The document discusses the role of microfinance in promoting financial inclusion, particularly for vulnerable groups in India who lack access to formal banking services. It outlines various microfinance models, challenges faced by the sector including predatory lending practices and regulatory responses, and highlights the importance of transparency and regulation in restoring trust in microfinance institutions. The document concludes that, despite challenges, microfinance remains crucial for achieving financial inclusion and has started to recover under new regulations.

1. Microfinance
With focus on Financial Inclusion
Adityasinh Chudasama Vivek Mehta Siddharth Shah
Development Innovations-2014

2. • Financial Inclusion Committee defined financial inclusion as
the process of ensuring access to financial services and timely
and adequate credit where needed by vulnerable groups such
as weaker sections and low-income groups at an affordable
cost
Financial Inclusion

3. • 2.5 million adults lack formal bank account & most of them
concentrated in developing countries
• Only 35% Indians have access to formal bank accounts
• Rural poor, illiterate, women and the workers in unorganized
sectors are those who are severely deprived of financial
services from formal financial institutions
• Time and travel costs, distance/physical access,
documentation requirements and bank charges for opening
bank account are some barriers
• Informal sources of finance are dominant among the poor
• Microfinance sector in India is considered to be one of the
main contributors to financial inclusion in the country
Financial Inclusion

4. • Means of extending financial service, usually in the form of
small loans with no collateral, to non traditional borrowers
such as the poor in rural or undeveloped areas.
• It is essentially for promoting self-employment, generally used
for:
– Direct income generation
– Rearrangement of assets and liabilities for the household to
participate in future opportunities
• Main Microfinance models are:
– SHG-Bank Linkage Model
– Grameen Bank Model
– NBFC-SKS model
Microfinance

5. • Launched in 1992 by NABARD
• to offer refinance to banks for collateral-free loans to groups
• SHGs thus linked became micro-banks able to access funds from the formal
banking system
• Various models for linkages are:
• the bank itself promotes and nurtures the SHGs until they reach maturity
Model-1
Bank - SHG - Members
Model-2
Bank - Facilitating Agency - SHG - Members
• groups are formed and supported by NGOs or government agencies
Model-3
Bank - NGO-MFI - SHG - Members
• NGOs act as both facilitators and MF intermediaries
SHG – Bank Linkage Programme

6. • Homogeneous affinity group of five
• Eight groups form a Centre
• Centre meets every week
• Regular savings by all members
• Loan proposals approved at Centre meeting
• Loan disbursed directly to individuals
• All loans repaid in 50 installments
Grameen Bank Model

7. Working of Grameen Bank

8. • Adopt a profit-oriented approach in order to
access commercial capital
• Standardize products, training, and other
processes in order to boost capacity
• Use Technology to reduce costs and limit
errors
NBFC-SKS Model

9. Resource Mobilization
• equity investors and lenders
Mega structure for coordination
• factory style recruitment and training for loan officers
Distribution of Credits
• credits are disbursed to beneficiaries through the loan
officers
Weekly Repayments
Functioning of SKS Model

10. • Rapid sector growth and minimal regulatory oversight
eventually led to predatory lending practices, lack of
transparency in interest rate and other charges, multiple
lending, coercive methods used for recovery by providers
• criticism for drowning people into an uncompromising debt
market
• linked to a spate of suicides in Andhra Pradesh
• Led to heavy regulations from state government
Challenges

11. • RBI responded to crisis by forming Malegam committee to
review the sector
• Based on committee’s recommendations, RBI introduced
strict regulations on microfinance operations
• regulation prohibits MFIs from accepting deposits from their
clients
• cap of 26 percent interest on loans
• limit of 10 percent on the amount lenders can place on top of
the rate at which it borrowed, thereby minimizing profits
• Narrowing definition of eligible loan clients
• As a result bank stopped lending to Microfinance client
• Difficulty especially to smaller MFIs to operate
Challenges

12. Higher degree of formalization and industrialization of the economy is associated
negatively with MFI performance, specifically with respect to outreach parameters.
Economic conditions also had an influence on MFIs performance

13. • Acknowledged role of MFIs in Financial inclusion
• Recommendations include:
– Universal reporting to credit bureaus to be mandated for all loans
– report data on a quarterly basis at the level of each one of their
access points such as branches, outlets, BCs, ATMs, and POS terminals,
as applicable
– creating an access point within 15 minutes of walking distance to
every resident by 01.01.2016
– Other important recommendations are dependent heavily on Aadhar
card scheme
Mor Committee on Financial Inclusion

14. • Microfinance still has a major role to play in achieving financial
inclusion targets.
• Though regulations posed challenge to the industry, it was
important to bring transparency to the sector
• New regulation ensures that it is only the serious players who
operates
• RBI’s decision to accord Self Regulatory Organisation status to the
industry association for NBFC-MFIs boosted the sector.
• Microfinance sector has already started recovering
• Some flexibility w.r.t interest rates can help MFIs to receive finance
for its operations.
• So Microfinance seems to be back on right path with regulations
bringing people back into the picture dominated by profit.
Conclusion

15. • Focus Note- Andhra Pradesh 2010: Global Implications of crisis in Indian
Microfinance, CGAP, No-67 (November-2010)
• Report of the Sub-Committee of the Central Board of Directors of Reserve
Bank of India to Study Issues and Concerns in the MFI Sector headed by
Dr. Y.H. Malegam (January-2011)
• Report of the Committee on Comprehensive Financial Services for Small
Businesses and Low-Income Households headed by Dr. Nachiket Mor
(January-2014)
• Venugopalan Puhazhendhi (2012): Microfinance India State of the Sector
Report, SAGE Publications
References