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Microcredit is the extension of very small loans (microloans) to those in poverty designed to

spur entrepreneurship. These individuals lack collateral, steady employment and a verifiable
credit history and therefore cannot meet even the most minimal qualifications to gain access to
traditional credit. Microcredit is a part of microfinance, which is the provision of a wider range
of financial services to the very poor.
Microcredit is a financial innovation that is generally considered to have originated with the
Grameen Bank in Bangladesh.[1] In that country, it has successfully enabled extremely
impoverished people to engage in self-employment projects that allow them to generate an
income and, in many cases, begin to build wealth and exit poverty.[citation needed] Due to the success
of microcredit, many in the traditional banking industry have begun to realize that these
microcredit borrowers should more correctly be categorized as pre-bankable; thus, microcredit is
increasingly gaining credibility[citation needed] in the mainstream finance industry, and many
traditional large finance organizations are contemplating microcredit projects as a source of
future growth, even though almost everyone in larger development organizations discounted the
likelihood of success of microcredit when it was begun. The United Nations declared 2005 the
International Year of Microcredit.

Contents
[hide]
• 1 History
• 2 Principles
• 3 Strengths
• 4 Microcredit and the Web
• 5 In the developed world
• 6 Criticism
• 7 Role of developing countries—a recent Forbes ranking
• 8 See also
• 9 References
• 10 Bibliography
• 11 External links

History
Ideas relating to microcredit can be found at various times in modern history.
Jonathan Swift inspired the Irish Loan Funds of the 18th and 19th centuries.[2] In the mid-1800s,
Individualist anarchist Lysander Spooner wrote about the benefits of numerous small loans for
entrepreneurial activities to the poor as a way to alleviate poverty.[3] Ideas relating to microcredit
were mentioned in portions of the Marshall Plan at the end of World War II.[citation needed]
The origins of microcredit in its current practical incarnation, with attention paid by economists
and politicians worldwide, can be linked to several organizations founded in Bangladesh,
especially the Grameen Bank in the 1970s and onward, for which its founder Muhammad Yunus
was awarded the Nobel Peace Prize in 2006.[4]
Principles
Microcredit is based on a separate set of principles, which are distinguished from general
financing or credit.[5]
Microcredit emphasizes building capacity of a micro-entrepreneur,[6] employment generation,
[citation needed]
trust building,[7] and help to the micro-entrepreneur on initiation and during difficult
[citation needed]
times.
Microcredit is a tool for socioeconomic development.[8][9]
Strengths
In the past few years, savings-led microfinance has gained recognition as an effective way to
bring very poor families low-cost financial services. For example, in India, the National Bank for
Agriculture and Rural Development (NABARD) finances more than 500 banks that on-lend
funds to self-help groups (SHGs). SHGs comprise twenty or fewer members, of whom the
majority are women from the poorest castes and tribes. Members save small amounts of money,
as little as a few rupees a month in a group fund. Members may borrow from the group fund for
a variety of purposes ranging from household emergencies to school fees. As SHGs prove
capable of managing their funds well, they may borrow from a local bank to invest in small
business or farm activities. Banks typically lend up to four rupees for every rupee in the group
fund. Groups generally pay interest rates that range from 30% to 70% APR[10], or 12% to 24% a
year, based on the flat calculation method. Nearly 1.4 million SHGs comprising approximately
20 million women now borrow from banks, which makes the Indian SHG-Bank Linkage model
the largest microfinance program in the world. Similar programs are evolving in Africa and
Southeast Asia with the assistance of organizations like Opportunity International, Catholic
Relief Services, CARE, APMAS and Oxfam. Microfinancing also helps in the development of
an economy by giving everyday people the chance to establish a sustainable means of income.
Eventual increases in disposable income will lead to economic development and growth.
Jason Cons and Kasia Paprocki of the Goldin Institute, while quite critical of some unintended
side-effects of microcredit, nonetheless acknowledge its "enormous potential as a tool for
poverty alleviation."[1]
Microcredit and the Web
The principles of microcredit have also been applied in attempting to address several non-
poverty-related issues. Among these, multiple Internet-based organizations have developed
platforms that facilitate a modified form of peer-to-peer lending where a loan is not made in the
form of a single, direct loan, but as the aggregation of a number of smaller loans—often at a
negligible interest rate. There are several ways by which the general public can participate in
alleviating poverty using Web platforms.
New platforms that connect lenders to micro-entrepreneurs are emerging on the Web, for
example Kiva, Lend for Peace and the Microloan Foundation. Another WWW-based
microlender United Prosperity uses a variation on the usual microlending model; with United
Prosperity the micro-lender provides a guarantee to a local bank which then lends back double
that amount to the micro-entrpreneur. United Prosperity claims this provides both greater
leverage and allows the micro-entrepreneur to develop a credit history with their local bank for
future loans.
In the developed world
Microcredit is not only provided in poor countries, but also in one of the world's richest
countries, the USA, where 37 million people (12.6%) live below the poverty line.[11] Among
other organizations that provide microloans in the United States,[12][13] Grameen Bank started
their operation in New York in April 2008. According to economist Jonathan Morduch of New
York University, microloans have less appeal in the US, because people think it too difficult to
escape poverty through private enterprise.[citation needed]
Other developed countries in which the micro-loan model is in fact gaining impetus include
Israel,[14] Russia, the Ukraine and more, where micro-loans given to small business entrepreneurs
are also used to overcome cultural barriers in the mainstream business society. The Israel Free
Loan Association (IFLA) has lent out over $100 million in the past two decades to Israeli
citizens of all backgrounds.[citation needed]
Even so, efforts to replicate Grameen-style solidarity lending in developed countries have
generally not succeeded. For example, the Calmeadow Foundation tested an analogous peer-
lending model in three locations in Canada, rural Nova Scotia and urban Toronto and Vancouver,
during the 1990s. It concluded that a variety of factors—including difficulties in reaching the
target market, the high risk profile of clients, their general distaste for the joint liability
requirement, and high overhead costs—made solidarity lending unviable without subsidies.[15]
However, debates have continued about whether the required subsidies may be justified as an
alternative to other subsidies targeted to the entrepreneurial poor, and VanCity Credit Union,
which took over Calmeadow's Vancouver operations, continues to use peer lending.[citation needed]
Some organizations, however, have been able to find success bringing the microfinance model to
the United States. ACCION USA, which is the US subsidiary of the more well-known ACCION
International, has been able to provide US$117 million in microloans since 1991, with an over
90% repayment rate.[citation needed]
Criticism
See also: Microfinance#Other criticisms
Gina Neff[16] of the Left Business Observer has described the microcredit movement as a
privatization of public safety-net programs.[17] Enthusiasm for microcredit among government
officials as an anti-poverty program can motivate cuts in public health, welfare, and education
spending.[citation needed] Neff maintains that the success of the microcredit model has been judged
disproportionately from a lender's perspective (repayment rates, financial viability) and not from
that of the borrowers. For example, the Grameen Bank's high repayment rate does not reflect the
number of women who are repeat borrowers that have become dependent on loans for household
expenditures rather than capital investments.[citation needed] Studies of microcredit programs have
found that women often act merely as collection agents for their husbands and sons, such that the
men spend the money themselves while women are saddled with the credit risk.[1][18] As a result,
borrowers are kept out of waged work and pushed into the informal economy.[citation needed]
Many studies in recent years have shown that risks like sickness, natural disaster and
overindebtedness are a critical dimension of poverty and that very poor people rely heavily on
informal savings to manage these risks (see, for example, The Microfinance Revolution:
Sustainable Finance for the Poor by Marguerite Robinson). It might be expected that
microfinance institutions would provide safe, flexible savings services to this population, but—
with notable exceptions like Grameen II—they have been very slow to do so. Some experts
argue that most microcredit institutions are overly dependent on external capital. A study of
microcredit institutions in Bolivia in 2003, for example, found that they were very slow to
deliver quality microsavings services because of easy access to cheaper forms of external capital.
[19]
Global data tables from The Microbanking Bulletin show that savings represent a small source
of funds for microcredit institutions in most developing nations.[citation needed]
Because field officers are in a position of power locally and are judged on repayment rates as the
primary metric of their success, they sometimes use coercive and even violent tactics to collect
installments on the microcredit loans. Some loan recipients sink into a cycle of debt, using a
microcredit loan from one organization to meet interest obligations from another.[1] Also, counter
to the original intention of the microcredit system to empower women, one of the effects of an
infusion of cash into local economies has been to increase dowries, with women forced at times
to take microcredit loans as the only means to pay these increased dowries for their daughters.[1]
Bangladesh's former Finance and Planning Minister M. Saifur Rahman charges that some
microfinance institutions use excessive interest rates.[20] In recent years, there has been increasing
attention paid to the problem of interest rate disclosure, as many suppliers of microcredit quote
their rates to clients using the flat calculation method, which significantly understates the true
Annual Percentage Rate.[citation needed]
The BBC Business Weekly program reported that much of the supposed benefits associated with
microfinance, are perhaps not as compelling as once thought. In a radio interview with Professor
Dean Karlan of Yale University, a point was raised concerning a comparison between two
groups: one African, financed through microcredit and one control group in the Philippines. The
results of this study suggest that many of the benefits from microcredit are in fact loaned to
people with existing business, and not to those seeking to establish new businesses. Many of
those receiving microcredit also used the loans to supplement the family income. The income
that went up in business was true only for men, and not for women. This is striking because one
of the supposed major beneficiaries of microfinance is supposed to be targeted at women.
Professor Karlan's conclusion was that whilst microcredit is not necessarily bad and can generate
some positive benefits, despite some lenders charging interest rates between 40-60%, it isn't the
panacea that is purported to be. He advocates rather than focusing strictly on microcredit, also
giving citizens in poor countries access to rudimentary and cheap savings accounts.[21]
Role of developing countries—a recent Forbes ranking
The US business magazine Forbes ranked the world's top 50 microfinance institutions. Forbes
made the ranking of MRIs by using data available from the Microfinance Information Exchange
and the analysis from rating firms Micro-Credit Ratings International Limited and MicroRate.
The ranking was based on six key variables: gross loan portfolio, operating expense, operating
expense divided by the average number of active borrowers as a proportion of gross national
income per capita, outstanding balance of loans overdue by more than 30 days as a proportion of
gross loan portfolio, return on assets, and return on equity. "Each microfinance institution earned
scores in four equally weighted categories—scale, efficiency, portfolio risk and profitability.
Rankings were then based on the combined average score of those four categories."[22]
India and Bangladesh together are home to the most MFIs. Seven of the 50 were little-known
institutions from India. Those in other countries included five from Bosnia and Herzegovina,
four each from Morocco and Peru, three from Colombia, two each from Ecuador, Ethiopia and
Serbia, and one each from 15 other countries, including Russia, Pakistan, Mexico and Brazil.
Forbes magazine said that "microfinance has become a buzzword of the decade, raising the
provocative notion that even philanthropy aimed at alleviating poverty can be profitable to
institutional and individual investors."
"Billionaires, global leaders and Nobel Prize recipients are hailing these direct loans to
uncollateralised would-be entrepreneurs as a way to lift them out of poverty while creating self-
sustaining businesses," it stated.
See also
• Cooperative banking
• Flat rate (finance)
• Microgrant
• Solidarity lending
References
1. ^ a b c d e Jason Cons and Kasia Paprocki of the Goldin Institute, "The Limits of Microcredit—A
Bangladeshi Case", Food First Backgrounder (Institute for Food and Development Policy),
Winter 2008, volume 14, number 4.
2. ^ University of Calgary
3. ^ Lysanderspooner.org
4. ^ Nobleprize.org
5. ^ SSRN.com
6. ^ SSRN.com
7. ^ SSRN.com
8. ^ SSRN-Micro Finance: The Pillars of a Tool to Socio-Economic Development by Vrajlal
Sapovadia
9. ^ Sapovadia, Vrajlal K., "Micro Finance: The Pillars of a Tool to Socio-Economic Development"
. Development Gateway, 2006
10.^ [1]
11.^ CIA.gov
12.^ Findarticles.com
13.^ University of Michigan
14.^ Svivatomehet.org.il (Hebrew)
15.^ Cheryl Frankiewicz. "Calmeadow Metrofund: A Canadian Experiment in Sustainable
Microfinance", Calmeadow Foundation, April 2001.
16.^ Blogspot.com
17.^ Microcredit, microresults The Left Business Observer #74, October 1996
18.^ Goetz, A.M. and R. Sen Gupta. "Who takes the Credit? Gender, power and control over loan
use in rural credit programmes in Bangladesh." World Development Vol. 24, January 1995.
19.^ Hillary Miller. The paradox of savings mobilization in microfinance: why microfinance
institutions in Bolivia have virtually ignored savings. Development Alternatives Inc. and USAID,
Washington, 2003.
20.^ Saifur takes swipe at micro-credit
21.^ BBC.co.uk
22.^ Forbes.com

Bibliography
Following is a selected bibliography about microcredit.
• Adams, Dale, Doug Graham and J.D. Von Pischke (eds.). Undermining Rural
Development with Cheap Credit. Westview Press, Boulder, Colorado, 1984.
• Drake, Deborah, and Elizabeth Rhyne (eds.). The Commercialization of Microfinance:
Balancing Business and Development. Kumarian Press, 2002.
• Rhyne, Elizabeth. Mainstreaming Microfinance: How Lending to the Poor Began, Grew
and Came of Age in Bolivia. Kumarian Press, 2001.
• Fuglesang, Andreas and Dale Chandler. Participation as Process – Process as Growth –
What We can Learn from the Grameen Bank. Grameen Trust, Dhaka, 1993.
• Gibbons, David. The Grameen Reader. Grameen Bank, Dhaka, 1992.
• Harper, Malcolm and Shailendra Vyakarnam. Rural Enterprise: Case Studies from
Developing Countries. ITDG Publishing, 1988.
• Hulme, David and Paul Mosley. Finance Against Poverty. Routledge, London, 1996.
• Johnson, Susan and Ben Rogaly. Microfinance and Poverty Reduction. Oxfam, Oxford
UK, 1997.
• Kadaras, James & Elizabeth Rhyne. Characteristics of equity investment in microfinance.
Accion International, 2004.
• Khandker, Shahidur R. Fighting Poverty with Microcredit. Bangladesh edition, The
University Press Ltd, Dhaka, 1999.
• Ledgerwood, Joanna. Microfinance Handbook. Washington, D.C., World Bank, 1998.
• Rutherford, Stuart. ASA: The Biography of an NGO, Empowerment and Credit in Rural
Bangladesh. ASA, Dhaka, 1995.
• Small Enterprise Development. Intermediate Technology Publications, London.
• Todd, Helen Women at the Center: Grameen Borrowers After One Decade. University
Press Ltd, Dhaka, 1996.
• Wood, Geoff D. & I. Sharif (eds.). Who Needs Credit? Poverty and Finance in
Bangladesh. University Press Ltd., Dhaka, 1997.
• Yunus, Muhammad. Banker to the Poor: Micro-Lending and the Battle Against World
Poverty. Public Affairs, 2003.
• Padmanabahn, K.P., Rural Credit, Intermediate Tech. Publ. Ltd., London 1988.
• Germidis D. et al.,Financial Systems and Development: what role for the formal and
informal financial sectors?, OECD, Paris 1991.
• Robinson, Marguerite S., The microfinance revolution, The World Bank, Washington
D.C., 2001.
• Mauri, Arnaldo, A new approach to institutional lending and loan administration in rural
areas of LDCs, International Review of Economics, Vol. XLV, no. 4 (1995).
External links
• Building a Microfinance Institution from Scratch Institution's objective is to offer
financial services on a self-sustaining yet efficient basis to microentrepreneurs.
• Journal of Microfinance, a forum for practitioners in microfinance and microenterprise
development to exchange information and ideas
• Omidyar-Tufts Microfinance Fund, a partnership between Pierre Omidyar and Tufts
University.
• "Microfinance in the U.S." Helping ensure egalitarian access to needed financial services.
• The Promise of Microfinance for Poverty Relief in the Developing World
• Microcredit Regulatory Authority, MRA The central body to monitor and supervise
microfinance operation of NGOs of Bangladesh
• Alleviation and poverty and enpowerment of the poor, BRAC Bangladesh
• The European Union Project "Credit Cooperatives - Russian Federation" official web site
• Small Fortunes: Microcredit and the Future of Poverty web site for a PBS documentary
Retrieved from "http://en.wikipedia.org/wiki/Microcredit"
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http://india-financing.com/Micro%20Credit%20in%20India%20-%20Overview%20of
Micro Credit in India:
%20the%20Regulatory%20Scenario.pdf

Overview of regulatory scenario


Vinod Kothari and Neha Gupta
Forbes brought a special issue on microfinance in December 2007 wherein it said: "microfinance
has become a buzzword of the decade, raising the provocative notion that even philanthropy
aimed at alleviating poverty can be profitable to institutional and individual investors." This
revolutionary and pro-poor economic activity has been recognized worldwide as an efficient tool
to combat poverty, create jobs and generate income. Above all, it has been regarded as a tool of
financial inclusion – that is, including masses in the progress of mankind.
This article provides a quick view of the regulatory scenario of micro credit in India. This article
is not a recommendation for regulation, but given the massive growth in micro credit in recent
years, the explosion of micro credit dispensing institutions, and the application of risk transfer
devices such as securitisation to micro credit, it is inevitable that there is some structured
thinking on the institutional framework for micro credit. Regulation is something that is needed
at a proper time – when the instrument is too mature to need pampering, and too immature to
deserve total freedom. Jury is still out on the question whether that time has come in India.
What is Micro Credit?
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. (As per RBI Master Circular, 2008). Evidently, the word micro credit
does not have an exact definition. For regulatory purposes, non-banking financial institutions
enjoy exemption from the RBI Regulations if such institutions provide loans upto Rs 50000/-,
and in case of loan for a dwelling unit, upto Rs 125000/- (NOTIFICATION No.
DNBS.138/CGM(VSNM)-2000 dated January 13, 2000).
The concept of micro credit is known more by its approach than by monetary limits to the
amount of loans. Of course, the target segment is the poorest, but Mohammed Yunus tried the
concept of joint-liability or peer-pressure. Most micro credit loans are dispensed through village
or community-level self-help groups (SHGs) who agree to create a pressure on the individual
borrower to perform as per contract.
Difference between microcredit and microfinance:
The term Micro Finance is much broader than micro credit. The main components of micro
finance are:
• deposits
• loans
• payment services
• money transfers
• insurance to poor and low-income households and their microenterprises
Thus, micro credit is only a component of the broad spectrum of micro financing. This article,
however, focuses on micro credit.
MICROFINANCE
Origin of the concept
In 1974, Professor Muhammad Yunus, then a professor of economics, in Bangladesh was moved
by the plight of people when the country faced a famine. Famine-struck “skeleton-like people
began showing up in the railway stations and bus stations of the capital, Dhaka. Soon this trickle
became a flood. Hungry people were everywhere. Often they sat so still that one could not be
sure whether they were alive or dead. They all looked alike: men, women, children. Old people
looked like children, and children looked like old people.”
Yunus felt guilty teaching economics in the cool comfort of this classroom in this scenario.
“What good were all my complex theories when people were dying of starvation on the
sidewalks and porches across from my lecture hall? My lessons were like the American movies
where the good guys always win. But when I emerged from the comfort of the classroom, I was
faced with the reality of the city streets.”
Yunus left the campus and went to Jobra, a village in Chittagong of Bangladesh, to learn a new
method of banking for the poor. That is where he tried the idea of tiny loans for self-employment
of the poor, and thus, the idea of micro credit was born. It is from here that it took the shape of
Gramin Bank, Bangladesh, and thereafter, has spread all over the world.
The World Bank estimates at there are now over 7000 microfinance institutions, serving some 16
million poor people in developing countries. The total cash turnover of MFIs world-wide is
estimated at US$2.5 billion and the potential for new growth is outstanding. It is estimated that,
worldwide, there are 13 million microcredit borrowers, with US$ 7 billion in outstanding loans,
Insurance
Services
Money
Transfers
Payment
Services
Deposits &
Loans
Flow of
Financial
Services
and generating repayment rates of 97 percent. It has been growing at a rate of 30 percent annual
growth. (Data Snapshots on Microfinance - The Virtual Library on Microcredit).
Special features of lending
Microcredit offers access to financial resources to the poorest of the poor in the rural areas. It
allows people to undertake self- employment activities or to venture very small businesses
without depending on money-lenders who demand exorbitant interest rates.
Currently there are following organisational forms of the MFIs, viz.,
• Banks
• Financial Corporations
• NBFCs regulated by the RBI
• Trusts, Societies, Co- Operative Societies and Section 25 companies
• Non- banking corporates
Such loans are collateral-free. Maturity is normally 50 weeks with repayment in weekly
installments. The loans are under $25,000 and for entrepreneurs who have not been able to
secure financing through traditional lenders. The purpose of these loans is to finance very small
businesses either to finance working capital or to buy assets for the business. These loans can
come with technical support such as business training also.
Micro‐credit in India
Microfinance in India through its major channels served over 33 million Indians in the financial
year 2007-08, up by 9 million over the last financial year, out of which around 80% clients were
women. As on 31st March, 2008, outstanding microcredit portfolio of India Microfinance was
about Rs. 22,000 crore, out of which 75% are accounted for by SHG- Bank Linkage Program,
20% by large MFIs and 5% by medium and small MFIs. India's MFIs operate in 209 out of 331
poorest districts of the country; up by 5% over the previous year. The Table below gives the
volumes of MFIs, that is, excludes the volume of SFG-Bank linkage program.
The Microfinance Institutions (MFIs)
From The Bharat Microfinance Report 2008:
MFIs with
Loan Portfolio
up to 5 crore
MFIs with
Loan Portfolio
>5 to 50 crore
MFIs with
Loan Portfolio
over 50 crore Total No of MFIs
Society 87.7 543.8 478.3 1,109.70 104
Trust 24 149.8 225.4 399.3 31
Cooperative Bank 8.3 - - 8.3 8
MACS 5.2 11 - 16.2 10
Section 25
Company 11.6 127.4 543.6 682.6 22
NBFC 10.6 197.3 3,312.10 3,520.00 25
LAB or any other 13.6 13.7 134.7 1,62.0 16
Total 161 1,043.00 4,694.10 5,898.20
No of MFIs 137 57 22 216
Source: www.sa-dhan.net
Microfinance evolved in India in the early 1980s with the formation of informal Self Help Group
(SHG) for providing access to financial services to the needy people. The MFIs are organised
under three models: SHGs, Grameen model/Joint liability groups and Individual banking groups
as in cooperatives.
Over the past few decades, this innovative scheme has attracted a range of non-governmental and
state-sponsored institutions. Leading financial institutions are the Small Industries Development
Bank of India (SIDBI), the National Bank for Agriculture and Rural Development (NABARD)
and the Rashtriya Mahila Kosh (RMK). A few NGOs like PRADAN, ICECD, MYRADA,
SEWA have played a significant role in promoting micro-credit.
With micro-credit becoming financially viable, even commercial banks like ICICI Bank,
ABNAMRO,
HDFC Bank, UTI Bank and international banks like Citibank have also entered the
field. Non-banking corporates are participating as well.
Regulatory Regime
The picture of the regulatory regime below relates to the general regulatory powers applicable to
different micro credit entities in India. This means that while there are no specific regulations
applicable to micro credit, there are regulations applicable to the providers thereof. These
regulations may be summed in the Table:
Categories of Providers Legal Framework governing their activities
(a) Domestic Commercial Banks, Public Sector
Banks, Private Sector Banks &
Local Area Banks
(i) RBI Act 1934
(ii) BR Act 1949
(iii) SBI Act
(iv) SBI Subsidiaries Act
(v)Acquisition & Transfer of Undertakings Act
1970 & 1980
(b) Regional Rural Banks (i) RRB Act 1976
(ii) RBI Act 1934
(iii) BR Act 1949
(c) Co-operative Banks (i) Co-operative Societies Act
(ii) BR Act 1949 (AACS)
(iii) RBI Act 1934 (for sch. banks)
(d) Co-operative Societies (i) State legislation like MACS
(e) Registered NBFCs (i) RBI Act 1934
(ii) Companies Act 1956
(f) Unregistered NBFCs (i) NBFCs carrying on the business of a FI
prior to the coming into force of RBI
Amendment Act 1997 whose application for
CoR has not yet been rejected by the Bank
(ii) Sec. 25 of Companies Act
(g) Other providers like Societies, Trusts, etc. (i) Societies Registration Act, 1860
(ii) Indian Trusts Act
(iii) Chapter IIIC of RBI Act, 1934
(iv) State Moneylenders Act
At one point of time, the government had mooted the idea of a comprehensive regulatory
instrument for micro credit institutions. As is common for most regulations, it is usually intended
for development, but ends up in regulation, if not strangulation. The Bill was also opposed,
particularly by the Left parties. We discuss below the history and some salient features of the
Bill.
The Micro Financial Sector (Development and Regulation) Bill,
2007
In March 2008, the Finance Minister tabled the bill in the Lok Sabha, which was then referred to
the Lok Sabha Standing Committee on Finance.
Key features of the Bill
It provides for the regulation and supervision of cooperative societies and non- profit institutions
(including societies and trusts) that are providing microfinance. The regulator for all of these
institutions would be the National Bank for Agriculture and Rural Development (NABARD).
• Microfinance is defined to include loans, savings, insurance and pension services. Loans
cannot exceed more than Rs 50,000 (Rs150,000 for housing purposes).
• The bill defines an MFO (Micro Finance Organisation) as any organisation that provides
micro-finance services and include societies, trusts and cooperative societies.
• All MFOs that accept deposit from ‘eligible clients’ need to be registered with
NABARD. Minimum experience of three years and minimum net owned fund of Rs five
lakhs has been fixed as a condition for registration.
• NABARD has to specify the form and manner of accounting of business operations of
micro finance organizations.
• Registered MFOs will be required to submit reports to the regulator.
• MFOs will also be subject to inspection by the regulator in case of complaints of harmful
practices.
• It also proposes to set up a corpus fund called the Micro Finance Development and
Equity Fund for the development of the sector
• Every MFO that accepts deposits has to create a reserve fund by transferring a minimum
of 15% of its net profit every year.
• The central government may establish a Micro Finance Development Council to advise
NABARD on formulation of policies related to the micro financial sector.
The Lok Sabha Standing Committee on Finance raised many objections to this bill and suggested
that the Bill needs to be dropped and an appropriate Bill needs to be evolved.
Master Circular on Micro Credit
The Reserve Bank of India has come out with a Master Circular on Micro Credit dated July 1,
2008, which pertains to bank lending and NBFC-lending activities in the micro credit segment.
Some of the key features of the circular are cited below:
The Self Help Group (SHG) - Bank Linkage Programme
The NABARD launched a pilot project and supported it by way of refinance. The criteria has
been laid down for selecting SHGs by NABARD. (http://www.nabard.org/)
The advances given by the banks to the groups were treated as advances to "weaker sections"
under the priority sector. While the norms relating to margin, security as also scales of finance
and unit cost would broadly guide the banks for lending to the SHGs, deviations therefrom could
be made by banks, where deemed necessary.
As a follow up of the recommendations of the Working Group under the Chairmanship of Shri
S.K. Kalia, the then Managing Director, NABARD, banks were advised in April 1996 as under:
• SHGs lending to be treated as a normal lending activity
• Banks to report their lending to SHGs and/or to NGOs under the new segment, viz.
'Advances to SHGs'
• Banks to include SHG lending within their Service Area Plan
• SHGs eligible to open savings bank accounts
• Banks were advised that the flexibility allowed to the banks in respect of margin, security
norms, etc. under the pilot project would continue to be operational under the linkage
programme even beyond the pilot phase.
• Keeping in view the nature of lending and status of borrowers, the banks may prescribe
simple documentation for lending to SHGs.
• The bank loan may not be utilized by the SHG for financing a defaulter member to the
bank.
• Training of the field level officials and sensitization of the controlling and other senior
officials of the bank.
• Banks to closely monitor the progress regularly at various levels
Exemptions granted to NBFCs engaged in microfinance activities
It is decided to exempt such NBFCs which are engaged in (i) micro financing activities, (ii)
licensed under Section 25 of the Companies Act, 1956 and (iii) which are not accepting public
deposits from the purview of Sections 45-IA (registration), 45-IB (maintenance of liquid assets)
and 45-IC (transfer of profits to Reserve Fund) of the RBI Act, 1934.
In view of the need to protect the interests of depositors, microfinance institutions (MFIs) would
not be permitted to accept public deposits unless they comply with the extant regulatory
framework of the Reserve Bank.
Interest rates deregulated
The interest rate applicable to loans given by banks to micro-credit organisations or by the
micro-credit organisations to Self Help Groups/member beneficiaries would be left to their
discretion.
Mainstreaming and enhancing outreach
• The banks may formulate their own model(s) or choose any conduit/ intermediary for
extending micro credit. Micro Credit extended by banks to individual borrowers directly
or through any intermediary would be reckoned as part of their priority sector lending.
• The criteria for selection of micro credit organisations are not prescribed. It may,
however, be desirable for banks to deal with micro credit organisations having proper
credentials, track record, system of maintaining accounts and records with regular audits
in place and manpower for closer supervision and follow-up.
• Banks may prescribe their own lending norms keeping in view the ground realities.
• Micro credit should be included in branch credit plan, block credit plan and state credit
plan of each bank. Micro credit should also form an integral part of the bank's corporate
credit plan and should be reviewed at the highest level on a quarterly basis.
• A simple system requiring minimum procedures and documentation is a pre-condition for
augmenting flow of micro credit.
Delivery Issues
• Banks should provide adequate incentives to their branches in financing the SHGs.
• The group dynamics of working of the SHGs may be left to themselves and need not be
regulated.
• The approach to micro-financing of SHGs should be totally hassle-free and may include
consumption expenditures.
Financing of MFIs by banks
• Competing MFIs were operating in the same area, resulting in multiple lending and
overburdening of rural households.
• Many MFIs supported by banks were not engaging themselves in capacity building and
empowerment of the groups to the desired extent.
• In many cases, no review of MFI operations was undertaken after sanctioning the credit
facility.
These findings were brought to the notice of the banks to enable them to take necessary
corrective action where required.
Total Financial Inclusion and Credit Requirement of SHGs
Banks are advised to meet the entire credit requirements of SHG members namely, (a) income
generation activities, (b) social needs like housing, education, marriage, etc. and (c) debt
swapping.
Transparency/ Disclosure Norms‐ Self Regulation
The Reserve Bank of India is understandably hesitant to directly regulate the disclosure practices
of all Indian MFIs. As such, the RBI has largely left MFI regulation to the MFIs themselves.
CGAP’s MFI Disclosure Guidelines offer the best benchmark for judging institutional
transparency. All Indian MFIs should work to comply with these guidelines.
Conclusions
No doubt, micro credit has come a long way. And still now it has a long way to go. Micro credit
institutions have not been completely successful in its pursuits because of some inherent
weaknesses and restraints. Speedy actions are needed to remove the obstacles to microcredit’s
development. Inadequate regulation is one element curbing this sector’s healthy expansion.
Considering the potential of the sector, a review of the Bill to rectify the above drawbacks is
essential.
• The authors are contactable at vinod@vinodkothari.com; neha@vinodkothari.comApproach
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Microeducation - Building knowledge and


aspirations
Education and exposure to new opportunities are an integral part of the group experience. The second meeting of
each month is utilized to convey information to the members on various topics of interest, such as entrepreneurship
and business, social issues such as health and education and general knowledge such the internet.

Education is delivered in small modules or ‘micro’ portions to make it as accessible to the audience as possible. In
addition, members discover new opportunities and hear of success stories through our seidhi malar member
newsletter, monthly video malar and through freely distributed copies of our classifieds newspaper.

Some of our education components are designed to not only to educate but also to invite new aspirations. Video clips
of our members, employees and management speaking on everything from their successes and failures to their
involvement in their local community are utilized to move our member audiences. Coming soon is our inspirational
feature film entitled “Shakti Pirakkudhu,” a film based on extensive research into the lives and struggles of our SHG
women that provides solutions and inspires expanded aspirations as well as a 5 part digital mini MBA certificate
program that takes business principles to the rural context.
Approach
• Self Help Groups
• Microfinance
• Microeducation
• Micromarkets

• Training our Self Help Groups


(for A training film)

• Shakthi Pirakkudhu - Trailer


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Elevar Equity

Elevar is a global growth investor focused on


the underserved four billion at the base of the
pyramid in emerging economies like India,
Mexico, Columbia, Peru, Brazil, Indonesia
and the Philippines. Elevar provides equity
capital primarily to entrepreneurs building
high growth microfinance institutions and
secondarily to entrepreneurs building
companies providing services and products to
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markets. Elevar intends to bridge the gap
between these communities and global
capital, helping to create a virtuous cycle of
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know more about Elevar, please go to
www.elevarequity.comMicrocredit: Why
India is failing
November 10, 2006 14:00 IST

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In the K R Puram slum in Bangalore, India, a group of 15 women gather in a small, muggy living room. The electricity
comes and goes, turning the fan and the single bare lightbulb on and off. Flies buzz around the room, and children
run in and out.

The women have borrowed $330 and meet weekly to make repayments. The loans were meant to serve as capital for
them to start small businesses and, eventually, lift themselves out of poverty. But the women say the loans haven't
turned into new income.

Sitting in a circle on the floor, some sound sad and others angry. One woman has started selling firewood, but others
haven't started businesses at all. Instead, they say, the money helped them pay for urgent expenses, such as their
children's school fees.

It's a scene that's repeated inside dark living rooms and on parched rooftops across India. Boosted by a government
mandate to keep the startup funds flowing, lenders making these small, or microcredit, loans are dutifully throwing
cash at shantytown borrowers.

Slideshows:
Most luxurious credit cards
Top ten hottest jobs in India

And the funds-- $1.3 billion was lent during the year ended Mar 31, up from $4 million in 1996--are often being used
not as seed money for a new enterprise, such as buying a cow to sell the milk or setting up a fruit stand, but as
handouts spent on consumption.

D S K Rao, the Asia organizer for the Microcredit Summit Campaign, estimates that only one-fifth of Indian
microcredit borrowers start a business. Mathew Titus, executive director of New Delhi-headquartered Sa-Dhan, an
association of microcredit lenders, says it's one-third, counting women who barter instead of selling goods.

Alas, there has never been a rigorous study in India or elsewhere of how successful the businesses become, whether
any of the borrowers eventually graduate to the middle class or how many of the loans get repaid on time. "I don't
know of any great studies--they haven't been done," says New York University professor Jonathan Morduch, who
focuses on microcredit and economic development.

For much of its 35-year history microcredit has enjoyed glowing reviews, culminating last month when Muhammad
Yunus--founder of Bangladesh's microlending Grameen Bank--won the Nobel Peace Prize. The tiny loans appeal to
both idealistic aid workers and gimlet-eyed bankers.
They seem to help the poor in developing countries earn a livelihood without making them dependent on handouts.
And they use market mechanisms, allowing banks to charge interest rates high enough to cover the risks of lending
to people with no collateral and little credit history. In India rates average 30 per cent a year, though some lenders
charge more than 45 per cent.

In the last decade microcredit has taken off. The 1997 Microcredit Summit in Washington, DC--sponsors included the
World Bank, MasterCard and JPMorgan--vaulted microlending onto the world stage.

Participants pledged to lend to 100 million families worldwide within a decade. Pushing to maintain the momentum,
the United Nations named 2005 the International Year of Microcredit. Today organisations from the US Agency for
International Development to Citigroup trumpet the idea.

Slideshows:
Top ten richest Indians
Emerging global cities

Much of that attention is focused on India, which is home to a quarter of the world's poor but also one of the hottest
economies. The country has seen an explosion of microfinance institutions, which are usually set up by
nongovernmental organizations. Ten years ago 400 institutions boasted 200,000 customers.

Today there are 1,000 that, together with 300 commercial banks, lend to 17.5 million people, according to Sanjay
Sinha, managing director of Micro-Credit Ratings International in India. Much of the lending is based on Yunus'
original idea--making loans to groups of women and relying on peer pressure from the members to ensure
repayment.

"India was very small in this field ten years ago," says Sam R Daley-Harris, director of the Microcredit Summit
Campaign. "Now they're going like gangbusters, expanding ferociously."

The money to fund all these lenders comes mostly from India's biggest commercial banks, such as ICICI [ Get
Quote ], State Bank of India [ Get Quote ] and Canara Bank [ Get Quote ]. But some is put up by foreign investors and
banks making social-responsibility bets, and by overseas donors.

Technology entrepreneurs are particularly intrigued. The foundations of Bill and Melinda Gates and Michael and
Susan Dell have each given $4 million or more to microcredit organisations. Vinod Khosla, a Sun Microsystems
founder and venture capital star, has put at least $1 million into Indian microfinance institutions, as donations and
investments.

"In their anxiety to expand very fast, they are pushing loans," says Rao, the microcredit campaign organiser. "They're
not careful in vetting." At least, some groups of borrowers are first required to save money that they can put down as
collateral; others must outline their business ideas to lenders.

The rapid growth also means that lenders are less likely to keep tabs on a borrower after a loan is made. In India,
says Daley-Harris, borrowers sometimes "are on their own after a couple of years, whereas in Bangladesh there's a
bank worker who often visits every week for a lifetime." In Bangladesh there is one microfinance staffer for 131
borrowers and in Afghanistan one for 54, but in India the ratio is one to 439, according to the Microfinance
Information Exchange in Washington.

The women in India could probably use more guidance, because it's so difficult to run a business there: The country
ranks 134th out of 175 that the World Bank studied this year for ease of doing business.

Slideshows:
The pros and cons of outsourcing in India
The world's largest companies

The result is that lenders often hand over money without taking the time to educate the borrowers, making sure they
understand that they're supposed to start businesses and that there are penalties for not paying the money back,
says Gowramma, secretary of the Bangalore branch of the All India Democratic Women's Association, who works
with women in the slums. "The people receiving these loans do not know what this microcredit system is all about,"
she says.

This means that microcredit's other goal--to empower women in highly patriarchal societies--isn't always achieved,
either. In Tumkur, a city outside Bangalore, a group of women received $155 loans. They stood in a circle, placed
their hands on the money and pledged to use their loans to launch businesses. But afterward, each handed the
money to her husband, and the men started the businesses. Because the women are responsible for repaying the
loan, they suffer the consequences if their husbands squander the money.

Microcredit advocates often claim impressively high repayment rates, averaging 95 per cent, as proof that borrowers
do use their loans to generate income. Otherwise they wouldn't be able to pay them back, they argue. "Can
[microcredit] be done badly? Absolutely," Daley-Harris says. "Can it make a massive difference in people's lives when
it's done well? Absolutely."

But in some cases women borrow from other sources to repay the loans. That often means resorting to
moneylenders--or loans from friends and family--to pay back the microloan and vice versa, trapping them in a cycle of
debt. The lucky ones have family members who have migrated to cities or abroad to work and send back remittances.

In Bangladesh, for example, 40 per cent of microcredit borrowers also borrow informally, says Thomas Dichter, who
has evaluated microcredit programs in 20 countries, including India. "You're getting a large number of people
borrowing from Peter to pay Paul," says Dichter, who wrote the 2003 book Despite Good Intentions: Why
Development Assistance to the Third World Has Failed.

More important, Dichter and others who study microfinance doubt the repayment rates. There are no reliable figures
on the percentage of loans delinquent for more than, say, six months. But it's telling that the vast majority of the
microlenders are not "sustainable," meaning that so few loans are repaid on time and costs are so high that lenders
need to keep tapping the easily available funds from banks, donors and the government to stay in business.

More than anything, the microcredit bubble is being inflated by government rules that all but force lenders to keep
pumping out microloans. New Delhi [ Images ] requires banks to devote 40 per cent of the money they lend to a
category of borrowers that includes small enterprises, with about half of that going to rural outfits. Banks have long
struggled to meet this obligation, and lending to microcredit institutions that then lend to the groups of women offers
an easy way to do it.

Sometimes microcredit does live up to its billing. Manjula, a 40-year-old seamstress who lives in Bagalur, a village 90
minutes away from downtown Bangalore, struggled to support her two children without help from her alcoholic
husband. She depended on moneylenders, who charge up to 1,000 per cent a year.

Two $220 microcredit loans over two years enabled her to open a shop selling saris, which she had been peddling
from her home. Since then she has increased her monthly income from $45 to $110, including the earnings from side
jobs tailoring and teaching sewing classes. That's enough to pay off her loan and save $30 a month. "My dream is to
convert this place into a big shop," she says proudly.

It was success stories like this that drew Khosla, an affiliated partner in Silicon Valley venture capital firm Kleiner,
Perkins, Caufield & Byers, to microcredit in his native India. Three microfinance lenders that he funds--SKS
Microfinance, Share Microfin and Activists for Social Alternatives--are on a top-ten list compiled by Micro-Credit
Ratings International, and he becomes so passionate about microcredit that his eyes tear up when he talks about it.
"This is the single most important tool for addressing poverty I have ever seen."

Might a careful study turn that article of faith into a provable proposition? "I don't need that study," Khosla says. "I
won't spend a penny on it because I've talked to 200 women who are recipients of these microloans myself. I've seen
it in the field."

Even Manjula's success story needs some cautionary footnotes. She started out with distinct advantages. Unlike
most of India's poor, she is educated, speaks some English and started her business before receiving the loan. And
Manjula hasn't been able to completely stop borrowing from moneylenders.

"The research is skimpy, but the research we do have shows increasingly that the main hope for microcredit--that it
will generate millions of tiny businesses and these businesses will grow and pull their owners over the poverty line--is
false," says Dichter, the author.
By the Numbers
Microcredit is quickly spreading in India, but the loans don't always lead to businesses; in some cases they are even
used to pay off previous debts.

• 200,000 -- People getting loans in 1996.


• 17.5 million -- People getting loans in 2006.
• $4 million -- Value of loans granted in 1996.
• $1.3 billion -- Value of loans granted in 2006.
• $75 -- Size of average loan.

Figures for year ending Mar. 31, 2006.


Source: Micro-Credit Ratings International.
Claire Cain Miller, Forbes
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Samasta Microfinance
I have joined the Board of Directors for a small start up microfinance company operating in
Tamil Nadu and Karnataka, called Samasta Microfinance.

It is amazing to know how many people are desperately looking forward to getting money to
kickstart their lives. It is also unfortunate to know that larger banks are not yet willing to lend
money to microfinance institutions. As a result, the credit demand in India remains unfulfilled.

With respect to Samasta, I would like to suggest to the company interesting ways in which the
borrowers can improve their lives, particularly through intervention in education, healthcare,
better solutions for safe drinking water, renewable electricity solutions and so on.

I have looked at some simple, low cost water purifiers which, if deployed, can cut down the
healthcare costs. The quality of water is notoriously bad in urban and suburban Chennai, and is
one of the major causes of diseases. Several low income households can benefit substantially
from solar lighting solutions. Power cuts have increased in the last 5 years in Tamil Nadu, not
just in rural TN but also in the urban areas. The most affected are school children, near their
exam times.

More technology providers will have to look at the lower end of the population to come up with
affordable solutions.
I am greatly interested in education and reading books in general, being a book publisher
myself. We gave away several free books to microcredit borrowers of Samasta (all women) and
talked to them about the need to get their children to read books (as opposed to watching TV
mindlessly). All the women accepted the idea and agreed to persuade their children to get into
reading books.

Let us see what difference we can make in the coming days.

POSTED BY BADRI AT 6:46 AM

LABELS: MICROCREDIT

2 COMMENTS:

Ramadoss Magesh said...

Is there anyway that individual can be investors in such initiative. I remember


reading either in your post or elsewhere about a possiblity of parking some funds
for causes that you want to associate with. This query is in a slightly different
perspective. Its also not a huge amount of money. Can we park some amount of
money(say 1-2lakhs) with the hope of getting back some decent returns and also
investing your money on an initiative which has some sort of social good(for want
of a better term) and also on a domain that you hold some belief in. Hope my
query is clear enough for you to respond to. Would appreciate your response.

5 / 2 8 / 20 0 9 9 : 4 0 A M

Ramadoss Magesh said...

http://blog.investraction.com/2009/09/microfinance-in-spot-of-trouble.html

Thought u might be interested to look into it..

9/25/2009 9:12 AM
Post a Comment

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Blog Archive
• ▼ 2009 (1)

○ ▼ May (1)

 Samasta Microfinance

• ► 2008 (25)

○ ► October (2)

 Credit crunch, Microfinance etc.

 India Post / NABARD credit disbursal

○ ► July (4)

 Don't make profits from micro finance - says Yunus...

 Rangde.org - a Kiva.org type set up for India

 Micro-finance growing the fastest in the East (Ind...

 Pragati Gramodyog Sansthan (PGS) - helping bonded ...

○ ► June (9)

 The Economist article on profiting from the poor

 Microcredit for slum dwellers in Delhi

 Kiva vs Microplace

 Micro-investment: Fabindia
 Microcredit in Meghalaya

 Bollywood film has micro-credit featured

 Microfinance Q&A in The Guardian

 LIC, state insurer to enlarge micro-insurance prog...

 Loan waiver culture - The ET editorial

○ ► May (2)

 Microfinance and Sub-prime - from India Developmen...

 Grama Vidiyal gets funding

○ ► April (2)

 Grameen Veolia Water partnership

 Micro finance institutions in East India, Forbes L...

○ ► March (3)

 Reliance Capital foray into microfinance

 The Independent: Microcredits go mobile in India.....

 New Yorker article: What Microloans Miss

○ ► February (3)

 Interview with Vikram Akula, SKS Microfinance

 SKS Microfinance gets third round of investment

 Micro - housing loans

• ► 2007 (49)

○ ► October (3)

 Changes to Grameen Bank's structure

 Microplace - Online microfinance

 Grameen Bank goes to USA

○ ► September (2)

 Birla Sun Life to offer micro-insurance

 Sex workers bank

○ ► August (7)
 Aavishkaar Goodwell gets money

 Micro credit for Scheduled Tribes and Castes

 Future of 'phone ladies' of Bangladesh

 A profile of Kotalipara Development Society

 Keya Sarkar: Hope and despair in micro-finance

 Review of BANKER TO THE POOR

 Business shouldn't be Govt. Business - Yunus

○ ► May (9)

 Out of Focus: KAS Foundation

 Interview with Jayshree Vyas of SEWA

 Unitus announces three partnerships in India

 Solar power through micro credit

 Would Grameen be the target of political parties?

 Citibank to buy SKS loans

 Indian Microfinance Bill not adequate

 Yunus abandons political plans

 Unitus $5 viral web campaign

○ ► April (8)

 Story on SKS Microfinance

 Tata Motors to provide Microfinance in Singur

 Two articles on Kiva

○ ► March (9)

○ ► February (5)

○ ► January (6)

• ► 2006 (48)

○ ► December (6)

○ ► November (4)

○ ► October (19)
○ ► September (7)

○ ► August (12)

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