it's all about microfinance

1.  By VTU Student

2. Microfinance: Definition
“Microfinance is an economic development tool whose objective
is to assist the poor to work their way out of poverty. It covers
a range of services which include, in addition to the provision
of credit, many other services such as savings, insurance,
money transfers, counselling, etc.” – Reserve Bank of India
In other words, Microfinance serves as a tool for providing
financial services to the low-income population., which do
not have access to the mainstream financial services.

3. Microfinance: Definition
The proposed Microfinance Services Regulation Bill defines
microfinance services as “providing financial assistance to an
individual or an eligible client, either directly or through a group
mechanism for :
i. Rs. 50000 or lesser amount, for an individual for small and tiny
enterprise, agriculture, allied activities (including for consumption
purposes of such individual) or
ii. Rs. 150000 or lesser amount for an individual for housing purposes,
or
iii. any other purpose nor exceeding Rs. 150000

4. MF: The Paradigm
 In 1976, Dr Mohammed Yunus, a Professor of Economics in
Chittagong University, Bangladesh, came up with the concept of
lending to groups of poor women.
 This group was loaned money without any collateral, but with
higher interest rates of 20-24%.
 If any one member defaulted, the group was denied access to
further credit.
 This joint liability put a social pressure with produced a very
high repayment rate of 98 %.
 The success of this pilot project inspired him to set up a
Grameen Bank for providing banking services to the poor.

5. Cont.
 In the Grameen Bank Model, members of the group are also the
owners of the bank.
 The group normally consists of the five members and the liability
to repay the loan lies with the individual.
 The loan is given directly on the basis of trust and no agreement
or document is required.
 The success of GB proved that the poor needed access to financial
services rather than cheap subsidized credit.

6. Cont..
 This pioneering experiment came to be later know as “Micro
Finance” for the poor.
 Dr Mohammed Yunus and the Grameen Bank were awarded the
Noble Peace Prize in 2006 ‘for their efforts to create economic and
social development from below’.
 The success of this concept inspired many to set up similar projects
across the globe.
 Today, there are over 7,000 MFIs across the globe, serving 16
million poor households in developing countries.

7. Evolution of Microfinance in India
 1974 – Establishment of Self-Employed Women’s Association (SEWA) in
Gujarat.
 Sep 26, 1975 – Rural bank Ordinance was passed.
 Oct 02, 1975 – Prathama bank (first RRB) came into existence.
 1976 – Ordinance was replaced by Regional Rural Bank Act.
 July 12, 1982 – NABARD was established on the recommendations of
Shivaraman Committee, by an act of Parliament to implement the National
Bank for Agriculture and Rural Development Act 1981.

8. Evolution of Microfinance in India
 Apr 02, 1990 – SIDBI was established through Small Industries
Development Bank of India Act 1989.
 1992 – NABARD launched SHGs-Bank Linkage program.
 1999 – SIDBI created Microcredit (SFMC) to create a national network of
strong, viable and sustainable Microfinance Institutions from the informal
and formal financial sector to provide microfinance services to the poor,
especially women’’.
 2006 – NABARD launched the ‘Micro-Enterprise Development
Programme’ (MEDP) for skill development.

9. Financial Needs
 Disasters: Such as flood, fire, cyclone and man-made events like
war
 Investment Opportunities: Such as expanding a business, buying
land or equipments, improving housing, securing a job (may require
giving a large amount of money)
 Lifestyle Needs: Such as wedding, childbirth, education of children,
homebuilding or old age
 Personal Emergencies: Such as sickness, injury, death, sudden
unemployment, theft or harassment

10. NGOs
 Non-government organization are the key players in the
microfinance sector.
 An NGO is a voluntary organization established to undertake
social intermediation like organizing SHGs of micro
entrepreneurs and entrusting them to banks for credit linkage
or financial intermediation, like borrowing bulk funds from
banks for on-lending to SHGs.

11. Conti....
 NGOs have emerged as an effective change agents by
organizing and promoting SHGs and facilitating their
linkages with banks.
 They conduct workshops, seminars, and training programmes
to create awareness among SHGs

12. The Self Help Group (SHG):
 SHGs is a small group of rural poor, who have voluntarily
come forward to form a group for improvement of the
social and economic status of the members. Homogeneous
group of about 15 to 20.
 Every member to save small amounts regularly.
 Every member learns prioritization and financial discipline.

13. Condition Required for Membership for
SHG‘s:
 Members should be between the age group of 21-60 years.
From one family, only one person can become a member of an
SHG. (More families can join SHGs this way).
 The group normally consists of either only men or only
women.
 Members should be homogenous i.e. should have the same
social and financial background.
 Members should be rural poor

14. Salient features of Microfinance
 Beneficiaries are from low income group.
 Loans are of small amount.
 Short duration loans
 Loans are offered without collateral.
 High frequency of payment
 Loans are generally taken for income generation purposes.