Final Law Ppt (2)

7/27/2019 Final Law Ppt (2)

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Legal & Regulatory

Aspects of MicroFinance in India

&Need for a Regulator

Group 5


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Introduction to Micro

Finance What is Micro Finance?

History of Micro Finance

Why Micro Finance?


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Demand for Credit in India

Four segments of Population needing Credit

Small and Medium Income Farmers who live barely

above Poverty Line

Small Marginal farmers including Artisans, DomesticServants, Weavers , Vendors

Landless farmers working on seasonal basis, Labourers ,Miners , Forest Labourers

Women working in all of the above 3 sectors


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Gaps in System

India home to almost 1/3rdof the worlds poor

Central government & state government povertyalleviation programs currently active in India

About 1/2 of the Indian population-no savings bankaccount, deprived of banking services.

Lack of services to fulfil their financial needs

E.g. building of assets and protection against risk.


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Salient Features of Micro

Finance Borrowers are from the low income group

Loans are of small amountmicro loans

Short duration loans

Loans are offered without collaterals

High frequency of repayment

Loans are generally taken for income generationpurpose


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Microfinance trend in India


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Microfinance trend in India


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Commercial Banks


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Other Banks


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Microfinance

MFI SHG JLG

Types Of Microfinance


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Micro Finance Institutions

in India


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Micro Finance Institutions

Department of Full-Service Banks

Advantage of Regulation

Unified Regulation System

Legal forms of MFI in India


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Self-Help Groups

SGHs is a small group of rural poor, who voluntarilycome forward to form a group for improvement ofsocial and economic status of the members.

Homogenous group of about 15 to 20 members

Regular savings are done by the members

The capital collected is used for lending


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Conditions required for

membership of SGHs Members should be between the age group of 21-60

years.

From one family only one person can become amember of an SHG.

The group normally consist of either only men orwomen.

Members should be homogenous i.e. should havesame social and financial background.


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Joint liability group(JLG)

Joint Liability Group (JLG) is a group of individuals coming

together to borrow from the financial institution.

Informal group comprising 4-10 individuals.

For the purpose of availing bank loan against mutual

guarantee.

JLG members to engage in similar type of economic

activities either in Farm & Non farm sector.

Simple management with little or no financial administration

within the group.


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Joint liability group(JLG)

One person in that group is appointed as leader ofthe group.

Each person is responsible for the loan taken by anymember of the group.

If any one person in the group defaults then other

group members will have to pay for that.

On defaulting, the member will not be able to takeloan in future.


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Financing to JLG(Region wise)


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Financing to JLG(Region wise)


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JLGSHG Difference

FACTORS JLG SHG

Group size 4-10 members 05-20 membersper SHG

Type of

members

Exclusively of Farmers, Oral

Lessees, Share croppers,

artisans, entrepreneurs

Only very poor

members

Savings A Credit Group - Savings

optional

Savings-cum-

Credit Groups


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JLG-SHG Difference

Loans Either Singly or Jointly by JLG by

financing bank

Only to SHG by

financing bank

Maximum

loan amount

Restricted to Rs.50,000/- per Individual

(both under Model A or B)

No such upper limit

since linked to total

savings etc. Of group

SB A/c JLG members to be encouraged to open

INDIVIDUAL No Frill Accounts

Group Bank A/c of SHG

Others To serve as a conduit for technology

transfer, facilitate access to market

information, carry out activities like soil

testing, training, health camps to its

members

May attempt, no such

bar.


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Channels in Micro Finance

SHG-Bank Linkage Program (SBLP)

Bank-led

NABARD, 1992 Women encouraged to form groups

Members contribute savings

Provide bank loan for income generationpurpose

Members meet periodically


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SHG Banking Linkage

Programme


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Channels in Micro Finance

Micro Finance institutions (MFI)

Lend through the concept of Joint Liability Group (JLG)

5-10 members

Avail loan either individually or through group

Mutual Guarantee


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MFIs Types

Investor Pool of FundsIntermediary

BankMicro-

entrepreneur

Non-Profit Mutual Benefit For Profit

Public Trust SocietiesSection 25Companies

Self-Help Groups &Federation

Co-operativeSocieties

Non-BankingFinancial

Corporation

Trusts

Public trusts are established in accordance with the respective Stateregulations Private trusts are established under the Indian Trusts Act 18--

Process of registration is not hindered by the lack of initial capitalThey enjoy tax benefits as they are exempt for taxation if they areregistered under C of the Income Tax ActIn order to accept foreign grants the institution needs to be registered under the

FCRA

Micro FinanceInstitution


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Client Outreach Comparison


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Comparison SHG-MFI


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Reasons for existence ofseparate institutions:

High Transaction Cost

Absence of Collateral

Loan for Short duration

Higher frequency of repayment, higher rate ofdefault


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Models in Micro Finance

DeliveryModel

Self HelpGroup

FederatedSelf-helpGroup

GrameenBank

Co-operative


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Self-Help Group

Evolved in the NGO sector.

Almost 90% of the SHGs in India have femalemembers.

Small group of 20 persons formed democratically &elects its own members.

Essential Features:- members belonging to same socialstrata & sharing common ideology.


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Self-Help Group

Pool their savings and then use it amongthemselves.

The rules and norms pertaining to finance orother matters are made by the group.

NGO supporting the group links them to banksfor more financial assistance.


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Federated Self-Help Groups

Federation of SHGs bring together several SHGs.

More than 1000 members.

Three tier structure:-

SHG(Basic Unit)

Cluster(Middle Tier)

Apex Body

(Topmost Unit)

2 SHG members meetregularly

10-15 members, they

form the link betweenthee SHGs & NGO

Examples of Federated SHG:-PRADAN, Chaitanya and SEWA.


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Grameen Bank Model

Significant Features:-

Low transaction costs.

Repayment of loans in small and short interval.

Quick loan sanctions.

Loans are provided for all purposes like housingloans, sanitation loans, supplementary loans etc.


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Co-operative Model

Owned by the members who use its services.

Members can be from different sections of samecommunities like agriculture, retail, wholesaleetc.

The organization which has been vastlysuccessful in co-operative form in India is

Sahavikasa or Co-operative DevelopmentFoundation (CDF).


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CDFs

Found in 1975 by group of individuals.

It relies on the well known Credit Union modelinvolving a savings first strategy.

Legislation In Andhra Pradesh known asMutually- Aided Societies Act (MACS).

The act helps the CDF to register the thrift groupspromoted by CDF under it.


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Working of Micro Finance

Institutions


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Types of Financial Institutions

Types ofFinancial

Institutions

Formal Banks

Informal/Non-Banks

Companies of Apex Development FinancialInstitutions, Commercial Banks, Regional ruralBanks, & Co-operatives Banks providingmicro finance services in addition to theirgeneral banking activities

Informal institutions that undertake microfinance services as a part of their main

activity


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Hierarchy of MFI


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Institutions


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Institutions Little or no collateral

High default risk

Individuals divided in groups of 5

Field officer appointed


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Working Method

Choosing a village

Introduce mission, methodology and services offered

Interested women gather (age 18-59 years)

Groups of 5

5 day training program

Meet weekly in village centre


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Environment Analysis

Internal

High transaction cost

Lack of access tofunding

Loan collection method

Fraud

External Increased competition

Uneven population

Challenges before the

MFI

Quality of SHG

Deserving poor are stillnot reached

Micro finance outreach

in 7 poorest states ofIndia

Low depth of outreach

Unregulatedmicrofinance institutions


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Challenges

Financial illiteracy Inability to generate

sufficient funds

Dropouts andMigration of group

members

Multiple Lending andOver-Indebtedness.

Cluster formation

fight to grabestablished market.

Client Retention

Loan default Low Outreach

High Interest Rate

Negligence of urban

poor Low education level

Language barrier

Late payments

Geographic factors

Debt managements


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FDI in Micro finance

Acceptance of Foreign Contribution

Foreign Direct Investment

FIPB


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LEGAL ASPECTS


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THE MICRO FINANCE

INSTITUTIONS(DEVELOPMENT AND

REGULATION) BILL, 2012


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Definition

To provide for development and regulation of the microfinance institutions for the purpose of facilitating accessto credit, thrift and other micro finance services to therural and urban poor and certain disadvantaged sectionsof the people and promoting financial inclusion throughsuch institutions and for matters connected therewith orincidental thereto.


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Other Definition


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"Micro credit facilities" means any loan, advance, grant or

any guarantee given or any other credit extended in cash orkind with or without security or guarantee

"Micro finance institution" means,

(A) a society registered under the Societies Registration Act,

1860; or

(B) a company registered under section 3 of the Companies Act,

1956; or

(C) a trust established under any law for the time being in force;

or

(D) a body corporate; or

(E) any other organization, as may be specified by the Reserve

Bank


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"Micro finance services" means any one or more of the followingfinancial services provided by any micro finance institution, namely:

(A) micro credit facilities involving such amount, not exceeding inaggregate five lakh rupees for each individual and for such specialpurposes, as may be specified by the Reserve Bank from time to time,such higher amount, not exceeding ten lakh rupees, as may beprescribed;

(B) collection of thrift;(C) pension or insurance services;

(D) remittance of funds to individuals within India subject to priorapproval of the Reserve Bank and such other terms and conditions, asmay be specified by regulations;

(E) any other such services, as may be specified,

In such a manner as may be prescribed


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"Thrift" means money collected in any formother than in the form of current account ordemand deposits, by a micro financeinstitution from members of self-help groupsor any other group of individuals, by

whatever name called, who are availingmicro finance services provided by suchmicro finance institution in accordance withthe regulations made by the Reserve Bank in

this behalf.


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Provisions & Features of the

Draft Bill To entrust to the National Bank the regulatory,

supervisory, promotional and developmental role

RBIonly seeks to regulate & Develop the MFO

Set up MFDC

To lay down Policies & Procedures for registration& cancellations

Defines the Functions of Regulator, Auditors,

Ombudsman & Penalty provisions

Set up institution of MFDEF


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Role Expectations from

Regulator Promote growth of MF services

Formulate Policies, evolve sector benchmarks &performance standards,

Undertake registrations, procedures & cancellations

On-site & off-site Surveillance

Exercise Penal Powers


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Legal Structure

NGO-MFIs, Cooperatives & Section 25Companies

NBFCs

NBFC-MFIs


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Li it ti f C t L l


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Limitations of Current Legal

Structure

Recognizing MFI Players prior to 2010

Priority Sector Lending

Register as NBFC-MFI:

75% of loan portfolio originated from income-generatingactivities

85% of total assets as Qualifying asset

Margin Cap of 12%

Interest Cap of 26%

Accepting deposits

Financing Restrictions

Deposit Mobilization

Access to Capital

Qualifying Asset


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Qualifying Asset

Borrowers household annual income does not exceed Rs. 60,000 or

household annual income does not exceed Rs. 60,000 or Rs. 120,000

(rural and urban areas respectively)

Maximum loan size - Rs. 35,000 (first cycle) and Rs. 50,000 (subsequent

cycles)

Maximum borrower total indebtedness - Rs. 50,000

Minimum tenure - 24 months when loan exceeds Rs. 15,000

No prepayment penalties

Repayable by weekly, fortnightly or monthly instalments, at borrowers

choice

No collateral

Li it ti f C t L l


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Limitations of Current LegalStructure

Policy Initiatives

Pricing of Products

Fair lending practices

MFI Self Regulation

State level Regulation

Over-indebtedness

Documentation & Transparency


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Limitations of Current Legal

Structure


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Need For A Regulator


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Need for a Regulator

Microfinance Institutions (MFIs) in Indianeed a Regulator like NABARD or RBI

Reserve Bank of India regulates only thosemicrofinance institutions which are registeredwith it as non-banking finance companies

SEBI can monitor them, only if they get listed

NABARD, presently has no such role


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Malegam Committee

ReportOctober 2010

Study the issues and concerns inmicrofinance sector

Chairmanship of Shri Y H Malegam

Recommendations


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Recommendations

NBFC-MFI will hold not less than 90% of its total assets in

the form of qualifying assets

Limits of an annual family income of Rs.50,000 and anindividual ceiling on loans to a single borrower ofRs.25,000

Not less than 75% of the loans given by the MFI should beforincome-generating purposes

Restriction on the other services to be provided by the

MFI MFI can levy only three charges, namely,

(a) Processing fee

(b) Interest and

(c) Insurance charge.

Problems Of Multiple-lending, over


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borrowing, ghost borrowers andcoercive methods of recovery

Borrower can be a member of only one Self-Help Group (SHG) or aJoint Liability Group (JLG)

Not more than two MFIs can lend to a single borrower

There should be a minimum period of moratorium between thedisbursement of loan and the commencement of recovery

The tenure of the loan must vary with its amount

A Credit Information Bureau has to be established

The primary responsibility for avoidance of coercive methods ofrecovery must lie with the MFI and its management

R l f RBI i P ti MFI


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Role of RBI in Promoting MFI

Establishing financial literacy/credit counselling centres.

Technology adoptions.

Establishing Financial Inclusion Fund (FIF) and Financial InclusionTechnology Fund (FITF).

Establishing Microfinance Development and Equity Fund (MFDEF)

R l f NABARD i P ti MFI


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Role of NABARD in Promoting MFI

Support NGOs, RRBs, DCCBs, FarmersClubs and Individual Rural Volunteers(IRVs)

Role of a facilitator

Research and Development (R & D)Fund was set up

Why NABARD should be


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Why NABARD should be

Regulator

Conceived by the Committee to Review Arrangements forInstitutional credit for Agriculture and Rural Development(CRAFICARD)

Various Committees had assessed the supervisory role ofNABARD

NABARDs supervisory services

Its pioneering role in financing, promotion and developmentof MF

All India presence

Regulatory Targets in the MFI


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Regulatory Targets in the MFI

Business

That of a credit provider

Distributor of other financial products

Agency that promotes awareness about financial services

Obligations:

Truth and transparency

Adherence to fair collection practices

Ensuring that the consumer is aware of all the alternatives


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Current Scenario

N ti l R l Li lih d Mi i


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National Rural Livelihood Mission

Earlier known as IRDP(Integrated Rural DevelopmentProgramme)

NRLM was started by Shri Atal Bihari Vajpayee In 1999

Objective of NRLM was to provide Self Employment andOrganisation for the Poor

Swarnajayanti Grameen Swarojgar Yojana was initiated for

converting poor people into Clusters i.e., Self-Help Groups

Aim of SGSY was to provide credit to poor and forpromoting Enterprenuerial Skills

NRLM K F t


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NRLM Key Features

Goal: Poverty elimination in rural areas through building andnurturing institutions of the poor, with a focus on women SHGs andtheir federations

Target: Reaching 70 million rural poor households in the next 10years

Coverage: Phased coverage of villages in the country over aperiod of 10 years

NRLM Key Features


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NRLM Key Features

Comprehensive livelihoods promotion

Overcoming shocksFood security credit, health risk fund, etc

Strengthening existing livelihoodsAgriculture, livestock, NTFP,fishery, weaving, etc

Skilling and placing youth from rural poor households

Micro-enterprise development: EDP trainings, skilling,apprenticeship and handholding

Risk management: Life, health, assets and livelihoods risks

MICRO INSURANCE


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MICRO-INSURANCE

Microfinance Institutions with


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Microfinance Institutions with

Health Programmes

NRLM Outreach


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NRLM Outreach


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NRLM Outreach(Cont)


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SHG Banking Linkage

Programme


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SHG Saving Account


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SHG Saving Account


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Savings Growth in SHGs


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SHG Dropout


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MFI Response to New RBIRegulation

RBI guidelines are not clear

Financial firms are cautious

Uniform policy will be difficult for small MFIs

Difficult for new start up to meet the demands

Accountability of NBFCs loan s difficult

Restrictions on margins and interest rates are too stringent


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Village Financial ServicesLtd.

The institution focuses its services in West Bengal andBihar, reaching 2,22,357 clients

Clients are limited to women, a maximum monthlyincome of Rs. 4000 in rural areas and Rs. 5000 in urbanareas


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Concerns

That repayment has dropped from 99% to 96-97%

Borrowers delaying their repayment

Extensive waiting periods

Larger MFIs have additional funding sources but , smaller regionalMFIs are experiencing the impact

Funding cost were increased to 14-15% from 10-11%

Increase in loan tenure will delay the payment


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Arohan Financial ServicesPvt. Ltd.

Arohan Financial Services Pvt. Ltd. is a NFBC operatingin 23 districts across West Bengal, Assam, and Bihar.

The institution has been in service since 2006, currentlyserving 2,14,059 clients.

Arohan uses a joint lending group model, and it hasRs. 9 crore in outstanding loans as of March 2012.


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Concerns

Lack of regulation on interest rate caps

Banks do not feel compelled to lend to MFIs becausethey are not a big ticket

Borrowers dont understand. Who is RBI? What isregulation? They are losing confidence.


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Trident Microfinance

Trident Microfinance is a NBFC, operating in AndhraPradesh, Madhya Pradesh, and Uttar Pradesh since2007

Trident utilizes a joint lending group operational modelto serve 2, 54000 clients

As of the end of March 2012, the NBFC had Rs. 150

crore in outstanding loans


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Concern

Trident had 109 branches, which has since beenreduced to 84 due to regulatory closure.

The representative reported that the 26% interest ratecap is not encouraging.

12% margin cap proposed by RBI is unreasonable

Indebtedness cannot exceed Rs. 50,000


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Highlights of the Budget

2012-2013

Proposed to provide 200 crore to enlarge the corpusto 300 crore of 'Women's SHG's Development Fund

To encourage micro enterprises, a credit linked subsidyprogramme namely Prime Minister's Employment

Objective of promoting market access of Micro andSmall Enterprises


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Highlights of the Budget

2013-2014

Benefits or preferences enjoyed by MSME to continueup to three years after they grow out of this category

Refinancing Capacity

Fund provided by India Microfinance equity fund

Set up tool rooms, technology development centres


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Case Study

Andhra Pradesh crisis(Krishna district)


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( )

Mi Fi C t


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Micro Finance Controversy

Andhra Pradesh

COMPLAIN:

Some Borrowers of the private MFIs in AP lodgedcomplain against their alleged usurious interest rate

and forced loan recovery practices.

ACTION:

Government side and Private MFIs in AP

The Andhra Pradesh Microfinance Institutions(Regulation of Money Lending) Act, 2010

Mi Fi C t


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Andhra Pradesh

ANALYSIS: Three allegations

1. Do private sector MFIs charge usurious interestrates?

2. Do MFIs (need to) employ coercive collectionpractices?

3. Are MFI clients being pushed to commit suicides

CONCLUSION

RESULT


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Mi Fi C t


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SKS

IPOJuly, 2010

Motive- stock sale will help fuel the companys rapid growth,

Impact- Forced SKS to increase interest rates, avoid riskier loans &enact policies contrary to the spirit of microfinance

Critic-

offering big money people an opportunity to make money out of

poor people

Everyone at SKS made money

SKS should operate where there are no SHGs

Mi Fi C t


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SKS

Crises-

1. Suffered loss of 1300 crore in AP

2. Shifted the registered office to Mumbai

The good part-

1. Helped SKS to expand and give more loans

2. Serves more than 90000 villages

3. Employs more than 21000 people

IPO good or bad- a fascinating debate

Gl b l T d I


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Global Trend In

Microfinance

N b f A ti D it


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Number of Active Depositors

(in Millions)

N b f A ti


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Number of Active

Borrowers(In Millions)


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Brazil Micro Finance

Bra il Microfinance


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Brazil Microfinance

Supply of Financial Services

Banking in Brazil for Lower IncomeEarners:

Consumer Credit

Credit Cards

Store Credit

Supplier Credit

Agiotas (Loan Sharks)

Brazil MF Today


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Brazil MF Today

Institutions associated with internationalmicrofinance networks

Civil society organisations

Government initiatives

Private Banks

Brazil MF Criticism


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Brazil MF Criticism

Low penetration rate

Hyperinflation period

Government-subsidized credit programs

Lack of framework to support a full andeffective microfinance system

Crowding out by the public sector

Way forward


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Way forward

What should financial regulation do?

Consumer protection regulation formicro-credit

Consumer protection regulation forfinancial distribution

Conclusion


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Conclusion

Frontline institutions

Not seen success like counterparts inLatin America, Europe & Bangladesh

Blind Adoption Difficult to regulate

Controversies

Criticised for interest rates

Consumer protection, micro-prudentialregulations & systematic risk

At present, focused on lending

Group 5


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Group 5

Nihar Manjrekar PG12093 Milind Kudal PG12095

Pooja Malde PG12096

Rohan Patel PG12097

Rushabh Desai PG12098

Sargam Mehta PG12099

Alisha Khimavat PG12106

Nikon Bhatt PG12110

Malay Shah PG12111

Keshav Kriplani PG12120


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Documents

Final Law Ppt (2)