Rural Nirman: NABARD

Micro Finance Institutions in India: Present Status and Future Prospects

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II Year PGP Student of IIM Lucknow II Year PGP Student of IIM Lucknow

Abstract
1. The issues surrounding rural credit disbursement 2. The regulatory policies introduced in the sector and the impact of these policies 3. Effectiveness of the recent innovations like Kisan Credit Card, National Agriculture Insurance Scheme and others in making necessary credit available to the farmers with ease 4. Reach and impact of the Non-banking Financial Corporations to make credit available.

Issues in disbursement
complaint lodged by some of the borrowers of these MFIs against their alleged usurious interest rate and forced loan recovery practices asked the district collectors to stop the unethical practices of MFIs by whatever steps possible Facilitate the formation of self-help groups (SHG) and link them with formal banks, often as a subset of activities that extend beyond microfinance. Championed by the National Bank for Agriculture and Rural Development (NABARD) SHGs typically consist of 15-25 members and utilize revolving savings funds. The size of individual loans is determined either by the volume of individual savings or by the groups savings as a whole, and interest rates are set by members. SHGs may borrow directly from an MFI or a bank and are often organized into federations to obtain external funds in bulk. In addition to the SHG model, the remaining MFIs employ the Grameen (group lending) model or offer individual loans 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. Banks disbursed Rs. 97 billion in credit to the poor, while MFIs and NABARDs SHG Bank-Linkage program disbursed Rs. 1.4 billion covering 20 percent of estimated demand. More recent data suggests that while the gap between supply and demand may be shrinking, it continues to exist. In March 2003, outstanding loans of the SHG Bank-Linkage Program amounted to Rs. 10 billion while MFIs held Rs. 2.4 billion in loans outstanding Moreover, SHG member households received an average of Rs. 1766 in credit. 5 Hence, not only did the bulk of demand remain unmet, but borrowers generally received smaller loans than they required. Microfinance services remain predominantly in the form of credit and do not address the poors need for saving and insurance services. Regulation prevents most MFIs from mobilizing savings, and insurance schemes are limited. In terms of scope, the microfinance sector in India is concentrated in the southern states of Andhra Pradesh, Tamil Nadu, Karnataka, and Kerala, with Andhra Pradesh alone encompassing 50 to 70 percent of microfinance activities. Banks prompted by priority lending targets and more recently by profit motivation, are increasingly investing in microfinance. To date, however, they have shown little or no interest in retail

microfinance, and the predominant providers of microfinance services in India continue to be SHGs and MFIs. In some cases has bought out their portfolio in lieu of opening microfinance retail branches directly. Over the last forty years, the Reserve Bank of India (RBI) has encouraged a significant expansion of bank branches in rural areas in order to extend credit services to disadvantaged groups, including small and marginal farmers, rural artisans, and other small borrowers. National development banks play a crucial role in the growth of microfinance. Despite general support for microfinance, there appears to be a tension between promotion of the sector and client protection. RBI has thus forbidden MFIs from taking public savings that would reduce their cost of capital. Andhra Pradeshs (AP) Mutually Aided Cooperative Societies Act --- APs populist mandate, however, sometimes serves to undermine credit, as is exemplified by the decision that farmers need not repay the principle on a loan for the first six months, unless they are borrowing from a bank. Role of NABARD: In addition to concessional refinancing for banks, NABARD provides its partners with policy guidance and capacity building support. The SIDBI Foundation for Micro Credit (SFMC) was established in 1999 to promote the growth and sustainability of the microfinance sector by providing a range of financial and non-financial services to MFIs, including loan funds, grant support, equity, and institution building support. Microfinance providers in India can be classified under three broad categories: formal, semiformal, and informal. The formal banking sector constitutes the first category while the semi-formal group consists of a variety of MFIs and SHGs. Informal providers, on the other hand, are not legal entities and include moneylenders and various social networks. Today, semi-formal and informal lenders dominate the sector. Interest Rate: High

Sustainability Current Sources of Funds: Sa-Dhan (an association of Indian MFIs) reports that donor funds account for only nine percent of funds among its members, with the majority of funds coming from the banking sector

SHGs vs. Grameen Methodology: the long run The cost of creating and sustaining new and high-quality SHGs can be as much as Rs. 10,000 (US$220) per group, though NABARD estimates it to be one-tenth as much. Though banks generally lend to SHGs at interest rates between 12 and 12.5 percent, one study finds the allinclusive costs to rural banks of forming and lending to SHGs translate into interest rates between 22 and 28 percent per year, even up to 48 percent. To the extent this is the case, rural banks may be lending to SHGs at a loss, making long-term sustainability an issue.