Methods of microfinance


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Methods of microfinance

  1. 1. Methods Of Micro FinanceMethods Of Micro Finance SHGS /JLGS / FarmerSHGS /JLGS / Farmer ClubsClubs
  2. 2. Credit - Financial Inclusion orCredit - Financial Inclusion or Poverty Alleviation??Poverty Alleviation?? High transaction costs Lengthy documentation Monitoring costs High defaults Collateralised Lending Leakages of subsidised resources
  3. 3. The Solution … Group ApproachThe Solution … Group Approach SHG Bank Linkage ProgrammeSHG Bank Linkage Programme Encourage thrift- Micro DepositsEncourage thrift- Micro Deposits Use social dynamics / peer pressureUse social dynamics / peer pressure as Social Collateralas Social Collateral Pool individual needs for CreditPool individual needs for Credit Simplify processes for LendingSimplify processes for Lending Link with the banking system forLink with the banking system for
  4. 4. SHG Bank Linkage ProgrammeSHG Bank Linkage Programme Aim: 1.Micro-deposits 2.Micro-credit 3.Micro Enterprise 4.Members of SHGs to graduate to
  5. 5. The Core Strategy of SHG-BankThe Core Strategy of SHG-Bank Linkage ProgrammeLinkage Programme Basic human feeling of Self Worth at its Core Building financial capabilities and self confidence in the rural poor, through internal savings and lending from the owned funds of the SHGs.
  6. 6. The Core Strategy of SHG-The Core Strategy of SHG- Bank LinkageBank Linkage (Contd..)(Contd..) Leveraging the strength of the formal banking system and the flexibility of informal Self Help Groups (SHGs) in providing adequate financial services to the rural poor.
  7. 7. MicroMicro financefinance SHG Approach Individual Approach SHG Bank Linkage Model MFI Bank Linkage Model SHGs promoted & Financed by bank SHGs promoted by NGO and Financed by banks SHGs promoted by MFI Bulk loan from Bank for on-lending to SHGs By Banks On-lending by MFIs Micro-enterprisesMicro-enterprises
  8. 8. Who Forms SHGs ?Who Forms SHGs ? VVVVVV ClubsClubs IndividualsIndividuals NGOs/NGOs/ mFIsmFIs SHGs/SHGSHGs/SHG FederationsFederations BanksBanks GovtGovt AgenciesAgencies SHPIsSHPIs
  9. 9. Design features of SHGsDesign features of SHGs  Self-selectionSelf-selection  Focus on women (85% of SHGs)Focus on women (85% of SHGs)  Savings first and credit laterSavings first and credit later  Group financed only after 6 monthsGroup financed only after 6 months  Intra group appraisal systems andIntra group appraisal systems and prioritizationprioritization  Shorter repayment termsShorter repayment terms  Market rates of interestMarket rates of interest  Progressive lendingProgressive lending  Maintenance of accounts by SHGsMaintenance of accounts by SHGs  Developing a relationship with BanksDeveloping a relationship with Banks  FLEXIBILITY IN APPROACHFLEXIBILITY IN APPROACH
  10. 10.  A homogeneous group of about 15 to 20A homogeneous group of about 15 to 20  Every member to save a small amountEvery member to save a small amount regularly. Pooled savings kept in aregularly. Pooled savings kept in a savings bank account in SHG’s namesavings bank account in SHG’s name transaction costs of both the poor andtransaction costs of both the poor and bank reduced !bank reduced !  SHG to use pooled thrift to give interestSHG to use pooled thrift to give interest bearing loans to members – decisionsbearing loans to members – decisions taken in group meetingstaken in group meetings Every member learns prioritisationEvery member learns prioritisation and financial discipline. Theirand financial discipline. Their capacities to thinkcapacities to think and handle largerand handle larger resources improves!resources improves! The Self Help Group (SHG). . What is it ?The Self Help Group (SHG). . What is it ?
  11. 11.  Depending on the SHG’s maturity, bankDepending on the SHG’s maturity, bank gives loan to the SHG as a multiple ofgives loan to the SHG as a multiple of the pooled savings. Bank loan added tothe pooled savings. Bank loan added to the SHG kitty.the SHG kitty. Adequate & sustained access toAdequate & sustained access to financial services!financial services! The Self Help Group (SHG). . What is it ?The Self Help Group (SHG). . What is it ? (contd..)(contd..)
  13. 13. MODE OF FUNCTIONING OF SHGsMODE OF FUNCTIONING OF SHGs  Function democratically  2-3 office bearers2-3 office bearers  Rotation of office bearersRotation of office bearers  Periodical meetingsPeriodical meetings  Decisions regarding thrifts loansDecisions regarding thrifts loans interestinterest rate etc in the meetingrate etc in the meeting
  14. 14. TYPES OF CREDITTYPES OF CREDIT Term loans in multiple of thriftsTerm loans in multiple of thrifts mobilized-4 times or more -mobilized-4 times or more - increasing graduallyincreasing gradually Repayable in 3 or more yearsRepayable in 3 or more years Cash Credit limit/revolving creditCash Credit limit/revolving credit limit of 4 times or more of group’slimit of 4 times or more of group’s expected savings in 3 yearsexpected savings in 3 years
  15. 15. Progress – 2008-09Progress – 2008-09  SHG Savings with Banks : No. of SHGsSHG Savings with Banks : No. of SHGs – 6,121,147, Amount : INR 55.46 billion– 6,121,147, Amount : INR 55.46 billion  Bank Loans disbursed to SHGs : No. ofBank Loans disbursed to SHGs : No. of SHGs – 1,609,586 Amount : INR 122.53SHGs – 1,609,586 Amount : INR 122.53 billionbillion  Bank Loans outstanding with SHGs:Bank Loans outstanding with SHGs: No. of SHGs – 42,24,338 Amount : INRNo. of SHGs – 42,24,338 Amount : INR 226.80 billion226.80 billion  Refinance to banks for SHG FinancingRefinance to banks for SHG Financing – INR 26.20 billion– INR 26.20 billion
  16. 16. JOINT LIABILITY GROUPJOINT LIABILITY GROUP  Informal group comprising 4-10Informal group comprising 4-10 individuals.individuals.  For the purpose of availing bank loanFor the purpose of availing bank loan against mutual guarantee.against mutual guarantee.  JLG members to engage in similarJLG members to engage in similar type of economic activities either intype of economic activities either in Farm & Non farm sector.Farm & Non farm sector.  Simple management with little or noSimple management with little or no financial administration within thefinancial administration within the
  17. 17. OBJECTIVEOBJECTIVE  To augument flow of credit to farmers &To augument flow of credit to farmers & Micro-entrepreneurs artisans in Farm &Micro-entrepreneurs artisans in Farm & Non farm Sector Activities.Non farm Sector Activities.  To serve as collateral substitute for loans.To serve as collateral substitute for loans.  To build mutual trust & confidenceTo build mutual trust & confidence between bank & the target group.between bank & the target group.  To minimise the risks in loan portfolio forTo minimise the risks in loan portfolio for the bank through group & cluster.the bank through group & cluster.  To provide food security to vulnerableTo provide food security to vulnerable section by enhanced production,section by enhanced production, productivity & livelihood promotionproductivity & livelihood promotion through JLG mechanismthrough JLG mechanism
  18. 18. Criteria for selection of JLG membersCriteria for selection of JLG members  Members to be of similar Socio- economicMembers to be of similar Socio- economic status, background & carrying out samestatus, background & carrying out same economic activity.economic activity.  Members carrying out either farming orMembers carrying out either farming or Non Farm activities & agreeing toNon Farm activities & agreeing to function as JLG.function as JLG.  Members to be from the same village/Members to be from the same village/ area/ neighbourhood & trust each other.area/ neighbourhood & trust each other.  Members defaulting to any other formalMembers defaulting to any other formal financial institution, in the past, debarredfinancial institution, in the past, debarred to be member of be member of Group.  Only one member from same family in theOnly one member from same family in the same JLG.same JLG.
  19. 19. Size of the JLG – 4 to 10 farmersSize of the JLG – 4 to 10 farmers Formations of JLGs byFormations of JLGs by  Banks, PACS, other Coop., Govt.Banks, PACS, other Coop., Govt. Depts.Depts.  NGOs, Panchayati Raj Institutions,NGOs, Panchayati Raj Institutions,  KVKs, State Agriculture Univ., Agri.KVKs, State Agriculture Univ., Agri. Tech. Management Agency (ATMA)Tech. Management Agency (ATMA)  Farmers Clubs, Farmers Associations,Farmers Clubs, Farmers Associations,  Producers Associations, ArtisansProducers Associations, Artisans Guilds, Dept. of SSI/ Agro IndustriesGuilds, Dept. of SSI/ Agro Industries etcetc  MFIsMFIs
  20. 20. Savings by JLGSavings by JLG  Primarily to be a credit group.Primarily to be a credit group.  Voluntary savings.Voluntary savings.  JLG members to be encouragedJLG members to be encouraged to open “no frills” open “no frills” accounts.
  21. 21. JLG ModelsJLG Models Model “A”Model “A”  Financing individuals inFinancing individuals in the groupthe group  All members to executeAll members to execute one inter-se documentone inter-se document making each one jointlymaking each one jointly & severally liable for& severally liable for repayment.repayment.  Financing bank toFinancing bank to assess creditassess credit requirement.requirement.  Mutual agreement &Mutual agreement & consensus amongconsensus among member on the quantummember on the quantum of loanof loan Model “B”Model “B” o Financing the groupsFinancing the groups o JLG to function asJLG to function as one borrowing borrowing unit. o JLG eligible forJLG eligible for acquiring one loan.acquiring one loan. o If the member want toIf the member want to save, SB A/c can besave, SB A/c can be opened in the name ofopened in the name of the JLG.the JLG. o All members toAll members to execute one inter-seexecute one inter-se document making eachdocument making each one jointly & severallyone jointly & severally liable for repayment.liable for repayment.
  22. 22. Important factors in JLG approachImportant factors in JLG approach  Concept depends heavily on mutual trust & peer pressure.  Quality of group leadership is important for sustainability of JLG.
  23. 23. Purpose of creditPurpose of credit  Flexible credit product.  For crop production, consumption, working capital, marketing & other productive purpose both in Farm & Non Farm Sector.
  24. 24. Loan limitLoan limit  Maximum loan upto Rs. 50000/- per individual under both model “ A” and model “B”.
  25. 25. Rate of InterestRate of Interest  As decided by Banks  Incentive for prompt repayment to be considered by banks.
  26. 26. Margin & Security normsMargin & Security norms  No collaterals to be insistedNo collaterals to be insisted upon.upon.  Margins as per usual normsMargins as per usual norms may be applied.may be applied.
  27. 27. DocumentsDocuments  Introduction form  Application cum appraisal form .  Mutual guarantee & DP note.
  28. 28. Personal accident InsurancePersonal accident Insurance  Banks may considerBanks may consider covering JLG membercovering JLG member under personal accidentunder personal accident
  29. 29. Incentive for Promotion of JLGsIncentive for Promotion of JLGs from NABARDfrom NABARD  Grant assistance to eligibleGrant assistance to eligible institutions @ Rs. 2000/- per JLGinstitutions @ Rs. 2000/- per JLG over a period of three years.over a period of three years.  Grant is for formation, nurturingGrant is for formation, nurturing & financing of JLG.& financing of JLG.  Capacity Building programmes &Capacity Building programmes & publicity material expenses alsopublicity material expenses also supported by NABARD.supported by NABARD.
  30. 30. Monitoring & ReviewMonitoring & Review  Banks to monitor at regular intervals.  Periodic report to be sent to RBI/ NABARD on half yearly basis (31 March/30 September)
  31. 31. JLG – SHG DifferenceJLG – SHG Difference FACTORSFACTORS JLGJLG SHGSHG Group size 4-10 members 05-20 members per SHG Type of members Exclusively of Farmers, Oral Lessees, Share croppers, artisans, entrepreneurs Only very poor members Savings A Credit Group - Savings optional Savings-cum- Credit Groups
  32. 32. SHG – JLG DifferenceSHG – JLG Difference (Contd..)(Contd..) FactorFactor JLGJLG SHGSHG Loaning Either Singly or Jointly by JLG by financing bank Only to SHG by financing bank Maximum loan amount Restricted to Rs.50,000/- per Individual (both under Model A or B) No such upper limit since linked to total savings etc. Of group SB A/c JLG members to be encouraged to open INDIVIDUAL ‘No Frill Accounts’ Group Bank A/c of SHG Others To serve as a conduit for technology transfer, facilitate access to market information, carry out activities like soil testing, training, health camps to its members May attempt, no such bar.
  33. 33. Farmer's Club ProgrammeFarmer's Club Programme  MissionMission Development in rural areasDevelopment in rural areas through credit, technologythrough credit, technology transfer, awareness andtransfer, awareness and capacity building.capacity building.
  34. 34.  Farmers’ Clubs are grassroot level informal forums of farmers.  Such Clubs are organised by rural branches of banks with the support and financial assistance of NABARD.  With the enhancement of the programme, other agencies like NGO, VAs, KVKs, etc. are also now included as agencies included in the formation and promotions of FCs.
  35. 35. The Programme was launched by NABARD in November 1982 to propagate the five principles of “Development through Credit”.
  36. 36. The five principles are:The five principles are: 1. Credit must be used in accordance with the most suitable methods of science and technology. 2. The terms and conditions of credit must be fully respected. 3. Work must be done with skill so as to increase production and productivity. 4. A part of the additional income created by credit must be saved. 5. Loan installments must be repaid in time and regularly so as to recycle credit. “VVV Programme” was rechristened as “Farmers’ Club Programme” in 2005 by revisiting its earlier mission.
  37. 37. FunctionsFunctions The broad functions of the Farmers’ Clubs as envisaged are as follows :  Coordinate with banks to ensure credit flow among its members and enhance better bank borrower relationship,  Organise minimum one meeting per month and depending upon the need, there would be 2-3 meetings per month. Non-members can also be invited to attend the meetings,  Interface with subject matter specialists in the various fields of agriculture and allied activities etc., extension personnel of Agriculture Universities, Development Departments and other related agencies for technical know how upgradation.  For guest lectures, even experienced farmers who are non members from the village/ neighbouring villages could be invited,
  38. 38. FunctionsFunctions (contd..)(contd..)  Liaison with Corporate input suppliers to purchase bulk inputs on behalf of members,  Organise/facilitate joint activities like value addition, processing, collective purchase of inputs and farm produce marketing, etc.; for the benefit of members. They can also sponsor / organise SHGs,  Undertake socio-economic developmental activities like community works, education, health, environment and natural resource management etc.  Market rural produce and products
  39. 39. NABARD’s support to Farmer ClubsNABARD’s support to Farmer Clubs  NABARD’s policy support for Farmers’ Club Programme lays stress on linking technologies with farmers’ club members and also facilitating market access through the following mechanism:  Capacity building of members of Farmers’ Clubs including leadership training.  Linkage with technology/markets  Self Help Groups (SHGs)/Joint Liability Groups (JLGs) formation  Forming Federations of Farmers’ Clubs/Producers’ Groups/Companies
  40. 40. Benefits of Farmers' Club to Bank BranchBenefits of Farmers' Club to Bank Branch The formation of Farmers’ Club lead to better Banker-Borrower relationship in the area. An Evaluation study of Farmers’ Club Programme (FCP) carried out by IIM, Lucknow has brought out the following advantages of FCs to bank branches:  Increase in deposits.  Increase in the credit flow and diversification of lending.  Generation of new business avenues.  Increase in the recoveries and decline in the non-performing assets.  Reduction in the transaction costs of financial institutions/ Banks.
  41. 41.  Socio economic development of the village  A win-win situation both for the banker and borrower  Besides benefit to banks, the Farmers’ Club has also been instrumental in certain social welfare measures like free eye check-up camp, Animal Health Care Camp, Mass vaccination camp, community works like road, check-dams, afforestation, etc.  Enhancement in bargaining power for bulk purchase of inputs and marketing of their produce Other BenefitsOther Benefits
  42. 42. Who can form Farmers' ClubsWho can form Farmers' Clubs All Institutional Agencies (Commercial Banks, Cooperative Banks and Regional Rural Banks) and all grassroot level organisations (NGOs, PRIs, State Agricultural Universities, KVKs, Post Offices etc.) are eligible to form Farmers’ Clubs
  43. 43. The Set UpThe Set Up  Farmers’ Club is an informal forum in villages.  Can be promoted in a village / cluster of villages, generally in the Operational Area of a Bank.  It should have minimum of 10 members, no upper limit in the membership is envisaged.  Every Club would have three office bearers - One Chief Coordinator/Volunteer/ President, the other Associate Coordinator/Volunteer/ Vice President and a cashier.  The office bearers would be elected by Club Members on a democratic basis for a term to be decided by the Club.  Office bearers should be residents of the area of the operation of the club. No NGO/FC promoting agency representative can be office bearer of the club.
  44. 44. Functions of the Office bearersFunctions of the Office bearers The main functions would be  to convene meetings,  to arrange meetings with experts,  maintenance of Books of Accounts,  coordination with Bank, Line Deptts. of the State Governments,  maintaining proper liaison with all concerned.
  45. 45. MembershipMembership  All villagers except willful defaulters can become members of the club.  The club must make endeavour to raise their own resources by way of contribution from members,  undertaking certain business services such as bulk procurement of inputs and collective marketing of agricultural produce,  agents for insurance and other services etc.
  46. 46. Steps in the formation of Farmers’ ClubsSteps in the formation of Farmers’ Clubs  Bank branch can promote the clubs directly or engage Farmers’ Club promoting agencies like Krishi Vigyan Kendras (KVKs), Agriculture Universities, NGOs, Corporates, etc.  All grassroot level organisations (NGOs, PRIs, State Agricultural Universities, KVKs, ATMA, Post Offices etc.) are eligible to form Farmers’ Clubs  Select a village/ cluster of villages suitable for launching Clubs in the operational area of the bank branch.  Identify a few progressive farmers and borrowers with good track record of proper loan utilisation, aptitude and capacity for team work. (Success of the Club hinges on the right choice of members).
  47. 47. Steps in the formation of Farmers’ ClubsSteps in the formation of Farmers’ Clubs (contd..)(contd..)  Encourage the members to select a Chief Coordinator/Volunteer/President and an Associate Coordinator/Volunteer/Vice President and a Cashier. This will ensure collective leadership and continuance of the Club.  Provide orientation training to them with the help of NABARD (Regional Office / DDM or trained officers from the bank) before launching.  Encourage members to convene monthly meeting regularly, guide them to have meaningful discussion and take necessary follow up action.  Motivate members them to identify credit and non- credit needs (training, socio-economic, village infrastructure, etc.), prepare a plan of action and accordingly arrange for expert talks, counselling, need-based activities, etc. with the help of Government Departments and other agencies concerned.
  48. 48.  Ensure that the members maintain Membership Register, Meeting Register, Minutes Book and Books of accounts .  Evolve a performance parameter and measure the Clubs’ contribution annually.  Use Club as a tool in aid of branch not only in the matter of credit and recovery but also in facilitating promotion of SHGs, micro credit, Financial Inclusion and convergence of services. Steps in the formation of Farmers’ ClubsSteps in the formation of Farmers’ Clubs (contd..)(contd..)
  49. 49. Rating of Farmers ClubsRating of Farmers Clubs  To facilitate the graduation of farmers’ Clubs into Federations of Farmers’ Clubs or Producers’ Groups/ Companies, it would be desirable for the sponsoring agencies to rate the Farmers’ Clubs as per prescribed parameters.
  50. 50. INCENTIVESINCENTIVES Awards to Best Working Clubs:  Awards would be given to be provided to best working clubs at the district, state and national levels, based on the rating norms. Capacity Building for Adoption of Technology (CAT):  NABARD’s Capacity Building for Adoption of Technology (CAT) programme may be used for the benefit of farmers’ club members for training and exposure visits within and outside the State.
  51. 51. Financial Support from NABARDFinancial Support from NABARD NABARD assistance to all agencies will uniformly be @Rs.10,000/- per club per year for a period of 3 years whether they are institutional or other agencies and the region concerned. Assistance will be towards the following minimum & mandatory expenses:  Formation & Maintenance Expenses 2,000/-Formation & Maintenance Expenses 2,000/-  Base Level Orientation TrainingBase Level Orientation Training 5,000/-5,000/- Programme (BLOTP)Programme (BLOTP)  Meet with Experts (2 ProgrammesMeet with Experts (2 Programmes 3,000/-3,000/- in a year)in a year)  TotalTotal 10,000/-10,000/-
  52. 52.  NGOs/KVKs will be provided with an incentive of Rs.2,000/- per club out of the total assistance of Rs.10,000/- per club per annum.  NGOs/KVKs who are operating in hilly/remote/naxal affected areas, will be provided with additional incentive of Rs.3,000/- per club for a period of 3 years over and above Rs.10,000/- referred to above.
  53. 53. Revival Package of Assistance forRevival Package of Assistance for Dormant ClubsDormant Clubs  In order to revive the dormant/defunct FCs, NABARD has introduced a revival package.  The assistance may be used towards meeting the revival cost including arranging exposure visits for members of such dormant clubs as well as concerned branch managers.  Package of assistance may be extended to NGOs/VAs for revival of clubs promoted by banks.