MICROFINANCE

ORIGIN, DEVELOPMENT & MODELS

MICROFINANCE
Provision of credit and other financial services and products of very small amounts (not exceeding Rs. 50,000 per borrower) to the poor in rural, semi-urban and urban areas, either directly or through a group mechanism, for enabling them to improve their living standards

NEED FOR MF
1. RANGE OF FINANCIAL SERVICES REQUIRED BY THE POOR
[STUDY BY ASIA TECHNICAL DEPARTMENT OF WB 95]

CONSUMPTION CREDIT 2/3rd,of its total requirement

of funds, and 3/4th of it is for short period

PRODUCTION CREDIT now nearly 75% of it is met

by formal Cr Institutions

SAVINGS [ Not more than 5-6% of Rural House Holds

avail facility of Banks]

INSURANCE REMITTANCE

NEED FOR MF
2. FINANCIAL EXCLUSION It is a situation where individuals either
do not have access to appropriate financial services, or do not have the knowledge, understanding and skills to make best use of these available financial products and services. There are a number of reasons for persistence of financial exclusion such as Attitudes and perceptions to the non-availability Lack of financial access in the form of appropriate financial products, Lack of physical access due to distances involved and Non-viability due to high transaction cost.

NEED FOR MF
The Rural Financial Access Survey (2003) conducted by WB and NCAER in Andhra Pradesh and Uttar Pradesh revealed that Formal financial institutions reach less than 30% of the population 44% rural households had informal borrowings at interest rates of up to 48% per annum. [preceding 12 months] Only 21% rural households had access to formal credit and majority of bank loans were collateralized.

HIGH SHARE OF INFORMAL SOURCES IN RURAL DEBT

CULTIVATORS 1951 1961 1971 1981 1991 81.6 68.3 36.8 33.7 89.5 89.2 63.3 44.7 NON CULTIVATORS ALL 93.7 83.7 70.8 38.3 36.0

Task Force on Supportive Policy and Regulatory Framework for Micro-finance, 1999

LOW SHARE OF FORMAL FIs-- RURAL DEBT 1992

COMMERCIAL BANKS & RRBs 26.6%

COOPERATIVE SOCIETIES

28.6%

OTHER FORMAL INSTITUIONS (Govt., Insurance, PF, Misc.) TOTAL

8.7%

64%

Debt and Investment Survey, GOI 1992

NEED FOR MF
3. DEMAND-SUPPLY GAP
Demand for micro-financial services 50,000 crores (2002) Demand for production credit 17000 crores Outstanding credit of the Banking system to the poor 5000 crores

Micro financeOpportunities and Challenges

Micro finance refers to small savings, credit and insurance services extended to socially and economically disadvantages segment of society. The recent task force on Micro finance has defined MF as provision of thrift ,credit, and other financial services and products of very small amts. to the poor in rural semi urban or urban areas. for enabling them to raise their income levels and improve living standards

Micro Finance Institutions--Need in India

Around 300 million people or about 60 million households are living below the poverty line. Out of these households only about 20 percent have access to credit from the formal sector MF practitioners estimated the annualized credit usage of all poor families at over Rs 45000 crores of which some 80 percent is met by informal sources Credit on reasonable terms to the poor can bring about a significant reduction in poverty Opportunities for the unskilled and the illiterate is not increasing fast enough even after liberalization of economy.

Institution involved in MF have a significant role to play to reduce this disparity and lead to more equitable growth

MF CONCEPTUAL THINKING

THE POOR CAN SAVE AND ARE BANKABLE THE POOR REQUIRE NOT ONLY CREDIT BUT ALSO OTHER FINANCIAL SERVICES MISMATCH BETWEEN THE REQUIREMENTS OF THE POOR & CAPABILITY OF THE FIs CAN BE MINIMISED SMALL AFFINITY GROUPS OF THE POOR, WITH INITIAL OUTSIDE SUPPORT CAN EFFECTIVELY MANAGE AND SUPERVISE MICRO CREDIT AMONG THEMSELVES

MF CONCEPTUAL THINKING
PARTICIPATIVE FINANCIAL SERVICES MANAGEMENT IS MORE EFFICIENT AND RESPONSIVE COLLECTIVE WISDOM OF THE GROUP AND PEER PRESSURE ARE VALUABLE COLLATERAL SUBSTITUTES MF COULD BE A PRE MICRO ENTERPRISE STAGE FOR MOST POOR SHG AS A BANK CLIENT, FACILITATES A WIDER OUTREACH, LOWER TRANSACTION COST & A MUCH LOWER RISK COST FOR THE BANK

HOW MICRO FINANCE IS DIFFERENT

SUPPLY SIDE PERSPECTIVE DEMAND SIDE PERSPECTIVE

SUPPLY SIDE PERSPECTIVE

1. 2. 3. 4. Poor need mainly credit Poor cannot save Poor can not repay consumption loans hence give sparingly. Only economically viable ventures can be supported. Systems neither permit meeting, emergent and frequent credit needs, nor could these operations be viable Production loans should not be diverted for consumption purposes Poor can not afford higher interest rates, hence require subsidy Unsecured loans are highly risky Can not reach all villages, especially in tribal and backward areas because of design and cost

5. 6. 7. 8.

SUPPLY SIDE PERSPECTIVE

1. 2. 3. 4. Social Security needs are too difficult to address Systems do not envisage empowerment as agenda Woman is not head of the family, She can not manage credit properly Poor people avail loans, primarily for subsidy

5. 6. 7.

Cooperatives, not banks are meant for participative financial management Can offer at best credit and to some extent savings facilities The Planners and Executives know fairly well as to what is in the best interest of the borrowers

DEMAND SIDE PERSPECTIVE

1. 2. 3. 4. 5. 6. 7. 8. Poor need comprehensive financial services in addition to credit Poor save and access to saving products & services, is equally important Consumption needs are predominant and important Credit needs are smaller, frequent and a mix of consumption and production purposes Dividing line between production and consumption loans, is very thin Rate of interest is not the determinant for selection of credit source Do not have collaterals to offer as security Need credit at door-step without hassle

DEMAND SIDE PERSPECTIVE

9-Social security is felt need 10-Socio-economic empowerment can help economic upward migration 11-Poor women, if financed, could contribute significantly for family welfare 12-Subsidy is welcome, if available without leakages 13-Govt. programmes are charity 14-It is easier to deal with institutions which encourage participation 15-Need institutions which address socio-economic issues as integral intervention 16-Economic decisions for the poor are best left to them 17-Socio-economic empowerment can help economic upward migration

ADVANTAGES OF MICROFINANCE
COST EFFECTIVE APPROACH TO ADDRESS THE FINANCIAL REQUIREMENTS OF THE POOR ALTERNATIVE FINANCIAL DELIVERY CHANNEL TACKLES FINANCIAL EXCLUSION EMPOWERMENT OF THE POOR

ADVANTAGES OF MICROFINANCE
DEVELOPS COLLATERAL SUBSTITUTES MF COULD BE A PRE MICRO ENTERPRISE STAGE FOR MOST POOR - BETTER CHANCES OF SUCCESS MACROECONOMIC OBJECTIVES OF GROWTH

Benefits formal FIs as well.

continued----SHGs AS CLIENTS- FACILITATE

A WIDER OUTREACH, LOWER TRANSACTION COST & A MUCH LOWER RISK COST FOR THE BANK SLOWER BUT CONSISTENT GROWTH IN VOLUME MORE & STABLE PROFITS DESPITE SLOWER GROWTH - FEE AND NON FEE FUTURE BUSINESS CROSS SELLING [Remittance, Bill payments ,Insurance ,Mutual funds etc]

Role of NABARD
NABARD
Conceptualized and introduced the pilot phase of SHG-Bank linkage programme Contributes to conducive policy framework Value addition to the programme by developing and sharing different types of conceptual inputs for the stakeholders Making available on large scale, capacity building inputs Fund support for expendable and loan funding needs of participating agencies

Role of NABARD]

[continued--

Holds training, consultations, supports stakeholders in training interventions Supports banks to act as Self Help Promoting Institutions Closely monitors the programme through provincial and district level forums Develops region specific strategies Conducts goal oriented project planning interventions for field level staff for better appreciation and solving of location specific problems Encourages evolution of intermediary structures

Rashtriya Mahila Kosh 1993

The success of the concept of micro-credit through self help groups (SHGs) has encouraged the Government of India to establish a National level Micro-Credit organization / Rashtriya Mahila Kosh (RMK) (National Credit Fund for Women) under the Ministry of Women and Child Development in 1993, with an initial corpus of Rs.31 crore. The objective was to help women organize income generating activities to improve their socio economics status. RMK had disbursed cumulative loan of Rs 151 crore up to July 2006, benefiting 5.50 lakh women and the recovery rate is above 91%.

SIDBI
In 1994, Small Industries Development Bank of India (SIDBI) launched a pilot scheme to provide financial assistance by way of loans to NGOs for providing credit to the poor households, especially women . A small amount of grant also accompanied the loans so as to build capacity of the intermediates and end-users. The programme did not achieve the desired objective. A large number of NGOs were not able to up scale their lending operations because of difficulties like interest rate cap on lending, security stipulations etc.

Continued-------------SIDBI
SIDBI reoriented its Micro Finance Programme in 1999 by addressing the weakness of the pilot scheme, with an objective to create a national network of large and viable Micro Finance Institutions from the formal and informal sector. The programme provides need based assistance by way of term loans to partner institutions for meeting their on lending fund requirements. Its programme took off slowly. The bank was able to improve its portfolio by 100% each year for the last three years in a row. It had sanctioned Rs.320 crore financial assistance during 2006 as against Rs 189.73 crore during 2005.

Services that can be provided

Four categories of services that may be provided to MF clients

Fin. Intermediation or the provision of financial products &

services such as savings, credit ,cards & payment systems

Social intermediation or the process of building the human

and social capital required by sustainable financial intermediation for the poor . This may require subsidies.

Enterprise development services or non financial services

that assist micro entrepreneurs .They include business training ,marketing and technology services ,skills development .These services may or may not require subsidies.

Continued- Social services or non financial services

that focus on improving the wellbeing of micro entrepreneurs .They include health ,nutrition education and literacy training .Social services are likely to require ongoing subsidies which are provided by states or donors.