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Project Proposal

Titled"MICROFINANCE IN INDIA AN INDEPTH STUDY (with special reference to Chhattisgarh State)"SUBMITTED BY: ANKUSH AGRAWALENROLLMENT NO.: 119211139UNDER THE GUIDANCE OF : J. SAHAMBA, FINANCETO: INDIRA GANDHI NATIONAL OPEN UNIVERSITYRATIONALEA growing body of research from around the world shows that well developed and inclusive financial systems are associated with faster growth and better income distribution. Finance helps the poor catch up with the rest of the economy as it grows. Finance also helps extend the range of individuals, households and firms that can get a foothold in the modern economy, and it reduces damaging of concentrations of economic power. By and large, thanks to microfinance, there is now a growing appreciation of the 'empowerment' dimension of finance, of the extent to which it can give ordinary people and the poor access to opportunity and the ability to escape ossified social structures.

Microfinance is a term for the practice of providing financial services, such as micro credit, micro savings or micro-insurance to poor people. By helping them to accumulate usably large sums of money, this expands their choices and reduces the risks they face. Suggested by the name, most transactions involve small amounts of money, frequently less than Rs. 50000.In the development paradigm, microfinance has evolved as a need-based policy and programme to cater to the so far neglected target groups (women, poor, rural, deprived, etc.). Its evolution is based on the concern of all developing countries for empowerment of the poor and the alleviation of poverty. Developmental organisations and policy makers have included access to credit for poor people as a major aspect of many poverty alleviation programmes. Microfinance programmes have in the recent past; become one of the more promising ways to use scarce development funds to achieve the objectives of poverty alleviation. Furthermore, certain microfinance programmes have gained prominence in the development field and beyond. The basic idea of microfinance is simple: if poor people are provided access to financial services, including credit, they may very well be able to start or expand a micro-enterprise that will allow them to break out of poverty. There are many features to this seemingly simple proposition, which are quite attractive to the potential target group members, government policy makers and development practitioners. For the target group members, the most obvious benefit is that microfinance programmes may actually succeed in enabling them to increase their income levels. Furthermore, the poor are able to access financial services, which previously were exclusively available to the upper and middle-income population. Finally, the access to credit and the opportunity to begin or to expand a micro-enterprise may be empowering to the poor, especially in comparison to other developmental initiatives that often treat these specific target group members as recipients. For developmental practitioners, the success of microfinance programmes is encouraging. Too often in the past, costly large-scale developmental initiatives have failed to achieve any sustainable benefits, especially after funds have dried up. Thus, microfinance has become one of the most effective interventions for economic empowerment of the poor. It has been approximately 25 years since the birth of microfinance with the founding of the Grameen Bank in Bangladesh by Professor Mohammad Yunus. The field has since spread with the adaptation and evolution of Professor Yunus ideas to various countries and contexts. The UN Year of Microcredit in 2005 indicated a turning point for microfinance as the private sector began to take a more serious interest in what has been considered the domain of NGOs. However, with all the excitement about the prospects of the field to contribute to poverty alleviation and the integration of the worlds poor into the rapidly evolving global market system, the Consultative Group to Assist the Poorest (CGAP) estimates that microfinance probably reaches fewer than 5% of its potential clients. Although this is a very rough estimate of those not reached by formal financial institutions, it might serve to provide a general idea of what share of the potential clients of microfinance have yet to be reached. India is home to a growing and innovative sector of microfinance. With a large portion of the worlds poor, India is likely to have a large potential demand for microfinance. For this reason, it makes sense to consider the changing face of microfinance in India, in order to shed light on comparable changes in the field all over the world.OBJECTIVES OF THE STUDY To analyse the impact and outreach of microfinance in Indian states (Specially in Chhattisgarh) To do a costs and benefits of a Microfinance NGO of transforming to a Non-Bank Financial Company (NBFC). To evaluate the commercialization of microfinance in Indian context and analyzing the costs and benefits of a more commercial model of microfinance delivery. To study social benefits of microfinance and how it helps in poverty alleviation.Research Methodology

All secondary data will be collected by going through trade journals, books, project reports and publications available at various Micro Finance Organizations in Chhattisgarh.The other information will be gathered by personal interviews of technical heads of different Microfinance Companies. The interview will be arranged on the availability of the Office bearers of these organizations. One of the most interesting and important evolutions in microfinance is the growing resource of analytical tools and financial information available. Since some MFIs have started to transform into a specialized type of bank or company such as an NBFC in India, many of these tools are analytical tools often used in commercial banking or finance. However, since MFIs often have social impact or poverty alleviation as a critical component of their mission, the proper analysis of MFIs is a marriage of traditionally used methods of assessing commercial banks as well as poverty impact assessment methods used in the development field. Techniques UsedI will use some basic indicators from industry sources of the financial, strategic and social strength of an MFI in order to help in the process of identifying both the financial and social benefits and costs to an MFI in India of becoming an NBFC. These indicators will then be used in analyzing the credit delivery models of SHARE, BASIX and SKS.

EXPECTED CONTRIBUTIONSome valuable lessons can be drawn from the experience of successful microfinance operation. First of all, the poor repay their loans and are willing to pay for higher interest rates than commercial banks provided that access to credit is provided. Secondly, the poor save and hence microfinance should provide both savings and loan facilities. These two findings imply that banking on the poor can be a profitable business. However, attaining financial viability and sustainability is the major institutional challenge. In order to be sustainable, microfinance lending should be grounded on market principles because large scale lending cannot be accomplished through subsidies.

A main conclusion of the report is that microfinance can contribute to solving the problem of inadequate housing and urban services as an integral part of poverty alleviation programmes. The challenge lies in finding the level of flexibility in the credit instrument that could make it match the multiple credit requirements of the low-income borrowers without imposing unbearably high cost of monitoring its end-use upon the lenders. A promising solution is to provide multi-purpose loans or composite credit for income generation, housing improvement and consumption support. Consumption loan is found to be especially important during the gestation period between commencing a new economic activity and deriving positive income. Careful research on demand for financing and savings behaviour of the potential borrowers and their participation in determining the mix of multi-purpose loans are essential in making the concept work.

Eventually, it would be ideal to enhance the creditworthiness of the poor and to make them more "bankable" to financial institutions and enable them to qualify for long-term credit from the formal sector. Microfinance institutions have a lot to contribute to this by building financial discipline and educating borrowers about repayment requirements. LIMITATIONSThe research may suffer from the following drawbacks:1. The information to be collected from different sources may be biased. 2. The data and information to be collected from the past manuals and reports may be inadequate. 3. There may be discrepancy of certain facts and opinions because the data collected mainly will be through secondary sources.4. Inexperience.

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