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Group Members
Sr no. 1. 2. 3. 4. 5. 6. Name Nishit Rohit Jignesh Anita Pooja Vinay Roll No. 49 43 40 46 56 37

BANKING AND INSURANCE

TOPIC:-

Submitted to:-

Prof.Rupali.
Self realization and self initiative are the two most powerful weapons to wash poverty out from the world Chanakya (Worlds Greatest Ancient Economic and Political Scholar)
The poor stay poor, not because they are lazy but because they have no access to capital -Milton Friedman
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SR. NO.

TOPIC
What is Microfinance Origin How does microfinance work Why microfinance Principles of microfinance Financial needs of poor Microfinance in India Current scenario Key concerns

Page no.

1. 2. 3. 4. 5, 6. 7, 8, 9.

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10. Proven impact of microfinance

MICRO FINANCING
What is micro financing? They are very small loans, typically less than $100 (54), made to the rural poor in developing countries who normally do not qualify for traditional banking credit. This is often the only way they can establish a business and lift themselves out of poverty. Professor Yunus founded his Grameen Bank in 1976 during a devastating famine in Bangladesh. Today it has 6.6 million borrowers of whom 97% are women. This focus on female borrowers in a society where women are frequently forced to take responsibility for their entire family is one of the characteristics that caught the Nobel Committee's attention. Grameen, which means village, is an idea that has spread to more than 40 countries including Sri Lanka where women's banks were already a familiar concept. Hence, Microfinance refers to the provision of financial services to low-income clients, including consumers and the self-employed. The term also refers to the practice of sustainably delivering those services. More broadly, it refers to a movement that envisions a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers. Those who promote microfinance generally believe that such access will help poor people out of poverty.

Micro credits have helped change the lives of many rural people

ORIGIN
Although neither of the terms microcredit or microfinance were used in the academic literature before the 1980s or 1990s, the concept of providing financial services to low income people is much older. While the emergence of informal financial institutions in Nigeria dates back to the 15th century, they were first established in Europe during the 18th century as a response to the enormous increase in poverty since the end of the extended European wars.(1618 1648). In 1720 the first loan fund targeting poor people was founded in Ireland by the author Jonathan Swift. Professor Yunus founded his Grameen Bank in 1976 and termed it as MICROFINANCE.
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Prof. Yunus

HOW DOES MICRO CREDIT WORK?

Grameen transactions take place at the village level, usually in a local hall or temple. Typically a Grameen borrower will use a loan to buy tools and equipment to set up on their own. As the microcredit idea has grown the Grameen organization has extended into foundations dedicated to fisheries and irrigation. By avoiding both employers and unscrupulous local money lenders the Grameen loan aims to break a circle of exploitation that frequently condemns rural villagers to lives of poverty. The Nobel Committee cited how his Grameen Bank aids the poor "to bring about their own development". And the concept of extending loans to a largely female client base has also been credited with reducing domestic violence by giving women a previously unattainable degree of independence. So it's worry free money then? Not quite. Critics argue that the Grameen idea is in danger of being oversold. And because the loans are often repaid by villagers banding together in loan clubs, this has led to accusations that some of the poor can come under peer pressure to repay the money they owe when times are tough. Grameen Bank has also survived accusation that it lacked adequate funds, though Professor Yunus was adamant that his bank could repay all of the money it raised from the commercial sector. Despite some concerns, Professor Yunus and his ideas have attracted a growing band of advocates, including the former US President Bill Clinton and his wife Hillary.

Community-based savings bank in Cambodia. There are a rich variety of financial institutions serving poor people.

WHY MICRO FINANCING?

Traditionally, banks have not provided financial services to clients with little or no cash income. Banks must gain substantial costs to manage a client account, regardless of how small the sums of money involved. For example, the total revenue from delivering one hundred loans worth $1,000 each will not differ greatly from the revenue that results from delivering one loan of $100,000. But the fixed cost of processing loansof any sizeis considerable: assessment of potential borrowers, their repayment prospects and security; administration of outstanding loans, collecting from delinquent borrowers and so on. There is a break-even point in providing loans or deposits below which banks lose money on each transaction they make. Poor people usually fall below it. In addition, most poor people have few assets that can be secured by a bank as collateral. Because of these difficulties, when poor people borrow they often rely on relatives or a local moneylender, whose interest rates can be very high. An analysis of 28 studies of informal money lending rates in fourteen countries in Asia, Latin America and Africa concluded that 76% of moneylender rates exceed 10% per month, including 22% that exceed 100% per month. Moneylenders usually charge higher rates to poorer borrowers than to less poor ones. While moneylenders are often demonized and accused of usury their services are convenient and fast, and they can be very flexible when borrowers run into problems. Hopes of quickly putting them out of business have proven unrealistic, even in places where microfinance institutions are very active. The founders of the microcredit movement in the 1970s Muhammad Yunus have tested practices and built institutions designed to bring the kinds of livelihood opportunities and risk management tools that financial services provide to the doorsteps of poor people. While the success of Grameen Bank (which now serves over seven million poor Bangladeshi women) has inspired the world, it has proved difficult to replicate this success in practice. In nations with lower population densities, meeting the operating costs of a retail branch by serving nearby customers has proven considerably more challenging. Although much progress has been made, the problem has not been solved yet. Microfinance has been growing rapidly. The industry has been growing rapidly and there have been concerns that the rate of capital flowing into microfinance is a potential risk unless managed well.
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PRINCIPLES OF MICRO FINANCING

Some principles that summarize a century and a half of development practice were sum up in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at the G8 Summit on June 10, 2004: 1. Poor people need not just loans but also savings, insurance and money transfer services. 2. Microfinance must be useful to poor households: helping them raise income, build up assets and/or soften themselves against external shocks. 3. Microfinance can pay for itself. Subsidies from donors and government are scarce and uncertain, and so to reach large numbers of poor people, microfinance must pay for itself. 4. Microfinance means building permanent local institutions. 5. Microfinance also means integrating the financial needs of poor people into a countrys mainstream financial system. 6. The job of government is to enable financial services, not to provide them. 7. Donor funds should complement private capital, not compete with it. 8. The key block is the shortage of strong institutions and managers. Donors should focus on capacity building. 9. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit. 10.Microfinance institutions should measure and disclose their performance both financially and socially.

Microfinance can also be distinguished from charity. It is better to provide grants to families who are poor, or so poor they are unlikely to be able to generate the cash flow required to repay a loan. This situation can occur for example, in a war zone or after a natural disaster.

FINANCIAL NEEDS OF POOR PEOPLE

Financial needs and financial services.

In developing economies and particularly in the rural areas, many activities that would be classified in the developed world as financial are not monetized: that is, money is not used to carry them out. Almost by definition, poor people have very little money. But circumstances often arise in their lives in which they need money or the things money can buy.

Types of financial needs:

Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood, old age. Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death. Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of dwellings. Investment Opportunities: expanding a business, buying land or equipment, improving housing, securing a job (which often requires paying a large bribe), etc.

Poor people find creative and often joint ways to meet these needs, primarily through creating and exchanging different forms of non-cash value. Common substitutes for cash vary from country to country but typically include livestock, grains, jewellery and precious metals. The obstacles or challenges to building a sound commercial microfinance industry include: Inappropriate donor subsidies Poor regulation and supervision of deposit-taking MFIs Few MFIs that meet the needs for savings, remittances or insurance Limited management capacity in MFIs Institutional inefficiencies Need for more spreading and adoption of rural, agricultural microfinance methodologies.

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MICRO FINANCING IN INDIA

Since independence, various governments in India have experimented with a large number of grant and subsidy based poverty alleviation programmes. These programmes were based on grant/subsidy and the credit linkage was through commercial banks only. As a result, these programmes became unsustainable, perpetuated a dependant status on the beneficiaries and depended ultimately on the govt. employees for delivery. This not only led to misuse of both credit and subsidy but banks never looked at it as a profitable and commercial activity as well. Hence was adopted the concept of micro-credit in India. Success stories in neighboring countries, like Grameen Bank in Bangladesh, Bank Rakiat in Indonesia, Commercial & Industrial Bank in Philippines etc, gave further boost to the concept in India in the 1980s. India thus adopted the similar model of extending credit to the poorest sector and took a no. of steps to promote microfinancing in the country.

TYPES OF ORGANIZATIONS AND COMPOSITION OF THE SECTOR

Microfinance providers in India can be classified under three broad categories: formal, semiformal, And informal. Formal Sector The formal sector comprises of the banks such as NABARD, SIDBI and other regional rural banks (RRBs). They primarily provide credit for assistance in agriculture and micro-enterprise development and primarily target the poor. Their deposits at around Rs. 350billion and of that, around Rs. 250billion has been given as advances. They charge an interest of 12-13.5% but if we include the transaction costs (number of visits to banks, compulsory savings and costs incurred for payments to animators/staff/local leaders etc) they come out to be as high as 2124%.
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Semi - formal Sector The majority of institutional microfinance providers in India are semi-formal organizations broadly referred to as MFIs. Registered under a variety of legal acts, these organizations greatly differ in philosophy, size, and capacity. There are over 500 non-government organizations (NGOs) registered as societies, public trusts, or non-profit companies. The following are the some of leading microfinance institutions in India working in the sector. Association for Sarva Seva Farms (ASSEFA) Mitrabharati - The Indian microfinance Information Hub Mysore Resettlement and Development Agency (MYRADA) SADHAN - The Association of Community Development Finance Institutions SEWA: Self-help Women's Association SKS India - Swayam Krishi Sangam Streedhan - Banking with Rural Women Working Women's Forum, Madras, India Some of the NGOs in India have adopted the approach of micro-enterprise development through micro-finance. The examples are CDF (Co-operative Development Foundation) in Andhra Pradesh, LHWRF (Lupin Human Welfare Research Foundation) in Rajasthan, UPLDC (Uttar Pradesh Land Development Corporation) in Uttar Pradesh and Group Enterprise Development Project of EDI (Entrepreneurship Development Institute of India) in Nagaland.

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Informal Sector In addition to friends and family, moneylenders, landlords, and traders constitute the informal sector. While estimates of their importance vary significantly, it is undeniable that they continue to play a significant role in the financial lives of the poor. Steps taken by India to promote micro-financing It set up development banks, such as SIDBI, NABARD which focused on rural credit and micro-financing. NGOs and SHGs were encouraged to become the govts arm in extending micro-credit to the poor. They were provided supplementary credit needed to fund the credit, paper work was reduced between them and the banks. Also, the govt assisted in mobilizing funds from formal financial institutions to meet the larger credit needs of these organizations.
Focus on Women for micro - credits

A lot of Micro-financing schemes are now increasingly focusing on women primarily as well. There are compelling reasons for this.

Among the poor, the poor women are the most

disadvantaged - they are characterized by lack of education and access to resources, both of which are required to help them work their way out of poverty and for upward economic and social mobility. The problem is more acute for women in countries like India, despite the fact that womens labor makes a critical contribution to the economy. Evidence shows that groups of women are better customers than men - they are better managers of resources - benefits of loans are spread wider among the household if loans are routed through women - mixed groups are often inappropriate in Indian society - record of all-male groups is worse than that of all-women groups, everywhere.

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Current Scenario of Micro - financing in India

With 75 million poor households potentially requiring financial services, the microfinance market in India is among the largest in the world. Estimates of household credit demand vary from a minimum of Rs. 2,000 to Rs. 6,000 in rural areas and Rs. 9,000 in urban settings. Given that 80 percent of poor households are located in rural areas, total credit demand ranges between Rs. 255 billion and Rs. 500 billion. However, only Rs.18 billion of this amount has been generated so far. The reason for this is that major portion for rural crediting has been from the informal sector and this is at a very high interest rate, thus reducing the volumes of such credits, and by far has been for investment purposes (13%) and more for family emergencies (29%) and social expenditures (19%). There are a number of factors why rural crediting by the formal sector has not taken pace so far.
High fiscal deficits have meant that Government is appropriating a large share of financial savings for itself. Persisting interest rate restrictions reduce the attractiveness of lending, particularly to small, rural clients.

On the other hand, informal credits have been attractive albeit high interest rates due to:

Flexible repayment options Convenience and frequency with which such loans can be accessed Less reliance on collateral (only 16.5% of households report providing
collateral against the loan)

Meeting the Demands

Inadequacies in rural access to formal finance and the seemingly extortionary terms of informal finance for the poor provide a strong need and ample space for innovative approaches to serve the financial needs of Indias rural poor. A gap of as high as 85%-90% in supply and demand cannot be closed by only the existing MFIs because many, particularly the younger and smaller organizations, lack the institutional capacity to expand.

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KEY CONCERNS
All said and done however, there are certain key issues that need to be tackled before ensuring the benefits of micro-financing would reach their optimum levels. Scaling-Up Microfinance: Micro financing through formal and semi-formal can reach selfsustainability only when there is substantial volume which they can generate. Effective policy, legal and regulatory framework :An enabling policy, legal and regulatory framework is critical to scaling-up. For this the govt. needs to take certain steps as: Reducing minimum start-up capital requirements to facilitate the transformation of MFIs into NBFCs Encouraging multiple sources of equity for MFIs Developing a set of prudential norms that are more appropriate to institutions serving the poor, and set up supervision mechanisms around those norms. Inclusiveness and competition in the microfinance sector can generate high payoff. This will not only give the borrower a no. of options for raising debt, but also drive the costs down to raise them.

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PROVEN IMPACT OF MICRO-FINANCING

The effects of micro-financing trickling down to the poorest of Indians can already be observed in the Indian economy. Improvement in Asset Position The average increase in assets was about 72%, from Rs6,843 to Rs11,793 in real terms (in one to three years) in most of the households where micro-financing has been extended. Before given the credit, one in three households had no assets; after that, it changed to one in six. Increase in Savings While most households given micro-credits were having negligible or no savings, this improved to Rs. 160-Rs. 460 and in some cases, the average household savings rose to as high as Rs. 1444. Changes in Borrowing Patterns With improvement in above two factors, people were more ready to borrow from the semi-formal and formal sector rather than their traditional creditors i.e. friends and family, moneylenders, landlords. Impact on income The average net income per household increased from Rs 20177 to Rs. 26889.

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