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MICROFINANCE

~~ bridging the gap between the


formal financial institutions and
the rural poor ~~
Introductio
n M IC R O FIN A N C E

f Refers
very small
to amounts to the poor in rural , semi urba
•small savings
•credit
•insurance services
In the Indian context terms
•small and marginal farmers
•rural artisans
•economically weaker sections
ORIGIN OF THE
CONCEPT
mmad Yunus, professor of economics, in Bangladesh

Yunus left the


“ Whatandgood
campus wentwere
to
all
Jobra , amy complex
village in
theories
Chittagong of when
people
Bangladesh were
, to learn
a new method
dying ofof
banking for the on
starvation
poor . That is where
the sidewalks
he tried the idea
of tinyand loans
porches
for
selfacross from ofmy
- employment
thelecture
poor , andhall?
thus”,
the idea of
ple notMICRO
servedCREDIT
by banks because of their poverty, lack of collateral, illi

MICROthe
that allow SAVINGS
client to save small amounts of money without any require

ACTIVITIES IN MICROFINANCE
MICRO
siness INSURANCE
organizations take out policies carrying small amounts as premium to share

REMMITTANCES
transfer of funds by people from one place to another usually to family o

ACTIVITIES IN MICROFINANCE
MICROFINANCE INSTITUTES
“ Micro Finance
Institutions accesses
financial resources
from the Banks and
other mainstream
Financial
Institutions and
provide financial and
support services to
the poor.”
MICROFINANCE MODELS
•Predominant model in the Indian Micro finance
•Accounts for nearly 20 million clients
•Self Help Promoting Institution usually a NGO, helps groups of
15-20 individuals
•Individuals through an incubation period after which time
they are linked to banks.

•SHG formed and financed by banks
MODEL
•The 1 the dual role of promotion of SHGs and also provider of cre
banks play

•SHGs formed by formal agencies other than banks (NGOs and other), but directly fin
MODEL
•The NGOs 2 agencies have played the role of facilitator
and other

The SHG-Bank Linkage Model


•Potential clients are asked by the MFO to organize
themselves into ‘groups’ of five members

• These are organized into ‘centres’ of around five
to seven such groups.

•Loans for productive purposes are provided by the
MFO directly to the members of small groups directly
on the strength of group assurance

•Grameen Model is being followed in India by
Association for Sarva Seva Farms (ASSEFA), Activists
for Social Alternatives (ASA) and Other Financial and
Technical Services Ltd.

Grameen Model
•Initiated by Cooperative Development Forum (CDF)

•It has built up a network of Women Thrift Groups
(WTGs) and Men Thrift Groups (MTGs).

•Are registered under Mutually Aided Cooperative
Society Act (MACs)

•Mobilize savings resources from the members and
access outside/ supplementary resources from the
institutional systems.

Co-operative Model
•Pioneered by ICICI Bank attempted to provide a
mechanism for banks to incentivize partner MFIs
continuously & deal with the inability of MFIs to
provide risk capital in large amounts

•MFI collects a ‘service charge’ from the borrowers to
cover its transaction costs and margins

•The lower the defaults, the better the earnings of
the MFI as it will not incur any penalty charges vis-
à-vis the guarantee it provides

Partnership Model
MICROFINANCE IN INDIA

Home to some 1.25 billion people in 2009

erural India
still below the ‘Poverty
constitutes about three
Line’toearning less thanquarters
Rs 50 pe

en that there are on an average five members in one household


KEY PLAYERS IN THE
MICRO FINANCE SYSTEM
•In November 1998 a high-powered Task Force on
Supportive Policy and Regulatory Framework for Micro
finance

•Objective was among others, to come up with
suggestions for a regulatory framework that brings
the operations of the Microfinance Institutions into
the mainstream

•Access the possible role of self-regulatory
organizations

•Explore the need for a separate legal framework for
micro finance
1. NABARD
“ For providing and regulating credit and other
facilities for the promotion and development of
agriculture , small scale industries , cottage and village
industries , handicrafts and other rural crafts and other
allied economic activities in rural areas ”
•Dr. Bimal Jalan’s Monetary and Credit Policy
Statement of April 1999: 1st mention of microcredit.

•policy attached importance to the work of NABARD
and public sector banks in the area of micro credit
•micro credit extended by the banks is reckoned as
part of their priority sector lending, and they are
free to device appropriation loan and saving
products in this regard

•Banks were also advised that SHGs which engaged in
promoting the saving among their members, would be
eligible to open savings accounts irrespective of
their availment of credit facilities from banks

2. RBI
an SHG is 10 •to 20 members
Savings have FUNCTIONS
to be a regular and continuous
ly, only one member
•‘Savings first – Credit later’ should be the motto of ev
sists of either only men or of only women
•Savings to be used
the same social and financial as loans to members
background
•Discuss and try to find solutions to the problem faced

3. SHG
4. Microfinance Institutions (MFIs)
5. Non Government Organizations (NGOs)
Regulatory Framework
Regulatory Acts governing the MFI
Framework
Recommendations- 2003
1. Structure and Sustainability
Issues
2. Funding Issues
3. Capacity Building Issues
Regulatory Issues
Regulatory Issues: SHGs
Regulatory issues: NGOs
Regulatory Issues : MICRO CREDIT
INSTITUTIONS
R e g u la to ry Issu e s : M IC R O
FIN A N C IA L INSTITUTIONS
Issues Related to Microfinance
•Repaying ability that ultimately led to defaults

•MFIs - moneylender, but a leveraged moneylender- Subprime Crisis

•SBI , ICICI Bank and Axis Bank lent Rs 16,000 crore to micro lenders.
ICICI’s lending is at Rs 2,000 crore, SBI’s at more than Rs 1,000
croreand SIDBI’s at Rs 4,000 crore

•Borrowed by poor people lack basic education or experience to
understand and manage business

•Nearly eight of 10 borrowers who borrowed money from Indian
Microfinance companies were in default

•Lack of due-diligence by banks while lending to microfinance
institutions
erest rates on micro lending and will leave self-help groups and small community servic

nterest rates, the regulatory body will advise the micro-finance institutions to keep rate

est that the break-even rate for micro-finance lending is 24 per cent owing to the small

ational Bank for Agriculture and Rural Development will become the regulatory body fo

MFIs will be allowed to take deposits also

MICRO FINANCING REGULATORY


BILL- 2007
Arguments against the Bill
Current Scenario