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Published by: Shreya Pavithran on Mar 27, 2011
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What is microfinance ? Development of Microfinance in India Need in India Features of microfinance Role of RBI and NABARD Activities of microfinance Delivery methods Issues and challenges SKS MicrofinanceAbout SKS Its activities Recent changes in the sector Malegam committee report Conclusion

repaired or traded. operate small or microenterprises where goods are produced.WHAT IS MICROFINANCE Microfinance refers to small-scale financial services including both credits and deposits provided to people who farm or fish or herd.animals. gain from renting out small amounts of land.recycled. provide services.vehicles. work for wages or commissions.or machinery and tools. in both rural and urban areas. Lend to poors Do not take security Small short term loans Prefer women customers over men .

DEVELOPMENT OF MICROFINANCE Microfinance has started to evolve in early 198o s with an effort of forming self help groups(SHG) to provide access to financial service to the poor India is the second most populous country in the world behind china with a large number of unfinanced poor people(clients of microfinance) Passing of Mutually Aided Co-op. Act in AP in 1995 MFI s are increasing their shares in the Indian microfinance supply in comparison to SHG s .

the supply is less than $2.NEED IN INDIA India is said to be the home of one third of the world s poor. Microfinance has been present in India in one form or another since the 1970s and is now widely accepted as an effective poverty alleviation strategy. About 87 percent of the poorest households do not have access to credit. the microfinance industry has achieved significant growth in part due to the participation of commercial banks.2 billion combined by all involved in the sector. Over the past few years. official estimates range from 26 to 50 percent of the more than one billion population. . The demand for microcredit has been estimated at up to $30 billion.

25 crore poor hoseholds NABARD s bank linkage program has cumulatively reached a total of 9. About 20 % are Trusts About 65 % of the MFIs follow the operating model of SHGs.4 crore households.4 lakh SHGs with about 1. . Large concentration in South India 600 MFI initiatives have a cumulative outreach of 1.FEATURES OF INDIAN MICROFINANCE About 60 % of the MFIs are registered as societies.

ROLE OF RBI AND NABARD Support financial liberalization Prudential regulation and supervision Training and advocacy Supporting the pilot project of microfinance RBI(CENTRA L BANK) NABARD(reg ulator) Framing policies and guideline for rural financial institutions Providing credit facilities Monitoring the flow of credit .

(this is as per the data produced by SIDBI in one of its study in 2008) The percentage of households reporting their main source of income as agriculture. . whereas. 72 per cent and 100 per cent respectively. Grameen. Individual Banking and Sector-speci c MFIs is 67 per cent.OUTREACH OF MICROFINANCE Micro Finance movement has gained momentum mainly in the Southern States which have a better socio-economic scenario due to gender-inclusiveness of cultural traditions and rich natural resource. The shing activity and salaried income did not register any signi cant change. The proportion of rural clients under SHG. animal husbandry and non-farm activities went up. MFIs generally serve rural clients (75 per cent clients). those reporting casual labour and others went down. 86 per cent.

ACTIVITIES OF MICROFINANCE 1. 2. 4. The main activities are : Microcredit Microsavings Micro insurance Remmitances . 3.

Microcredit can be offered. to an individual or through group lending. often without collateral. Advantages of micro credit: Available at door step Less paper work No middlemen involvement Easily accessible .MICRO CREDIT It is a small amount of money loaned to a client by a bank or other institution.

They were able to save small amounts on regular basis which was not possible in any formal nancial institution.MICRO SAVINGS These are deposit services that allow one to save small amounts of money for future use. Savings scheme a boon to the women : The reasons for preference of saving scheme by women were: They can maintain savings at their door steps. . They can contribute to their family or near and dear ones during distress. these savings accounts allow households to save in order to meet unexpected expenses and plan for future expenses. Often without minimum balance requirements. They can create emergency funds which acts as a security at their odd times.

but the term certainly implies focus on the poor and involves insurance coverage with modest premium and sums insured. . usually across borders to family and friends. Definition of these relatively new terms is still evolving. Remittances: These are transfer of funds from people in one place to people in another. remittances are a relatively steady source of funds. Compared with other sources of capital that can fluctuate depending on the political or economic climate.Micro insurance: Micro-insurance is the term now commonly used for insurance services specially aimed at the poor.

GRAMEEN MODEL focused on financial transactions Joint liability Groups Interest rate are charged on flat basis SELF HELP GROUPS (SHGs) origin in India formed by NonGovernment Organizations as well as Government agencies discussing and solving their common problems either financial or social through mutual help .DELIVERY METHODS INDIVIDUAL METHOD provide loans to an individual based on his/her own personal credit worthiness ask for individual guarantors or take postdated cheques from clients.

Research has shown that investing in women offers the most effective means to improve health. hygiene. and educational standards for families and consequently for the whole of society. .WOMEN AND MICROFINANCE A majority of micro nance programmes target women with the explicit goal of empowering them. Naila Kabeer defines women s empowerment as the process by which those who have been denied the ability to make strategic life choices acquire such ability. nutrition.

Some of them are: The poor s inability to offer marketable collateral for loans Poor institutional viability of micro enterprises Lack of knowledge about microfinance services Shortage of Financial Capital Or Misallocation .ISSUES AND CHALLENGES : Offering financial services to the poor individual is a complex process and that in itself leads to various challenges.

CONTD: Few organizational resources and poor governance Vulnerability to economic changes Ability to train trainers prepare a panel of locally Identify and available trainers. .

In 2005.SKS-MICROFINANCE SKS stands for Swayam Krishi Sangam. Dr. founded SKS in 1997 and launched operations in 1998 in Andhra Pradesh. SKS converted into a non-banking financial company (NBFC) which is regulated by India s central bank. the Reserve Bank of India (RBI). . India with the mission to eradicate poverty. Vikram Akula. Founder and Chairperson. which in Hindi means self-cultivation society.

to opening a village tea stall SKS uses the joint liability group lending model where women guarantee each other s loans SKS approves new loans based on initial screening of the applicant and approval of the other members in the group Re-payment rates on their collateral-free loans are more than 99% because of this systematic process. 4.SKS ACTIVITIES their core business is distributing income generation and productivity loans that begin at Rs.000 to poor women Their micro-enterprises range from raising cows and goats in order to sell their milk. SKS lends only to women .

product offerings.Sources of revenue. geographies Rural distribution network Superior asset quality Scalable operating model Access to multiple sources of capital and emphasis on asset / liability and liquidity management Experienced management team and board of directors .7 STRENGTHS Market leadership Expertise in microfinance Diversified .

RECENT CHANGES IN THE SECTOR Over the last two decades. many lenders that began as non-profit organizations have transformed into commercial microfinance institutions (MFIs) among them. What we are really seeing in Andhra Pradesh is the fallout from a longstanding competition between MFIs and the state government. and Spandana. each of which believes it should be the source of financial services to the poor. one of India s most populous states. An initial public offering is the triggering point for making a lot of money personally as well as for the company and shareholders Last November. Andhra Pradesh. SHARE. banning many of their activities and telling borrowers they did not need to repay their loans. Andhra Pradesh officials charged that MFIs levy usurious" interest rates (24-30 per cent per year) to sustain their promoters extravagant salaries and profits . . SKS. BASIX. cracked down heavily on private microfinance institutions (PMFIs).

4. There is a restriction on the other services to be provided by the MFI which has to be in accordance with the type of service and the maximum percentage of total income as may be prescribed. 3. 2. These are: The NBFC-MFI will hold not less than 90% of its total assets (other than cash and bank balances and money market instruments) in the form of qualifying assets.25.000 Not less than 75% of the loans given by the MFI should be for incomegenerating purposes. . 1. some additional qualifications for NBFC to be classified as NBFC-MFI. The Committee has recommended that net owned funds should be in form of Tier I capital. It has recommended creation of a separate category of NBFCs operating in the microfinance sector to be designated as NBFC-MFIs.000 and an individual ceiling on loans to a single borrower of Rs.MALEGAM COMMITTEE to study Issues and concerns in the micro finance institutions (MFI) Sector. There are limits of an annual family income of Rs.and has set the minimum capital for NBFC-MFIs at `15 Crore.50.

the SubCommittee has proposed a four-pillar approach with the responsibility being shared by (a) MFI (b) industry associations (c) banks and (d) the Reserve Bank. in the interest of transparency. (a) processing fee (b) interest and (c) insurance charge. 100 crore and of 12 per cent for smaller MFIs and a cap of 24% for interest on individual loans. the Sub-Committee has recommended an average margin cap of 10 per cent for MFIs having a loan portfolio of Rs. . It has also proposed that. namely. With regard to the interest chargeable to the borrower. For monitoring compliance with regulations. an MFI can levy only three charges.

Whether providing financial services to groups that traditionally could not access them helps these people or only puts them further in debt is still up for debate MFI s have to decide between the interests of their customers and interests of their investors .CONCLUSION There should be proper regulation as the area in which the MFI S operate in is different from the area of commercial banks and other lending bodies. The recommendations given by Malegam Committee is excellent and the government should take atmost care in accepting the same. either through nonprofit organizations or through larger commercial lenders. Microfinance provides small loans to the world's poorest people.

all we have to do is to free them from the chains that we have put around them -MUHAMMAD YUNUS ..The poor themselves can create a poverty-free world.

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