MICROFINANCE IN INDIAAuthor: Deepak Tiwari Author: Ravichandra.GStudent, 2nd Semester, MBA Student, 2nd Semester, MBASir M. Visvesvaraya Institute of Technology Sir M. Visvesvaraya Institute of TechnologyBangalore BangaloreCell number: 9379298455 Cell number: 9886747490Email ID: email@example.com Email ID:firstname.lastname@example.orgAbstract:In the Indian subcontinent terms like "small and marginal farmers", " rural artisans" and"economically weaker sections" have been used to broadly define micro-finance customers.The recent Task Force on Micro Finance has defined it as "provision of thrift, credit and otherfinancial services and products of very small amounts to the poor in rural, semi urban or urbanareas, for enabling them to raise their income levels and improve living standards". Womenconstitute a vast majority of users of micro-credit and savings services.Indias GDP ranks among the top 15 economies of the world. However, around 300 millionpeople or about 60 million households, are living below the poverty line. It is further estimatedthat of these households, only about 20 percent have access to credit from the formal sector.A group of micro-finance practitioners estimated the annualized credit usage of all poor familiesSat over Rs 45,000 crores, of which some 80 percent is met by informal sources. This figure hasbeen extrapolated using the numbers of rural and urban poor households and their average annual
credit usage assessed through various micro studies.Credit on reasonable terms to the poor can bring about a significant reduction in poverty. It iswith this hypothesis; micro credit assumes significance in the Indian context. There are about 60million households below or just above the austerely defined poverty line and with more than 80percent unable to access credit at reasonable rate. With globalization and liberalization of theeconomy, opportunities for the unskilled and the illiterate are not increasing fast enough, ascompared to the rest of the economy. This is leading to a lopsided growth in the economy thusincreasing the gap between the haves and have-nots. It is in this context, the institutions involvedin micro finance have a significant role to play to reduce this disparity and lead to more equitablegrowth.IntroductionMicroﬁnance sector has covered a long journey from micro savings to micro credit and then tomicro enterprises and now entered the ﬁeld of micro insurance, micro remittance, micro pensionand micro livelihood. This gradual and evolutionary growth process has given a great boost tothe rural poor in India to reach reasonable economic, social and cultural empowerment, leadingto better life of participating households. Microﬁnance has registered an impressive expansion atthe grass root level.The year 2008-09 is the third year that the data on progress in Microﬁnance sector have beenpresented on the basis of returns furnished directly to NABARD by Commercial Banks (CBs),Regional Rural Banks (RRBs) and Cooperative Banks operating in the country. The data
includes the information related to savings of Self Help Groups (SHGs) with banks as on 31March 2009, loans disbursed by banks to SHGs during the year 2008-09 and outstanding loans ofSHGs with the banking system and the details of Non-Performing Assets (NPAs) and recoverypercentage in respect of bank loans provided to SHGs as on 31 March 2009.The banks operating, presently, in the formal ﬁnancial system comprises of Public SectorCommercial Banks (27), Private Sector Commercial Banks (28), Regional Rural Banks (86),State Cooperative Banks (31) and District Central Cooperative Banks (371).NABARD has also been instrumental in facilitating various activities under Microﬁnance sector,involving all possible partners in the arena.Demand of Micro Finance Services in IndiaDue to its large size and population of around 1000 million, Indias GDP ranks among the top 15economies of the world. However, around 300 million people or about 60 million households,are living below the poverty line. Only about 20 percent have access to credit from the formalsector.A group of micro-finance practitioners estimated the annualized credit usage of all poor families(rural and urban) at over Rs 45,000 crores, of which some 80 percent is met by informal sources.This figure has been extrapolated using the numbers of rural and urban poor households and theiraverage annual credit usage (Rs 6000 and Rs 9000 pa respectively) assessed through variousmicro studies.
Credit on reasonable terms to the poor can bring about a significant reduction in poverty. It iswith this hypothesis; micro credit assumes significance in the Indian context. With about 60million households below or just above the austerely defined poverty line and with more than 80percent unable to access credit at reasonable rates, it is obvious that there are certain issues andproblems, which have prevented the reach of micro finance to the needy.With globalization and liberalization of the economy, opportunities for the unskilled and theilliterate are not increasing fast enough, as compared to the rest of the economy. This is leadingto a lopsided growth in the economy thus increasing the gap between the haves and have-nots. Itis in this context, the institutions involved in micro finance have a significant role to play toreduce this disparity and lead to more equitable growth and the status of microfinance in India isas shown in the table below: SOURCE: NABARD
Demand for CreditIn terms of demand for micro-credit, there are three segments and at the very bottom in terms ofincome and assets, and most numerous, are those who are landless and are engaged inagricultural work on a seasonal basis, and manual laborers in forestry, mining, householdindustries, construction and transport.The next market segment is small and marginal farmers and rural artisans, weavers and thoseself-employed in the urban informal sector as hawkers, vendors, and workers in householdmicro-enterprises. This segment mainly needs credit for working capital.The third market segment is of small and medium farmers who have gone in for commercialcrops such as surplus paddy and wheat, cotton, groundnut, and others engaged in dairying,poultry, fishery, etc.Self Help GroupsMicrofinance has evolved over the past quarter century across India into various operating formsand to a varying degree of success. One such form of microfinance has been the development ofthe self-help movement. Based on the concept of “self-help,” small groups of women haveformed into groups of ten to twenty and operate a savings-first business model whereby themember’s savings are used to fund loans. The results from these self-help groups (SHGs) arepromising as it is proving to be an effective method of poverty reduction.
SOURCE: NABARDThe SHG Model and StructureA SHG is a group of about 10 to 20 people, usually women, from a similar class and region, whocome together to form savings and credit organization. They pooled financial resources to makesmall interest bearing loans to their members.
SHG FederationSHGs have also federated into larger organizations. In Figure 1, a graphic illustration is shownof a SHG Federation. Depending on geography, several clusters or VOs come together to forman apex body or an SHG Federation. In Andhra Pradesh, the Village Organizations, SHGClusters and SHG Federations are registered under the Mutually Aided Co-operative Society(MACS) Act 1995.SHG Federations resulted in several key benefits including: • Stronger political and advocacy capabilities • Sharing of knowledge and experiences • Economies of scale • Access to greater capital
The State of SHGs in IndiaBefore evaluating their impact and determine support solutions, it is important to examine thecurrent state of SHGs in India today. And, it is certainly a mixed picture.SHGs – Micro Finance Institutions (MFI)-Bank LinkageMicro Finance Institutions (MFIs) are playing an important role of financial intermediaries inmicrofinance sector. The MFIs operate under various legal forms viz., NGO MFIs – Registered under Societies Registration Act, 1860 and / or Indian Trust Act, 1880 Cooperative MFIs – Registered under State Cooperative Societies Act or Mutually Aided Cooperative Societies Act (MACS) or Multi- State Coop. Societies Act, 2002 NBFC MFIs under Section 25 of Companies Act, 1956 (Not for profit) NBFC MFIs incorporated under Companies Act, 1956 & registered with RBIThe progress under SHG-MFI-bank Linkage program for the years 2007-08 and 2008-09 isgiven below:SOURCE: NABARD
Financial Support and Promotional Efforts by NABARD1. NABARD Refinance Support to BanksNABARD provides refinance support to banks to the extent of 100% of the bank loans disbursedto SHGs. The total refinance disbursed to banks against banks’ loans to SHGs during the year2008-09 was Rs. 2620.03 crore as against Rs. 1615.50 crore during the year 2007-08 registeringa growth rate of 62.2 %. Further, the cumulative refinance disbursed under SHGs bank linkageProgram by NABARD to Banks up to 31 March 2009 stood at Rs.9688.09 crore.2. Promotional Support - SHG-Bank Linkage(i) Micro Finance Development and Equity Fund (MFDEF)During the financial year 2000-01, there was a creation of a Micro Finance Development Fund(MFDF) with initial contribution of Rs.100 crore, to be funded by Reserve Bank of India andNABARD (Rs.40 crore each) and the balance Rs.20 crore to be contributed by commercialbanks. The objective of MFDEF is to facilitate and support the orderly growth of themicrofinance sector through diverse modalities for enlarging the flow of financial services to thepoor, particularly for women and vulnerable sections of society consistent with sustainability.
(ii) Training and Capacity buildingNABARD continued to organize training programs to enhance their effectiveness in the field ofmicrofinance. Training supplements and materials were supplied to banks and other agencies.Best practices and innovations of partner agencies were widely circulated among governmentagencies, banks and NGOs. During the year 2008-09, fund support of Rs. 6.10 crore wasprovided for capacity building, exposure and awareness-building as against Rs. 6.24 crore during2007-08. The cumulative fund support for the purpose as on 31 March 2009 stood at Rs. 35.09crore. During the year, 6,278 training/ capacity building programs were conducted covering2,83,998 participants.(iii) Micro Enterprise Development Program (MEDP) for skill DevelopmentIt is tailor-made and focused on skill building training program. The duration of trainingprogram ranged between 3 to 13 days. A training budget of Rs.30,000/- per program isearmarked for imparting training to 30 participants up to 13 days. During 2008-09, a total 879Micro Enterprise Development Programs (MEDPs), both under Farm and Non – farm activities,were conducted across the country.(iv) Grant Support to Partner Agencies for Promotion and Nurturing of SHGsNABARD has been instrumental in the formation and nurturing of quality SHGs by means ofpromotional grant support to NGOs, RRBs, DCCBs, Farmers’ Clubs and Individual RuralVolunteers and by facilitating capacity building of various partners, which has brought excellent
results in the promotion and credit linkage of SHGs. Further, the number of partner institutionsfunctioning as Self-Help Promoting Institutions (SHPIs) over the years has increased to 2592.Further, the grant to various partners under the SHG-BANK linkage program is as given below:SOURCE: NABARD(v) Pilot Project on SHG-Post Office Linkage ProgramThe Pilot Project for SHG-Post Office Linkage program was initially launched in 5 selectdistricts of Tamil Nadu, with the objective of examining the feasibility of utilizing the vastnetwork of Post Offices in rural areas in disbursement of credit to rural poor, through SHGs. Theprogress under the project has been encouraging. As on 31 March 2009, 2,835 SHGs haveopened zero interest savings accounts with select Post Offices in Tamil Nadu and 889 SHGshave been credit linked with loan amounting to Rs 213.11 lakh.(vi) Support to Activity-Based Groups (ABG) and SHG Federation.NABARD introduced a scheme for supporting small-scale activity-based groups where incapacity building, production and investment credit and market-related support would be
extended. The scheme focuses on forming and nurturing groups engaged in similar economicactivities, such as farmers, handloom weavers, craftsmen, fishermen, etc., to improve efficiencyof their production and realize better terms from the market through economies of aggregationand scale and the Progress of savings of SHG with banks is as given below in the following tableSOURCE: NABARD
The Problems Associated with Mainstream MFIsThe mainstream financial institutions are flush with funds and have access to enormous amountsof low cost savings deposits. While banks are physically present in rural areas and offerconcessional interest rates, rural producers are not able to access, with the result that the rest ofthe deposits are finding their way into the financial sector. Some of the main reasons for theabove are:1. Borrower Unfriendly Products and Procedures2. Inflexibility and Delay3. High Transaction Costs, both Legitimate and Illegal4. Social Obligation and not a Business Opportunity5. Financing to Alternative MFIsNABARD Act does not permit them to refinance any private sector FI and do any directfinancing (NABARDs direct lending to micro-finance NGOs so far has been out of donorfunds), similarly SIDBI Act restricts it from extending loans to the agricultural and allied sectors,whereas many of members of the self help groups are engaged in such activities.
6. Complexity in Legal and Regulatory Framework1. The policymakers feel that poor cannot save, they are unwilling to repay the loans, and theadministrative costs of servicing them are high.2. The Regional Rural Banks Act does not permit any private share holding in any RRBs, and theCooperative Act of all states do not permit district level co-operative banks to be set up exceptby the state government.Problems for Alternative Micro-Finance InstitutionsThe alternative finance institutions have not been fully successful in reaching the needy. Thereare many reasons for this:1. Financial problems leading to setting up of inappropriate legal structures2. Lack of commercial orientation3. Lack of proper governance and accountability4. Isolated and scattered(i). Inappropriate Legal FormsIf an MFI opts to become an NGO, it has the following problems:1.The major source of funds of NGOs are grants, which are very limited.
2. If the NGOs earn a substantial part of their income from lending activity, they violate section11(4) of the Income Tax Act and can lose their charitable status under Section-12.3. NGOs do not have the appropriate financial structure for carrying out micro financeActivities.4. The minimum entry-level capital requirements is Rs 2 Crores, as started from April 1999.5. It is difficult to mobilise any borrowings from Indian Financial Institutions due to the negativeimage of NBFCs in general.6. RBI’s requirement of at least two credit ratings in the context of loan takers from foreigninstitutions.(ii). Lack of Commercial OrientationSince credit is available at low cost with subsidies and grants, most of the alternate MFIsachieve a lot of success in their programs in the initial period, but they fail to maintainconsistency because of lack of commercial orientation thus making it unsustainable.(iii). Lack of Proper Governance and Accountability(iv). Isolated and Scattered
ConclusionAfter the pioneering efforts of the last ten years, the microfinance scene in India has reached atakeoff point. With some effort substantial progress can be made in taking MFIs to the next orbitof significance and sustainability. This needs innovative and forward-looking policies, based onthe ground realities of successful MFIs. This, combined with a commercial approach from theMFIs in making microfinance financially sustainable, will make this sector vibrant and helpachieve its singleminded mission of providing financial services to the poor.RecommendationsThe Committee examined the structure and nature of operations of MFIs and took into accountthe proposed provisions of the MFI legislation which is under consideration of the GoI. Keepingin view the above aspects, the Committee makes the following recommendations :1.Greater legitimacy, accountability and transparency in MFIs.2. There is a need to recognize a separate category of Microfinance – Non Banking FinanceCompanies (MF–NBFCs), without any relaxation on start-up capital and subject to the regulatoryprescriptions applicable for NBFCs.
3. It should be specified that at least 80% of the assets of MF-NBFCs should be in the form ofmicrocredit of upto Rs. 50,000 for agriculture, allied and non farm activities and in case ofhousing, loans upto Rs. 1,50,000, per individual borrower.Other Recommendations:1.MF-NBFCs as Business Correpondents (BCs) for a local feel.2. Relaxation in FIPB guidelinesCurrent guidelines used by FIPB (Foreign Investment Promotion Board) require a minimum ofUS$ 500,000 equity investment from a foreign entity. The Committee is of the view that theminimum amount of foreign equity for MF-NBFCs may be reduced to a level of US$ 100,000.To facilitate raising Indian equity, NABARD may extend equity support out of its MFDEF tosuch MF-NBFCs based on objective rating / criteria.To further facilitate raising India equity, the SEBI Venture Capital Guidelines may permitVenture Capital Funds to invest in MF-NBFCs.
3.Tax ConcessionsMF-NBFCs may be allowed, like Housing Finance Companies and Infrastructure Companies,tax concessions to the extent of 40% of their profits, as a proportion to their business portfolio inexcluded districts as identified by NABARD without attracting tax.4.MF-NBFCs as microinsurance agentsTo enable MF-NBFCs to offer risk mitigation services to the poor, the Committee recommendsthat the IRDA Microinsurance Guidelines, 2005 may permit MF-NBFCs to offer microinsuranceservices as agents of regulated life and non-life insurance companies.5.Code of conductA voluntary mutual code of conduct has been prepared by some MFIs covering aspects includingmission, governance, transparency, interest rates, handling of customer grievances, staff conduct,recovery practices, etc.6.Accounting and Disclosure NormsThe Institute of Chartered Accountants of India (ICAI) may be involved in formulatingappropriate accounting and disclosure norms for MFIs, so that they can generate confidence.
The cost of funds for MFIs, their operating costs, risk premium, etc., have to be studied for abetter understanding of viable and economic rates of interest that can be charged by them.7.Unifying regulatory oversightAt present, all the regulatory aspects of microfinance are not centralized. The Committee feelsthat RBI may consider bringing all regulatory aspects of microfinance under a single mechanism.Further, supervision of MF-NBFCs could be delegated to NABARD by RBI.References:www.basixindia.comwww.nabard.orgwww.rbi.org.inwww. microcapitalmonitor.comwww.microfinanceinfo.com