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PICTURING MICRO FINANCE

S. ARUN KUMAR

DHANAMJAYA BHUPATHI

E.MOHANRAJ

---- PRESENT

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Micro Finance is the supply of loans, savings, and otherbasic financial service to the poor .

-> CGAP

To most, micro finance means providing very poor

families with very small loans (micro credit) to help themengage in productive activities or grow their tinybusinesses.

-> Financial Gateway

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WHAT IS MICRO FINANCE ?

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ABOUT MICRO FINANCE

The modern micro finance movement dates back to the1970s when experimental programs in Bangladesh, Brazil,and a few other countries began to extend tiny loans togroups of poor women to invest in micro enterprises

By lending to groups of women where every member of the

group guaranteed the repayment of all members, these microcredit programs challenged the prevailing conventionalwisdom and proved that poor people without collateral couldbe "credit worthy". When offered the opportunity, they wouldrepay loans with interest, at extraordinary rates of repayment.

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Micro finance refers to loans, savings,insurance, transfer services and other financialproducts targeted at low-income clients.

Micro credit refers to a small loan to a clientmade by a bank or other institution. Micro credit

can be offered, often without collateral, to anindividual or through group lending.

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MICRO FINANCE AND MICROCREDIT

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MICRO FINANCE IN INDIA

Evolution of Micro finance in India

Micro finance has been in practice for ages ( though informally).

Legal framework for establishing the co-operative movement set upin 1904.

Reserve Bank of India Act, 1934 provided for the establishment of

the Agricultural Credit Department. Nationalization of banks in 1969

Regional Rural Banks created in 1975.

established as an apex agency for rural finance in 1982.

Passing of Mutually Aided Co-op. Act in AP in 1995.

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THE PROFILE OF MICRO FINANCE ININDIA

The scenario Estimated that 350 million people live Below Poverty Line

This translates to approximately 75 million households.

Annual credit demand by the poor in the country is estimated to be aboutRs. 60,000 crores.

Cumulative disbursements under all micro finance programmes is onlyabout Rs. 5000 crores.(Mar. 04)

Total outstanding of all micro finance initiatives in India estimated to beRs. 1600 crores. (March 04)

Only about 5 % of rural poor have access to micro finance

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THE STATUS OF MICRO FINANCE ININDIAConsiderable gap between demand and supply for all financial

servicesMajority of poor are excluded from financial services. This is due to,inter-Alia, the following reasons

Bankers feel that it is fraught with risks and uncertainties.

High transaction costs

Unfavourable policies like caps on interest rates which effectivelylimits the viability of serving the poor.

While MFIs have shown that serving the poor is not an unviableproposition there are issues that have constrained MFIs whilescaling up. These include

Lack of an appropriate legal vehicle

Limited access to equity

Difficulty in accessing low cost on-lending funds (as of now theyare unable to offer savings services in a legitimate

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THE STATUS OF MICRO FINANCE IN INDIA (CONTD.,)Limited access to Capacity Building support which is animportant variable in terms of quality of the portfolio, MIS,and the sustainability of operations.

About 56 % of the poor still borrow from informalsources.

70 % of the rural poor do not have a deposit account

87 % have no access to credit from formal sources.

Less than 15 % of the households have any kind ofinsurance.

Negligible numbers have access to health insurance

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FEATURES OF INDIAN MF

About 60 % of the MFIs are registered as societies.

About 20 % are Trusts

About 65 % of the MFIs follow the operating model of SHGs.

Large concentration in South India

600 MFI initiatives have a cumulative outreach of 1.25 crore poo

households

NABARDs bank linkage program has cumulatively reached a totof 9.4 lakh SHGs with about 1.4 crore households.

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PROJECTIONS FOR THE FUTURE

Annual growth rate of about 20 % during the next five years.

75 % of the total poor households of 80 million (i.e. about 60million will be reached in the next five years.

The loan outstanding will consequently grow from the presentlevel of about 1600 crores to about 42000 crores

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WHAT IS THE MICRO FINANCE DEVELOPMENT

FUND ?

Union Finance Minister in his budget speech for the year 2000-01, this Rs. 100 croreFund has been created in NABARD to support broadly the following activities:

a) giving training and exposure to self-help group (SHG) members, partner NGOs, banksand govt. agencies

(b) providing start-up funds to micro finance institutions and meeting their initialoperational deficits

c) meeting the cost of formation and nurturing of SHGs; (d) designing new deliverymechanisms

e) promoting research, action research, management information systems anddissemination of best practices in micro finance.

This Fund is thus expected to address institutional and delivery issues like institutionalgrowth and transformation, governance, accessing new sources of funding, buildinginstitutional capacity and increasing volumes. RBI and NABARD have contributed Rs.40 crore each to this Fund. The balance Rs. 20 crore were contributed by 11 publicsector banks.

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MICRO CREDIT AND RBI

RBI defines Micro Credit as :

Micro Credit is defined as provision of thrift, credit and other financial services andproducts of very small amount to the poor in rural, semi-urban and urban areas for

enabling them to raise their income levels and improve living standards. Micro CreditInstitutions are those which provide these facilities.

DO RBI ENFORCE INTERESR RATES ?

No. The reform of the interest rate regime has constituted an integral part of thefinancial sector reforms initiated in our country in 1991. In consonance with this reformprocess, interest rates applicable to loans given by banks to micro credit organizationsor by the micro credit organizations to Self-Help Groups/member-beneficiaries has been

left to their discretion. The interest rate ceiling applicable to direct small loans given bybanks to individual borrowers, however, continues to remain in force.

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MICRO CREDIT AND RBI ( CONTD.,)

DO RBI IMPOSE THE TERMS & CONDITIONS FOR ACCESSING MICROCREDIT ?

No . Banks have been given freedom to formulate their own lending norms keeping in view groundrealities. They have been asked to devise appropriate loan and savings products and the relatedterms and conditions including size of the loan, unit cost, unit size, maturity period, grace period,margins, etc

IS FOREIGN INVESTMENT ALLOWED IN MICRO CREDIT PROJECTS ?

Govt. of India with their notification dated August 29, 2000 have included Micro Credit/Rural Credit inthe list of permitted non-banking financial company (NBFC) activities for being considered for

Foreign Direct Investment (FDI)/Overseas Corporate Bodies (OCB)/Non-Resident Indians (NRI)investment to encourage foreign participation in micro credit projects. This covers credit facility atmicro level for providing finance to small producers and small micro enterprises in rural and urbanareas

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TYPES OF MICRO CREDIT PROVIDERS ININDIA

SUCCESSFUL MICRO FINANCE MODELS THAT

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SUCCESSFUL MICRO FINANCE MODELS THATHAVE EMERGED IN INDIA

An Intermediate Model that works on banking principles with focus onboth savings and credit activities and where banking services are providedto the clients either directly or through SHGs;

There is also a Wholesale banking Model where the clients compriseNGOs, MFIs and SHG Federations. This Model involves a unique package ofproviding both loans and capacity building support to its partners; and

Further, there is an Individual Banking-based Model that has its clients asindividuals or joint liability groups. While programme management andclient appraisal in this Model may be a challenge, it is best suited to lendingto enterprises.

ICICI BANK INNOVATIONS IN

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ICICI BANK - INNOVATIONS INMICRO FINANCE

The bank led model was derived from the SHG-Bank linkageprogram of NABARD. Through this program, banks financed SelfHelp Groups (SHGs) which had been promoted by NGOs andgovernment agencies.

ICICI Bank drew up aggressive plans to penetrate rural areasthrough its SHG program. However, rather than spending time in

developing rural infrastructure of its own, in 2000, ICICI Bankannounced merger of Bank of Madura (BoM), which had significantpresence in the rural areas of South India, especially Tamil Nadu,with a customer base of 1.2 million and 77 branches

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CHALLENGES AHEAD

Appropriate legal structures for the structured growth of MF operations

Ability to access loan funds at reasonably low rates of interest.

Ability to attract and retain professional and committed human resources.

Design of apt MIS including user friendly software for tracking accountsand operations.

Ability to innovate, adapt and grow.

Bring out a compendium of small and micro enterprises for the MFclients.

Identify and prepare a panel of locally available trainers.

Ability to train trainers.

Capacity to provide backward linkages or create support

structures for marketing

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RELATED ISSUES

Designing financially sustainable models

Aim for community participation & ownership

Increase outreach and scale up operations

Demonstrate that banking with the poor is viable

Build professional systems and processes.Ensure transparency and enhance credibility through disclosures.

Provide support for capacity building initiatives.

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IDEOLOGICAL ISSUES

Are MFIs guilty of sacrificing targeting at the altar of financial sustainability?

Can MF ever be inclusive of the bottom two quintiles below thepoverty line?. Are the economically inactive ineligible?

How to include the developmental agenda without compromisingon financial sustainability ?

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IF You are UpliftingThe PoorYour UpliftingThe Nation

-> Mahatma Gandhi

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Source

DATA SOURCE

www.rbi.org.in/ -

www.microfinanceindia.org/ March 2007

CGAP

http://www.microfinanceindia.org/http://www.microfinanceindia.org/

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