S.

ARUN KUMAR
DHANAMJAYA BHUPATHI
E.MOHANRAJ
---- PRESENT

PICTURING MICRO FINANCE

 WHAT IS MICRO FINANCE ?
 Micro Finance is the supply of loans, savings, and
other basic financial service to the poor .
-> CGAP

 To most, micro finance means providing very poor

families with very small loans (micro credit) to help
them engage in productive activities or grow their
tiny businesses.
-> Financial Gateway

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 ABOUT MICRO FINANCE
 The modern micro finance movement dates back to the
1970s when experimental programs in Bangladesh,
Brazil, and a few other countries began to extend tiny
loans to groups of poor women to invest in micro
enterprises

 By lending to groups of women where every member of

the group guaranteed the repayment of all members,
these micro credit programs challenged the prevailing
conventional wisdom and proved that poor people
without collateral could be "credit worthy". When offered
the opportunity, they would repay loans with interest, at
extraordinary rates of repayment.

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 MICRO FINANCE AND MICRO
CREDIT
Micro finance refers to loans, savings,
insurance, transfer services and other
financial products targeted at low-income
clients.

Micro credit refers to a small loan to a

client made by a bank or other institution.
Micro credit can be offered, often without
collateral, to an individual or through group
lending.

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 MICRO FINANCE IN INDIA

Evolution of Micro finance in India

 Micro finance has been in practice for ages ( though informally).
 Legal framework for establishing the co-operative movement
set up in 1904.
 Reserve Bank of India Act, 1934 provided for the establishment
of the Agricultural Credit Department.
 Nationalization of banks in 1969
 Regional Rural Banks created in 1975.
 established as an apex agency for rural finance in 1982.
 Passing of Mutually Aided Co-op. Act in AP in 1995.

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THE PROFILE OF MICRO FINANCE IN
INDIA
The scenario
 Estimated that 350 million people live Below Poverty Line
 This translates to approximately 75 million households.
 Annual credit demand by the poor in the country is estimated to be
about Rs. 60,000 crores.
 Cumulative disbursements under all micro finance programmes is
only about Rs. 5000 crores.(Mar. 04)
 Total outstanding of all micro finance initiatives in India estimated to
be Rs. 1600 crores. (March 04)
 Only about 5 % of rural poor have access to micro finance

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THE STATUS OF MICRO FINANCE IN
INDIA
Considerable gap between demand and supply for all financial
services
Majority of poor are excluded from financial services. This is due
to, inter-Alia, the following reasons
Bankers feel that it is fraught with risks and uncertainties.
High transaction costs
Unfavourable policies like caps on interest rates which
effectively limits the viability of serving the poor.
While MFIs have shown that serving the poor is not an unviable
proposition there are issues that have constrained MFIs while
scaling up. These include
Lack of an appropriate legal vehicle
Limited access to equity
Difficulty in accessing low cost on-lending funds (as of now
they are unable to offer savings services in a legitimate

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THE STATUS OF MICRO FINANCE IN INDIA
( CONTD.,)

Limited access to Capacity Building support which is

an important variable in terms of quality of the
portfolio, MIS, and the sustainability of operations.
About 56 % of the poor still borrow from informal
sources.
70 % of the rural poor do not have a deposit
account
87 % have no access to credit from formal sources.
Less than 15 % of the households have any kind of
insurance.
Negligible numbers have access to health insurance

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 FEATURES OF INDIAN MF

About 60 % of the MFIs are registered as societies.

About 20 % are Trusts
About 65 % of the MFIs follow the operating model of SHGs.
Large concentration in South India
600 MFI initiatives have a cumulative outreach of 1.25 crore
poor households
NABARD’s bank linkage program has cumulatively reached a
total of 9.4 lakh SHGs with about 1.4 crore households.

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 PROJECTIONS FOR THE FUTURE

Annual growth rate of about 20 % during the next five years.

75 % of the total poor households of 80 million (i.e. about 60

million will be reached in the next five years.

The loan outstanding will consequently grow from the present

level of about 1600 crores to about 42000 crores

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WHAT IS THE MICRO FINANCE DEVELOPMENT
FUND ?

Union Finance Minister in his budget speech for the year 2000-01, this Rs. 100
crore Fund has been created in NABARD to support broadly the following
activities:
a) giving training and exposure to self-help group (SHG) members, partner NGOs,
banks and govt. agencies
(b) providing start-up funds to micro finance institutions and meeting their initial
operational deficits
c) meeting the cost of formation and nurturing of SHGs; (d) designing new
delivery mechanisms
e) promoting research, action research, management information systems and
dissemination of best practices in micro finance.

This Fund is thus expected to address institutional and delivery issues like
institutional growth and transformation, governance, accessing new sources of
funding, building institutional capacity and increasing volumes. RBI and NABARD
have contributed Rs. 40 crore each to this Fund. The balance Rs. 20 crore were
contributed by 11 public sector banks.

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 MICRO CREDIT AND RBI

RBI defines Micro Credit as :

Micro Credit is defined as provision of thrift, credit and other financial services
and products of very small amount to the poor in rural, semi-urban and urban
areas for enabling them to raise their income levels and improve living
standards. Micro Credit Institutions are those which provide these facilities.

DO RBI ENFORCE INTERESR RATES ?

No. The reform of the interest rate regime has constituted an integral part of the
financial sector reforms initiated in our country in 1991. In consonance with this
reform process, interest rates applicable to loans given by banks to micro credit
organizations or by the micro credit organizations to Self-Help Groups/member-
beneficiaries has been left to their discretion. The interest rate ceiling applicable
to direct small loans given by banks to individual borrowers, however, continues
to remain in force.

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MICRO CREDIT AND RBI ( CONTD.,)

 DO RBI IMPOSE THE TERMS & CONDITIONS FOR ACCESSING MICRO

CREDIT ?
No . Banks have been given freedom to formulate their own lending norms keeping in view
ground realities. They have been asked to devise appropriate loan and savings products and
the related terms and conditions including size of the loan, unit cost, unit size, maturity
period, grace period, margins, etc

 IS FOREIGN INVESTMENT ALLOWED IN MICRO CREDIT PROJECTS ?

Govt. of India with their notification dated August 29, 2000 have included ‘Micro Credit/Rural
Credit’ in the list of permitted non-banking financial company (NBFC) activities for being
considered for Foreign Direct Investment (FDI)/Overseas Corporate Bodies (OCB)/Non-
Resident Indians (NRI) investment to encourage foreign participation in micro credit projects.
This covers credit facility at micro level for providing finance to small producers and small
micro enterprises in rural and urban areas

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TYPES OF MICRO CREDIT PROVIDERS IN
INDIA

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SUCCESSFUL MICRO FINANCE MODELS THAT
HAVE EMERGED IN INDIA

 An Intermediate Model that works on banking principles with focus

on both savings and credit activities and where banking services are
provided to the clients either directly or through SHGs;
 There is also a Wholesale banking Model where the clients comprise
NGOs, MFIs and SHG Federations. This Model involves a unique
package of providing both loans and capacity building support to its
partners; and
 Further, there is an Individual Banking-based Model that has its
clients as individuals or joint liability groups. While programme
management and client appraisal in this Model may be a challenge, it is
best suited to lending to enterprises.

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ICICI BANK - INNOVATIONS IN
MICRO FINANCE

 The bank led model was derived from the SHG-Bank linkage
program of NABARD. Through this program, banks financed
Self Help Groups (SHGs) which had been promoted by NGOs
and government agencies.

 ICICI Bank drew up aggressive plans to penetrate rural areas

through its SHG program. However, rather than spending time
in developing rural infrastructure of its own, in 2000, ICICI
Bank announced merger of Bank of Madura (BoM), which had
significant presence in the rural areas of South India,
especially Tamil Nadu, with a customer base of 1.2 million and
77 branches

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 CHALLENGES AHEAD
Appropriate legal structures for the structured growth of MF
operations
Ability to access loan funds at reasonably low rates of interest.
Ability to attract and retain professional and committed human
resources.
Design of apt MIS including user friendly software for tracking
accounts and operations.
Ability to innovate, adapt and grow.
Bring out a compendium of small and micro enterprises for the
MF clients.
Identify and prepare a panel of locally available trainers.
Ability to train trainers.
Capacity to provide backward linkages or create support
structures for marketing

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 RELATED ISSUES

Designing financially sustainable models

Aim for community participation & ownership
Increase outreach and scale up operations
Demonstrate that banking with the poor is viable
Build professional systems and processes.
Ensure transparency and enhance credibility through
disclosures.
Provide support for capacity building initiatives.

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 IDEOLOGICAL ISSUES

 Are MFIs guilty of sacrificing “targeting” at the altar of

financial sustainability?

 Can MF ever be inclusive of the bottom two quintiles below

the poverty line?. Are the economically inactive ineligible?

 How to include the developmental agenda without

compromising on financial sustainability ?

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 “IF You are Uplifting
The Poor
Your Uplifting
The Nation”
-> Mahatma Gandhi

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 Source

DATA SOURCE
 www.rbi.org.in/ -
www.microfinanceindia.org/ March 2007
CGAP

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