Basics of Microfinance with reference to India

1. Micro-finance B.V.Raghunandan, SVS College, Bantwal

2. Micro-Finance: the Background Loans from Organised Sector was security oriented, big in size,and procedure-ridden Mohammad Yunus getting a Nobel Prize for the activities of Grameen Bank of BanglaDesh attracted the attention of the financial world C.K.Prahlad advocating the Bottom of the Pyramid approach to inclusive development

3. Money-lenders: the Fore-runners Money lenders adopted a flexible system to suit the borrowers of micro-finance Instead developing a similar model, the Government and RBI tried to curb their activities Only NBFC institutions were regulated Individuals operated as ever Only after 2000, there is a change in the policy

4. Definition of Micro-finance MICROCREDIT IS THE EXTENSION OF SMALL LOANS TO ENTREPRENEURS TOO POOR TO QUALIFY FOR TRADITIONAL BANK LOANS. IN DEVELOPING COUNTRIES ESPECIALLY, MICROCREDIT ENABLES VERY POOR PEOPLE TO ENGAGE IN SELF-EMPLOYMENT PROJECTS THAT GENERATE INCOME - WIKIPEDIA

5. Features of Microfinance Borrowers are the poor Small Amounts of loans For Production, Consumption or House Construction and Shelter Improvement Lenders use Intermediaries Group Based Lending A large Number of Financial Services Simple Procedure No Security

6. Functions/Role of Microfinance Institutions Providing loans Accepting deposits Remittance of Funds Issue of credit cards/debit cards/ATM cards Life-Insurance products Non-life insurance products Pensions Factoring Bills Discounting Financial Counselling

7. Types of MFIs Savings and Credit Organization (SCO) Small Farmers Development Program (SFDP) Small Farmers Cooperative Limited (SFCL) model Savings and Credit Cooperative (SCC) models, Government programs Donor supported models, and Financial Intermediary Non-Government Organization (FINGO) models

8. Microfinance in India NABARD is recognised as the regulator of microfinance 1987, NABARD sponsored a research project Group Based Approach(GBA) for lending to the poor was accepted In 1994, RBI working group advised banks to lend through SHG, which came to be known as SHG-Bank linkage

10. Four Tier Approach Tier I- SHGs Tier II-NGOs Tier III- Sec 25 NBFCs Tier IV-MCI/Other NBFCs

11. Tier I-SHG Bank Linkage SHG is a voluntary group not exceeding 20 formed to promote the common economic welfare of the group members Banks do not interfere in the management of SHG Three models: Bank-SHG (20%) , Bank-SHG through intermediation by an NGO (72%) and Bank-SHG through intermediation by NGO,NBFC, MCI intermediation

12. Tier II-NGO-SHG NGOs are non-profit organisations Registered under Societies Act/Trust Act/Sec 25 of Companies Act NGOs provide finance to the SHGs They also assisted SHGs to organise themselves as Federations Banks follow parameters while providing finance through NGOs

13. Tier III-NBFCs U/S 25 of CA Many NGOs want to convert to NBFCs to provide credit directly They also want to accept deposits To do that, they should have a minimum capital of Rs.200 lakhs They have to wait for three years after registration to accept deposits Again they can accept only time deposits

14. Tier IV-NBFCs and Micro-Co-operative Institutions NBFCs and MCI are allowed to collect deposits MCIs are registered under Co-operative Societies Act or Mutually aided Co-operative Societies Act MCIs enjoy operational freedom from government NBFCs are registered under Companies Act and regulated by RBI

15. RBI Guidelines Interest rates are left to the discretion of SHG or MFI Banks may choose their own intermediary Microfinance by banks is priority sector lending Banks can have their own criteria in selecting the intermediary Banks may have their own lending norms Banks can devise loan and saving products MF for consumption, production and housing Simple procedure and documentation Delegatory powers to branches to expedite loans

16. “Unless all the discoveries that you make have the welfare of the poor as the end in view, all your workshops will be really no better than Satan’s”-Mahatma Gandhi