Microfinance intercession is considered an of import constituent of development scheme to mainstream the hapless rural families with the formal fiscal system in India. However, there is some grounds for the contrary, that microfinance may, in fact, increase informal money loaning, if clients need to ‘top up ‘ microloans, or borrow to refund harmonizing to the installment agenda. The aim of this paper is to analyze the relationship between the degree of liability to usurers and the type of microfinance theoretical account through a instance survey in Varanasi, U.P. Comparing two microfinance theoretical accounts prevalent in the research country, the writers conclude that the degree of liability to usurers is higher in the instance of clients of Microfinance Institutions ( MFI ) theoretical account and without complete information on the credit-worthiness of borrowers, MFIs may lend to the over-indebtedness of their clients every bit good as harm in their public presentation.


Most people in the developing world- the bulk of the universe ‘s population- bash non hold entree to formal fiscal services. Very few get benefited from nest egg histories, loans, or convenient manner to reassign money. Those who do pull off to, state open a bank history, are frequently faced with suboptimal services.

Families need entree to finance for several intents, the most of import being for eventuality planning and hazard extenuation, families build buffer nest eggs, allocate nest eggs for retirement ( for illustration via pension programs ) and purchase insurance and hedge merchandises for insurable eventualities. Once these demands are met, families typically need entree to recognition for livelihood creative activity every bit good as ingestion and exigencies ( in the event that they do non hold savings/insurance to fund them ) . Finally, wealth creative activity is another country where fiscal services are required. Households require a scope of nest eggs and investing merchandises for the intent of wealth creative activity depending on their degree of fiscal literacy every bit good as their hazard perceptual experience.

Financial services for the hapless, frequently referred to as microfinance, can non work out all the jobs caused by poorness. But they can assist set resources and power into the custodies of hapless and low-income people themselves, allowing them make those mundane determinations and chart their ain waies out of poorness. The possible is tremendous, and so is the challenge.

In other words, this vision is about inclusive fiscal systems, which are the lone manner to make to the big figure of hapless and low-income people.

The Rangrajan Committee Report-2008 objects on Financial Inclusion that “ Financial inclusion may be defined as the procedure of guaranting entree to fiscal services and timely and equal recognition where needed by vulnerable groups such as weaker subdivisions and low income groups at an low-cost cost ” .


Increasing entree to recognition for the hapless has ever remained at the nucleus of the Indian planning in contending against the poorness. Shortly after independency in 1947, the first study fo rural liability i.e. All India Rural Credit Survey ( 1951-52 ) prepared by Reserve Bank of India ( RBI ) in 1954 documented that usurers and other informal loaners met more than 90 per centum of the rural recognition demands. The portion of Bankss in specific was merely approximately 1 per centum in entire rural family debt. Get downing in the late sixtiess, India was home to one of the largest province intercessions in the rural recognition market ( Khandelwal, 2007 ) . Following bank nationalisation, the portion of Bankss in the rural family debt increased to about 28 per centum and 33.7 per centum in 1981 and 1991 severally, while the portion of formal or institutional beginnings in entire debt reached 61.3 per centum in 1981 and 64 per centum in 1991 before worsening 2002.

Among institutional bureaus, concerted societies and commercial Bankss were the two most of import beginnings in both rural and urban countries in 2002. Together they accounted for about 50 per centum of the debt both in rural and urban countries. Non-institutional bureaus played a major function in progressing recognition to the families, peculiarly in the rural India. Among non-institutional bureaus, professional money loaners were of premier importance in 2002. They accounted for about 20 per centum of the debt in the rural country. About 10 per centum of the rural debt was accounted for by the agricultural money loaners. A major ground for addition in the overall family debt and the addition in the portion of families indebted to non-institutional beginnings between 1991 and 2002 was a important addition in current farm outgo and family outgo in the rural countries ( RBI, 2008 ) .

As per the National Sample Survey Organization ( NSSO, 2005 ) about 73 per centum of the families in India were located in the rural countries. The incidence of liability was about 27 per centum among the rural and 18 per centum among the urban families. About 13 per centum of the rural families were indebted to institutional bureaus and 16 per centum to non-institutional bureaus.

Surveies across the universe have found that one ‘s degree of income and business is an of import determiner of entree to recognition and economy ( Peachy and Roe, 2004 ; United Nations, 2006 ) . The RFAS 2003 confirms this by showing that husbandmans with bigger landholdings benefit more from the fiscal services in comparing to smaller husbandmans. Further, this study observes that 44 per centum of the larger husbandmans have entree to recognition and 66 per centum of them have a economy history. In crisp contrast, 71 per centum of fringy husbandmans do non hold entree to a salvaging history and 87 per centum can non entree recognition. Commercial families, that is, families, engaged in some signifier of micro-enterprise, are besides strapped for finance. Therefore, the system appears to be skewed in favor of richer rural borrowers ( Basu, 2005 ) .

Given the absence of formal beginnings of recognition, rural borrowers turn to non-formal beginnings of recognition such usurers. Around 44 per centum of surveyed families reported holding borrowed money informally at least one time in the preceding twelvemonth at an mean involvement rate of 48 per centum per annum ( as opposed 12.5 per centum for loans from the commercial Bankss ) ( Basu, 2005 ) . Informal loaning is most important for fringy farm families, followed by little and commercial families, which tallies good with the information that shows that fringy husbandmans are the most disadvantaged of formal recognition.

The chief beginning of informal adoption is usurers ( some 56 per centum of families who report holding borrowed informally in the station 12 months used usurers ) , followed by friends/relatives ( 21 per centum ) . The largest users of informal loans are for run intoing “ household exigencies ” ( 29 per centum ) and “ societal outgos ” ( 19 per centum ) originating from events such as births, matrimonies, deceases. Some 13 per centum of borrowers report utilizing informal loans for investment-related intents ( RFAS, 2003 ) .

Informal loans tend to be of as short tenor. Close to 50 per centum of the families who report holding borrowed informally in the predating 12 months took loans with a tenor of less than ( or up to ) six months. Other important characteristics that make informal loans more attractive to the hapless include flexible refund, the convenience and frequence with which such loans can be accessed and less trust on collateral ( Basu, 2005 ) . While grounds indicates that hapless families frequently borrow from both formal and informal beginnings ( United Nations, 2006 ) , in this instance, hapless families are able to borrow overpoweringly from informal beginnings.

Therefore, demand was felt for the alternate policies, systems and processs, nest eggs and loans merchandises, other complementary services and new bringing mechanisms, which would carry through the demands of the hapless. As a consequence National Bank for Agriculture and Rural Development ( NABARD ) , in India, launched its pilot stage of the Self Help Group ( SHG ) Bank Linkage programme in February 1992. SHGs are little informal associations created for the intent of enabling members to harvest economic benefit out of the common aid, solidarity and joint duty. These little and homogenous groups involved in nest eggs and recognition activities are capable of taking attention of the hazards through equal monitoring. The chief advantage to the Bankss of their links with the SHGs is externalisation of a portion of the work points of the recognition rhythm, viz. , appraisal of recognition demands, assessment, disbursal supervising and refund, decrease in the formal paper work involved and a attendant decrease in the dealing costs ( Rangarajan, 1996 ) .


Insufficiencies in rural entree to formal finance and the exorbitant footings of informal finance for the hapless provide a strong demand and ample infinite for advanced attacks to function the fiscal demands of India ‘s rural hapless. Over the last decennary, attempts have been made by the authorities, fiscal establishments, and Non-government Organisations ( NGOs ) , frequently in partnership, to develop new fiscal bringing attacks. These microfinance attacks have been designed to unite the safety and dependability of formal finance with the convenience and flexibleness that are typically associated with informal finance. They typically involve supplying thrift, recognition and other fiscal services and merchandises of really little sums to the hapless, with the purpose to raise income degrees and better life criterions.

What Microfinance Does and How?

Microfinance is the proviso of fiscal services on a little graduated table for mark groups that have been excluded by the Bankss. Some suppliers started offering microfinance services manner back in the 1970s, e.g. SEWA Bank in Gujarat. However, in the 1990s it gained impulse. At the nucleus of microfinance is the proviso of loans through group based methodological analysis. In India, two chief constructs can be distinguished.

Self Help Group ( SGH ) Bank Linkage Model

The Self Help Group has between 10 and 20 members who pool nest eggs and lend among themselves. It was foremost conceived by NGOs like MYRADA and PRADAN during the 1980s. Since 1996, NABARD mainstreams a countrywide bank linkage programme that offers extra i.e. beyond their ain savings-credit to SHGs.

Banks typically provide the group a loan amounting to four times the groups ‘ nest eggs but, as the group matures, and based on the groups ‘ path record, Bankss are ready to impart more. Borrowed and saved financess are rotated through loaning within the group utilizing flexible refund agendas ( normally monthly refund ) ; SHGs therefore save, borrow and refund jointly. SHG financess may be distributed either to one or more members of the group- who are personally responsible for refund to the group, or spent jointly by the group. The group is free to make up one’s mind the involvement rate charged to its members, but typically, a member borrows from the group at about 24 per centum per annum. After a loan from a bank is to the full repaid, the group may borrow once more, frequently a larger sum.

Grameen Group Model

The Grameed Group Model comprises of five members who guarantee each other ‘s loans which are provided by microfinance establishments. The Grameen methodological analysis originated in Bangladesh, where it was configured into a extremely standardised loan merchandise that all allowed functioning cost-efficiently hapless people with little loan demands. Grameen attack marks entrepreneurial hapless who invest of all time turning loans into their small-scale concerns such as junior-grade trade, domestic fowl milking cattles and the similar.

In the recent old ages, the scope of microfinance merchandises has widened well. Remittance services have been recongised as a critical service for the hapless, many of which migrate temporarily and back up their households from far. Micro-insurance as a route to cut down exposure and non least to cut down repayment hazards of micro-loans, is an of import fiscal service for the hapless. Currently about 15 million hapless are at least rudimentarily covered, largely loan-linked ( Sa-Dhan Quick Data, 2008 ) .

But microfinance still plays a modest function in India. At the all India degree, less than five per centum of hapless rural families have entree to microfinance ( as compared to 65 per centum in Bangladesh ) but important fluctuations exist across the provinces. The southern provinces in peculiar, history for about 75 per centum of financess fluxing under microfinance programmes. By for the most successful theoretical account of microfinance in India, in footings of graduated table and outreach, is SHG Bank Linkage, with other theoretical accounts, such as the “ Grameen Type ” independent microfinance establishments, dawdling far behind.


There is presently a clear perceptual experience that there are a huge figure of people, possible enterprisers, little endeavors and others, who are excluded from the fiscal sector, which leads to their marginalisation and denial of chance for them to turn and thrive.

Fiscal inclusion is therefore a key policy concern, because the options for runing a family budget, or a micro/small endeavor, without mainstream fiscal services can frequently be expensive. This procedure becomes self-reinforcing and can frequently be an of import factor in societal exclusion, particularly for the communities with limited entree to fiscal merchandises, peculiarly in the rural countries. Microfinance intercession is considered an of import constituent of development scheme to mainstream hapless rural families with the formal fiscal system in India. With the able support of assorted bureaus intercession has exponentially grown over the old ages. The addition in SHG clients taken together with the expanded outreach of the MGIs has led to an overall addition of 11.15 million clients during 2007-08. Internet of accommodations more than 54 million clients are estimated to hold been reached by the microfinance sector in different signifiers, with an enlargement of 9.9 million during the twelvemonth ( Srinivasan, 2008 ) .

While transverse state aggregative indexs can assist bring forth placeholders for entree by families and papers barriers that prevent enlargement of this entree, merely carefully conducted family studies can supply us with in-depth information on the function of microfinance in supplying sustainable entree to finance for India ‘s rural hapless and its influence on the usage of informal beginnings for carry throughing their recognition demands. In this context this survey tries to reply the undermentioned cardinal research inquiries:

How make the clients of the two chief theoretical accounts of microfinance, the SHG theoretical account and the MFI theoretical account, differ?

What is the mean degree of liability to non-institutional beginnings among clients of different theoretical accounts of microfinance?

Does the degree of liability to usurers depend on the type of microfinance theoretical account one is client of?


Research Methodology

In order to reply the above stated cardinal research inquiries, we conducted a pilot study in different blocks stand foring rural country of Varanasi territory in the Eastern Uttar Pradesh ( U.P ) . This study was conducted sum 59 families of 12 small towns covering four blocks of the selected territory. Although the pick of location is based strictly on convenience footing, the choice of families is made such as to include both classs of respondents ( members of SHGs every bit good as MGIs ) relevant for our survey.

Primary informations on different socio-economic facets of the families and inside informations of micro-financial services availed by them were collected straight from the clients through the structured questionnaire are personal interview.

Qualitative information was collected through Focus Group Discussions ( FGDs ) and semi-structured interview of the bankers, NGOs and MFIs operating in the country to understand the supply-and demand sides of the job of microcredit in the selected research country. The field survey was conducted during April 04-10 May, 2009 and farther confirmation through field Visits was done during june 10-25, 2009. Sing complex nature of the field survey, the day of the month collected were processed and tabulated utilizing a computing machine for analysis and reading. The collected informations are subjected with the chi-square statistical trial in order to carry through the aims of the survey.

Sample Profile

Out of the 59 respondents, 34 respondents were members of ego aid groups whereas 25 belonged to one of the taking MFI in the survey country. The respondents were mostly hindus. A caste break-up revealed that the bulk ( 73 per centum ) of respondents belonged to Other Backward Castes. Among others were Scheduled Castes, General and Other Minority Groups with 5 per centum, 10 per centum and 5 per centum severally. The mean figure of members in each family was six, with about 3.7 grownup members on norm.


Comparison of Alternative Microfinance Model Clients

In this survey a modest effort has been to distinguish between the client features of two chief microfinance theoretical accounts prevalent in the survey country. Annexure I provide drumhead statistics for the sample harmonizing to the beginning of microfinance.

Degree of Literacy

The caputs of the families interviewed were illiterate with 42 per centum coverage they had ne’er been to school. The mean accomplished old ages of instruction per family member was 4.9 old ages for the SHG clients and 4 old ages for MFI clients. All the kids aged between 5-14 old ages were reported to go toing the school on a regular footing irrespective of the pick of the theoretical account of microfinance they made. As far as the literacy of microfinance clients concerned, around half of the SHG clients were reported literate ( attended formal school at least up to 5th class ) which is somewhat on higher side comparing MFI clients.


Equally far as mean figure of suites is concerned, MFI clients scored less by 40 per centum with an norm of 1.6 suites compared to SHG clients with an norm of 2.63 suites compared to SHG clients with an norm of 2.63 suites per family. Comparing theoretical account wise, 37.5 per centum of SHG families live in Kaccha houses whereas merely 20 per centum of MFI clients have been reported to shack in the homes made up on non concrete walls and roof. Given the rural focal point of our survey, it comes as no surprise that over 95 per centum of our respondents live in the self-owned homes.

Landholdings and Beginnings of Income

A immense difference has been observed comparing the size of mean land retentions per family which is rather low ( 0.74biswa3 ) in instance of MFI clients comparing to SHG clients ( 12.24 biswa ) . The ground for that can be attributed to the fact that 62.5 per centum of SHG clients depend on agribusiness as a primary beginning of their income that requires big landholdings. On the other manus, none of the MFI client has been reported engaged in agriculture.

Merely 25 per centum of the families were self employed among SHG clients. An interesting fact to observe is that all the MFI clients were self employed engaged in working as street peddlers. A portion from farming, another major beginning of support for SHG clients ( 12.6 per centum ) was pay labor.

Targeting Efficiency of Microfinance Programme

On an mean merely 22.8 per centum of the sample families were found below the official Poverty line for rural Uttar Pradesh ( based on 2004-05 poorness line estimations by the NSSO ) . Below the poorness line for rural Uttar Pradesh is defines as holding per capita per month ingestion under rupees 365.84. This figure was 25 per centum for SHG clients and 20 per centum for MFI clients corroborating to the impression that microfinance services are non merely provided to those who fall below poorness line but besides to the class of vulnerable non-poor who are at hazard of stealing into poorness. The per centum of families having BPL rationing was found as 66 per centum in instance of MFI clients as compared to the 50 per centum of SHG clients.

Income and Consumption Expenditure

Average per capita monthly ingestion outgo for SHG clients was lower ( rupees 917.40 ) when comparing with that of MFI clients which was about rupees 940.00. Another interesting characteristic to detect is that per capita monthly income of the family is lesser than the per capita monthly outgo. The possible ground can be the underestimate of reported income as the bulk of families were engaged in agricultural or non-farm endeavors. However, there is important difference between SHG and MFI clients in respect to per capita monthly income. The account for this difference lies in the fact of difference in the primary beginnings of income of the two groups. Majority of SHG clients were engaged in farming which is low return economic activity whereas most of the MFI clients are into the sort of concern supplying higher return on investings compared to agriculture.

Household liability

In this survey indebted families is defined as one holding some hard currency loans outstanding as on 31.3.2009.

All the families were indebted to formal or informal beginnings of recognition, about 19 per centum of the sample families were indebted to non-institutional bureaus merely, 44 per centum were indebted to non-institutional bureaus merely and 37 per centum were reported to be indebted to both formal every bit good as informal beginnings of recognition as per the field of degree family study of the full sample.

All the clients of SHG every bit good as MFI are holding some hard currency loans outstanding as on the day of the month of study. However, looking at the figures of outstanding dues from formal beginnings for SHG and MFI clients individually reveals that all the MFI clients are indebted to the formal beginning of finance whereas merely 75 per centum of SHG clients are holding outstanding loans from the institutional bureaus. As MFIs are non allowed to accept sedimentations from the populace, a member of MFI tends to dropout from the group if he does non necessitate loan any more. On the other manus SHG offers salvaging services every bit good, hence one remains the member of SHG even he does non obtain/require any loan.

The mean outstanding loan from all the beginnings per family of SHG clients was observed as rupees 27563, it was relatively high ( rupees 37260 ) in instance of MFI clients. The portion of formal institutional beginnings was somewhat higher ( 36 per centum ) for MFI clients compared to 35 per centum in instance of SHG clients. The high norm outstanding debt of MFI clients can be explained by the fact that the lone intent for fall ining MFI has been reported as “ recognition demand ” whereas the motive behind fall ining SHG was salvaging every bit good as recognition.

Average degree of Indebtedness to Non-Institutional Agencies among Microfinance /Clients

Non- institutional bureaus played a major function in progressing recognition to 81 per centum of the sample families. Among non-institutional bureaus, professional usurers and relations were the two most of import beginnings in the survey country. They together accounted for about 65 per centum of the outstanding hard currency dues. The loan from relations was a major beginning of recognition for societal outgos such as nuptials in the household. Another noticeable characteristic was that such loans were involvement free and required to be repaid merely when any such event occurs in the household of the loaner. The other intents of the loan from informal beginnings were medical demands, refunding old debt, funeral and impermanent fiscal trouble. On an mean 70 per centum of such loans were taken either for fulfilling, unproductive demands or smoothening out ingestion demands. On the other manus the portion of institutional recognition bureaus in the outstanding hard currency dues of the rural sample families was 35 per centum about. Indebtedness to money loaners were found more common among MFI clients compared to SHG clients.

As shown in Chart 1, forty four per centum of the outstanding debt sum was supplied by the professional money loaners to the MFI clients whereas this figure was merely 25 per centum in the instance of SHG clients.

The collected informations are subjected with the chi-square trial of independency in order to find if there is important fluctuation in the inclination to borrow from the money loaners among clients of SHG and MFI theoretical account of microfinance. The trial is applied when we have two categorical variables from a individual population. It is used to find whether there is a important association between the two variables i.e. liability to money loaners and being client to peculiar type of microfinance theoretical account.


It is derived from the above tabular array that the deliberate value ( 4.22 ) is more than the value ( 3.84 ) at 5 % significance level4. Hence, the void hypothesis is rejected and it is concluded that inclination to borrow from money loaner has been found more, among MFI clients.

This difference stems from the fact that MFIs disburse loans for income bring forthing purpose merely. To carry through other fiscal demands, MFI clients are left with no other option but to borrow from the usurers. On the other manus, SHG clients can borrow internally for ingestion intent as good. If other members of the group are convinced to give away the loan from the group principal to the member. This can be farther confirmed by the fact that merely 73 per centum of the loan sum signifier formal beginnings were utilized for productive intent by SHG clients, whereas the full sum of the loan from MFIs was invested in income generating activities.

Peer force per unit area and rigorous monitoring by MFIs oblige its clients to keep a clear payment record irrespective of the type of exigency they face at place, could be another ground for this difference. Few cases of borrowing from usurers to refund the outstanding debt from microfinance establishment were found during the pilot study conducted in the selected research country.

The mean outstanding loan to money loaners among MFI and SHG clients is reported as rupees 16.160 and rupees 68.75 severally as shown in the chart below.


As for microfinance and self-help group loaning agreements, they are utile institutional inventions and they have important possible to run into the fiscal demand of the usurers is widespread in the rural countries of the state despite microfinance intercessions.

Comparing two microfinance theoretical accounts in the research country reveals that the degree of liability to money loaners is higher in the instance of clients of MFP theoretical account. Such instances illustrate the troubles MFI clients face, when they have unproductive fiscal demands or they are compelled to guarantee prompt and regular loan refunds through farther adoptions from even money loaners. This makes poorness worse in the short tally, and makes it harder to get away from poorness and so can be beginning of poorness and inequality “ traps ” .`

We should admit that the inclination to borrow from non-institutional beginnings at higher involvement rates exist because the fiscal system has non yet come up with equal solution. Reserve Bank of India ( 1954 ) . “ All India Credit Survey. ” Reserve Bank of India Bulletin, RBI, Bombay without complete information on the recognition worthiness of borrowers they may lend to the over-indebtedness of their clients and every bit good as damage their public presentation.


RFAS [ Rural Finance Access Survey ] – 2003 covers 6,000 rural families in two Indian states- Andhara Pradesh ( AP ) and Uttar Pradesh ( UP0. It was conducted jointly by the World Bank and the National Council of Applied Economics Research, India ( NCAER )

It is possible that families ‘ responses may include committee agents, bargainers and other such beginnings within the ‘moneylender ‘ class though other informations in the RFAS-2003 suggests the likeliness of this is limited.

1 Biswa = 1361 square pess.

Significance degrees show you how probably a consequence is due to opportunity. A value of “ 05 ” means that there is a 95 % ( 1-05=95 ) opportunity of it being true.