutions 5.5 MICRO FINANCE IN INDIA India has one of most extensive banking infrastructures in the world. However, m illions of poor people in India do not have access to basic banking services lik e savings and credit. In the mid-1990s, about 70% of India's population lives in rural areas which account for only 30% of the bank deposits. About 70% of the r ural poor do not have bank accounts and 87% of them do not have access to credit from banks. In the same period, the share of non-institutional agencies includi ng traders, money lenders, friends and relatives in the outstanding cash dues of rural households was 36%. In the past, both public and private commercial banks in India perceived rural banking as a high-risk, high-cost business i.e. a busi ness with high transaction costs and high levels of uncertainty. Rural borrowers , on their part, felt that banking procedures were cumbersome and that banks wer e not very willing to give them credit. Commenting on the problems faced by the microfinance industry in India, YSP Thorat, managing director of National Bank f or Agriculture and Rural Development (NABARD), and Graham AN Wright, an internat ional expert in microfinance, wrote, "Poor credit-deposit ratios, 31

unsustainable lending and high-levels of non-performing assets often cripple muc h of this infrastructure In 1954, All India Rural Credit Survey Committee recomm ended expansion of the cooperative credit system to cater to the credit needs of the rural poor. The regional rural banks (RRBs) were incorporated in 1976. By t he mid-1970s, the banking sector was operating as a three-tier system. The first tier consisted of commercial banks, RRBs formed the second tier, and cooperativ e banks formed the third tier. About 49% of all scheduled commercial banks opera ted from rural areas. In the early 1980s, the Indian government realized the nee d for microfinance to provide the rural poor with savings and microcredit servic es. Loans available through microcredit schemes were more accessible to the poor people as compared to bank loans. It also compared favorably with non-instituti onal money lenders in terms of cost. In the early 1980s, NABARD study found that though the network of rural bank branches had been trying to create self employ ment opportunities by providing bank credit for over two decades, many poor peop le remained outside the purview of the formal banking system. The existing banki ng policies, procedures and systems including deposit and loan products were not tailored to the requirements of the poor. They required better access to servic es and products rather than subsidized credit. The study concluded that there wa s a pressing need to improve access to microfinance. It therefore recommended th at alternative policies, systems and procedures be put in place in order to boos t the growth of microfinance in India. The Reserve Bank of India (RBI) and NABAR D were actively involved in spreading the network of commercial banks in rural a reas, especially after nationalization. RBI had made it compulsory for all priva te sector banks to open at least 25% of their branches in rural and semiurban ar eas. It had also stipulated that 40% of the net bank credit should be allotted t o sectors categorized as priority sectors, like housing, rural development and a griculture. With these measures, commercial banks did move into rural areas but the advances given to the poor remained very low. To improve the accessibility o f the existing banking network to the poor, the Self Help Group (SHG)7 - Bank Li nkage Model was launched in 1992 with a pilot project for promoting 500 SHGs. Th e objective of the microfinance initiatives was to facilitate empowerment of the poor, while pursuing the macroeconomic objective of overall economic 32

growth. In 1995, the RBI set up a working group to study the possibility of link ages between informal SHGs and banks. Microfinance sector has traversed a long j ourney from micro savings to micro credit and then to micro enterprises and now entered the field of micro insurance, micro remittance and micro pension. This g radual and evolutionary growth process has given a great opportunity to the rura l poor in India to attain reasonable economic, social and cultural empowerment l eading to better living standards and quality of life for participating househol ds. Financial institutions continue to play a leading role in the microfinance progr amme for nearly two decades now They have joined hands proactively with the info rmal channels to give the microfinance sector the required momentum. During the current year too micro finance has registered an impressive expansion at the gra ss root level 5.6 MICROFINANCE IN GUJARAT On the occasion of the golden jubilee year celebration chief minister Narendra M odi launched an ambitious campaign by the name MISSION MANGALAM. The objective o f this mission is to organize the poor into Self Help Groups/ Sakhi Mandals, lin k them with banks build capacities in them and lead them towards sustainable liv elihoods. To implement this mission, Government of Gujarat formed a company by t he name GUJARAT LIVELIHOOD PROMOTION COMPANY. Micro finance has developed in Guj arat basically due to the fact that there huge no of NGOs who volunteer for the same e.g. SEVA and Anandi. Moreover in Gujarat the government is highly active a s far as development of micro finance is concerned. A lot of schemes and support are being provided by the Government of Gujarat. 33

5.7 NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD) NABARD is set up as an apex Development Bank with a mandate for facilitating cre dit flow for promotion and development of agriculture, small-scale industries, c ottage and village industries, handicrafts and other rural crafts. It also has t he mandate to support all other allied economic activities in rural areas, promo te integrated and sustainable rural development and secure prosperity of rural a reas. In discharging its role as a facilitator for rural prosperity NABARD is en trusted with 1. Providing refinance to lending institutions in rural areas 2. Bringing about or promoting institutional development and 3. Evaluating, monitoring and inspecting the client banks Besides this pivotal role, NABARD also: Acts as a coordinator in the operations of rural credit institutions Extends assistance to the government, the Reserve Bank of India and other organi zations in matters relating to rural development Offers training and research facilities for banks, cooperatives and organization s working in the field of rural development 34

 Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development Acts as regulator for cooperative banks and RRBs Extends assistance to the government, the Reserve Bank of India and other organi zations in matters relating to rural development Offers training and research facilities for banks, cooperatives and organization s working in the field of rural development Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development Acts as regulator for cooperative banks and RRBs 35

TECHNICAL SUPPORT ENCOURAGING INOVATIONS CREDIT SUPPORT INFLUENCING POLICY GROUP LINKAGE NABARD INVOVING INSTITUTIONS GROUP FORMATION MOTIVATING PARTNERS CORDINATING WITH PARTNERS 36

CHAPTER 6 MICRO FINANCE MODELS: 37

6.1 MODELS Microfinance Lending Model 1: Associations An association is formed by the poor in the target community to offer microfinan ce services (micro savings, microcredit, micro-insurance, etc.) to themselves. T he association, which can form on the basis of gender, religion, or political an d cultural orientation of its members, then gathers capital and intermediates be tween banks, MFIs and its members. Example: Self Help Groups, SHGs (India) Micro finance Lending Model 2: Bank Guarantees A donor or government agency guarantees microloans made by a microfinance/commer cial bank to an individual or group of borrowers. Compulsory deposits by borrowe rs in such banks are also included in this model. Examples: AfriCap Microfinance Fund (Mauritius), Bellwether Microfinance Fund (India), Latin America Bridge Fu nd, Microfinance Credit Guarantee Facility (Pakistan) Microfinance Lending Model 3: Community Banking/ Grameen Bank/ Village Banking C ommunity Banks/Village Banks are formal versions of associations and are created b y members of a target community who wish to improve their living standards and t o generate employment. By offering microfinance services, these banks seek to de velop their communities. Guarantees are provided by social collateral (peer-pres sure) as services are distributed through 5member groups where each members eligi bility for loans is based on his/her peers performance. Examples: Grameen Bank (B angladesh), MuCoBa (Tanzania) Microfinance Lending Model 4: Cooperatives 38

Cooperatives are very much like associations and Community Banks except that their ownership structure does not include the poor. A group of middle or upper class individuals may form a co-op to offer microfinance services to the poor. Exampl es: Co-operative Bank (England), Cooperative Rural Bank of Bulacan (Phillipines) Microfinance Lending Model 5: Credit Unions In a credit union, members of a target community gather their money and make loa ns to one another at low interest rates. Compared to community banks, credit uni ons are smaller and nonprofit oriented, charging interest rates that merely allo w sustainability. Example: Unin Progresista Amatitlaneca (Guatemala), Vancity Cre dit Union (Canada) Microfinance Lending Model 6: Non-Governmental Organizations (NGOs) Unlike commu nity-based models, NGOs are external organizations and their activities range from offering microfinance services (loans, insurance, savings, etc.) to improving c redit rating of the poor, training, education and research. NGOs may also act as intermediaries between the poor and donor agencies (UN, ADB, World Bank) and op erate locally, as well as globally (through a physical or online presence). Examples: ACCION International (headquarters in USA), KIVA (Headquarters in USA) , Kashf Foundation (Pakistan) Microfinance Lending Model 7: For-profit Banks Commercial Banks, as well as specialized Microfinance Banks offer various financ ial services to the poor but the main purpose may be to secure a high return on investment. Unlike other models, the aim is social development as well as financial progress, beyond inst itutional sustainability. Examples: Bank Compartamos (Mexico), Khushali Bank (Pa kistan) 39

Microfinance Lending Model 8: ROSCAs Rotating Savings and Credit Associations (R OSCAs) ROSCAs are small groups, typically composed of women, where each member makes reg ular cyclical contributions into a common fund, which is given entirely to one me mber at the start of each cycle (weekly, monthly, quarterly). The benefit of thi s model is the matching of a clients cashflows with the loan, the ability to stru cture the deal without interest rates, and the absence of over-head costs. Examp le: Say, a group of 10 women come together in January and pitch in Rs.7 each, ma king a total of Rs.70, and this sum is given to Member A for the month. In Febru ary, another Rs.70 is gathered and given to Member B, and the cycle continues fo r 10 months (10 members). No interest is charged, and social collateral ensure t he money is returned. Government with the help of NABARD (National Bank for Agri culture and Rural Development) has through various tests and survey found out th at the best model is SHGs i.e. self help group. Dr. Suran (General Manager NABAR D Ahmedabad) also suggested that SHGs has better reach and is more promising in terms of credit and disbursement of finance. 40

6.2 SHG BANK LINKAGE MODEL- THE MOST SUCCESSFUL MODEL The SHG-bank linkage program is gaining increasing acceptance amongst NGO commun ity and bankers. The NABARD envisions covering one third of the rural population in India by establishing one million SHGs. The government of India has already made announcements for linking 200,000 SHGs by year 200203. The task force on mic rofinance sees the SHG-bank linkage program emerging as a major way of banking w ith the poor in coming years. It is estimated that at least 25,000 bank branches , 4000 NGOs, and 2000 federations of SHGs involving 0.10 million personnel of th ese institutions will be involved in scaling up microfinance to this magnitude. Under the SHG-bank linkage program, NGOs and banks interact with the poor, espec ially women, to form small homogenous groups. These small groups are encouraged to meet frequently and collect small thrift amounts from their members and are t aught simple accounting methods to enable them to maintain their accounts. Although individually these poor could never have enough savings to open a bank account, the pooled savings enable them to open a formal bank account in the nam e of the group. This is the first step in establishing links with the formal ban king system. Groups then, meet often and use the pooled thrift to impart small l oans to members for meeting their small emergent needs. This saves them from usu rious debt traps and thus begins their empowerment through group dynamics, decis ion-making, and funds management. Gradually the pooled thrift grows and soon they are ready to receive external fu nds in multiples of their group savings. Bank loans enable the group members to undertake income generating activities. There are several advantages of the grou p lending setup. For one, rather than a bank, borrowers themselves undertake the task of credit evaluation; this creates a peer screening effect and reduces the transaction costs as community members have much better information than banks Two, there is the peer monitoring effect that induces group members to use their loans in productive ways have developed models that illustrate the working of t he peer monitoring effect. Three, the desire to preserve valuable social ties in duces borrowers to spend extra effort if necessary to secure timely payments. So cial ties are valuable because they allow 41

members to borrow in the future and provide business connections. Moreover, a ve ry important feature of group lending is the collateral effect. NABARD led SHG bank linkage model is widely accepted as one of the largest and s uccessful micro finance model in the world. There are three kinds of model are b eing emerged under SHG linkage programme. They are: Model-1: SHGs are financed, guided and promoted by banks. Model-2: SHGs are promoted by Non Government Organizations/Government agencies b ut financed by bank. Model-3: SHGs are promoted by NGOs but financed through financial intermediaries like NGOs or by any formal agencies. Banks losses incurred due to unsuccessful projects are generally reduced as succe ssful entrepreneurs within each group cover part of their losses. Through the SH G-bank linkage program the RBI and NABARD have tried to promote relationship ban king, i.e., improving the existing relationship between the poor and bankers wit h the social intermediation of NGOs. The Indian model is predominantly a Linkage Model, which draws upon the strengths of various partners: NGOs, who are best in mobilizing the poor and building their capacities, and bankers, whose financial strength is financing. As compared to other countries where parallel model of le nding to the poor is predominant, the Indian linkage model tries to use the exis ting formal financial network to increase the outreach to the poor, while ensuri ng the necessary flexibility of operations for both bankers and the poor. Various credit delivery innovations such as Grameen Bank Replications, NGO netwo rking, credit unions, and SHG federations have been encouraged by NABARD for inc reasing the outreach. It has also instituted a Micro Credit Innovations Departme nt for planning, propagating, and facilitating the microfinance movement. Given the network of 42

institutional structures supporting the microfinance movement, the SHG-bank link age program has been increasing its outreach substantially. Together the commerc ial banks, cooperatives, and regional rural banks had succeeded in linking 114,7 75 SHGs by March 2000. With an average size of 20 members per group, the program had reached over 2.2 million households. A large majority (85%) of the SHGs lin ked to banks were essentially womens groups. The new microfinance approach has be nefited women largely and has emerged prominently as a womens program in rural The NABARD, Small Industrial Development Bank of India, Housing Urban Developmen t Corporation, and Rastriya Mahila Kosh are some of the institutions that operat e as the wholesale financers of microfinance. As bulk financiers, they leverage fu nds from the government, market, donors, and lenders for lending to its partners and NGOs. Reserve Bank of India and the government lend support to the SHG-bank linkage program through policy formulation and regulation while the NABARD acts as a facilitator and a refinancing agency. The program at the grass root level is executed through a network of commercial banks, regional rural bank (RRBs), d istrict central cooperative banks (DCCBs), and primary agricultural credit socie ties (PACS). The program has been gradually gathering momentum. A review of the SHG credit linkages by these institutions indicated that commercial banks had es tablished the maximum linkages. The RRBs had a sizable coverage but the performa nce of cooperatives in the program was minimal. The average loan per SHG also fo llowed a similar pattern. Through this program, the Reserve Bank of India and NABARD have tried to promote relationship banking, i.e., Improving the existing relationship between the poor and the bankers with the social intermediation of the NGOs. The SHG-bank linkage program in India is rapidly expanding its outreach under the pioneering initiat ive of NABARD, the monitoring and supervision of RBI, and the promotional polici es of the government of India. At the grassroot level the program is being imple mented by the commercial banks, cooperatives, and regional rural banks, with gov ernment agencies like DRDA/DWDA acting as facilitators. 43

With coverage of two-thirds of SHG credit linkages, the linkage program was pred ominant in the Andhra Pradesh, Tamil Nadu, Karnataka, and Uttar Pradesh states o f India. Further, among these four states the program was heavily concentrated i n Andhra Pradesh, where 40% of credit linkages were established. The acceptabili ty of the program was relatively higher in southern India, because the savings a nd the credit movement was launched here. Some of the other contributory factors were large coverage of DWACRA groups and the operation of Swarna Jayanti Swaroj gar Yojna Program and the presence of leading MFIs. Kerala, Maharashtra, Orissa, West Bengal, Gujarat, Madhya Pradesh, Rajasthan, and Bihar together had 23.6% S HG linkages, while the remaining states and union territories had only 1.47% SHG credit linkages. Northeastern India and Jammu and Kashmir need special attention and action plans because of the complexities prevalent in the regional, political, economical, a nd human conditions. In Haryana and Punjab the pro poor program had few takers. The major reasons identified for the spatial coverage of the program in some sta tes were a lack of concentrated efforts by bankers; the absence of large sized N GOs operating as MFIs. 44

6.3 SOME HIGHLIGHTS OF SHG BANK LINKAGE PROGRAM 2010 Physical Total number of SHGs savings linked with banks : 69.53 lakh Out of total [of whi ch] exclusive Women SHGs : 53.10 lakh Out of total [of which] SGSY SHGs : 16.94 lakh Total number of SHGs credit linked during 2009-10 : 15.87 lakh Out of total [of which] exclusive Women SHGs credit linked : 12.94 lakh Out of total [of whi ch]-SGSY SHGs credit linked : 2.67 lakh Total number of SHGs having loans outsta nding as on 31 March 2010 : 48.51 lakh Of which exclusive Women SHGs : 38.98 lak h Of which-SGSY SHGs : 12.45 lakh Estimated number of of families covered upto 3 1 March 2010 : 97 million Financial Total savings amount of SHGs with banks as on 31 March 2010 : Rs 6198.71 crore O ut of total savings of exclusive Women SHGs : Rs 4498.66 crore Out of total savi ngs of SGSY SHGs : Rs 1292.62 crore Total amount of loans disbursed to SHGs duri ng 2009-10 : Rs 14453.30 crore Out of total loans disbursed to Women SHGs : Rs 1 2429.37 crore Out of total loans disbursed to SGSY SHGs : Rs 2198.00 crore Total amount of loans outstanding against SHGs as on 31 March 2010 : Rs 28038.28 cror e Out of total loans o/s against Women SHGs : Rs 23030.36 crore Out of total loa ns o/s against SGSY SHGs : Rs 6251.08 crore Average loan amount outstanding per SHG as on March 2010 : Rs 57795 Average loan amount outstanding per member as on 31 March 2010 : Rs 4128 45

6.4 PREFACE OF STATUS OF MICRO FINANCE IN INDIA 2010 NABARD REPORT The Self Help Group (SHG)-Bank Linkage Programme, in the past eighteen years, ha s become a well known tool for bankers, developmental agencies and even for corp orate houses. SHGs, in many ways, have gone beyond the means of delivering the f inancial services as a channel and turned out to be focal point for purveying va rious services to the poor. The programme, over a period, has become the common vehicle in the development process, converging important development programmes. With the small beginning as Pilot Programme launched by NABARD by linking 255 S HGs with banks in 1992, the programme has reached to linking of 69.5 lakh saving -linked SHGs and 48.5 lakh credit-linked SHGs and thus about 9.7 crore household s are covered under the programme, envisaging synthesis of formal financial syst em and informal sector. This booklet presents the consolidated data obtained fro m the banks along with preliminary analysis of the various trends and progress u nder microfinance sector under the two models viz., SHG Bank Linkage model and M FI Bank Linkage model. The data furnished by the banks have been analysed on a r egion-wise, state-wise, agency-wise, bank-wise and also for SHGs exclusively und er Swarnajayanti Gram Swarojgar Yojana and exclusive women SHGs data in the book let. The trend in submitting the Management Information System by banks has show n improvement. This year all 27 Public Sector Commercial Banks, 19 private secto r Commercial Banks, 81 Regional Rural Banks and 318 Co-operative Banks have subm itted the MIS. We thank all the banks for furnishing the data and expected that in the coming years all the remaining banks will co-operate in timely and accura te submission of data to us. The major support provided by NABARD under Micro Fi nance Development and Equity Fund relates to promotion and nurturing of SHGs by Self Help Promoting Institutions and 46

training and capacity building of the stakeholders in the Sector. NABARD is also experimenting innovative projects for further developing the microfinance throu gh Joint Liability Groups. 6.5 SHG BANK LINKAGE MODEL- STATISTICS PARTICULARS No of SHGs 2007-2008 Amount (crores) No of SHGs 2009-10 Amount (crores) Savings of SHGs with Banks as on 31st March Total SHGS 5009794 3885.39 6121147 5545.62 Out of which SGSY 1203070 809.51 1505581 1563.38 Bank loan disbursed to SHGs during the year Total SHGS 1227770 8849.26 1609586 12253.51 Out of which SGSY 246649 1857.74 264653 2015.22 Source: Report on status of micro finance in India, NABARD 47

6.6 STUCTURE OF MICRO FINANCE INTITUTIONS IN INDIA COMMERCIAL BANK GRAMEEN BANKS REGULATED BANKS COOPERATIVE BANKS MICRO FINANCE INSTITUTIONS URBAN COOPERATIVE BANKS SOCIETY TRUSTS MFI (SPECIAL MICRO FINANCE INTITUTIONS) NBFC SEC 25 48

Here in the diagram we can see that the banks which are regulated are governed b y RBI under the RBI act and bank act. These institutions are focused on the deve lopment and regulation of overall micro finance and not only just the micro cred it part. They also have the pooling of savings and also see to the transfer of f unds and insurance part of micro finance. According to the survey carried out by NABARD in1981-82 it was found that only 38% of the rural population was into th e formal financial banking system and the rest of them were indulged into the in formal financial system which included the landlords, tehsildars, zamindaars and the cream crowd of the society who was rich and landed money to the tenants and the poor class of the society at very high rate of interest and collaterals. MF Is are basically into the credit giving part. They generally are established for micro credit only and not all other micro finance areas like savings or funds t ransfer. But recently they have started pooling the savings only but all the ins titutions are not allow to save and transfer funds only some AAA+ ( graded by RB I) are allowed to save 1.5 times their net worth. Out of the four sub institutes Society, Trusts and Sec 25 have around 10% share in the micro credit part and t hey are not for profit. Even if they incur profit they cannot distribute amongst the members. They only can plough back their profits. Whereas NBFC has 90% shar e in micro finance and can go for savings also. They can distribute the profit a mongst the members. BANAS DAIRY stands as guarantor for the societies which prov ide milk to Banas Dairy. 49

Chapter 7 MICRO FINANCE PRODUCTS 50

7.1 MICRO FINANCE PRODUCTS SELF HELP GROUP (SHG) INDIVIDUAL JOINT LAIBILITY GROUP (JLG) MICROFINANCE PRODUCTS 51

7.2 SELF HELP GROUP An SHG is formed by an initial set of members (generally between 10 to 20 as gre ater than 20 comes under the companies act) and the group remains constant. (Ini tial membership fees are ignored; they make little difference to the model outpu t.) Each member saves a specified amount with the SHG. The SHG pays interest on this amount. The members saving should desirably be regular, but in practice it i s often irregular. All members may save in a given month (or there may be a shor tfall in the individual saving quantum). A loan cycle represents the repayment p eriod of a loan to members made by the SHG. The model accepts loan cycles rangin g from 1 to 24 months. The SHG accumulates savings over the first loan cycle and maintains this with th e MFIs. Thereafter, the SHG lends a fraction of the available funds to members o ver several loan cycles (referred to as the self-cycle phase). The balance is sa ved with the MFI. The loan to members is repayable in monthly installments over the loan cycle period. Interest is paid monthly over the loan cycle. At the end of the self-cycle phase, the SHG raises funds from the MCI and lends a fraction of the total available funds (member savings, surplus retained, and borrowing fr om MFI) to members. The balance is saved with the MFI. The loan from the MCI can be back-to-back (i.e., identical in tenor to the SHG loan to members), or range for periods from 1 to 24 months. The SHG incurs an annual operating cost expressed as a fraction of the common fu nd (member savings plus accumulated operating surplus) The SHG makes annual prof its (losses) that add to (reduce) the accumulated surplus. The members are gener ally free to pick their group depending upon their affinity with the other poten tial members. This reduces the scope of any mutual conflict, making it easy for the NGO supporter to build the group in to a strong social and financial institu tion. Once the SHG is formed, the NGO supporting it builds a high level system t o follow that helps the SHG to be sustainable. The group members meet regularly (once in a week) and carry out their financial transactions. The group mobilizes savings among its members only and provides need based loans to the members onl y (based on the funds created by savings). The rules and norms pertaining to fin ance or other matters are made by the group. The internal transactions are stren gthened first, and after that, the NGO supporting the group links them to banks for more financial assistance There are many disadvantages of SHG models and the y have 52

been discussed in literature, a lot. Despite that fact, the advantages of the SH G have outnumbered the disadvantages and have made the SHGs as the most popular delivery model for microfinance in India. We can gauge the popularity from the f ollowing simple fact that even the government programs have SHG as the core of t heir strategies. Design features of SHGs Enables exclusion of rich

Saving first and credit later Intra group appraisal systems and prioritization: Credit rationing Shorter repayment terms Market rates of interest Progressive lending Self selection Focus on women Federated Self Help Group Model: Self Help Groups have been very successful in e mpowering women by providing direct and indirect benefits to them. However, SHGs are small in size (usually 10 15 members) and are limited in the types of finan cial services they can provide. Since Self Help Groups are a widely successful d elivery model a need arises to scale them up without compromising with the succe ss. The Federated Self Help Group model is one such way to scale up the previous model. Federation of SHGs bring together several SHGs. Compared to a single SHG , federation of SHGs have more than 1000 members. In Federated SHG model, there is a three tier structure 53

the basic unit is the SHG, the middle tier is a cluster and the topmost unit is an apex body, which represents the entire SHG. At the cluster level, each SHG is represented by two of its members. The representatives of each SHG meet regularly. Information about the groups to the apex body and vice versa is given by the cluster unit. The apex body usually made up of 10 15 members and they form the link between the SHGs and the NGO su pporting them. With the help of federations, an NGO with limited resources can h ave an impact on a large number of people. Few notable examples of Federated Sel f Help Group model are PRADAN, Chaitanya, and SEWA. Other NGOs also act as finan cial intermediaries by borrowing from NABARD or elsewhere and on-lending to SHGs , either because they aim to become MFIs, or because this is often the only way by which the groups could access finance, because many bankers refused to lend t o SHGs directly, or even to open savings accounts for them. The financial margin on this business is however insufficient to cover more than a small part of the transaction costs. 54

7.2.1 CALCULATION FOR CASH CREDIT LIMIT STEP 1: Calculate the estimated amount of savings at the end of 3 years. The amo unt saved per month by the group is multiplied with 36 (months) e.g. if in a 10 member group, each member is saving Rs.50/- per month, then the total amount sav ed by the group per month is Rs.500/- this amount has to be saved by the group a t the end of 3 years. Rs.500/- p.m. * 36 months = Rs.18000/STEP 2: Addition of the revolving fund to calculate estimated corpus amount Add the revolving fund availed by the group with the amount calculated as estimated savings at the end of 3 years and calculate the total estimated total corpus e.g . for the above group if the group avails Rs.5000/- as revolving fund from the s tate government , then add this amount to Rs. 18000/- calculated as above Rs.180 00/- + Rs.5000/- = Rs 23000 STEP 3: Final calculation of cash credit limit The g roup will be provided 4 times the estimated total corpus at the end of 3 years a s cash credit limit. e.g. for the above example, the group should be given 4 tim es the estimated total corpus which is Rs..23000/- which would be as follows Rs 23000/- * 4 = Rs. 92000/55

7.3 JOINT LIABILITY GROUP (JLGS) SHGs were successful in providing financial service from the formal banking sect or to the poor. However the issue of linking small farmer Tenant farmers/ oral l essees, share coppers and the rural nonfarm entrepreneurs with the formal bankin g sector was a concern. NABARD came up with the concept of JLGs. It started on a pilot basis in 8 states of India. It proved to be a very successful way of enha ncing peoples capability to take more credit formally. JLG is an informal group o f preferably 4 to 10 individuals but can be upto 20 members as in the case of SH G. The JLG members would offer a joint undertaking for bank loans. The JLG membe rs are expected to engage in similar type of economic activities crop production . JLGs are formed primarily considering the tenant farmers and small farmers cul tivating land without possessing title of their land. Such farmers do not have a ny collateral which h they can offer to the bank from which they take loans so j oint liability acts as collaterals. The main aim for any banks would be to reduc e two things 1. Transaction costs 2. Risk When small loans are given to many peo ple the transaction cost become very high for the bank as it has to keep record for the repayment schedule, the interest calculation, disbursement etc. so when loan is taken in group on a whole a big amount is given to a single group which then the group internally decided who uses how many each group member will use a nd for what propose that is not the concern of the bank so bank at last handle a small no of transaction leading to reduction in the costs. Risk also decreases as there is a group liable for the repayment of the amount. If any one member do es not repay it becomes liability for the entire group to repay the amount to th e bank. FORMATION OF JLGs: Banks may initially form JLGs by using their own staff wherev er feasible. Banks may also engage business facilitators like NGOs and other ind ividual rural volunteers to assist banks in promoting the concept and formation of groups. 56

SAVINGS BY JLGs: The JLG is intended primarily to be a credit group. Therefore s avings by JLG members is voluntary and not compulsory as in the case of SHG. All the JLG may be encouraged to open an individual no frills account. However, if th e JLG chooses to undertake savings as well as credit operations through the grou p mechanism, such groups should open a savings account in the name of JLG with a tleast two members being authorized to operate the account on behalf of the grou p. JLG MODELS: Banks can finance JLG adopting any one of the following: Model A Fina ncing individuals in a group: The group would be eligible for accessing separate individual loans from the financing bank. All members would jointly execute one inter-se document (making each one jointly liable for repayment of all loans ta ken by all the individuals in the group). The financing bank could assess the cr edit requirement depending on the activities being undertaken and credit absorpt ion capacity of the individual. However there has to be mutual agreement and con sensus among all members about the amount of individual debt liability that will be created. Model-B Financing the group: The JLG would consist preferably of 4 to 10 individuals and function as one borrowing unit. The group would be eligibl e for assessing one loan, which could be combined credit requirement of all its members. In case of crop loan, the credit assessment of the group could be based on crop/s and the available cultivable area by each member of the JLG. All memb ers would jointly execute the document and own the debt liability jointly and se verally. 57

7.4 DIFFERENCE BETWEEN SHG AND JLG People generally have a notion that self help group is an institute for micro cr edit but in actual sense it is the products of micro finance. The basic differen ce between SHG and JLG is that people who form SHG are very poor and unbanked wh ereas people of JHG are of mid segment and not very poor and are banked also. Th e basic purpose for which both the products are availed is also different. SHG i s credit for consumption where as JLGs are formed because it becomes quite tedio us and risky for bank to give credit to each small individual, instead when a gr oup is formed where in people take mutual guarantee for repayment on each others behalf makes it easy and lower for banks, this is why JLGs are formed. SHG is in a group of 10-20 people where as JLG is in group of 5-7 people. No collaterals are required in SHG where as JLG has mutual guarantee which acts as a collateral . JLG provides only for credit product but SHG has savings lead credit products i.e. first you save only then can you get credit. 58

Chapter 8 MICROFINANCE LOOPHOLES and problems 59

8.1 INTRODUCTION source:microfinance blog, 30df.org Upper class Poor (earning less than $4-5) who can during emergency spend money on health care and formal education Poor (earn ing less than $2 a day) who cannot afford to spend money on health care and form al education Ultra poor (earning less than $1 a day) who don't mind not living. Thus from the above graph we can see that microfinance has been working but not for the purpose for which it was intended. Only 5% of the ultra poor people have been helped with microfinance. This is the crowd which is into committing suici de. This mostly includes farmers who take loan under microfinance but are unawar e of the consequences of the non repayment, which leads to the fact that there l and is being hypothecated and leaving them only with the option of committing su icide. 60

8.2 LOOPHOLES 1. Technology related hurdles such as high costs involved in small loan transact ions for microfinance providers. Most of the times the rural population in not in the light of the technology bei ng used for various transaction so either the technology which could be easy und erstood by the rural crowd is to be used or they need to be trained as to how th e new technology id to be used. Moreover the transactions which are undertaken u nder the micro finance are very small that spending for each transaction becomes very costly for the bank. 2. Lack of customized solution/ microfinance models for the poor. Government of India has centralizes plans for the entire nations microfinance wh ich is then customized by the state government but then each village has a diffe rent mentality n financial capability which needs to be catered to. But the surv ey also depicts that the demand to each rural sector and village has not been ca tered to. There is huge chunk of crowd which does not avail the facility of micr o credit just because the scheme is not proper or suitable to them. In normal ba nking there are many alternatives available to the general public but in micro f inance very few alternatives are available only from those the people need to ch oose the credit schemes. 3. Difficulty in measuring the social performance of MFIs. There are no special instruments for measuring the progress or output of microfi nance. Various banks and institutions have their own models and criterion on whi ch they measure the performance of their microfinance. But there is no specific fixed on which the effectiveness or the outcome can be measured. No proper ratin g is done for MFIs. 61

4. High interest rate of loan made to the poor. Microfinance institutions walk a thin line as they offer financial services to t he poor at high costs. While high interest rates have been justified in many way s, there are now accusations about microfinance providers using aggressive loan recovery tactics that pushes clients to commit suicides (crisis in India). Furth ermore, the recent wave of commercialization of microfinance has led many to que stion the real motive of practitioners. 5. Political Risk: The recent microfinance crisis in India is said to be politic ally motivated as the governments owns a rival microfinance institution in the s ame province where suicides have soared amongst microfinance clients. More over if the state government is not active as to the development and functioning of M FIs; the state loses a lot of opportunities for the rural development. Political support is very much important for upliftment and successful implementation of micro finance schemes. 6. Lack of understanding consequences of non repayment Most of the farmers who t ake microcredit are not aware of the entire structures of credit or banks do not clarify clearly what would be the consequences of non repayment. It is for this reason that there is huge non repayment and in the end leading to suicides in I ndia. This has lead to bad name of micro credit. 7. Purpose Banks have to give certain part of their finance in the microfinance sector. It is for this reason they give loans very easily on a frequent basis. W hen people get loans so easily they are not using it for the very purpose for wh ich they borrow instead they use for non productive purpose. E.g. they borrow lo an for the purpose of irrigation but instead they use it for the marriage of the ir children or for the renovation of their house. Thus the objective of fulfillm ent of micro finance is not achieved. 62

We would now have a look at what was the purpose of microfinance and microcredit and to what extend is it fulfilled. After the survey the following outcomes hav e been underlined. INTENT Providing micro credit to Poor as well as Ultra Poor REALITY Due to MFI regulation, government rules and other factors such as access to comm ercial banks, ultra poor (who probably need microfinance the most) are getting i gnored Sure did poor and middle class get benefited through microfinance, but qu estion still remains - when will the ultra poor and unreached section will recei ve the glorified microcredit Even though the realization about underserved ultra poor is there, but very few NBFC (Non Banking Financial Corporations) MFI works with such section of the society. This behavior is attributed to the focus of M FIs towards sustainability and profit. In reality, Microfinance is being commerc ialized in India. Engaging poor in the growth of the country While microfinance works well for the upper poor and poor sections of society, t he ultra poor sections of society need much more than finances. Ideally, Microfinance's goal should be to produce social capital. 63

8.3 PROBLEMS Although there have been various successful stories about microfinance instituti ons helping the poor, they face with many problems. The problems can be solved o n many occasions or sometimes cannot be avoided. We discuss the problems MFIs fa ce under the following broad categories. 1. Ethical Reasons: Microfinance Institutions can be often viewed as a profit ma king organization. The desire to make MFIs an industry, commercialize micro-lend ing or enable them to be a profit making institutions should not distract them f rom one important aspect for which they are formed in the first place: social se rvice by enabling poor to work on profit making projects or small businesses. Ma ny a times, the lack of this aspect can lead the microfinance institutions to be have similar to the local moneylenders. Furthermore, the important point of corr uption cannot be neglected. Many MFIs in India or elsewhere in world suffer from corruption at various levels: corruption in the MFI itself, corruption in the M icroEnterprises (MEs) these MFIs support or corrupt channels, officials or indiv idual service providers. An example of a group based MFI suffering from corrupt channel once is The Bridge Foundation (TBF). Located in Bangalore and Chennai in India, TBF serves poor entrepreneurs in south eastern India. Initially, TBF rel iedon local pastors to encourage people to take loan from them. The pastors were appointed as the lender. The intention of TBF was to provide the poor members o f society with loan using pastors knowledge of the local area and goodwill . It turn ed out that the pastors were more eager to raise the income of their flock in or der to increase their salaries. Furthermore, some of the pastors used their ties with TBF as the base to boast their financial status and coax beleaguered Hindu s in to their congregations. Another reason of failure has been lack of motivati on. MFIs thrive on better economical conditions and an economic down turn can in cur heavy loss on them. In such adverse situations, MFIs generally lose man powe r too. In Tanzania, during economic down turn the MFIs perform poorly because of lack of motivation, resulting in below par loan repayment. 64

2. Managerial Reasons: One of the major problems which the MFIs can resolve is m anagerial problems. They tend to be fairly straightforward and the solutions to them are also pretty straightforward. Managerial problems are a major factor and they have more effects than any other problems discussed. In developing countri es like India this becomes a huge problem because of lack of management training .One of the major factors attributed to failures of MFIs is poor record keeping. In India, generally the records are not online and hence it becomes extremely d ifficult to search for a record which is a few years old. Furthermore, in many c ases, like SHGs in Andhra Pradesh, the records are kept poorly. For example, som ewhat 40% of SHGs have a weak record which includes both NGO and bank promoted g roups and government promoted groups. The former appears surprising considering the fact that bank records are generally well maintained in India. One of the fa ctors which led to poor record keeping is the relative complexity in record keep ing. For office bearers and group members, record keeping seems like a waste of time. Lack of record keeping can have its share of problems. One of the problems can be an increase in number of defaulters. We will focus on SHGs in Andhra Pra desh where recovery of loans is not properly handled. Every member of an SHG has to repay the loan regularly (monthly) and studies show that more than 25% of bo rrowers are over a year due. The lack of management training does not help the m atter either. Sometimes poor monitoring also leads to increased number of defaul ters. For example, Peoples Bank of Ireland, formed on the same model as the Peopl es Bank of Germany failed miserably and hence was shut down. One of the reasons o f the failure of Peoples Bank of Ireland was poor monitoring by the officials and the reluctance to follow the norms to ensure timely repayments of loans. Anothe r form of managerial problems is the lack of management capacity. In many cases, a MFI field officer has to assume different roles for which proper expert is ne eded. Since, MFIs work with the poor they need to have experts in handling socia l and household problems. In India or its neighbouring countries, such experts a re more needed because of widely present social and gender discrimination. 65

3. Legal Reasons: Microfinance Institutions can be viewed as a social organization helping the poo r and a profit organization too. In many countries, profit organizations are reg istered under different set of acts and non-profit organizations come under diff erent legislations. These legalities sometimes create complications. For example , TBF had to face some problems like how to lend loans as a charitable organizat ion in India. In India, TBF cannot register as a bank given the enormous barrier s for becoming one. Instead, TBF resorted to register itself as a charitable fou ndation and trust, which enabled it to receive funds internationally and domesti cally for development purposes. But as a charitable foundation, TBF was not allo wed to indulge in to money lending and hence all loans distributed by them were entered as aid . The repayments were entered as donations with 8% service fee. This i n an idealized situation is good but TBF still has to face chronic defaulters wh o dont repay loans. The usual tactics in this case entail a combination of person al persuasion and religious obligations. The above case was a lack of a legislat ion especially serving microfinance institutions. There are some random acts whi ch prohibit the growth of microfinance institutions and delimit their impact. Fo r example, in India, Regional Rural Bank Act does not permit private share holdi ng in any RRBs, and the Co-operative Acts of all states do not permit district l evel cooperative banks to be set up by any sector except the government sector. The result of these two laws together is that rural credit has been a monopoly o f state-owned institutions. Furthermore, there are certain laws that dont affect the MFIs directly but indirectly 4. Unfortunate Reasons: Sometimes Microfinance Institutions have to face problems which cannot be resolv ed. These problems arise in cases when something unfortunate happens to a person o r a community. A flood or famine can kill the hopes of farmers to pay their loan s. Grameen Bank operates in different regions of Bangladesh and overall the loan repayment record is impressive. But this varies from region to region and time to time. Districts like Tangail have a 100% loan repayment records and districts like Rangpur have 30% record in 1996. The reason for such bad records in Rangpu r district is nature. It is repeatedly savaged by flood and major cyclones. Sinc e the loan repayment time was regular, the people in Rangpur district were unabl e to pay their debt 66

in time. Under these circumstances, tension runs high between Grameen Bank offic ials and the community and requires the most skilled members of Grameen Bank. Pe rsonal plights are another reason which might affect the MFI based on Grameen Ba nk model. Since its inceptions, Grameen Bank provided loan to one member of a gr oup of five and loan repayment was due to peer pressure. Since 2002, Grameen Ban k has been working on a slight variation of the original model. But before 2002, some members have to face problems due to the original model and their personal plights. 5. Other Reasons: There are various other factors for the failure of MFI. They can be listed as fo llows: Lack of vision is a factor which pushes new MFIs in to extinctions. Formati on of an MFI requires considerable research and should have a clear cut vision o f why they are operating and the clients they will be serving. Sadly, due to lac k of research MFIs set up by NGOs fail to scale up. MFIs need trained sta to opera te. In several cases, drop out of trained staff is very high which ff reduces th e reach of an MFI. Furthermore, the dropping out rate is more than the coming in rat e. Grameen Bank is an example where trained staffs drop out because of the amoun t of workload they have to bear. MFIs serve society but they are also a profit-mak ing institution. In many cases, MFIs achieve a lot of success in their programs in initial period, but they fail to maintain the same record in the long run bec ause of lack of proper commercial orientation, thus making them unsustainable. 67

CHAPTER 9 CHALLENGES IN MICROFINANCE 68

9.1 CHALLENGES IN MICROFINANCE- FINANCIAL INCLUSION Inclusive growth is one of the important objectives of eleventh five year plan in India. Inclusion of each and every section of the society in the process of econ omic development and achieving growth with equity is the basic objective of inclu sive growth . Financial inclusion is conceived as a major driving force to achieve self sustained inclusive economic growth. Financial inclusion can be defined as the process of ensuring access to financial services and timely availability of adequate credit where needed by vulnerable Groups such as weaker sections and l ow income groups at an affordable cost (Report of the Committee on Financial Inc lusion in India, 2008). Achieving financial inclusion through formal banking sys tem is a cumbersome task. Financial inclusion is the delivery of financial services at affordable costs to sections of disadvantaged and low income segments of society. Unrestrained acce ss to public goods and services is the sine qua non of an open and efficient soc iety. It is argued that as banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire po pulation without discrimination is the prime objective of public policy. The ter m "financial inclusion" has gained importance since the early 2000s, and is a re sult of findings about financial exclusion and its direct correlation to poverty . Financial inclusion is now a common objective for many central banks among the developing nations. The Reserve Bank permitted commercial banks to make use of the services of nongovernmental organizations (NGOs/SHGs), micro-finance institu tions and other civil society organizations as intermediaries for providing fina ncial and banking services. These intermediaries could be used as business facil itators (BF) or business correspondents (BC) by commercial banks. The main reaso n for financial exclusion is the lack of a regular or substantial income. In mos t of the cases people with low income do not qualify for a loan. The proximity o f the financial service is another fact. The loss is not only the transportation cost but also the loss of daily wages for a low income individual. Most of the excluded consumers are not aware of the banks products, which are beneficial for them. Getting money for their financial requirements from a local money lender i s easier than getting a loan from the bank. Most of the banks need collateral fo r their loans. It is very difficult for a low income individual to find collater al for a 69

bank loan. Moreover, banks give more importance to meeting their financial targe ts. So they focus on larger accounts. It is not profitable for banks to provide small loans and make a profit. Major Three Aspects of Financial Inclusion' Make people to Access financial markets Access credit markets Learn financial matters (financia l education) 9.2 RELATIONSHIP BETWEEN FINANCIAL INCLUSION AND DEVELOPMENT INDICATORS Economic growth follows financial inclusion. In order to achieve the objective o f growth with equity, it is imperative that infrastructure is developed with fin ancial inclusion.

savings and credit accounts - indicators of financial inclusion. per capita inco me - indicator of economic development Electricity consumption and road length indicators of infrastructure development. All the above influence economic devel opment which follows adequate financial and credit facilities The RBI has simplified the KYC (Know your customer) norms for opening a No frill a ccount. This will help the low income individual to open a No Frill account withou t identity proof and address proof. Self Help Groups are playing a very importan t role in the process of financial inclusion. SHGs are usually groups of women w ho get together and pool money from their savings and lend money among them. Usu ally they are working with the support of an NGO. The SHG is given loans against the group members guarantee. Peer pressure within the group helps in improving r ecoveries. Through SHGs nearly 40 million households are linking with the banks. Micro finance is another tool which links low income groups to the banks. The p rovision of uncomplicated, small, affordable products will help to bring the low income families into the formal financial sector. Banks have limitations to rea ch directly to the low 70

income consumers. Correspondents can be considered to be an excellent channel wh ich banks can use to distribute their product information. Educating the consume rs about the financial benefits and products of banks which are beneficial to lo w income groups will be a great step to tap their potential. But here again the problem lies with the fact that banks are opening accounts with the initial depo sit but then the accounts are not regularly used that is the main problem. The a ccount once opened is never operated then they can of no use. According to Dr. S uran, General Manager (NABARD, Ahmedabad) financial inclusion remains to be a ch allenge for micro finance 9.3 SHG AND FINANCIAL INCLUSION In spite of Indian banking sector having witnessed a spectacular progress in spr ead of banking networks and extending financial outreaches across the country in the recent past, the relative decline in the supply of credit in rural areas po ses the biggest challenge to achieve hundred percent financial inclusion before Indian formal financial system. In this context, self help group bank linkage mo del launched by NABARD (1992) can be conceived as an alternative model to bridge the gaps which could not be filled up by formal banking system. It facilitates extending financial services to unbanked vulnerable section of society. NABARD l ed SHG bank linkage model is widely accepted as one of the largest and successfu l micro finance model in the world. There is also a concept of credit widening a nd credit deepening. There exists a positive relationship between Financial Deepening with Per Capita Income, Financial Liter acy, and an effective SHG bank linkage programme. larger expansion of branches l ead to larger financial inclusion. Credit widening means to expand the number of people involved in it. To open more and more accounts in the banks and include higher number of people in t is part of credit widening. Credit deepening includes all the activities that speedup the usage of microfina nce i.e. activities like taking more and more credit or including various other aspects like earlier that only existed concept of microcredit and micro savings but now there also exists the concept of 71

micro insurance. Covering more and more aspects will lead to a beter awareness a nd growth of microfinance. 9.4 EMPOWERING WOMEN WITH MICROFINANCE Over 3,300 microfinance institutions reached 133 million clients with a microloa n in 2006. 93 million of the clients were among the poorest when they took their first loan. 85 percent of these poorest clients were women. -Microcredit Summit Campaign Report 2007 Microcredit plays a critical role in empowering women, helps deliver newfound re spect, independence, and participation for women in their communities and in the ir households. - Juan Somavia, ILO Director-General The organizations involved in micro credit initiatives should take account of th e fact that Credit is important for development but cannot by itself enable very poor women to overcome their poverty. Making credit available to women does not automatically mean they have control over its use and over any income they migh t generate from micro enterprises. In situations of chronic poverty it is more i mportant to provide saving services than to offer credit. A useful indicator of the tangible impact of micro credit schemes is the number of additional proposal s and demands presented by local villagers to public authorities. India is the country where a collaborative model between banks, NGOs, MFIs and W omens organizations is furthest advanced. It therefore serves as a good starting point to look 72

at what we know so far about Best Practice in relation to micro-finance for womens empowerment and how different institutions can work together. It is clear that g ender strategies in micro finance need to look beyond just increasing womens acce ss to savings and credit and organizing self help groups to look strategically a t how programmes can actively promote gender equality and womens empowerment. Mor eover the focus should be on developing a diversified micro finance sector where different type of organizations, NGO, MFIs and formal sector banks all should h ave gender policies adapted to the needs of their particular target groups/insti tutional roles and capacities and collaborate and work together to make a signif icant contribution to gender equality and pro-poor development. There have undou btedly been women whose status in the household has improved, particularly where they have become successful entrepreneurs. Even where income impacts have been small, or men have used the loan, the fact that micro-finance programmes have th ought women worth targeting and women bring an asset into the household may give some women more negotiating power. Savings provide women with a means of buildi ng up an asset base. Women themselves also often value the opportunity to be see n to be making a greater contribution to household wellbeing giving them greater confidence and sense of self-worth Micro-finance has also been strategically us ed by some NGOs as an entry point for wider social and political mobilisation of women around gender issues. For example SEWA in India, CODEC in Bangladesh and CIPCRE in Cameroon, indicate the potential of micro-finance to form a basis for organization against other issues like domestic violence, male alcohol abuse and dowry. Womens choices about activity and their ability to increase incomes are s eriously constrained by gender inequalities in access to other resources for inv estment, responsibility for household subsistence expenditure, lack of time beca use of unpaid domestic work and low levels of mobility, constraints on sexuality and sexual violence which limit access to markets in many cultures. The feminis t empowerment paradigm did not originate as a Northern imposition, but is firmly rooted in the development of some of the earliest micro-finance programmes in t he South, 73

including SEWA in India. It currently underlies the gender policies of many NGOs and the perspectives of some of the consultants and researchers looking at gend er impact of microfinance programmes Here the underlying concerns are gender equ ality and womens human rights. Womens empowerment is seen as an integral and insep arable part of a wider process of social transformation. The main target group i s poor women and women capable of providing alternative female role models for c hange. Increasing attention has also been paid to men's role in challenging gend er inequality. Micro-finance is promoted as an entry point in the context of a w ider strategy for womens economic and socio-political empowerment which focuses o n gender awareness and feminist organization. As developed by Chen in her propos als for a sub sector approach to micro credit, based partly on SEWA's strategy a nd promoted by UNIFEM, microfinance must be: Part of a sectoral strategy for cha nge which identifies opportunities, constraints and bottlenecks within industrie s which if addressed can raise returns and prospects for large numbers of women. Possible strategies include linking women to existing services and infrastructu re, developing new technology such as labor-saving food processing, building inf ormation networks, shifting to new markets, policy level changes to overcome leg islative barriers and unionization. However there is no necessary link between w omens individual economic empowerment and/or participation in micro-finance group s and social and political empowerment. These changes are not an automatic conse quence of microfinance per se. 9.4.1 Why target women? Seventy percent of the worlds poor are women. Yet traditionally women have been d isadvantaged in access to credit and other financial services. Commercial banks often focus on men and formal businesses, neglecting the women who make up a lar ge and growing segment of the informal economy. Microfinance on the other hand o ften targets women, in some cases 74

exclusively. Female clients represent eighty-five percent of the poorest microfi nance clients reached. Therefore, targeting women borrowers makes sense from a p ublic policy standpoint. The business case for focusing on female clients is substantial, as women client s register higher repayment rates. They also contribute larger portions of their income to household consumption than their male counterparts. There is thus a s trong business and public policy case for targeting female borrowers. Children o f women microfinance borrowers also reap the benefits, as there is an increased likelihood of full-time school enrolment and lower drop-out rates. Studies show that new incomes generated from microenterprises are often first invested in chi ldrens education, particularly benefiting girls. Households of microfinance clients appear to have better health practices and nu trition than other households. Positive environmental impact is also achievable as microfinance programmes may support green jobs and renewable energy systems. Microfinance therefore makes a strong contribution to the realization of the Mil lennium Development Goals. 9.4.2 AVOIDING UNDESIRED CONSEQUENCES Although the positive impact of microfinance on womens empowerment is evident, mi crofinance providers must also be cautious to avoid possible negative outcomes. Studies have shown that women sometimes have little or no control over their loa n, with the husband or male family member making all decisions. Moreover, differ ences in literacy, property rights and social attitudes about women may limit im pact outside of the immediate household. Residents of rural areas specifically c ontinue to have difficulties in accessing microfinance. Women may also struggle with the heavier workload created by the responsibility for loan repayment. 75

CHAPTER 10 ANALYSIS OF QUESTIONARIE 76

1O.1 INTRODUCTION The objective here is to study the purpose of taking loan, awareness regarding S HG and JLG and their readiness to take loan from formal institutions. Moreover h ow much is their savings and are they regular in the repayment of loan are the q uestions considered here. Various villages are being considered for the survey w hich was selected by Banas dairy. These villages are the ones in which dairy has its collection center for milk. The following villages have been visited by me for the survey Jagana Navasamanva Fatehpura Deesa Dhanera Dantiwada The people b eing illerate were not able to fillup the questionnaire themselves so the questi ons were asked to them and as per their answers the options were chosen. Sample size is 100. It consists of people of different profession like farmers, tenant farmers and labourers. 1. Purpose for which you borrow credit? 77

Crop loan minor irrigation Land development Mechanization Cattle purchase Others 45 15 0 7 15 18 PURPOSE OF LOAN 18% crop loan minor irrigation 45% 15% 7% 0% landdevelopment mechanization cattle purchase 15% others Majority of the loan was taken for the purpose of crop loan. No loan was taken t he area of land development. So banks have a lot of scope in the area of land de velopment, various schemes can be included as to promote this area. Here others include loans for renovation of house and non productive uses like marriage or a t the time of festival etc. 78

2. Which credit schemes are you aware of? Kisan credit card Swarojgar credit car d others 22 0 78 AWARENESS FOR CREDIT SCHEMES 22% 0% kisan credit card swarojgar credit card others 78% There was very little awareness as to the various schemes launched by government regarding the credit. Most of the farmers purchase on the Kisan credit card. Mo stly it was purchased from Dena bank under the scheme of Dena Kisan Credit Card (DKCC). The others here include various scheme related to horticulture, cattle p urchase, rural artisans scheme, micro business scheme etc. 79

3. What is the interest rate which you currently are paying? Less than 4% 4%-8% 8%-10% Greater than 10% 60 8 2 30 INTEREST RATE 30% less than 4% 4%-8% 2% 8% 60% 8%-10% greater than 10% Here in the previous question we found out that maximum loans were taken for the crop purpose and so the interest rate for the crop was 4% or below 4% and so ma ximum interest that was paid is below 4%. Whereas the mechanization loans and mi nor irrigation loan have interest greater than 10% 80

4. What are your annual savings? Less than 5000 5000-7000 7000-9000 9000 and above 41 18 7 34 ANNUAL SAVINGS 34% 41% less than 5000 5000-7000 7000-9000 9000 and above 7% 18% Majority of farmers do not have savings because they have agriculture as their m ajor resource of earning income and agriculture depends on rain. If the rains ar e good then they do have savings but if the crop is not proper they loose on the income, saving being a distant matter than. 34% people have their savings above 9000 was due to the dairy. The milk which they give at the collection center gi ves them a regular income on which they can rely upon. Savings between Rs.5000-7 000 is from the people who were daily wages laborer. 81

5. What is the time period for which you generally borrow? Short term (upto one yea r) Long term (greater than one year) 78 22 TIME PERIOD 22% short term loan long term loan 78% The crops loan which were taken in majority from Dena bank are of a short term n ature i.e. upto one year. Farmers generally take loan at the time of cultivating the crop and once the crop is reaped and sold into the market the loan is repai d. Other loan like machine loan or vehicle (tractor ) and minor irrigation loan is taken for a year of around 3 years and so it is covered under the head of lon g term loan. 82

6. How frequently do you borrow loans? As per requirement Once in a year 21 79 FREQUENCY 21% as per requirement once in a year 79% The cart depicts that 79% of people use loan only once in a year. As most of the loans are for the purpose of crop so they were available on once in a year. Oth er than that loans which are taken for the purpose of non productive use like re novation of house or marriage of children were taken as per the requirement. But not more than once loan can be taken for the same purpose. 83

7. What is the amount of borrowing? Less than 50000 50000-100000 100000-300000 G reater than 300000 28 12 41 19 BORROWING 19% 28% Less than 50000 50000-100000 100000-300000 12% 41% Greater than 300000 Minimum amount to be borrowed is 50000 but most of the borrowings were for the c rop loan around 1,40,000. In case of mechanization or minor irrigation the amoun t in most of the cases exceeds 3,00,000. Most of the farmers, on yearly basis op t for crop loan so mostly the amount lies between 1 lac and 3 lac. The banks can reduce interest on these loans so that the repayment is regular and minimum def ault takes place. That would reduce the transaction as well as collection cost o f the banks. The risk would also decrease to a considerable extent. 84

8. Do you prefer loans from finance institution to other methods of informal mon ey generation? yes no 59 41 70 60 50 40 30 20 59 41 10 0 yes yes no no 59% i.e. more than half of the farmers in the surveyed villages prefer formal sy stem of credit to money lenders. This shows that there was a lot of scope for th e banks who approach these villages for new savings account and for loan. The ba sic reason as to why they prefer banks is that the interest rate is lower than t he money lenders and banks are trusted as they have government approval and back up. Further there was an approach in the village that if some leader or a truste d and educated person opts for banks the remaining entire village will prefer to choose for that option. 85

9. If no to the above questions what are the reasons? Complexity involved in the process Fear of land hypothecation Time period Flexib ility of repayment Service provided by bank Total 20 2 2 10 7 41 48.78% 4.87% 4.87% 24.39% 17.07% 100 60 50 40 30 48.78% 20 10 0 complexity involved in the process 4.87% fear of land hypothecation 4.87% time period flexibility services provided by bank 24.39% 17.07% The major reason why people opt for informal way of credit or saving is because of the complexity involved in the process of loan. In most of the cases the bank does have its branch at each and every village so each tie there is a work; peo ple need to go to the bank. Moreover people in these villages do not have suffic ient level of literacy so various documents and all becomes a dilemma for these poor and illiterate farmers. Flexibility is with regards to the repayment of loa n. 86

10. Are you satisfied with the current schemes of govt. related to the developme nt of microfinance? Extremely satisfied Satisfied Neutral Dissatisfied Extremely dissatisfied 0 85 5 10 0 90 80 70 60 50 40 30 20 10 0 0 extremely satisfied satisfied 5 neutral 10 0 dissatisfi ed extremely dissatisfied 85 Majority of the people were satisfied with the schemes of the government regardi ng the micro credit and other microfinance schemes. 10% are not satisfied becaus e the schemes introduced by government do not fulfill their need to a great exte nt or have certain loopholes and defects. If survey is carried out by banks and certain relevant schemes are customized according to the different groups then i t would lead to better satisfaction. 87

11. Are you aware of SHGs and JLGs? If yes are you a part of any group? SHG(sakhee mandal) JLG None 10 6 84 10% 6% SHG(sakhee mandal) JLG none 84% Only 10% of people are aware of SHGs .That was quite surprising as SHG bank link age model is considered to be the most successful and approachable model. When t he people were not aware of the very concept of micro finance and the basic mode l of SHG then it becomes all the more necessary to spread the awareness regardin g it as their saving does not become a part of the formal financial system 88

12. Which bank do you prefer for taking micro credit? Why? Dena bank Cooperative bank Others 57 14 29 MOST PREFFERD BANK 29% dena bank 57% 14% cooperative bank others The most preferred bank as we can see from the survey is Dena bank. The basic re ason as to why it was the most preferred bank was the branches of Dena bank are easily accessible from each village. Most of the people who preferred Dena bank had the reason of it being near to their village. Dena bank being the lead bank also acts as a mediator between people and government representatives and so is more aware of the situation of people in villages, providing them better array o f schemes other than the cooperative banks. Others here includes different teach ers mandali and wholesalers mandali. 89

13. Are you satisfied with the current loan schemes provided to the banks? Yes N o 58 42 42% 58% Yes No 58% of the people surveyed were satisfied with the schemes of loans which were p rovided by the banks. Here various variables were looked upon in the area of sat isfaction as well as dissatisfaction which will be further covered. 90

14. If yes what is the reason? Interest rate Time period Easy loan availability whenever needed Total 34 16 8 58 58.62% 27.58% 13.79% 100 70 60 50 40 30 20 10 0 interest rate easy loan avilabity whenever needed time pe riod 27.58% 13.79% 58.62% Majority of people availing the loan facilities are satisfied with the bank due to the interest rate. For crop loan interest is lower than 4% and for irrigation and mechanization loans are available for around 10%. These rates are lower tha n income which is generated from their savings so it is satisfied the basic purp ose of the farmers. Loans are available easily whenever the requirement is gener ated. One year for the credit scheme is believed to the idle time for farmers in the sense of repayment 91

15. If No than what are the reasons? Repayment method Interest rate Vagueness regarding the entire loan repayment str ucture Lack of guidance given by banks Total 5 21 10 11.9% 50% 23.8% 6 14.28% 42 100 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 11.90% repayment method effective Inte rest rate Vagueness regarding the entire loan repayment structure 50% 23.80% 14.28% Lack of guidance given by banks 0.00% The survey concludes that those who are not satisfied with the credit scheme is basically due to the effective interest rate. When the bank explains them the cr edit the rate is different but when it comes to actually payment the amount is m uch higher and this is not being informed at the time of taking the loan. Some p eople are dissatisfied with the annual repayment they prefer monthly repayment. Some banks do not proper explain the schemes due to which there arises dissatisf action. 92

16. Are you satisfied with the repayment system? What are the actions taken if y ou default to repay This was the open ended question which showed that majority of people were satis fied with the repayment system. If they default to repay a loan amount then noti ce was sent to them even after that duration mentioned in the notice they were u nable to pay then legal notice was given and they were called in the bank and as ked as to what the reason behind not repaying the loan installment. Some people also complained that the bank official did not treat them properly and abused th em infront of entire crowd when they visited the banks for complaints or explain ing them as to why the delay in repayment. Upto the date no land or collaterals have been hypothecated by Dena bank. 93

17. Annual income <100000 100000-300000 >300000 74 21 5 Maximum people have annual income less than 100000 on an average. It is on major ity cases between 25000-75000. Due to the weather uncertainty agriculture income is not stagnant but it keeps on changing. Very few farmers have annual income m ore than 3 lacs. The level of poverty is depicted by this. 94

HYPOTHESIS (CHI SQUARE TEST) 1. Savings and Income H0 : saving amount is independent to the income of the farmer. H1 : saving amoun t is dependent to the income of the farmer. Level of significance = Degrees of freedom= DOF At 5% level of significance, the value of tabulated =0.05 DOF = (4-1) (3-1) =6 2 is given by: 2 (tabulated) = 12.36 SAVINGS ANNUAL INCOME Less than 100000 100000 to 300000 More than 300000 Total Less than 5000 30 10 1 41 50007000 8 10 0 18 70009000 7 0 0 7 >9000 29 1 4 34 Total 74 21 5 100 95

OBSERVED FREQUENCY (O) 30 10 1 8 10 0 7 0 0 29 1 4 EXPECTED FREQUENCY (E) 30.34 8.61 2.05 13.32 3.78 0.9 5.18 1.47 0.35 25.16 7.14 1.7 (O E ) 2 (O E ) 2 E 0.12 1.93 1.10 28.30 38.68 0.81 3.31 2.16 0.12 14.74 37.69 5.29 0.003 0.22 0.53 2.12 10.23 0.9 0.64 1.47 0.35 0.58 5.28 3.11 25.46 2 (calculated) = 25.46 2 (calculated) > 2 (tabulated) Interpretation: Here, H0 is rejected. It means that saving and income of a farmer are interrelated or dependent on eac h other. 96

2. Amt of borrowing and method of money generation H0 : amt of borrowing has no relation with the method of money generation. H1 : amt of borrowing has relation with the method of money generation. At 5% level o f significance, the value of tabulated =0.05 DOF = (4-1) (2-1) =3 2 is given by: 2 (tabulated) = 7.815 MEANS OF BORROWING AMOUNT OF FORMAL INFORMAL BORROWING MEANS MEANS Less than 50000 50000 to 100000 100000 to 300000 Greater than 300000 18 7 24 10 59 10 5 17 9 41 TOTAL 28 12 41 19 100 TOTAL 97

OBSERVED FREQUENCY (O) 8 7 24 10 10 5 17 9 EXPECTED FREQUENCY (E) 16.52 1.2 24.19 11.21 11.48 4.92 16.81 7.79 (O E ) 2 (O E ) 2 E 2.19 33.64 0.036 1.46 2.19 0.0064 0.0361 1.4641 0.13 28.03 0.00 0.13 0.19 0.00 0.00 0.19 28.68 2 (calculated) = 28.68 2 (calculated) > 2 (tabulated) Interpretation: Here, H0 is rejected. So we can say that borrowing amount and the channel of borrowing i.e. formal and informal are interrelated and dependent. 98

Chapter 11 Findings 99

11.1 FINDINGS The following are some of the core findings Majority of the loans taken by farme rs are for the crop purpose. There are no loans or minimum loans taken for the p urpose of land development or agricultural land cultivating ( e.g. certain type of soil testing which determines which ingredient is not present or abundantly p resent in the soil, certain fertilizers which are very costly) People prefer ban ks to the informal institution of financial transaction, credit and savings if t he following factors are taken care of: 1. Keep bank representative from the vil lage itself rather than any outsider appointed by the banks 2. Explain the entir e loan structure to the people in a lucid manner 3. Regularly update them about the new schemes 4. Treat people in a good manner when they approach the bank 5. Solve their doubts even after once the loan is given out. Farmers mostly are awa re of Dena Kisan credit card (DKCC) scheme for working capital loan or short cre dit as we say in financial terms. Other than that no schemes are much heard abou t by the farmers Those who are farming also in most of the cases have cattle als o so their major income for livelihood is earned from agriculture but they do no t solely depend on it Trends are changing due to irregularity of whether farmers are shifting from agr iculture to cattle keeping for milk as dairy industry is developing by leaps and bounds and one can be sure of earning big amount sitting at home 100

The loans which are taken in certain cases are not used for the productive purpo se for which they are actually taken but for certain non productive uses like ma rriage and renovation of their house. SHG bank linkage being the most successful model in other parts of India is not preferred for by the farmers in the villag es surrounding Palanpur where Banas dairy has its milk collection centers. In ce rtain villages like Navasamanva there are Sakhee Mandals running other than that majority of the villages there are no initiative taken by NGOs or banks for the SHG. Illiteracy is one of the major factors which hold back people from taking loans and taking initiatives as to the SHG formation People lack insight as to the for mation of micro enterprise in the villages. They just rely upon the dairy and fa rming incomes. Laborers also are found working on others farm as tenant farmers but they lack the guidance needed to come together to form a independent micro e nterprise The major reason as to the dissatisfaction from the credit scheme is t he effective interest rates .E.g. during the survey people of Jagana village had problems regarding the repayment of loan. At the time of giving loan banks had told the interest to be 6 % but then at end of the loan period the interest was calculated at 14% to which the entire village united and did not pay the princip al as well as the interest. Majority of the tenant farmers do not have savings b ecause of the low annual income Dena bank is preferred by the people for the rea son it has a good penetration except the Jagana village There is no customizatio n in schemes leading to non availability of ideal microfinance products 101

There are noticeable number of cases where in there was rejection from formal ba nking system which lead people to turn to informal banking system Easy availabil ity of timely and doorstep services from money lenders/informal sources which bo osts the informal money system There are also farmers who said the hassle involv ed in documentation and procedures in the formal banking system pinches them to move to the money lenders. Lack of flexibility of repayment of loan is also anot her factor. Banks have annual interest whereas moneylenders now have monthly int erest or flexible repayment system where in the month in which farmers has savin gs can repay certain amount and then interest would be counted on remaining amou nt thereon. Joint liability groups are found at a lower side in certain village 102

CHAPTER 12 SUGGESTIONs and recommendations 103

FOR BANAS DAIRY SHG is found to be the ideal product and SHG bank linage model is considered to be ideal model for the development of microfinance and upliftment of livelihood in these villages but according to the survey very few people are aware of existence of S HG. In most of these villages Banas dairy has its collection center for milk. Banas dairy sends its staff in these villages to provide them knowledge as to the clea nliness of milk, cattle, and ways of increasing the quantum of milk. Banas dairy thus has a touch with the local farmers in these areas, Along with the other knowledge Banas dairy can tie up with MFI or NGO in order t o provide them the required education about SHG and how it can develop a success ful SHG bank linage model. Basically banks are not interested in giving loans to SHG because they do not get much of money generation in the same but if the NGO which takes care of the particular SHG is strong then banks would be bound to g ive them loans. Banas dairy being a strong pillar in Banaskatha district can take the initiative of including these remote villages into the formal financial system through mic rofinance. Banas dairy is very trusted name in the Banaskantha district so it ta kes initiative it will be open hearted invited and accepted by the villages. Due to operations of Banas dairy, women empowerment is strengthening but still if S HG is practiced amongst the women of these villages it would become a more power ful tool for women upliftment. Motivating them for microenterprise is also anoth er initiative which can be taken by Banas dairy with help of NGO. 104

Microenterprise would not only make the villages and its people more self suffic ient and confident but will also help with the development of infrastructure as more and more will commute with these villages. FOR BANKS Banks should find out as to which villages want these loan and other saving facilities and accordingly build a branch in each village (e.g. people of Jagana village told that they wo uld like Dena bank to reopen their branch in the village as now the branch is no t functioning so they have to go commute a long way which prevent them having a saving account Moreover village people have habit that if a knowledgeable person has saved in a particular bank from their village, they all would save in that particular bank only. So bank must keep a representative from each village so that trust of people is intact and bank also does have to spend time regularly visiting the village for any dispute or complaint Bank can also tie up with Banas dairy as to better pene trate with the people in these remote villages as such Banas dairy acts as a gar unter for the societies which provide milk to Banas dairy. For SHG bank linage model many times SHG are not strong enough to repay leading to bad debt and high cost to the bank. The following are some of the points whic h should be considered at the time of giving loans to SHG. 1. Meetings held in a year 105

2. Average attendance of the members in the meetings in the months preceding to the month of grading 3. Saving pattern of members of group 4. Utilization of sav ings / corpus of the group for the purpose of internal lending to the members 5. Recoveries of internal loans (installments of loans and interest on due dates) 6. Maintenance of books. Each of these points can be given weight according to the policy of bank and the n ratings can be given for each point. Minimum score must be predecided and then those SHG should be financed. Credit scoring for microfinance is another area on which banks should focus upon . Scoring relies fundamentally on quantitative information kept in the computers of a lender. Credit scoring model can be used for the same where in a formula t hat puts weights on different characteristics of a borrower, a lender, and a loa n. The formula produces an estimate of the probability or risk that an outcome w ill occur. Credit model for all the banks cannot be same. They first need to pon der upon the degree of risk they are ready to take and decided the probability a nd the factors which they want to include into the model. All microfinance lende rs who want to use scoringeven those who already have large, comprehensive data b asesshould start to quantify and record the subjective assessments of loan office rs. 106

The banks must collect this data which would help them to classify the loan take rs individuals as well as SHGs into different categories and reduce the risk of default of loan as probability would have been counted for the risk part. Of cou rse, estimating profitability does not imply that lenders must reject all unprof itable clients; it merely helps them to know better the trade-offs between profi ts and depth of outreach. Managers and board members must understand the strengt hs and weaknesses of scoring so that they can commit to support its adoption and integration in the organization. Otherwise, a scoring model might sit unused; a n unused model serves no purpose, and a misused model might be worse than no mod el at all. 107

CHAPTER 13 CONCLUSION 108

From the survey we can conclude the following points Awareness regarding SHG in this area is negligible. If provision is made to provide knowledge and train the m regarding microfinance and SHG then a lot of scope is seen in the development and poverty eradication in these villages. Banas Dairy plays an important role i n making the people from villages earn their livelihood. Dairy industry is very important player in the penetration of microfinance in smaller village. Women em powerment is possible through Dairy industry. This is only one business in which inspite of women staying at home only can earn her livelihood by keeping cattle and providing raw milk at the collection center Dairy industry provides the bas ic necessity of the population and so with the ever increasing population dairy industry has a certain future Banas dairy can become a bridge between banks, MFI s, NGO or any govt. initiative in strengthening the microfinance structure. MFI should see to it that Banas dairy being the largest dairy in Asia has a huge no of farmers who also supply raw milk connected with them can thus give them a hug e market for microcredit and micro saving. Current model of SHG bank linage also has many loopholes as it does not cover all the aspects of microfinance. Microf inance has not actually reached to the ultra poor people who actually should be the beneficiary of the same. MFIs and NGO need to work for the awareness of SHG, especially in certain part of Gujarat. 109

Informal structure / channel of financial credit still prevail to a great extent due to the prompt give and take of money and flexibility which needs to be redu ced. The basic human development index factor literacy is a major bottleneck whi ch is decreasing the enhancing speed of spread of awareness of microfinance c 110

CHAPTER 14 REFRENCES 111

REPORTS MICROFINANCE STATUS 2009-2010 , NABARD. ANNUAL REPORT, BANAS DAIRY MISSI ON MANGALAM, GUJARAT LIVELIHOOD CORPORATION LTD, 2010 BOOKS & JOURNALS JACKSON ,C., 1995, RESCUING GENDER FROM POVERTY TRAP , GENDER ANA LYSIS IN DEVELOPMENT SERIES.NO.10 NEERA BURRA, JOY DESKMUKH, RAJANI MURTHY, MICR O-CREDIT, POVERTY AND EMPOWERMENT, 2008, 5TH PRINTING, SAGE PUBLICATIONS INC. J U Ahmed, D Bhagat & G. Sangria - NEHU, Microfinance in India-Issues & Challeng es, Hardback. August 2010, Hardback. Kim Wilson, Malcolm Harper & Mathew Griffith, financial promise poor-how groups build microsavings, paperback. June 2010. Frances Sinha, Microfinance Self-Help Groups in India: Living Up to Their Promis e?, Paperback. Ocyober 2009 K.G. KARMAKAR , MICROFINANCE IN INDIA, SAGE INDIA, F EBRUARY , 2008 WEBSITES WWW.MICROFINANCEGATEWAY.ORG WWW.WIKEPEDIA.COM WWW.MICROFINANCE.COM WWW. NABARD.ORG WWW.BANASDAIRY.COOP WWW.MICROCREDITSUMMIT.ORG WWW.RBI.ORG.IN WWW.NDDB .ORG WWW.AMUL.COM WWW.GCMMF.COM 112

Chapter 15 ANNEXURE 113

Questionnaire for farmers/tenant farmers/laborers 1. Purpose for which you borrow credit? a. Crop loans c. Land development e. cat tle purchase 2. Which credit schemes are you aware of? Kisan credit card Swarojg ar credit card Others b. minor irrigation d. mechanization f. others 3. What is the interest rate which you currently are paying? a. <4 % c. 8-10 % 4 . What are your annual savings? a. < Rs.5000 b.Rs. 7000- Rs.9000 c.Rs.5000-Rs.70 00 d.Rs.9000 and more b. 4-8% d. >10% 5. What is the time period for which you generally borrow? a. short term(upto on e year) 6. How frequently do you borrow loans? a. As per requirement b. once in a year 7. what is the amount of borrowing ? a.< Rs.50000 c.Rs.100000- Rs.300000 b. Rs.50000 Rs.100000 d. >Rs. 300000 b. long term(more than one year) 114

8. Do you prefer loans from finance institution to other methods of informal mon ey generation? Yes no 9. If no to the above questions what are the reasons? Comp lexity involved in the process Fear of land hypothecation Time period Flexibilit y Services provided by bank 10. Are you satisfied with the current schemes of go vt related to the development of micro finance? Extremely satisfied Satisfied Ne utral Dissatisfied Extremely dissatisfied 11. Are you aware of SHGs and JLGs? If yes are you a part of any group? 13. Which bank do you prefer for taking micro credit? Why? Dena bank Cooperative banks 14. Are you comfortable with the repayment method? If you default once or more t han once what are actions taken? 115

15. Are you satisfied with the current loan schemes provided to the banks? Yes t han what are the reasons Interest rates Time period Easy Loan availability when needed 16. if no to the above question what are the reasons? Repayment method In terest rate Vagueness regarding the entire loan repayment structure Lack of guid ance given by banks Name: gender profession: Age: Village: Annual income: 116