1. Micro Finance:
An Emerging Concept In The Perspective Of The Indian Economy
In the post nationalization era the banking sector witnessed flow of substantial
amount of resources while the banking network underwent an expansion phase
without comparables in the world. Credit came to be recognized as a remedy for
many of the ills of the poverty. Credit packages and programmes were designed
based on the experience gained.
Microfinance is a general term to describe financial services to low-income
individuals or to those who do not have access to typical banking services.
Microfinance is also the idea that low-income individuals are capable of lifting
themselves out of poverty if given access to financial services. While some studies
indicate that microfinance can play a role in the battle against poverty, it is also
recognized that is not always the appropriate method, and that it should never be
seen as the only tool for ending poverty.
I. Overview
Microfinance: A CONCEPT
"Microfinance is the supply of loans, savings, and other basic financial services to
the poor."
As these financial services usually involve small amounts of money - small loans,
small savings, etc. - the term "microfinance" helps to differentiate these services
from those which formal banks provide.
Why are they small? Someone who doesn't have a lot of money isn't likely to want or
be able to take out a Rs.50,000 loan, or be able to open a savings account with an
opening balance of Rs.1,000.
It's easy to imagine poor people don't need financial services, but when you think
about it they are using these services already, although they might look a little
different.
"Poor people save all the time, although mostly in informal ways. They invest in
assets such as gold, jewelry, domestic animals, building materials, and things that
can be easily exchanged for cash. They may set aside corn from their harvest to sell
at a later date. They bury cash in the garden or stash it under the mattress. They
participate in informal savings groups where everyone contributes a small amount of
cash each day, week, or month, and is successively awarded the pot on a rotating
basis. Some of these groups allow members to borrow from the pot as well. The
poor also give their money to neighbors to hold or pay local cash collectors to keep it
safe.
However widely used, informal savings mechanisms have serious limitations. It is not
possible, for example, to cut a leg off a goat when the family suddenly needs a small
amount of cash. In-kind savings are subject to fluctuations in commodity prices,
destruction by insects, fire, thieves, or illness (in the case of livestock). Informal
rotating savings groups tend to be small and rotate limited amounts of money.
Moreover, these groups often require rigid amounts of money at set intervals and do
not react to changes in their members' ability to save. Perhaps most importantly, the
poor are more likely to lose their money through fraud or mismanagement in informal
savings arrangements than are depositors in formal financial institutions.
2. "The poor rarely access services through the formal financial sector. They address
their need for financial services through a variety of financial relationships, mostly
informal."
Different types of financial services providers for poor people have emerged - non-government
organizations (NGOs); cooperatives; community-based development
institutions like self-help groups and credit unions; commercial and state banks;
insurance and credit card companies; telecommunications and wire services; post
offices; and other points of sale - offering new possibilities.
These providers have increased their product offerings and improved their
methodologies and services over time, as poor people proved their ability to repay
loans, and their desire to save. In many institutions, there are multiple loan products
providing working capital for small businesses, larger loans for durable goods, loans
for children’s education and to cover emergencies. Safe, secure deposit services
have been particularly well received by poor clients, but in some countries NGO
microfinance institutions are not permitted to collect deposits.
II. History
Ideas relating to microcredit can be found at various times in modern history.
Jonathan Swift inspired the Irish Loan Funds of the 18th and 19th centuries. In the
mid-19th century, Individualist anarchist Lysander Spooner wrote about the benefits
of numerous small loans for entrepreneurial activities to the poor as a way to
alleviate poverty. Ideas relating to microcredit were mentioned in portions of the
Marshall Plan at the end of World War II.
The origins of microcredit in its current practical incarnation, with attention paid by
economists and politicians worldwide, can be linked to several organizations founded
in Bangladesh, especially the Grameen Bank in the 1970s and onward, for which its
founder Muhammad Yunus was awarded the Nobel Peace Prize in 2006.
III. Principles
Microcredit is based on a separate set of principles, which are distinguished from
general financing or credit.
Microcredit emphasizes building capacity of a micro-entrepreneur, employment
generation,trust building, and help to the micro-entrepreneur on initiation and during
difficult times.
Microcredit is a tool for socioeconomic development.
IV. Evolution Of Microfinance In India
The NABARD has successfully spearheaded the microfinance programme through
partnership with various stakeholders like non-governmental organisations
(NGOs),banks, cooperatives, etc, in the formal and informal sector, with support from
both the government of India (GOI) and the Reserve Bank of India (RBI) since the
early1990s. The SHG-bank linkage programme . The SHG-bank linkage
programme(BLP) was launched by NABARD as a pilot project in 1992 against the
backdrop of a huge banking structure unable to adequately address the microcredit
needs of the poor.
V. Strengths
1. Microfinance and Social Empowerment
The SHG-BLP itself has had a profound social impact. A number of studies
conducted on the effectiveness of the programme, have highlighted its impact on the
3. social empowerment process. Important findings with respect to the SHG
programme are:
o It has enabled households to spend much more on education than non-client
households. Families participating in the programme have reported better school
attendance and lower dropout rates.
o It has empowered women by enhancing their contribution to household income,
increasing the value of their assets and generally by giving them better control over
decisions that affect their lives.
o In certain areas, microfinance has reduced child mortality, improved maternal
health and the ability of the poor to combat disease through better nutrition, housing
and health – especially among women and children.
o It has contributed to reduced dependency on informal moneylenders and other
non-institutional lenders in rural areas.
2. Microfinance and Economic Growth
Economic growth requires many things—from relatively stable governments to
alleviation of poverty to the creation of a formal business sector to access to clean
water, education, and healthcare. Long term growth can be achieved by
1. Putting an emphasis placed on improving overall quality of life, Public goods are
missing from many of the small villages and poor slums in which microcredit is
extended. Lack of safe wells, paved roads, and so on, limits the growth that
successful and entrepreneurial microcredit borrowers can experience.
2. A focus on real businesses (which very possibly means not lending to the poorest
of the poor, but lending to the better off who can create real enterprises and employ
their less able neighbors) is necessary to create self-sustaining small companies,
and to make the push toward a formal sector. Because MFIs have maintained their
strong reputation and their ability to reach millions of people, they possess the
necessary qualities to bring change.
While projects of this caliber may sound too lofty, it is absolutely necessary to
consider using microfinance on a slightly larger, more innovative scale. There is no
accessible data to say that these types of projects in conjunction with MFIs have
been tested or tried, therefore it cannot be stated that microfinance used in other
ways would not lead to more successful, and developed towns, villages and cities.
Because microfinance is still a relatively new idea, MFIs are not eager to switch
practices. But there are some changes that need to take place...
VI. Microfinance Providers
Microfinance Institutions
A microfinance institution (MFI) is an organization that provides microfinance
services. MFIs range from small non-profit organizations to large commercial banks.
Historical context can help explain how specialized MFIs developed over the last few
decades. Between the 1950s and 1970s, governments and donors focused on
providing subsidized agricultural credit to small and marginal farmers, in hopes of
raising productivity and incomes. During the 1980s, micro-enterprise credit
concentrated on providing loans to poor women to invest in tiny businesses, enabling
them to accumulate assets and raise household income and welfare. These
experiments resulted in the emergence of nongovernmental organizations (NGOs)
that provided financial services for the poor. In the 1990s, many of these institutions
4. transformed themselves into formal financial institutions in order to access and on-lend
client savings, thus enhancing their outreach.
NABARD
Established by NABARD in accordance with the provisions of the NABARD Act,
1981, the Research and Development Fund aims at acquiring new insights into the
problems of agriculture and rural development through in depth studies and applied
research and trying out innovative approaches backed up by technical and economic
studies. The R&D Fund is utilized for the formulating policies on matters of
importance to agricultural operations and rural development.
REGULATORY FUNCTIONS:
1. The Banking Regulation Act , 1949empowers NABARD to undertake inspection of
the RRBs and Co-operative banks .
2. Any RRB or Co-operative banks taking permission from RBI for opening new
branches will have to obtain recommendation of NABARD.
3. RRBs and Co –operative are required to file returns and documents with the
NABARD.
It has been entrusted with the statutory responsibility of the conducting responsibility
of con
Ducting inspections of the State Cooperatives Banks, District Central Cooperative
Banks and regional Rural Banks under the provisions of The Banking Regulation Act
, 1949. In addition it conducts periodic inspections of state level co-operative
institutions on the voluntary basis.
SUPERVISORY FUNCTIONS:
NABARD is an apex involved in refinancing credit needs of major financial
institutions in the country engaged in the offering Financial assistance to agriculture
and rural development operations and programmes , is undertaking and sharing with
the RBI certain supervisory functions in respect of Co-operative banks and regional
rural banks such as :
1. Inspection of RRBs and Co-operative Banks under the provisions of The Banking
Regulation Act , 1949.
2. Inspection of State Cooperative Agriculture and Rural Development banks and
apex non-credit cooperative societies on a voluntary basis.
3. Portfolio inspections , system study and off-site surveillance of Co-operative
Banks and RRBs.
4. Recommendations to RBI on opening of new branches by State Cooperative
Banks and RRBs.
5. Administering the Credit Monitoring Arrangements in the State Cooperative
Banks, District Central banks.
The day to day functioning of the the supervised banks is being monitored through
various statutory returns prescribed by the RBI/NABARD including OSS returns.
VII. The SHG system
The launching of pilot phase of SHG programme in February 1992 was a landmark
development in banking with poor. SHG informal thrift and credit groups of poor
came to be recognized as the bank clients under the Pilot phase.
According to NABARD, almost 3 million SHGs have linked to nearly 500 banks since
5. the program started, reaching over 11 million households across.
The members form a group of around twenty members. The group formation process
may be facilitated by an NGO or by the MFI or bank itself, or it may evolve from a
traditional rotating savings and credit group (ROSCA) or other locally initiated
grouping. The process of formal ‘linkage’ to an MFI or bank usually goes through the
following stages, which may be spread over many years or which may take place
within a few months
.• The SHG members decide to make regular savings contributions. These may be
kept by their elected head, in cash, or in kind, or they may be banked.
• The members start to borrow individually from the SHG, for purposes, on terms and
at interest rates decided by the group themselves.
• The SHG opens a savings account, in the group’s name, with the bank or MFI, for
such funds as may not be needed by members, or in order to qualify for a loan from
the bank.
• The bank or MFI makes a loan to the SHG, in the name of the Group, which is then
used by the Group to supplement its own funds for on-lending to it members.
The SHG need never go through all these stages; it may satisfy its members’ needs
quite effectively if it only goes to the second or even to the first stage, saving money
and possibly not even withdrawing it .
The SHG carries out all the same functions as those required by the Grameen
system, but they do this on their own behalf, since the SHG is effectively a micro-bank,
carrying out all the familiar intermediation tasks of savings mobilisation and
lending. The MFI or bank may assist the SHG in record keeping, and they may also
demand to know who are the members and impose certain conditions as to the uses
of the loan which they make to the SHG, but the SHG is an autonomous financial
institution in its own right.
The SHG system is mainly found in India, where it is used by both MFIs and banks.
There also some important users in Indonesia, parts of South East Asia, Africa and
elsewhere. The SHG system in India was initiated by NGOs, and is used for financial
intermediation both by commercial banks and by MFIs.
Financing Strategies
Commercial banks, regional rural banks (RRBs) and cooperative banks primarily
fund the SHG-Bank Linkage Programme, and NABARD in turn re-finances them.
Credit lines to SHGs are critically limited, as they are based on a certain multiple of
SHG members' savings accounts within banks. While the cumulative savings of
SHGs could serve as a low-cost source of funds for onlending, their potential is
limited by the lack of aggregated savings across SHGs. Commercial equity
investments are not available to for SHGs due to their informal status
Illusive socio-economic impacts
SHGs form a critical link for poor women to access a variety of financial services.
They are effective platforms for women to participate in politics through awareness
campaigns and community action. SHGs have also emerged as "last mile" channels
for government to distribute financial benefits and for corporations to retail their
products through member-entrepreneurs. Even so, questions remain about the
ability of SHGs to attain a primary objective - economic empowerment of poor
women.
6. the program started, reaching over 11 million households across.
The members form a group of around twenty members. The group formation process
may be facilitated by an NGO or by the MFI or bank itself, or it may evolve from a
traditional rotating savings and credit group (ROSCA) or other locally initiated
grouping. The process of formal ‘linkage’ to an MFI or bank usually goes through the
following stages, which may be spread over many years or which may take place
within a few months
.• The SHG members decide to make regular savings contributions. These may be
kept by their elected head, in cash, or in kind, or they may be banked.
• The members start to borrow individually from the SHG, for purposes, on terms and
at interest rates decided by the group themselves.
• The SHG opens a savings account, in the group’s name, with the bank or MFI, for
such funds as may not be needed by members, or in order to qualify for a loan from
the bank.
• The bank or MFI makes a loan to the SHG, in the name of the Group, which is then
used by the Group to supplement its own funds for on-lending to it members.
The SHG need never go through all these stages; it may satisfy its members’ needs
quite effectively if it only goes to the second or even to the first stage, saving money
and possibly not even withdrawing it .
The SHG carries out all the same functions as those required by the Grameen
system, but they do this on their own behalf, since the SHG is effectively a micro-bank,
carrying out all the familiar intermediation tasks of savings mobilisation and
lending. The MFI or bank may assist the SHG in record keeping, and they may also
demand to know who are the members and impose certain conditions as to the uses
of the loan which they make to the SHG, but the SHG is an autonomous financial
institution in its own right.
The SHG system is mainly found in India, where it is used by both MFIs and banks.
There also some important users in Indonesia, parts of South East Asia, Africa and
elsewhere. The SHG system in India was initiated by NGOs, and is used for financial
intermediation both by commercial banks and by MFIs.
Financing Strategies
Commercial banks, regional rural banks (RRBs) and cooperative banks primarily
fund the SHG-Bank Linkage Programme, and NABARD in turn re-finances them.
Credit lines to SHGs are critically limited, as they are based on a certain multiple of
SHG members' savings accounts within banks. While the cumulative savings of
SHGs could serve as a low-cost source of funds for onlending, their potential is
limited by the lack of aggregated savings across SHGs. Commercial equity
investments are not available to for SHGs due to their informal status
Illusive socio-economic impacts
SHGs form a critical link for poor women to access a variety of financial services.
They are effective platforms for women to participate in politics through awareness
campaigns and community action. SHGs have also emerged as "last mile" channels
for government to distribute financial benefits and for corporations to retail their
products through member-entrepreneurs. Even so, questions remain about the
ability of SHGs to attain a primary objective - economic empowerment of poor
women.
