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Microfinance
EXECUTIVE SUMMARY Microfinance is yet another area where banks can play an active role. The objective of microfinance is to deliver a wide range of financial services like like deposi deposits, ts, advanc advances, es, insura insurance nce and other other relate related d produ products cts to people people engaged in agricultural, small enterprise and poor people in order to increase their standard of living. Finance, which is basically an institutional/group finance instead of lending to individual beneficiaries unlike in the case of priority sector/rural lending, is extended to SHGs or NGOs. Moreover, there are no subsidies or interest concessions and the basic concept in microfinance is to give a timely finance to the needy people. Therefore, transaction costs are cheaper and profitability is better under microfinance when compared to the conventional rural lending. In view of these factors in the long run, microfinan microfinance ce is likely likely to replace the convention conventional al and concessional rural lending. There is ample scope for private & foreign banks to venture into this activity due to the above mention advantage. Rural India an its economy is mainly depend on monsoons. Famine and floods both occur at the same time in different parts of the country causing damage to the crops. Therefore, rural insurance has to be an effective tool in hedging these these risk risk facto factors. rs. Govern Governmen ment, t, banks banks and insura insurance nce agenci agencies es have have to together evolve a more proactive and vibrant measures to deal with this issue, both at micro and macro level.
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Microfinance
OBJECTIVES
The objective of undertaking a project on Microfinance is to have indepth knowledge about the current rural development by banks and government.
Objective behind these project are:
To make a comprehensive study the about the microfinance.
To know about the competition and challenges faced by the banks in order to survive in the market.
To know the future scope involved in Microfinance Industry.
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INTRODUCTION
India is the largest democratic country and one of the fastest growing economies in the world. It is the second most populous country after China, with 1.1 billion populations in 2007.
The improving economic conditions and steady rise in Gross Domestic Product (GDP) growth rate have put the country in the center of focu focuss in glob global al bu busi sine ness ss envi enviro ronm nmen ent. t. With With a hu huge ge po popu pula lati tion on and and an increasing number of the consuming class, the Indian economy was ranked among top 15 economies of the world. The agricultural growth coupled with steady expansion of industry and services contributed to a high GDP growth rate. It shows in the below:
In spite of these developments, nearly 400 million people lived on less than $1 a day in India in 2005. According to the data available for the year 2006, more than 35% of the population in India earned about less than a dollar a day. Nearly 70% of the total population lived in rural areas, while about 30% lived in urban areas in 2006. According to the government statistics, 70% of the poor (nearly 225 million) lived in the villages, with per 3
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capita consumption expenditure of Rs. 356 ($8.70) a month or Rs. 11.70 ($0.28) a day. The majority of rural poor were mainly involved in the agricultural activities employed by the local landowners. The others followed followed caste-orie caste-oriented nted occupation occupationss like priests, priests, carpenter carpenters, s, blacksmit blacksmiths, hs, barbers, weavers, potters, oil-pressers, leatherworkers, sweepers, etc. Thus, the incomes generated from such activities were far from ‘acceptable’.
The majority of the rural population was neither prosperous nor had enough security to approach formal financial institutions for its credit needs. It lacked access to formal financial intermediaries, including basic saving services. This created the need for microfinance, which meant any activity that provided financial services as credit, savings, and insurance to low income individuals with a goal of creating social value. The social goal included poverty alleviation and improving livelihood opportunities through the provision of capital for micro enterprise and insurance and savings.
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WHAT IS MICROFINANCE? Microf Microfina inance nce refer referss to the provis provision ion of financ financial ial servic services es to lowlowincome clients, including the self-employed. The term also refers to the practice of sustain ably delivering those services.
More broadly, it refers to a movement that envisions “a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers.”
Microfinance could be defined as the provision of a broad range of financial services such as deposits, loans, money transfers and insurance to the poor, low income households and micro-enterprises. Another definition of microfinance microfinance is the small scale financial financial services provided provided to the people people who work work in agricu agricultu lture, re, fishin fishing, g, herdin herding; g; who operat operatee small small or micro micro enterprises; who provides services; who work for wages or commission; and other individuals or groups at the local level of developing countries, both rural and urban. Financial services usually include credit and savings, but there are micro-finance institutions who provide additional services also, such as issue of cheques, drafts, guarantees etc. The Task Force constituted by NABRD defined micro-finance as ‘provision of thrift, credit and other financial services and products of very small amounts to the poor in rural and semi-urban or urban areas for enabling them to raise their income levels and in improving living standards.
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Improving the access of these bypassed people to financial services is one of the tools to improve their financial condition and also to enable them to contribute optimally to the overall economic development of the community.
The origins of institutionalizing micro-finance could be traced to the beginning of the cooperative movement in Germany. The famed Raiffeisen Societies were perhaps the first institutional structures which attempted to provide loans to the peasants for developing their businesses and freeing them from the money lenders who charged very high rates of interest. In Indi India, a, the the enac enactm tmen entt of the the coop cooper erat ativ ivee soci societ etie iess Act Act in 19 1904 04 was was the the beginning of micro-finance. The objectives of the enactment were the same which had led to the establishment of Raiffeisen Societies i.e. to provide credit to the farmers and combating the problems of usury and indebtedness to the villag villagee money money lender lenders. s. The urgenc urgency y to improv improvee agricu agricultu lture re and keeping in view the widespread poverty, oppression and ignorance, the state became increasingly involved in the financial markets. On the recommendation of the All India Rural Credit Survey Report, the State partnership in credit cooperatives started.
Over time, the Government’s involvement in the credit cooperatives increased and the credit cooperatives (by and large) ceased to be autonomous people’s institutions and are now seen more as a state instrument. The Government of India has also taken a number of steps to improve the flow of institutional credit to the small and marginal farmers (SMF) in particular and other rural population in general. The expansion of the branch network of the nationalized banks, establishment of the RRBs, 6
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the priority sector and other targets [agricultural loans, loans to weaker sections etc.] for commercial banks, the Differential Rate of interest scheme, programmes like IRDP, SGSY etc. were intended to improve the access of the rural people to credit and to improve their incomes. However, some of these, particularly the Differential interest rate lending the IRDP, SGSY etc. were more in the nature of poverty alleviation schemes and not so much for improv improving ing the access access of the byp bypass assed ed rural rural pop popula ulatio tion n to the financ financial ial services.
The expansion of the network of the banking system in the rural areas helped in bringing banking to the masses. The institutional credit which accounted for only 7% of the borrowings of the rural households in 1951-52 increased to 61.2% in 1981, but came down to 56.6% in 1991. Tanks to the efforts of the banking system, the agriculture credit flow during 2003-04 has reached a massive Rs. 80000 crore. The credit flow to the agriculture sector has been registering as decadel annual growth rate of around 14 to 15% which means the doubling of credit flow in about every five years or so. Inspite of these massive gains, it is believed that the formal sector only accounts for the tip of the iceberg of rural finance. A large part of the rural financial flows is transacted in the informal sector and remains unreported.
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DEFINITION OF MICROFINANCE
Microfinance refers to the provision of financial services to poor or low-income clients, including consumers and the self-employed. The term also refers to the practice of Sustainability delivering those services.
More broadly, it refers to a movement that envisions “a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers.
The Task Force on supportive Policy and Regulatory Framework for Microfinance created by NABARD suggests a working definition of microfinance as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or areas for enabling them to raise their income levels and improve living standards”.
As per one of the working groups of RBI “Microfinance refers to small saving, credit and insurance services extended to socially and econom economica icall disadv disadvant antage aged d segmen segments ts of societ society. y. In much much more more broade broader r context it include capacity building, training, marketing of products, establishing forward and backward linkage to micro-enterprise”
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Microcredit It is generally observed that that poor people do not have access to bank loans. Private money lenders charge very high interest rates. This makes it difficult difficult for poor people people to access funds funds for starting starting small small income income generation activities like sewing, buying buffalo, opening a tea stall or some other small shop. The microcredit summit, held in Washington DC (1997) define definess Microc Microcred redit it as, “exten “extendin ding g small small loans loans to poo poorr people people for for selfselfemployment project that generate income, allowing than to care for themselves and their families.” (Swaminathan, M., 2007) Microcredit caters the need of people for small loans. Microfinance includes support services along with the loan components. In Microcredit, more emphasis is placed on providing loans. Microfinance, thereby, open up channels for thrift, market assistance, techni technical cal assist assistanc ance, e, capaci capacity ty buildi building, ng, social social and cultur cultural al progra programme mmes. s. Thus, microfinance has an element of ‘Credit plus’ while microcredit is ‘only credit’.
NEED FOR EMERGENCE OF MICROFINANCE 9
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Most Mo st of the the coun countr trie iess in the the worl world d are are eith either er in the the cate catego gory ry of developing or underdeveloped economy. When compared with developed countries, developing and underdeveloped countries have more population and less resources.
In any economy, most of the day-to-day activities require money. Money is mandatory for education, wedding, health, etc. The financial needs of any human being can be divided into lifecycle, needs, personal emergencies, disasters, invest opportunities, etc.
Agri Agricu cult ltur uree is the the main main occu occupa pati tion on for for thos thosee in rura rurall area areas. s. Th Thee farmers have to invest money to buy seeds, fertilizers, land and various requirements for agriculture. But because of their financial crisis, they find it difficult to buy them. So they usually depend on moneylenders and other informal financial sources. The formal financial institutions do not much interest in lending to the rural poor. There are millions of them who are presently suffering from the high interest rates and debt overhang in the developing and underdeveloped countries.
There are two basic strategies that can help the poor to meet their needs. needs. The strategy of providing providing money money before before the need arises is known known as ‘Saving Up’. When a need arises, to fulfill the need, people borrow money. Later they save money to repay the loan. It is known as ‘Saving Down’.
The above fact has given rise to microfinance. This is purely based on the fact that poor can save, borrow or lend and even repay their debts. These 10
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findings have led to other great inventions like liquid-yields options. The fundamentals financial services, like savings, credit and insurance provide an opportunity to people to borrow, save, invest and protect against risks. Poor people require basic insurance option, saving services and realistic remittance systems to manage their assets and generate income. But with little income, they are unable to manage their lives and, moreover, they are not able to borrow money from banks. Hence, they tend to rely on informal financial financial institutio institutions, ns, like village village moneylende moneylenders, rs, pawn-brok pawn-brokers, ers, Rotating Rotating Savings Savings and Credit Credit Associatio Associations ns (ROCSAs) (ROCSAs),, Accumulati Accumulating ng Savings Savings and Credit Credit Associatio Associations ns (ACSAs), (ACSAs), savings savings collection collections, s, supply supply shops, shops, money money guards etc. which usually charge a high rate of interest on whatever is lent. In India India the apex apex financ financial ial instit instituti ution on which which provid providee micro microfin financ ancee are National Bank for Agriculture and Rural Development (NABARD), Commercial Banks, Small Industries Development Bank of India (SIDBI), Regional Rural Banks, Co-operative Banks, Non Banking Financial Companies (NBFCs), etc.
ORIGIN OF MICROFINANCE MICROFINANCE
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In order to reduce poverty, Bangladesh had introduced microfinance in the name of Grameen Bank in 1976. The major objects of this project was to facilitate and promote the standard of living of the poor by providing the thrift (savings), credit and other financial services such as microcredit, micro savings, micro insurance, etc. These institutions are financial nongovernmental organizations, financial cooperatives, etc. They provide small amounts of credit at reasonable interest rates. Although credit is an impo import rtan antt part part of micr microf ofin inan ance ce,, it is just just on onee of the the asso assort rted ed fina financ ncia iall services which help to improve the lives of poor across the world. These institutions help to spread the business in rural areas and stimulate the local economic growth.
NABARD was carved out of the Reserve bank of India in 1982; the apex financial institution for the development of the agriculture and rural areas areas was consta constantl ntly y challe challenge nged d to streng strengthe then n the rural rural credit credit delive delivery ry system so as to enable the rural poor to access small loans from financial institution. With perhaps one of the most impressive institutional infrastructures, this should not being difficult task, particularly given the fact that that most most of the banks banks were were gov govern ernmen ment-o t-owne wned. d. To supple supplemen mentt credit credit provision in the rural areas, Regional Rural Banks (RRBs) were established across the country in 1975, in addition to the already existing institutional infrastructure of the cooperative and land development banks. Coupled with statutory priority-sector lending obligations, the flow of finance to the rural poor under poor under this regime should not have been an issue.
MICROFINANCE MICROFINANCE SECTOR IN INDIA
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Microfinance has demonstrated the potential of building the social capital of the poorest communities. The Asian journey begins with India where the country’s first microfinance institution was set up in 1974, earlier than the famous Grameen Bank which was set up in 1976. However, the microfinance movement accelerated in the 1980s only. Like in other Asian countries the operation was through small loan to ‘Self Help Groups’ of women. From this small beginning, the microfinance sector grown significantly in the past decade and half. National bodies like the Small Industries Development Bank of India (SIDBI) and the National Bank for Agriculture and Rural Development (NABARD) are devoting significant time and financial resources on microfinance.
These points to the growing importance of the sector. The strength of the microfinance sector in India is the diversity of approaches and forms that have evolved over time. In addition to the home grown models of SHGs and Mutually Aided Cooperative Societies (MACS), the country has learnt from other microfinance experiments across the world, particularly Bangladesh, Indo Indone nesi sia, a, Th Thai aila land nd and and Boli Bolivi via, a, in term termss of deli delive very ry if micr microf ofin inan ance ce services. Indian organization can learn from the transformation experience of these microfinance initiatives.
WHAT IS EXCITING ABOUT INDIAN MICROFINANCE? 13
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A Task Force on Microfinance recognized in 1999 that microfinance is much more than microcredit, stating: "Provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban and or urban areas for enabling them to raise their income levels and improve living standards". The Self Help Group promoters emphasize that mobilizing savings is the first building block of financial services.
For many years, the national budget and other policy documents have almost equated microfinance with promoting SHG links to the banks. The central bank notification that lending to MFIs would count towards meeting the priority sector lending targets for Banks offered the first signs of policy flexibility towards MFIs. One could argue that MFIs are small and insignificant, so why bother. The larger point is about policy space for innovation and diversity of approaches to meet large unmet demand. The insurance sector was partially opened to private and foreign investments during 2000. Over 20 insurance companies are already active and experimen experimenting ting with new products, products, delivery delivery methodolog methodologies ies and strategic strategic partnerships.
Microf Microfina inance nce progra programm mmes es have have rapidl rapidly y expand expanded ed in recent recent years. years. Some examples are: Membership of Sa-Dhan (a leading association) has expanded from 43 to 96 Community Development Finance Institutions during 2001-04. During the same period, loans outstanding of these member MFIs have gone up from US$15 million to US$101 million.
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The CARE CASHE Programme took on the challenge of working with small NGO-MFIs and community owned-managed microfinance organi organisat sation ions. s. Outrea Outreach ch has expand expanded ed from from 39,000 39,000 to around around 300 300,00 ,000 0 wome women n memb member erss ov over er 20 2001 01-0 -05, 5, Many Many of the the 26 CASH CASHE E part partne ners rs and and another 136 community organisations these NGO-MFIs work with, represent the next level of emerging MFIs and some of these are already dealing with ICICI Bank and ABN Amro.
In additi addition on to the domina dominant nt SHG method methodolo ology, gy, the po portf rtfoli olios os of Grameen replicators have also grown dramatically. The outreach of SHARE Microfinance Limited, for instance, grew from 1,875 to 86,905 members between 2000 and 2005 and its loan portfolio has grown from US$0.47 million to US$40 million.
Since banks face substantial priority sector targets and microfinance is beginning to be recognized as a profitable opportunity (high risk adjusted returns), a variety of partnership models between banks and MFIs have been tested tested.. All variet varieties ies of banks banks - domest domestic ic and intern internati ationa onal, l, nation national al and regional - have become involved, and ICICI Bank has been at the forefront of some of the following innovations:
Lending wholesale loan funds.
Assessing and buying out microfinance debt (securitization).
Testing and rolling out specific retail products such as the Kissan (Farmer) Credit Card.
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Engaging microfinance institutions as agents, which are paid for loan origination and recovery, with loans being held on the books of banks.
Equity investments into newly emerging MFIs.
Banks and NGOs jointly promoting MFIs.
The 2005 national budget has further strengthened this policy perspective and the Finance Minister Mr P. Chidambram announced "Government intends to promote MFIs in a big way. The way forward, I believe, is to identify MFIs, classify and rate such institutions, and empower them to intermediate between the lending banks and the beneficiaries."
What is beginning to happen in microfinance can be seen from the perspective of what has happened to phones in India. With the right enabling environment, and intense competition amongst private sector players, mobile phones in India expanded by 160% during just one year 2003-04 (from 13 to 33 million). Mobile tariffs fell by 74% during the same period. While this is heady progress, there is a less heralded but even more powerful nationwide success on access. In the late eighties, the phone infrastructure was the monopoly of public sector institutions. Phones were difficult to get and even more difficult to use for those lacking ownership. Realization that users need not own a phone to access one led to privatization of the last mile - where a phone user could interface with a private sector provider using the public sector telecom infrastructure. Even with this policy change, today there are 2.5 million million entrepren entrepreneurs eurs selling selling local, local, national national and internati international onal phone services through the length and breadth of India. Many of these are now
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graduating to sell internet services and could potentially be banking agents that is the evolving story.
Savings services are needed by many more customers and as frequently as access to phone services. Many poor households value access to savi saving ngss serv servic ices es and and find find new new prov provid ider erss and and arra arrang ngem emen ents ts,, desp despit itee hearing of unreliable savings collectors or even occasionally falling prey to such arrangements. Many customers are rich, literate and lucky to have banks working for them. But many others lack access to safe, secure and accessible savings services for the short, medium and long terms. In the past, many many bank bankss sent sent coll collec ecto tors rs to gath gather er thes thesee savi saving ngss bu butt prob proble lems ms with with monitoring, inability to tackle misappropriation and the rising aspiration of collectors to become permanent staff of public sector banks killed a useful servic service. e. The centra centrall bank bank has strict strictly ly forbi forbidde dden n commer commercia ciall banks banks from from using agents in collection of savings services. This is unfortunate as:
Effective microfinance delivery is about managing transaction costs for providers and customers. A combination of agents and technology can play a powerful role in rightly aligning incentives for the collector and customers, while keeping transaction costs manageable for everyone.
The banks can only open so many branches, branches, and fixed fixed and operating operating costs are high, apart from approvals still needed from the central bank to open new branches or close existing ones. The appointment of agents can keep costs manageable and offer greater flexibility to Banks.
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Banking service may not be able to defy the commercial logic pursued by most most othe otherr sect sector orss wher wheree a vari variet ety y of reta retail iler erss prov provid idee serv servic ices es to custom customers ers,, while while compan companies ies focus focus on custom customer er needs, needs, produc productt design design,, quality control, branding, logistics and distribution.
Fortunately, the 2005 Budget opened a small window in this area and the central bank annual policy recently confirmed discussions on this: "As a follow-up to the Budget proposals, modalities for allowing banks to adopt the agency model by using the infrastructure of civil society organisations, rural kiosks and village knowledge centers for providing credit support to rural and farm sectors and appointment of micro-finance institutions (MFIs) as banking correspondents are being worked out." But readers may note that between the budget and the annual policy statement, "credit" has again crept in as the key perceived need .
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THE INDIAN CONCEPT
In India microfinance is generally understood, but not clearly defined. For instance, if an SHG gives a loan for an economic activity, it is seen as microfinance. But, if a commercial bank gives a similar loan, it is not likely to be treated as microfinance. In the Indian context there are some value attributes of microfinance.
Microfinance is an activity undertaken by the alternate sector (NGOs). Therefore, a loan given by a market intermediary to a small borrower is not seen as microfinance. However, when an NGO gives a similar loan it is treated as microfinance. It is assumed that microfinance is given with a laudable intention and has institutional and non exploitative connotations. Therefore, we define microfinance not by form but by the intent of the lender.
Microfinance is something done predominantly for the poor. Banks usually do not qualify to be MFOs because they do not predominantly cater to the poor. However, there is ambivalence about the Regional Rura Rurall Bank Bankss (RRB (RRBs) s) and and the the new new Lo Loca call Area Area Bank Bankss (LAB (LABs) s).. In normal course one would not ascribe the value attribute of an MFO to them. 19
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Microfinance grows out of development roots. This can be termed as the “alternative commercial sector”. MFOs classified under this head are promoted by the alternative sector and target the poor. However, these MFOs need not necessarily be “developmental” in the comm commer erci cial ally ly.. Here Here MFOs MFOs that that are are offs offsho hoot otss of NGOs NGOs and and run run commercially. There are commercial MFOs promoted by the people who have have develo developme pmenta ntall creden credentia tials. ls. We do not find find commer commercia ciall organisations having “microfinance business”.
The reserve bank of India (RBI) has defined microfinance by specifying criteria for exempting MFOs from its registration guidelines. This definition is limited to non-profit companies and only two MFOs in India qualify to be classified as microfinance companies.
Issue that trigger transformation We examine the five significant issues that trigger the transformation of NGOs into MFOs.
1. SIZE:-
The most significan significantt issue that triggers triggers a transform transformation ation is growth. growth. This affects the promoters as well as providers of microfinance. In organisation like Mysore Resettlement and Development Agency (MYRADA) and South Indian Federation of Fisherman Societies (SIFFS), which promoted credit
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groups, banks were unwilling to provide loan at the same pace at which microfinance customers needed them. It was nor easy for MYRADA or SIFFS to deal with the attitudes of people meaning in this organisations. In seve severa rall inst instan ance cess it was was an enth enthus usia iast stic ic bank bank mana manage gerr who who made made the the difference and this was not institutionalized. In such situation, NGOs tend to get get into into acti action on by op open enin ing g a micr microf ofin inan ance ce divi divisi sion on or by sett settin ing g up a separate MFO. The genesis of several Indian MFOs is rooted in the failure of banks to meet the needs of the poor.
2. Diversity:-
Another trigger for transformation is the diverse financial services that an MFO wants to offer. In most cases, NGOs start with credit but soon realize the need to provide other support services. While MFO reduced their own lending risks through group guarantees and addressed the issue of willful willful default, they have not been able to grapple with the situation situation where the underlying economic activity fails and the borrower faces a genuine problem.
3. Sustainability:-
Sustainability is closely linked to growth. Beyond a certain level, MFOs have to seek external funds for keeping the credit activity going. When MFOs seek funds from financial institutions, issues like ownership structure and capital adequacy become critical. For MFO to survive in long run, it has to transform itself into as institution with transparent system and acco accoun unta tabi bili lity ty.. In most most of case casess the the prom promot oter erss of MFOs MFOs do no nott have have sufficient capital to invest and, therefore, the main constraint is that they are dealing with “other people’s money”. NGOs have to clear-cut ownership 21
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structure, and making people liable under this format is a problem. The only option they have in order to be sustainable is to deal with mainstream institutions (Rhyne, 2000).
4. Focus:-
NGOs need to maintain focus on their original mandate. Undertaking microfinance is transaction intensive and requires distinct orientation and skills. For NGOs there is always a conflict between microfinance, which earns earns retur returns ns and, and, theref therefore ore,, “comm “commerc ercial ial”” and other other activi activitie tiess that that are “developmental”. This is the reason why NGOs spin off their own microfinance activities. The entity that emerges to carry out microfinance should be understood by the mainstream and, therefore, it should have an appropriate institutional form.
5. Taxation:-
When an NGO carries out commercial activities (microfinance) on a large scale, it is liable to lose its “tax free” status and is likely to jeopardize its other activities. Even grants may become taxable. This is a major concern for NGO-MFOs. This also triggers a search for an alternative source, where microfinance could be kept isolated.
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SELF HELP GROUP (SHG): SHG is unregistered group of less than twenty people (any structure of more than twenty has to be registered) from a homogeneous class who come together for addressing their common economic problems. They are encouraged to make voluntary savings on a regular basis. They use this savings to make interest-bearing loans to their members. This process i.e. saving, lending and recovering it back imbibes the essentials of financial intermediation including prioritization of needs, setting terms and conditions and keeping financial accounts. This helps in building financial discipline and more impotently credit history for themselves, as the money involved in landings is their own ‘warm money’, the lending is done very carefully and the entire money is recovered [zero tolerance default]. The group members also learn to handle larger suns of money which are much beyond their individual savings. This process also makes them to understand the basic principle of banking that money has a time value and is a scare scare resour resource. ce. The group groupss which which learn learn this this basic basic proves proves of saving savings, s, lending and recovering it back, are ready to be linked to the bank. Linking means access to larger resources as well as the security of their saving when they have surplus. The banks take the advantage of lending to the group and the group rakes the responsibility of prioritizing the loan demands from the 23
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members and fixing the terms and conditions of sanction. In other words, the bank bankss get get the the adva advant ntag agee of lend lendin ing g to thos thosee who who have have expe experi rien ence ce in borr bo rrow owin ing g and and repa repayi ying ng and and addi additi tion onal ally ly majo majorr part part of thei theirr cost costss of sanctioning, disbursing, monitoring and recovering are externalized. The bank bank’s ’s loan loan amou amount nt adds adds to the the smal smalll savi saving ngss whic which h the the grou group p had had accumulat accumulated ed and thereby thereby the availabili availability ty of resource resourcess increases. increases. The banks are able to lend at the normal commercial rate of interest; there are no subsidies and the money comes back. The peer pressure among the group of members ensures timely repayment as the group’s own accumulated savings are part and parcel of the aggregate loans made by the group to their members and there are other members waiting as to when their demands loan loan woul would d be prio priori riti tize zed d by the the SHG. SHG. Th Thee conv conven enti tion onal al coll collat ater eral al is substituted by more effective collateral [the peer pressure]. The crucial judgment of the banker is to assess when the SHG is ready for receiving bank loan and how much should be sanctioned. In the Pilot Project (1992), NABARD had suggested that the bank loan should be in multiple of the accumulated thrift of the SHG. The idea was not to exceed 1:4 and the suggestion was to start slowly by 1:1 or 1:2 and gradually increase. It was also suggested that the credit linkage was not to be done before six months of the members of the SHG doing regular thrift and the money so collected was used for lending among them and recovered. Many, particularly the non-bankers were unhappy with the ‘waiting period’ of six months. Fortunately, NABARD and the banks stuck to it and ensured that only mature SHGs were credit linked. The important features of the product developed under the SHG-Bank linkage Programme are as under:
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Groups of homogeneous people from similar economic background living in the neighborhood.
Focus on woman.
Saving first, credit later. Small fixed saving at regular interval. It helps in building up financial discipline.
Shorter repayment period.
Progress lending.
No subsidies.
The SHG deciding the quantum as also the terms as conditions for loans to members.
No subsidization of interest.
The linkages were in the two main areas:-
(1) Institution – linkage between the SHG and the Banks, directly or through the NGO or other self-help group promoting institutional (SHGPI). (2) Financial linkage between savings and credit (discussed earlier).
SHG Model
The strategy involved in this model is that of forming small, cohesive and participative group of the poor, encouraging them to pool their savings regularly and using the pooled savings to make small interest-bearing loans to members and, in the process, learning the nuances of financial discipline. Subsequently, bank credit also becomes available to the group to augment its
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resources for the purpose of lending to its members. The SHG-bank linkage program has proved to be the major supplementary credit delivery system with a wide acceptance by banks, NGOs and various government depa depart rtme ment nts. s. Th Ther eree are are thre threee mode models ls of SHGSHG-ba bank nk link linkag ages es that that have have evolved over time, especially in India.
Model 1: SHGs Formed and Financed by Bank:
In this model, the bank itself takes up the work of forming and nurturing the groups, opening their bank accounts and providing them with bank loans after satisfying itself regarding their maturity to absorb credit. Here, the bank acts as the Self-help Group Promoting Institution (SHGPI).
Model 2: SHGs Formed by NGOs and Formal Organisations, but Directly Financed by the Banks:
In this model, groups are formed by NGOs (in most cases) or by government agencies like Velugu project in AP. The groups are nurtured and trained by the agencies. The bank then provides credit directly to the SHGs after observing their operations and maturity absorb credit. While the bank provides loans to the groups directly, the facilitating agencies continue their interaction with the SHGs. The model has also been popular with and more acceptable to banks, especially in India, as most of the difficult functions of social dynamics are taken care of either by NGOs or government agencies. Around 75% of the total numbers of SHGs are financed under this model. 26
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Model 3: SHGs Financed by Banks Using NGOs and Other Agencies as Financial Intermediaries:
For various reasons, banks in some areas are not in a position even to finance SHGs promoted and nurtured by other agencies. In such cases, the NGOs act as both facilitators and microfinance intermediaries. First, they promote the groups, nurture and train them and then they approach banks for bulk loans for on-lending to SHGs. Of late, this model is becoming more popular with private sector banks in India as they are in a position to partly fulfill their social lending obligation by giving bulk loans to intermediaries (like NGO/MFI) for their onward lending to weaker sections.
Where the SHGPI was a NGO, the promoting institution also took upon itself the role of keeping an eye on the SHG, providing technical support in the matters of account keeping, holding of meetings, elections and training etc. besides the NGOs, the banks also started promoting the SHGs. In certai certain n areas, areas, the Pancha Panchayat yat Raj instit instituti utions ons or certai certain n gov govern ernmen mental tal organizations have also promoted SHGs.
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Microfinance
VARIOUS PLAYERS PROVIDING MICROFINANCE
The microcredit, which has its roots in 1970s, lost its momentum for a while. It achieved great deal in its progress by delivering financial services to the people of urban and nearby areas. But, it failed to reach the populated rural areas. Its other goal, i.e., eliminating the traditional moneylenders from the business has been achieved partly.
There are four major categories of microfinance-providers, who are engaged in the microfinance movement to achieve its goals. They are:
1. Informal Financial Service-Providers:Service-Providers:-
This category includes pawn-brokers, money lenders, ROSCAs, ACSAs savings collections, supply shops and money guards. These are very flexible and easy to access. But these services are costly and are in limited variety. There are high risks of losing money.
2. Member-owned Organizations:-
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This
Microfinance
category
includes
Self-Help
Groups
(SHGs),
financial
cooperatives and a variety of hybrid organizations like Financial Service Associations (FSA) and Self-managed Village Savings and Credit Associations (SVSCAs). Generally, theses are small, situated in local areas and have access to each other’s financial circumstances. Hence, these groups offer convenient and flexible services. They have low cost of operations and are managed by the poor. Simultaneously due to lack of awareness about financial services, poor are getting into trouble when they are in need of money to perform their daily activities. Hence, these member-owned organizations are playing vital role in the lives of poor.
3. NGOs:-
They play significant role in lending microfinance. They began their operat operation ionss by promo promotin ting g financ financial ial servic services es to the poo poorr and low-i low-inco ncome me households in rural areas of the developing countries. Recently, the RBI has permitted NGOs to merge with microfinance activities for the promotion of the External Commercial Borrowing (ECB) up to $5mn. Of late, the SIDBI has provided a need-based financial support to poor and assembled efficient and well-performing NGOs and microfinance institution in Orissa.
4. Formal Financial Institutions:-
This This catego category ry consis consists ts of commer commercia ciall Banks, Banks, statestate-own owned ed banks, banks, agricultural development banks, savings banks and NBFCs, which are wellregulated and supervised. They have branch network spread over nationally and internationally which offers a wide range of products. But, they have an expensive operation framework which enables them to serve the poor or remote population. 29
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Microfinance
So, to solve the microfinance problems, these institutions can bridge leverage through appropriate regulation and supervision. It helps the microfinance movement to achieve its goals rather quickly and effectively.
5. NABARD:-
NABARD should promote and ensure a rapid growth of microfinance sector in terms of formulating policies for good governance and transp transpare arency ncy,, superv supervisi ising ng with with benchm benchmark arks, s, facil facilita itatin ting g the maturi maturity ty in credit-rating norms and maintaining specific accounting and auditing norms, etc.
Various thrift services that are offered by every MFI should obtain a certificate of registration from NABARD and those who do not offer thrift servic services es are required required to file file their their return returnss with with Nabard Nabard.. There There are some limitations which require certification from Nabard if the MFIs are ready to accept the confines such as the general character of the management is not prejudicial to the interest of eligible clients; the act owned funds of the MFI is at least Rs. 5 Lakhs; the MFI has been in existence for at least three years etc. NABARD possesses the authority to revoke the registration, if an MFI which ceases the thrift services or fails to comply with any of the conditions on which the registration is granted or any direction issued by NABARD or does not tender account books or other documents for inspection. If an MFI disobey any prescribed provision, NABARD may also forbid such MFI from 30
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Microfinance
accept accepting ing thrift thrift servic services. es. Every Every MFI has to genera generate te a reserv reservee fund fund by allocating a minimum of 15% of its net profit or surplus realized out of saving services and microfinance services. This fund will be invested in some specified securities suggested by Nabard.
NBFCs play a vital role in distributing and using microfinance in India. India. Microf Microfina inance nce is offer offered ed throug through h two channe channels, ls, i.e., i.e., SHG Bank Bank Linkage and MFIs. About 70% of the loans distributed in the rural areas in India are through MFI channels. Few other important recommendations are pertaining to MFIs such as reducing the foreign equity requirement to $1 lakh lakh from from $5 lakh lakh,, tran transf sfer erri ring ng the the regu regula lati tion on of NBFC NBFC MFIs MFIs ov over er to NABARD and also to furnishing tax concessions of 40% of their profits if they work in exclusive districts as identified by NABARD.
The uniqueness of SGHs is to empower the poor to enable and control the direction on own development by categorizing their felt needs. These SGHs add a very significant dimension to microfinance. In 1992, NABARD gave stimulus to the movement by starting the SHG Bank linkage program. It was the first major effort to link the conventional financial institutions with the informal groups.
6. Microfinance in banks:-
Traditionally, banks incurred substantial cost in managing the client’s accounts. This is true irrespective of sum of money involved. Generally, poor people possess small amount of money. If banks decide to serve these peop people le,, thei theirr brea breakk-ev even en po poin ints ts in loan loanss and and depo deposi sits ts will will be affe affect cted ed seriously and they have to incur loss. But, with economic growth in rural 31
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Microfinance
areas through microfinance, banks are developing an interest in microfinance. In the case of ICICI bank, there has been a huge development in rural microfinance and agri-business loans within 9 months time and there is growth in financial turnover with an average of Rs. 5,200 cr to Rs. 10,000 cr. Microfinance shows its impact on the bank’s growth, customer relationsh relationship ip and accumulate accumulatess 3.2 million million low-incom low-incomee customers customers.. India’s India’s largest international bank, Standard Chartered Bank is planning to involve in microfinance to increase the Bank’s turnover from Rs. 100 cr to Rs. 500 cr. The ABN Amro Bank believes that microfinance is a powerful tool for addressing poverty, empower the socially-marginalized poor and strengthen the social fabric.
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Microfinance
THE CASE OF ICICI BANK
India's second largest commercial bank, the ICICI Bank, was quick to recognize the microfinance market as a profitable investment, and eagerly seized the opportunity to expand its business while improving the lives of poor people. It utilized two business models to expand its presence in India, viz., the bank-led model and the partnership model. The article discusses these unique models which helped the ICICI Bank extend credit directly to India's rural areas without investing much in initial developmental costs.
Since Since the concept was born in Bangladesh Bangladesh almost three decades ago, microfinance has proved its value, in many countries, as a weapon against pove po vert rty y and and hu hung nger er.. It real really ly can can chan change ge peop people le's 's live livess for for the the bett better er,, especially the lives of those who need it most. -
Kofi A Annan, Annan, the UN UN Secreta Secretary ry Genera Generall (Retired (Retired))
ICICI Bank, one of the largest private sector banks in India, ventured into microfinance in 2001, and within a short span of time, it achieved
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Microfinance
remarkable progress. The microfinance portfolio of the Bank grew from $16 mn to $6 mn (the average loan is $223) from 2001 to 2003. Adopting the partne partnersh rship ip model, model, it extend extended ed credit credit facili facilitie tiess direct directly ly to rural rural masses masses.. Information irregularity, irregularity, inability of poor people to offer collaterals and lack of details of credit history were the major challenges it faced. Apart from providing credit to rural people, it planned to develop various financial products like weather insurance, health insurance, remittance services and commodity derivatives. Despite these developments, the question that remains is whether the ICICI Bank will be able to sustain its success in the Indian microfinance sector as more and more entities have begun to jostle for a share in the burgeoning sector.
Hist Histor oric ical ally ly,, in Indi India, a, cred credit it give given n to the the po poor or was was view viewed ed as a government program which required large amounts of subsidy. The nationalization of banks initiated by the late Primer Minister Indira Gandhi in 1969 compelled commercial banks to open branches in rural areas. As a result, the share of banks in rural household debt increased to 29% in 1981. In spite of such developments, there was only a little progress towards providing the rural poor with access to formal credit as rural banks served rich rural borrowers who had access to bank accounts. In 1978, Integrated Rural Development Program (IRDP) was launched to alleviate India's rural poverty. The main objective of the program was to provide loans to needy rural households. A government evaluation, later in 1989, revealed that only a mere 28% of people assisted under IRDP crossed the poverty line, compared to 33% supported by private sector programs. Bureaucratic delivery systems with high transaction cost, unsuitable financial products for the poor and inefficient coordination of the program 34
T.Y.B.B.I.
Microfinance
were the major factors responsible for poor performance of the governmentassisted project.
During 1990s, following the liberalization of the Indian economy, the financial financial and banking banking system system witnessed witnessed major structura structurall changes changes and adjustments. The partial deregulation increased competition and led to the develo developme pment nt of a new approa approach ch to micro microfin financ ance. e. In 200 2002, 2, the averag averagee population served per commercial bank branch stood at 15,000, reflecting the deep root of the Indian financial system. Compared to other developing countries, India showed a strong outreach in terms of active borrowers per microfinance institution during 2005-2006.
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Microfinance
In India, organizations involved in microfinance can be divided into `Mainstream' and `Alternative' Microfinance institutions. The former include National Bank for Agriculture and Rural Development (NABARD), Small Indust Industria riall Develo Developm pment ent Bank Bank of India India (SIDBI (SIDBI), ), Housin Housing g Develo Developme pment nt Finance Finance Corporati Corporation on (HDFC), (HDFC), commercia commerciall banks, banks, Regional Regional Rural Banks (RRBs), and the credit cooperatives. On the other hand, the latter exist to fill the gap between demand and supply for microfinance. They comprise NonGovernment Organizations (NGOs) (which mainly focused on promoting Self-Help Groups (SHGs) and linking them with banks), cooperatives and non-banking finance companies.
But, But, the India Indian n microf microfina inance nce sector sector witnes witnessed sed strong strong links links with with informal local groups known as SHGs (promoted by NGOs); the term used for unregistered groups of 10 to 20 members involved primarily in saving
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Microfinance
and credit activities. The participating members save periodically in the group and these savings are lent out to the members who require loans at a fixed rate of interest. According to the industry experts, SHG-Bank Linkage is set to become India's dominant system of mass-outreach banking system for poor. Since 1990s, nearly 700,000 SHGs obtained more than Rs. 20 bn ($425 mn) as loans from banks.
The SHG-Bank Linkage Program, developed and managed by NABARD, was started in 1992 as a pilot project and was upgraded to a regular banking program in 1996. Experts opined that lower interest rates and high-level of liquidity with banks made the SHG-Bank Linkage program profitable for the banks. Besides, Nabard also created `Microfinance Deve Develo lopm pmen entt Fund Fund'' cont contri ribu bute ted d by the the Rese Reserv rvee Bank Bank of Indi India, a, whic which h expanded and attracted more banks to the microfinance sector.
ICICI Bank: Doorway to Microfinance:-
The ICICI Bank was promoted in 1994 as a wholly-owned subsidiary of ICICI limited (a development financial institution for providing mediumand long-term project financing to Indian businesses). In 2002, after the consideration of various corporate structuring alternatives, the ICICI Limited and and ICIC ICICII Bank Bank were were merg merged ed to crea create te lead leader ersh ship ip po posi siti tion on in Indi Indian an financial sector. It offered a wide range of commercial banking products and services to retail and corporate customers through a network of more than 37
T.Y.B.B.I.
Microfinance
950 branches and 3,300 ATMs in India and presence in 17 countries. At the end of March 2007, its total asset base was Rs. 3,446.58 bn ($79 bn). The ICICI Bank witnessed witnessed untapped untapped opportunitie opportunitiess in rural rural markets markets as 41% of adul adultt po popu pula lati tion on did did no nott have have acce access ss to form formal al bank bankin ing g faci facili liti ties es.. According to Nachiket Mor, Deputy Managing Director of the ICICI Bank, "The informal credit segment is about $82 bn." Instead of conventional branch banking model, the ICICI Bank adopted a different strategy to foray into rural markets in the country. In December 2000, it merged with Bank of Madura Madura (BoM). (BoM). BoM had a substantia substantiall network network of 77 branches in the rural areas of Tamil Nadu. The BoM developed a model and became an expert in catering to the needs of the small and medium sector with well-developed network of 1,200 SHGs. After the merger, the ICICI Bank started working on BoM model combining intermediary forms of organization to capitalize their strengths in rural markets.
Partnership Model:-
To ensure profitability, it adopted a three-tier business model to reach the rural poor by offering them microfinance products and services. Establishment of hierarchical structure ensured scalability of the operation. Thee top Th top po posi siti tion onss were were reta retain ined ed by the the empl employ oyee eess of the the bank bank.. Th Thee coordinator (usually an SHG) was asked to report to the project manager and supervise a group of 20 people for 12 months, upon which promoter would receive financial compensation from the bank. 38
T.Y.B.B.I.
Microfinance
For the implementation of the program, the ICICI Bank partnered with with sele select cted ed NGOs NGOs on a long long-t -ter erm m basi basis. s. Th Thee NGOs NGOs,, with with thei theirr past past experience in implementation of project, assisted the ICICI Bank to develop field organization for the promotion and management of SHGs. The ICICI Bank provided credit, savings and other services directly to the SHGs, apart from providing working capital assistance to the NGOs to meet the cost of promotion for the program.
With the implementation of such initiative, the microfinance portfolio of ICICI Bank grew at an impressive pace. The ICICI bank reached 8,000 39
T.Y.B.B.I.
Microfinance
SHGs in 2003 from just 1,000 SHGs in 2001, showing a high rate of growth in its its op oper erat atio ion. n. Th Thee expe expert rtis isee of BoM BoM help helped ed the the Bank Bank to exte extend nd its its products and services to more SHGs. The outstanding portfolio increased to Rs. 9.98 bn ($ 227 mn) from a level of Rs. 0.20 bn ($4.5 mn).
Towards Commercialization:Commercialization:-
Accord According ing to Nachik Nachiket et Mor, Mor, "Provi "Providin ding g enough enough financ financee does does not always always mean good economics, economics, which which demands demands that a poor farmer becomes becomes capable of articulating his financial needs. Financial needs arise out of economic activities that are sustainable. For this, the poor need not only capital, but also real services. We are in constant dialogue with the central bankin banking g author authority ity to improv improvee financ financial ial inclus inclusion ion.. The recent recent busine business ss correspondent rules—that are a perfect fit to our strategy—sell more than a 1,000 savings accounts each day."
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Microfinance
The ICICI Bank developed market-based approach whereby it targeted the extremely poor by providing them access to basic financial services. To provide basic financial services, it emphasized on the participat participation ion of mainstrea mainstream m organizat organizations ions to facilitate facilitate communit community-ba y-based sed institutions. It initiated development of community-based financial institutions. The Bank developed network organizations which could establish link between rural poor and large markets. These efforts helped them to attain minimum level of subsistence.
The ICICI Bank entered into a partnership with SHARE Microfinance Ltd. (SML), a microfinance institution, operating in rural areas of Andhra Prades Pradesh, h, to securi securitiz tizee microf microfina inance nce po portf rtfoli olios. os. The US-ba US-based sed Gramee Grameen n Foundation supplied collateral deposit of $325,000 for technical assistance. As per per the the agre agreem emen ent, t, the the ICIC ICICII Bank Bank pu purc rcha hase sed d a part part of SHAR SHARE' E'ss microfinance portfolio against consideration of $4.9 mn at Net Present Value
41
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Microfinance
(NPV) of receivables at an agreed discount rate. The interest payment was 4% less than that of commercial banks.
SHARE provided credit provision in the form of guarantee amounting to 8% of the the rece receiv ivab able less un unde derr the the po port rtfo foli lio o as a fixe fixed d depo deposi sit. t. Th This is arrangement helped SHARE to increase its lending. The ICICI Bank gained in terms of reaching to new markets and by trading high quality assets in capital markets to hedge its own risk. Janet MacKinley, Vice Chairperson of Grameen Foundation, said, "I believe it will encourage more of these types of transactions that can play a strategic role in making microfinance more widely available to the world's poorest communities."
The ICICI Bank started encouraging venture capitalists to scale up equity needs of the microfinance sector. Venture capitalists like Lok Capital and Aavishkar had shown their interest to identify and mentor entrepreneurs. The Bank entered into an agreement with these venture capitalists to provide financing to microfinance institutions and buy out the venture after a period of three to five years, once the operational sustainability was achieved. Apart from these initiatives, the Bank established the Center for Microfinance Resear Research ch (CMFR) (CMFR) at the Instit Institute ute for Financ Financial ial Manage Managemen mentt Resear Research ch (IFMR) in Chennai. It aimed at conducting research, research-based advocacy, training and strategy building activities in the field of microfinance.
Future Ahead
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Apart from regulatory issues, information irregularity was the biggest challenge faced by the ICICI Bank. Also, the inability of the poor people to offer collateral, details of their credit history and difficulty in evaluating the success potential of the enterprise were major concerns. The high cost of inte interm rmed edia iati tion on with with low low use use of tech techno nolo logy gy and and high high supe superv rvis isio ion n cost cost necessitated the Bank to implement innovative strategies. For instance, it established 200 rural branches, 1,500 credit access points and 5,000 kiosks. Apart from these, it has planned to expand its presence in more than 450 rural districts by 2008.
Thee ICIC Th ICICII Bank Bank has has plan planne ned d to offe offerr weat weathe herr insu insura ranc nce, e, heal health th insurance, remittance services and commodity derivatives services to make its presence felt by providing a wide range of financial services to the rural masses. Under weather insurance, it will launch index-based rainfall insurance product which compensates the farmer for loss in yield due to deficient rainfall.
For remittance services, it plans to establish fund transfer facility betw betwee een n urba urban n cent center erss and and vill villag ages es,, espe especi cial ally ly to cate caterr to the the migr migran antt popula pop ulatio tion. n. By develo developin ping g commod commodity ity deriva derivativ tives, es, it will will ensure ensure price price discovery and hedging against price risks by small farmers by participating in commodity exchanges with NGO and MFIs.
According to industry experts, commercial banks need to evaluate the sustainability of the SHGs as financial intermediaries and develop external appraisal system. 43
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Microfinance
CHALLENGES FOR MICROFINANCE MICROFINANCE Expanding access of the poor and near-poor to sustainable microf microfina inance nce is the greate greatest st challe challenge nge facing facing the micro microfin financ ancee indust industry. ry. Many microfinance stakeholders see provision of commercial microfinance as the way to achieve this goal. However, several challenges to microfinance commercialization exist at the micro (institutional) and macro (operational environment) levels. Below are a few of the most pressing challenges:
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Internal Constraints:Constraints:-
The most pervasive internal constraints to commercial microfinance is the perception problem. Because the microfinance market is not monopo monopoliz lized ed by microf microfina inance nce NGOs, NGOs, a big intern internal al challe challenge nge faced faced by potential players in the market (e.g., rural banks and cooperatives) is the lack of appreciation of the viability and sustainability of microfinance as a market niche. Both the rural banks and the credit cooperatives have long been in operation but have only been recently engaged in the microfinance business. The perception problem, however, is partially based on the lack of ability or flex flexib ibil ilit ity y of the the exis existi ting ng syst system emss of rura rurall bank bankss and and coop cooper erat ativ ives es to accommodate the unique features of microfinance technologies. Most other internal constraints faced by existing MFIs and potential new entrants have significant differences according to institutional type. The internal constraints in rural banks, cooperatives, and microfinance NGOs are examined below.
1. Rural Banks:-
Rural banks are ideally suited to the provision of commercial microfinance in that they are formal financial intermediaries run on a forprofit basis and have a wide client base over which to diversify risk. Rural banks are managed on a continuing continuing basis with the same staff. staff. This helps to keep information costs low when selecting micro- and small-scale borrowers and helps to build trust and confidence among clients who want to deposit small savings. These relations between customers and the bank, 45
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characterized by mutual trust, also attract some clients who could deposit with commercial banks.
Access to support services is also a constraint. The development of new microf microfina inance nce produc products ts and servic services, es, the train training ing of staff, staff, and the enforcement of effective auditing and control mechanisms are expensive. The costs involved are too high for a single rural bank.
2. Cooperatives:-
Unlike
rural
banks,
cooperatives
are
considered
semiformal
institutions; they are regulated and supervised by the CDA but this supervision is known to be weak. Lack of transparency has historically been a major difficulty in assessing cooperative performance. performance.
Cooperatives, like the rural banks, suffer from a lack of an effective network. Access by cooperatives to support services also remains weak.
3. Microfinance NGOs:-
With the growing scarcity of donor funds for microfinance on lending, most microfinance NGOs are now faced with the challenge of finding funds from commercial sources or from deposits of their member-clients. Because deposits are considered a cheaper source of funds than commercial loans, the inability of NGOs to mobilize deposits legally poses a significant internal chal challe leng nge. e. Lack Lack of lega legall iden identi tity ty stem stemmi ming ng from from weak weak owne owners rshi hip p and and governance structures poses the greatest challenge to microfinance NGOs in accessing funds to provide microfinance on a commercial basis. 46
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Commitment to balancing social and commercial objectives is also an import important ant intern internal al challe challenge nge faced faced by most most micro microfin financ ancee NGOs. NGOs. Most Most microfinance NGOs, therefore, remain small and weak and dependent on fresh infusions of subsidized funds for their survival. Related to constraints stemming from small size and weak capacity, many microfinance NGOs face face the the cons constr trai aint nt of po poor or acce access ss to appr approp opri riat atee syst system emss and and supp suppor ortt services.
Moreover inadequate management information systems and the lack of capacity to undertake market research as two major constraints curtailing their growth. Although computerization of systems has been identified as essential to the growth of MFIs, there still appears to be a supply problem in terms of affordable, commercially available, off-the-shelf software packages that suit the system and information requirements of MFIs.
Market research is a relatively new concern for most MFIs, prompted by increased client exit (heightened drop-out rates) and the desire to improve repayment repayment performance. performance. Given the strong strong recent recent interest interest in undertaki undertaking ng market research, the need to build this capacity in MFIs is great, especially in microfinance NGOs, which face limited funding to support their increased lending.
CONSTRAINTS IN THE OPERATING ENVIRONMENT
1. Threat of Policy Reversal:-
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The very convenient nature of direct credit provision by government makes it politically expedient and tempting for policymakers to revert to the previous policy of regulating interest rates and supporting directed credit programs. The challenge to prevent this lies not only with the Government but also with private sector MFIs. It is imperative for all types of MFIs to close ranks and advocate actively that the Government continue moving away from outright credit provision and focus its interventions where it has distinct comparative advantage.
2. Unclear
Regulation and Supervision Concerning Microfinance
Operations:Significant improvements have been made in the last few years by the Government in recognizing microfinance and adapting regulation and supervision to the specialized nature of microfinance operations. Until the rules of engagement of formal financial institutions in microfinance are complete, uncertainties regarding the final form of regulation and supervision of microfinance-oriented banks may curtail efforts by formal institutions to downscale their operations.
3. Inadequate Access to Commercial Sources of Funds:-
One One of the the cons conseq eque uenc nces es of no nott bein being g able able to mobi mobili lize ze depo deposi sits ts over ov ertl tly y is that that many many micr microf ofin inan ance ce NGOs NGOs rema remain in high highly ly depe depend nden entt on external funding, which has historically come from donors.
4. No Credit Information Bureau that Captures Microcredit Information:
With increasing microcredit provision by microfinance NGOs, rural banks, and cooperatives, creation of a credit bureau that captures microcredit 48
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information from these actors is becoming increasingly vital to the continued health of the industry.
5. Lack of Microfinance Training Centers:-
There is a variety of microfinance training programs. However, no “one-stop shop” yet exists for the provision of regularly scheduled, demanddriven, and affordable technical courses on microfinance program management and operation. CARD’s microfinance training center is perhaps the best known and most widely used, but it cannot be considered as a wholly professional training institution that would attract a wide variety of regular students from different types of MFIs. The institution that seems most suitable for offering additional microfinance training on a regular basis is Punla, provided that its management focuses on developing demanddriven courses suitable for a wide range of viable MFIs. To serve as the onestop shop to build the technical capacity that the industry needs for further professionalization and commercialization, Punla will need to shift its focus more toward serving the complex and varied needs of commercial microfinance providers.
FINDINGS
To go through this project:-
Masses in the country are unaware on has very little knowledge about Microfinance.
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People hardly know the difference between microfinance and microcredit.
People are not taking the help of microfinance institution in over to get finance.
Effo Effort rt made made by go gove vern rnme ment nt to incr increa ease se the the awar awaren enes esss abou aboutt the the microfinance is appreciable but along with government all the NGOs, corporate
should
assist
in
spreading
the
information
about
Microfinance from grass route level.
FUTURE OF MICROFINANCE MICROFINANCE
It has been clear for many years now that microfinance is becoming increasingly integrated in the much broader world of mainstream markets and financial systems. The aim for the future is the development of deep domestic financial markets with sound and healthy financial institutions that serve the majority of the poor population. Future sources of funds will be 50
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mainly mainly domest domestic ic saving savings, s, and the role role of financ financial ial interm intermedi ediari aries es is to provide critically important deposit services, recycling these savings into productive loans for the poor.
Recently the external NGOs having allowed to avail External Commercial Borrowings (ECBs) route the mobilizing their recourses. Severa Severall foreig foreign n instit instituti utiona onall and don donor or agenci agencies es are showin showing g inter interest est in lending money to MFI in India
CONCLUSION
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T.Y.B.B.I.
Microfinance
Indi Indiaa is land land of vill villag ages es.. Acco Accord rdin ing g to the the fath father er of the the nati nation on,, Mahatma Gandhi, India can globally be visible only when its rural sectors shine. He was the one to propagate the village and cottage sector so that rural economy can grow and become prosperous. But, all this is only on paper. Now the time come to restrict the entry of microfinance into urban sector to promote rural marks and provide better, speedy and affordable financing schemes. Infotech application in microfinance is laudable and with emerging computer and communication technologies, it can be made as simple tool for rural folks to adopt and availed the finance for the proposed project to make the rural economy a dream. So the rural economy can defi defini nite tely ly cont contri ribu bute te to the the grow growth th the the of nati nation onal al econ econom omy y with with the the adoption of mixing infotech with microfinance
Microfinance has come a long way despite doubts expressed and criticism launched about its viability, impact, and poverty fighting capacity. The pioneers in the field and the practioners at large with their commitment, determination, and innovations have not only demonstrated its power and success, but also accelerated its growth. The task of building a poverty-free world is yet to be finished. There are still over 1.2 billion people living in extreme poverty on this planet. They are not living in one country or region but spread all over the world.
Fortun Fortunate ately, ly, there there is an increa increasin sing g awaren awareness ess about about the power power of micr microf ofin inan ance ce,, and and the the need need to supp suppor ortt its its grow growth th.. Many Many play player erss have have committed themselves to its promotion. Governments are taking an increasing interest in it. More banks, both national and international are coming forward with different support packages. NGO-MFI partnerships are 52
T.Y.B.B.I.
Microfinance
on the increase. New instruments are being used to solve the problem of funding. It is expected that in the coming years more ideas, innovations, cost saving saving device devices, s, and player playerss will will contin continue ue to reinf reinforc orcee the microf microfina inance nce movement and increase its expansion.
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