MICROFINANCE-SERVICE PROVIDERS A SMALL BUSINESS INVESTMENT COOPERATIVE PAPER SUBMITTED BY M.TULASINADH R.MAHESH II MBA, K.B.N PG COLLEGE, VIJAYAWADA.

ABSTRACT Microfinance refers to small-scale financial services including both credits and deposits provided to people farm or fish or herd; operate small or micro enterprises where goods are produced recycled, repaired or traded; provide services; work for wages or commission; gain income renting for out small amount of land, vehicles, draft animals, or machinery and tools; in both rural and urban areas. Introduction: Micro finance means the provision of banking services to lower income people, especially the poor and very poor. Micro finance is a financial service of small quantity provided by financial institutions to the poor. This financial services may include savings, credit, insurance, leasing, money transfer etc. i.e., any financial service provided to customers to meet their normal financial needs unlike normal credit, microcredit limited with collateral substitute and credit plan services. Despite the expansion of the organized banking system deep into rural areas it was found that a very large number of the poor continued to remain outside the fold of the formal baking system .thus began the search for an alternative delivery mechanism which would meet the requirements of the poor and especially the women members of such households. The first official interest in group lending in India took shape during 1986-87.when national bank for agricultural and rural development (NABARD) Supported and financed research project on saving and credit management of self help group of Mysore resettlements and

development agency. so it is finally clear that the role of microfinance institution are very important in rural development and poverty eradication. It is in this context, that one needs to appreciate the role-played by microfinance institution government NGOs and social organizations.

HISTORY OF MICRO FINANCE: The pioneering of modern microfinance of often credited to Dr Mohd Yunus, who began experimenting by lending to poor women in the village of jobra,

Bangladesh, during his tenure as a professor of economist at Chittagong university in1970s. He went on to find Grameen Bank in 1983, and won Noble Peace Prize in 2006.Since then, innovations of micro finance have continued and providers of

financial services to the poor continue to evolve. Today the world bank estimates that about 160 million people in developing countries are served by microfinance.

Key Features Of Microfinance:

LEND TO THE POOR PEOPLE & DONT TAKE SECURITY

PREFER SAVING OVER BORROWING & SMALL SHORT TERM LOANS

KEY FEATURES OF MICROFINANCE COST COVERING INTEREST RATES &GROUP APPARAISAL AND GUARENTEE

PREFER WOME N CUSTOMERS OVER MEN

FINANCING MODEL IN MICROFINANCE INDUSTRY:

SHG- BANK LINKAGE PROGRAMME: The SHG-BANK linkage programme which commenced as a pilot programme during 1992 to the link 500 SHG banks, has grown exponentially during the last two decades and the over 97 million rural households have now access to regular savings through 74.62 lakh SHGs linked to different banks. Over BANK linkage programme all programs under SHGs

Fig 2: SHG- Bank Linkage Programme - Number of SHGs

80 60 40 20 0 2008-09 2009-10 2010-11 Saving linked SHGs Loans Disbursed During the Year Loans Outstanding 31st March

SHG Bank Linkage Programme - Amount of Savings and Credit

30000 25000 20000 15000 10000 5000 0 2008-2009 2009-2010 2010-2011 Saving linked SHGs Loans Disbursed During the year Loans Outstanding 31st March

Service providers: Informal financial service providers: These include moneylenders, pan brokers, savings, collectors, money guards, rotating savings and credit associations (ROSCAs), accumulations and credit associations(ASCAs) and input supply shops. Because they know each other well and live in the same community, the understand each others financial circumstances and can offered very flexible, convinent and fast services. These services can also be costly and the choice of financial products limited and short term. Informal services that involve savings are also risky. Formal financial institutions: In addition to commercial banks these include state banks, agricultural banks, savings banks, rural banks, on- bank financial institutions. They are regulated and supervised, offer a wider range of financial services, and control a branch network that can extend across the country and internationally. However, they have proved reluctant to adopt social mission due to their high costs of operation, often cannot deliver services to poor or remote populations. The increasing use of alternative data credit scoring such as trade credit, is increasing commercial banks interest in microfinance.

DEVELOPMENTS IN MICROFINANCE INDIA: Micro finance in India has started to evolve in early 1980s with an effort of forming informal small help group (SHG) to provide access of financial services to needy. India is 2nd most populous country behind china with a large number of un-financed poor people. In 1992 --NABARD conducts pilot project refinancing SHG

programmes.1996-encouraged by the above pilot project, the govt. appoints the working group- made important recommendations including inclusion in the priority sector list.

1999- A task force on NBFCs made recommendations on microfinance.2000-The RBI announces broad guidelines to banks on microfinance in its credit and monetary policy.2005- KHAN report(RBI) on policy options, on development and regulations issues. MFIS are increasing their share in India microfinance supply as of comparison to SGHs where their share has gone down to 53% in March 2008, from 72% in the year March 2003.

The challenges in building a sound microfinance industry include:

Inappropriate donor subsidies Poor regulation and supervision of deposit-talking microfinance institutions(MFIs) Few MFIs that meet the needs for saving remittance or insurance Limited management capacity of MFIs Institutional inefficiencies Need for more dissemination and rural agricultural finance methodologies.

RECOMMENDATIONS AND SUGGESITIONS: There is need to bill strong and efficient microfinance institution this requires governance professionalism management strengtning internal control and accounting introducing low cost ways of doing business. The biggest hope of cost reduction comes from new technology. For example transferring funds via mobile phones. Micro financing needs the financial infrastructure to support it. Microfinance institutions looking to commercial funding sources, require independent assessments for credit rating agencies. now there is no credit rate agency , a few which are not adequate in number to access the credit worthiness of micorfinancing institutions. so a better credit rating methodology is needed. Microfinance interest rate are high which range about 25%. The best way to lower interest rate ,would be encourage more MFIs because the more competition the more will be the innovative idea for the reduction of the interest rate by way of reducing the cost of the management. The local and the national government have a n important role ensuring the growth and improvement of microfinance, each Indian state could consider forming a multi party working group to meet with the microfinance leaders and have a dialogue with then about how the policy environment we made more supportive and to clear up misperception. RBI regulates financial services in India currently various aspects of microfinance are handled by various departments. This multiplicity has not ensured suffiencicy in supervision as well as MFIS remain regulated. Compliance to the regulation needs to made simpler. Regulation of all aspects( financial services ,insurance services, ratings and foreign borrowing approvals) of microfinance should be a single a entity. So the regulating environment of microfinance need to be simplify. A new category of NBFC should be created. MFIs need to actively manage their growth and provide legal and operational comfort to banks and potential equity investors. Greater legitimacy, acceptability and transparency and enable to use savings as a low cost source of lending

 . A new NBFC category should be created for the provision of microfinance services with a minimum of equity capital and subsequently the equity capital base should be raised in proportions to the growth of microfinance services. Special incentives should be provided to NGOs working particularly in hilly and backward districts. Some special prices schemes should be introduced for the better performance of NGOs in the formation of SHGs in the backward regions. All SHGs particularly in the backward regions should be consider under one umbrella by adopting E-chou pal system monitoring activities are to be performed by appointing computer machines, a new modified system that is now prevailing in some of the states in India.

FUTURE OUTLOOK: size and growth: The indian micro finance sector has expected to grow nearly ten times by 2012 by a size of about Rs 325 billion from the current market size Rs 27 billion, at a compounded annual grwoth rate of 76%, with out populations of the people living below $1.25 day the country , the total demand of the micro credit in the country is Rs550 billion at an annual average loan size of Rs 6,000. Thus even 2012 only about 50% of the market demand may be covered

350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 2008 2009 2010 2011 2012 INR MILLION

CONCLUSION: Microfinancing is going to put poverty in to the museum Muhammad Yunus, Noble Prize winner & founder of Grameen Bank. How much is going to be true only time will tell, but one thing is certain where ever there will be poor people wanting loans, there will be lenders ready to oblige!

Bibliography: Web links: www.indiamicrofinance.com www.capital.ifmr.co.in www.microfinancefoucs.com

References: Yunus Mohamad. Creating a world without poverty: social business and the future of capitalism. Public affairs, New York, 2008. The future of microfinance in India: By Sukwinder Sing Arora, Financial Sector Team, Policy Division, DFID. Doug Johnson, The Geographic Distribution Of Microfinance Services In India 2007. Microfinance In India State of the Sector Report 2009.