Executive Summary

Indian economy is growing strongly with the growth rate of 8.5%-9% annually. India is emerging as one of the strongest developing economy in the world. But the other hand 26% of Indian population lives below poverty line. They don’t have proper employment to earn their daily needs. Most of the poor population of India lives in villages and urban area.

Govt. of India is taking Initiatives for development of these people by providing credit for their farming & small scale industries like fisheries, Horticulture etc. The process of providing loans to farmers & poor people called ‘Micro Finance’.

Indian microfinance industry is emerges as one of the fastest growing industry in India due to its vast poor & needy population. There is huge demand & supply mismatch in this sector. This demand & supply mismatch creates lots of opportunity for banks & financial institutions.

According to a survey, there are about 75mn poor people in India who require credit support to meet their daily requirements; of this 60mn are rural & 15 mn are urban. The annual demand for credit by the 75mn poor people about $ 11bn; of this 64% is for consumption and 36% is for production.

NABARD is the apex body for facilitating credit flow for development of agriculture, small scale industries, handicrafts & other rural crafts. NABARD has the mandate to support all the allied economic activities in rural areas. NABARD is implementing its new & innovative idea for development of rural people like SHG-Bank Linkage model & Model Bankable Projects. NABARD has two subsidiaries NABCONS (NABARD consultancy services) & BIRD (Bankers Institute of Rural development). NABCONS provides consultancy in the area of rural development, agriculture & allied areas. BIRD is training institute of NABARD provides training to RRB persons.

Self Help Groups emerges as most important player of Indian microfinance industry. SHGs have almost 75% of total Indian microfinance sector. SHGs are providing assistance to poor people & farmers in their financial needs. They are doing a role of bridge between consumer & banks. They do not provide only financial assistance; they also provide skills & technical training for better use of credit. This total process called SHG-Bank linkage model. Over 16 lakhs SHGs have been linked with various financial institutions all over the country. SHG services have benefited 242.5 lakh families thereby reaching to nearly 1212.5lakh people.

Model bankable projects are financed by NABARD in the related field of agriculture. These projects are indirectly related to farming like land development, irrigation system etc. The main objective behind the model bankable projects is to avoid total dependency on farming.

There is little concern about the uses of the credit. Indian rural people are not much educated; they don’t have proper skills to use of their credit. The recent suicides & the 60,000cr loan waiver package in recent union budget indicating that people are struggling with their repayment of credit.

Industry Outlook

Robinson (2001) defines microfinance as “small scale financial services, primarily credit & savings, provide to people who farm, fish or herd” and adds that it “refers to all types of financial services provided to low income households and enterprises”.

A large part of Indian population lived in the villages. Most of them don’t have the sufficient land to survive; they are illiterate that’s why they can’t get the opportunity in the commerce & industry. Two third of this poor population belongs to women who can change her family life with some extra earnings.

Women are not enough educated to face the barriers of commercial banks & financial institutions. In this context, microfinance institution can change the way with filling up the gap between the poor people & commercial banks.

In India microfinance started in the early 1980s with small efforts at forming informal self help groups (SHG) to improve savings & a professional rural credit system. Indian microfinance industry is dominated by the SHG & NGO’s with its subsidiaries called MFI’s. Examples: MYRADA a NGO group set up an MFI called Sanghmitra Rural Financial services (SRFS), while SEWA set up the SEWA Cooperative bank.

Objective Methodology

In the beginning of the microfinance activity the objective of the MFIs is only to provide credit to poor people. They are not concerned about usage of their credit. In early days people are not skillful. They don’t have many ideas for using the credit for the development. If they fail, then the loan turned to be a curse for him & they commit to suicide. But now days MFIs are not providing credit only they also provide the proper training for maximum use of the credit.

Now this whole activity called “credit plus” service. With this context a NGO-MFI, Shri Kshetra Dharamsthala Rural Development Projects (SKDRDP) which is working in the southern part of the Karnataka state. SKDRDP is working in the three districts of the state with more than 25,000 SHGs & more than one lakh clients (as on 31st September 05).

The methodologies of SKDRDP for alleviation of poverty with the approach of credit plus services are as below:

SHG-Bank Linkage Model

This methodology contains NGOs/Banks promoted groups & provides them microfinance through the assistance of the National Bank for the Agriculture & Rural Development (NABARD). This model works on the partnership between banks & NGO’s. This has the lions share in the Indian microfinance sector. According to the sources, at the end of march06, as over 22.35lakh SHGs were linked with banks; 90% of them were women groups, and Rs 113.98bn had been disbursed to 32.98mn poor households. The average loan group in this program is Rs 50,917 & per household Rs 3,456.

These facts are showing that avg. loan per household is too small for meeting the requirements of a family. This amount is also not sufficient to repay money lenders debt. So there is lots of opportunity in this area.

SHG-Bank Linkage Model Path of Development

he basic idea behind for linking SHG & banks is to easily access of loan funds & credit limit from the rural banks.SHG plays the role of mediator between bank & the farmers. SHG on lends the funds its access from banks to its members. SHG provides hassle free loan to its members.


SHGs in India are informal organization who is conducting the financial activities with the help of formal banks. SHGs are developing banking habits in the rural people, especially the women. SHGs are helping formal banks by increasing the number of accounts. Study shows that banking habits are good for the development of microfinance in rural areas. According to an analysis being a member in SHGs giving the confidence to operate the bank account. SHGs members are operating their accounts confidently in comparison with those people who are not a member of SHG.

Leadership experience in SHGs would improve an individual’s banking habits much more than a simple membership. If the leadership position of each SHG is systematically rotated over appropriate time, such that each one in the group has a leadership experience people will have more exposure to formal banking system.

Distribution of female population on the basis of SHG membership & Bank deposit Account Holding:

Above table shows that on an average in both villages together, 25.4% of the total women are members of SHGs. Individually taken, Potapatty village which is more experienced in terms of the number of years of SHG operation of its women involved in SHGs.

Distribution of SHG Members According to Leadership and Bank Account Holding

Role of SHGs in the context of Microfinance

SHG are the major link between the banks & the consumer. They are doing the tremendous jobs in the development of microfinance sector in India. SHG of India is considered the world’s largest microfinance program.

NABARD is taking initiatives for the development of SHG-BANK linkage program from its beginning in 1992. The main motive of SHG in India to uplift the rural people, especially woman. Poverty eradication and empowering rural poor were the two main objectives of this movement.

SHG-Bank linkage program is an integral business for the entire 27 public sector banks & 21 private sector banks. State Bank of India has the largest SHGs followed by Andhra Bank, Indian Bank and Canara Bank. Commercial Banks are in the forefront of credit linkage program with 8, 09,238 SHGs, regional Rural Banks at 6, 15,021 SHGs & Cooperatives at 1, 94,217 SHGs.

As on March 2005, banks have disbursed Rs.1267.63cr as repeat loans to the existing 2, 58,092 SHGs. The SHG-Bank linked program has spread to 31 states and union territories covering 563 districts & 80.636 lakh families.

MFIs Model

MFIs are those institutions that provide credit as well as the training, research & consulting for maximum use of credit. At the beginning, institutions provide credit only. They did not provide any training or consultation for better use of credit. This model is attracting lots of commercial banks because of the untapped opportunity in this sector. In the Indian microfinance sector MFIs has hardly 25% of total market share.

MFIs are ready for the take off with the help of NBFCs & big private banks like ICICI. Private financial institutes are realizing the huge potential in the microfinance sector through MFIs. They are ready to put huge investments in the sector. ICICI bank is going to put $100mn fund which will support few priority sectors & a microfinance classic fund with the tune of $40mn.

According to the Forbes world’s top 50 MFIs, India’s Bangalore based Bandhan captured 2nd place in the list & the other entrants’ are Microcredit Foundation of India, Saadhna Microfin Society, Grameen Koota, Sharda’s Woman Association for Weaker Section, SKS Microfinance Pvt. Ltd. and Asmitha Microfin Ltd.

MFIs model is creating wealth for both consumer & institutions. MFIs are doing good business & making good profits. For the FY.2006-07 Grameen Koota reported 40% increase in their profit compare to FY.2005-06.

Grameen Koota is one of the leading MFIs in India. Grameen Koota is situated in Karnataka. At the end of FY. March 2007 Grameen Koota reported following statistics:

Branches 44
Staff 404
Villages 1544
District 13
Members 1, 09,251
Active Borrowers 82,562
Portfolio 45.97cr
Loan Outstanding Rs.541, 657,611
Repayment Rate 99.99%

Following tables shows the growth path of Grameen Koota in the number of branches, members, loan disbursed and outstanding loans:

Model Bankable Projects

Govt. of India is taking initiatives for accelerating the credit disbursement for agricultural sector & new investment projects in agricultural sector.

NABARD proposes to identify highly potential zones for undertaking investment activities in various states and organize interactive workshops in these potential zones:

Minor Irrigation
Drip irrigation is the latest invention for the low rain & insufficient irrigation system area. It is also known as “trickle” irrigation. In this system water is directly delivered at the root, through small diameter pipes with attached dipper, which deliver drop by drop direct to the plant root. Drip irrigation is widely used in developed in developed countries & getting popularity in developing countries like India. This system is well suited for hard rock areas where the ground water is very low.The system has its advantages and limitations. Its advantages are in terms of savings of water (50-60%) of that required for flow irrigation, effective use of fertilizers, less labor and energy cost.
The limitation for adopting of this method is its high initial cost which is beyond the purchasing capacity of small and marginal farmers and thus mainly adopted by large farmers.Govt. of India is taking steps for promotion of these types of systems to giving up to 50% of subsidy for the small & marginal farmers & the balance is available by institutional credit.

Unit Cost
Per unit cost of Drip Irrigation system is depends upon the shape, size, spacing & number of plants & their water requirement. Per unit cost contains following items:
Lateral connectors
Straight connectors
Filters (Screen or Gravel)
Bends/end plugs, couplers, joint, tees
Pressure gauge, water meters
Water regulators
Installation charges


Land Development

Land Development includes maximum & environmental use of land. In this process some methods are considered by the government for improving the productivity of the land.

Biopesticide Unit
Biopesticide is the alternative of the chemical fertilizer. Chemical fertilizer is harmful for land, environment & those persons who are using these crops. Now days Govt. is encouraging farmers for using the biopesticide.

Bio pesticides are living organisms which can intervene the life cycle of insect pests in such a way that the crop damage is minimized. The agents employed as biopesticides are parasites, predators, fungi, bacteria and viruses which are natural enemies of pests. These bio agents can be conserved, preserved and multiplied under laboratory condition for field release.

There is huge demand & supply mismatch in biopesticide production. Currently India has 140 production units, contributing only 1% of total demand of biopesticide. There is huge gap between demand & supply, which can only be filled by setting up more production units. This need huge investment & private participation.

Biofertilizer Unit

A good crop depends upon good soil health. Soil health depends upon the organic & inorganic components in the soil. The aggressive use chemical fertilizer destroys soil biota. Naturally soil have useful micro organism which can help plants to grow. Biofertilizer is the measure for retaining the natural micro organism in the soil.

Biofertilizer are living microorganisms of bacterial, fungal and algal origin. Biofertilizer enhance the productivity of the soil & retain the natural nitrogen & phosphorus for the crops.

It is estimated that the production of Biofertilizer in the country by the existing units is about 7500 to 9000 TPA. This is far below the potential requirement as estimated by the National Biofertilizer Development Centre (NBDC) Ghaziabad. So far, the Ministry of Agriculture has supported establishment of 67 Biofertilizer units in different parts of the country.

Ministry of Agriculture, Department of Agriculture and Cooperation, Government of India is implementing a central sector scheme viz., "National Project on Development and use of Biofertilisers". Under this project, a subsidy up to Rs.20 lakhs is provided for setting up a Biofertilizer production unit of 150 TPA capacity. It is proposed to release the subsidy through back ended subsidy procedure. If the units are getting the subsidy, the amount will be adjusted to the last few installments of bank loan.

Vermi Compositing units under Agri Clinic

Vermi compositing is getting vast acceptance due to its ecofriendly nature and cheap cost compare to fertilizers. Vermin compositing is the process where agricultural waste & cow dung composited through earthworms. The fruits, flowers and vegetables and other plant products grown using vermi-compost are reported to have better keeping quality. The total cost of vermin composite production is Rs.1.5/kg & the selling price would be around Rs.2.5/kg. Due to high margin in this business many individuals & institutions are taking interest in producing the composite.

Land development by above three methods is cheap for farmers & highly profitable for Individuals & institutions that are providing those kinds of services. Some, other methods are also recommended by NABARD for development of land. These methods are as below:

Reclamation of soil Model Scheme on Reclamation of Saline
-Alkali Soils Using underground drainage system
Salvadora Species Improvement of salt affected black soils by using Salvadora Species
Testing Services Project profile for soil, water quality & input testing laboratory services
NAPED Compost Model Scheme on Composting through NAPED method

Model Bankable schemes provide assistance for other projects that provides the additional income to farmers. These projects are as below:
Plantation Horticulture
Mango Cultivation
Guava Cultivation
Tea Plantation
Cashew nut Cultivation
Jasmine Cultivation
Coconut Cultivation
Jasmine Cultivation
Aonla Cultivation
Vanila under shadenet
Pineapple Cultivation
Citrus cultivation
Ornamental Nursery
Oyster Mushroom
Cactus Nursery
Oil Mill
Cactus Nursery
Agricultural Engineering
Cold Storage
Onion Storage
Grain Godowns
Farm Machinery
Power Fencing
Rice Mill
Dal Mill
Farm Mechanization
Regulated Markets
Wind Mills
Power Tiller
Forestry Waste Land
Bamboo Cultivation
Forest Nursery
Composite Fish Culture
Shrimp Farming
Prawn Culture
Mud-Crab Fattening
Eco Hatchery
Surimi Production
Fish Diagnostic Lab
Mussel Culture
Chitosan Preparation
Paddy Cum Fish Culture
IQF Processing Unit
Edible Oyster Culture
Ornamental Fisheries
Biotechnology is used for developing more productive seeds & plants by mixing two types of breeds of plants. This technology is often used to refer to genetic engineering technology of 21st century. NABARD is taking initiatives for more use of biotechnology in Indian Agricultural sector.

The Indian Microfinance sector is attracting big international banks, domestic commercial banks & MNCs due to demand supply mismatch & a high repayment rate. Indian microfinance sector is facing a liquidity crunch due to demand supply mismatch. According to sources the annual credit demand of Rs.450bn versus supply of Rs. 39bn. This demand supply mismatch is giving the huge opportunity for big commercial players.

Indian microfinance sector is witnessing an eye popping growth in its loan distribution portfolios, besides of this growth there is huge untapped market behind. Sector is working on two models one is SHG-Bank & the other one is MFI-Bank linkage programs. According to sources major portion of the loan disbursement market (about 75%) is captured by SHG- Bank & the remaining part (25%) is done by MFI-Bank linkage model. But in the change scenario the trend is in the favors of MFIs. According to sources in 2005 SHGs registered 76.6% yoy growth in cumulative bank loans while MFIs registered 152.8% yoy growth in loans outstanding.

According to industry sources 60% of loans outstanding market is captured by nine large MFIs. A 2005 Mix market survey based on 450 global microfinance institutions reported that five of the top 20 MFIs were in India. The Mix report, in addition, based on a sample of 28 Indian MFIs reported Indian MFIs' average ROE and ROA at 10.2% and 1.5% respectively and reported a 76% compounded annual growth rate between the time-period 2001 to 2005.

According to sources total credit demand in agriculture sector is estimated at $25.1bn & $1.5bn in the non agricultural sector while annual cumulative credit demand is estimated to be in the range of $71 to $119bn. To put this into perspective, this demand level is roughly equal to the total agricultural sector contribution to Indian GDP in FY07. One source takes into consideration the microfinance industry’s current trend and estimates that the outstanding loan portfolio could potentially witness over 35% CAGR through 2011.

The current demand supply mismatch in Indian microfinance sector is giving a huge opportunity for investment. Sector is growing with the modest CAGR rate & promising repayment record. Women are major client of the microfinance sector & supposed to be the loyal client.

Legislative Initiatives

NABARD is the governing body & the watch dog of Indian microfinance system. According to the bill all the MFIs operating in the form of trusts, societies and co-operatives will now come under NABARD, non-bank finance companies have been kept out of the ambit. Significantly, the minimum capital required has been fixed at as low as Rs 1 lakh.

According to the bill, MFIs operating as co-operatives, trusts and societies need to register under the Microfinance Development Council (MDC), which will be a NABARD promoted entity. It will permit MFIs to raise savings, but they will have to take specific approvals from the council after registration to be able to raise savings. The minimum capital requirement has been capped at Rs 1 lakh, with promoters of such MFIs having to contribute, at least, 50% of this amount.


Indian Microfinance sector is not growing well as compare to other nations like Bangladesh. Reason behind the slow growth is the unfriendly policy process & weak networks. Besides the regulations & guidelines from the RBI & Govt., banks are not taking interest for the developments in microfinance sector. There is need of more MFIs to come with new ideas & training methods for development of poor people. Indian microfinance sector is lacking a strong network between people & banking system.

The recent 60,000cr loan waiver in union budget shows the concerns of Indian microfinance sector. Indian microfinance sector is lacking skills & transparency in the system. In this loan waiver a large number of those persons are going to benefitted, who are dishonest to repay his loan. This loan waiver will create the doubts in the mind of honest people who are paying their monthly installments properly.

Loan waivers are not the proper solutions for the problem. Indian microfinance system needs a proper & modern training for use of their resources. Indian farmers are not tech savvy; they are using old techniques for farming. There is huge need for proper irrigation system, Land development, good seeds & Biofertilizer etc.

by, Manish Marwah