About NABARD Introduction NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for

promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. In discharging its role as a facilitator for rural prosperity NABARD is entrusted with 1.Providing refinance to lending institutions in rural areas 2.Bringing about or promoting institutional development and 3.Evaluating, monitoring and inspecting

the client banks Besides this pivotal role, NABARD also: Acts as a coordinator in the operations of rural credit institutions Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development Offers training and research facilities for banks, cooperatives and organizations working in the field of rural development Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development Acts as regulator for cooperative banks and RRBs Some of the

milestones in NABARD's activities are: Refinance disbursemen t under STAgri & Others and MTConversion/ Liquidity support aggregated Rs.16952.83 crore during 2007-08. Refinance disbursemen t under Investment Credit to commercial banks, state cooperative banks, state cooperative agriculture and rural development banks, RRBs and other eligible financial institutions during 200708 aggregated Rs.9046.27 crore. Through the Rural Infrastructure Development Fund (RIDF) Rs.8034.93 crores were disbursed during 200708. With this, a cumulative amount of Rs.74073.41 crore has been sanctioned for 280227 projects as on 31 March 2008 covering

irrigation, rural roads and bridges, health and education, soil conservation, drinking water schemes, flood protection, forest management etc. Under Watershed Development Fund with a corpus of Rs.613.71 crore as on 31 March 2008, 416 projects in 94 districts of 14 states have benefited. Farmers now enjoy hassle free access to credit and security through 714.68 lakh Kisan Credit Cards that have been issued through a vast rural banking network. Under the Farmers' Club Programme, a total of 28226 clubs covering 61789 villages in 555 districts have been formed, helping farmers get access to credit,

technology and extension services.

NABARD role and functions Overview NABARD is set up by the Government of India as a development bank with the mandate of facilitating credit flow for promotion and development of agriculture and integrated rural development. The mandate also covers supporting all other allied economic activities in rural areas, promoting sustainable rural development and ushering in prosperity in the rural areas. With a capital base of Rs 2,000 crore provided by the Government of India and Reserve Bank of India , it operates through its head office at Mumbai, 28 regional offices situated in state capitals and 391 district offices at districts. Contact NABARD It is an apex institution

Contact NABARD Departments of NABARD

handling matters concerning policy, planning and operations in the field of credit for agriculture and for other economic and developmental activities in rural areas. Essentially, it is a refinancing agency for financial institutions offering production credit and investment credit for promoting agriculture and developmental activities in rural areas. NABARD today Initiates measures toward institutionbuilding for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel, etc. Coordinates the rural financing activities of all the institutions engaged in developmental work at the field level and maintains liaison with the

government of India , State governments, the Reserve Bank of India and other national level institutions concerned with policy formulation Prepares, on annual basis, rural credit plans for all the districts in the country. These plans form the base for annual credit plans of all rural financial institutions Undertakes monitoring and evaluation of projects refinanced by it Promotes research in the fields of rural banking, agriculture and rural development Functions as a regulatory authority, supervising, monitoring and guiding cooperative banks and regional rural banks NABARD's Roles and Functions are summarized below: Credit Functions Developmental and Promotional

Functions Supervisory Functions Institutional and Capacity building Role in Training go to top NABARD 2007

Credit functions Introduction NABARD's credit functions cover planning, dispensation and monitoring of credit. This activity involves: Framing policy and guidelines for rural financial institutions Providing credit facilities to issuing organization s Preparation of potentiallinked credit plans annually for all districts for identification of credit potential Monitoring

the flow of ground level rural credit

Development and Promotional Functions

Credit is a critical factor in development of agriculture and rural sector as it enables investment in capital formation and technological upgradation. Hence strengthening of rural financial institutions, which deliver credit to the sector, has been identified by NABARD as a thrust area. Various initiatives have been taken to strengthen the cooperative credit structure and the regional rural banks, so that adequate and timely credit is made available to the needy. In order to reinforce the credit functions and to make credit more productive, NABARD has been undertaking a number of developmental and promotional activities such as: Help cooperative banks and Regional Rural Banks to prepare development actionsplans for themselves Enter into MoU with state governments and cooperative banks specifying their respective obligations to improve the affairs of the banks in a stipulated timeframe Help Regional Rural Banks and the sponsor banks to enter into MoUs specifying their respective obligations to improve the affairs of the Regional Rural Banks in a stipulated timeframe Monitor implementation of development action plans of banks and fulfillment of obligations under MoUs Provide financial assistance to cooperatives and Regional Rural Banks for establishment of technical, monitoring and evaluations cells Provide organisation development intervention (ODI) through reputed training institutes like Bankers Institute of Rural Development (BIRD), Lucknow www.birdindia.org.in, National Bank Staff College, Lucknow www.nbsc.in and College of Agriculture Banking, Pune, etc.

 Provide financial support for the training institutes of cooperative banks Provide training for senior and middle level executives of commercial banks, Regional Rural Banks and cooperative banks Create awareness among the borrowers on ethics of repayment through Vikas Volunteer Vahini and Farmers clubs Provide financial assistance to cooperative banks for building improved management information system, computerisation of operations and development of human resources Supervisory Functions Overview As an apex bank involved in refinancing credit needs of major financial institutions in the country engaged in offering financial assistance to agriculture and rural development operations and programmes, NABARD has been sharing with the Reserve Bank of India certain supervisory functions in respect of cooperative banks and Regional Rural Banks (RRBs). As part of these functions, it Undertakes inspection of Regional Rural Banks (RRBs) and Cooperative Banks (other than urban/primary cooperative banks) under the provisions of Banking Regulation Act, 1949. Undertakes inspection of State Cooperative Agriculture and Rural Development Banks (SCARDBs) and apex non-credit cooperative societies on a voluntary basis Undertakes portfolio inspections, systems study, besides off-site surveillance of Cooperative Banks and Regional Rural Banks (RRBs) Provides recommendations to Reserve Bank of India on opening of new branches by State Cooperative Banks and Regional Rural Banks (RRBs) Administering the Credit Monitoring Arrangements in SCBs and CCBs. Core Functions

NABARD has been entrusted with the statutory responsibility of conducting inspections of State Cooperative Banks (SCBs), District Central Cooperative Banks (DCCBs) and Regional Rural Banks (RRBs) under the provision of the Banking Regulation Act, 1949. In addition, NABARD has also been conducting periodic inspections of state level cooperative institutions such as State Cooperative Agriculture and Rural Development Banks (SCARDBs), Apex Weavers Societies, Marketing Federations, etc. on a voluntary basis. Objectives of Inspection To protect the interest of the present and future depositors To ensure that the business conducted by these banks is in conformity with the provisions of the relevant Acts/Rules, regulations/Bye-Laws, etc To ensure observance of rules, guidelines, etc. formulated and issued by NABARD/RBI/Government To examine the financial soundness of the banks To suggest ways and means for strengthening the institutions so as to enable them to play more efficient role in rural credit go to top Instruments of Supervision Periodic on-site inspection of 31 SCBs , 371 DCCBs, 20 SCARDBs and 82 RRBs and other Apex level Cooperative institutions Supplementary Appraisal Off-site Surveillance System ( OSS ) Portfolio inspection/System study CMA returns Supervisory Strategy In the wake of the banking sector reforms, new set of international norms/practices were made applicable to Commercial Banks (CBs) to make them more competitive and sustainable in the

changing scenario. The co-operative banks and RRBs were also to function in the general banking environment, emerging out of the financial sector reforms, introduced by the GOI/RBI. Accordingly, the prudential norms were extended to them in phases. While the capital adequacy norm has not yet been made applicable to these banks, the other prudential norms viz. income recognition, asset classification and provisioning, which were made applicable by RBI to the commercial banking sector had been extended to cover RRBs in 199596, SCBs and DCCBs in 1996-97 and to SCARDBs in 1997-98. NABARD, through a concrete and time-bound supervision strategy, facilities these banks to adjust to the new financial discipline so as to internalize prudential norms stipulated. Current Focus Under the revised strategy, a sharper focus of the NABARDs inspection was given on the core areas of the functioning of banks pertaining to Capital Adequacy, Asset Quality, Management Earnings, Liquidity and Systems Compliance (CAMELSC). Thus, NABARDs focus in its statutory onsite inspections is on core assessments leaving the collateral appraisals to supplementary inspections. The micro level aspects are to be taken care of by the banks themselves by way of internal inspections or by other agencies such as auditors. In this direction, through a series of workshops and meetings held with the Chief Executives and the Chief Auditors of cooperative banks, NABARD attempted to ensure that the other areas, particularly relating to the internal checks and controls, revenue and income realization by way of interest on loans and deposits and other routine features of carrying out general banking transactions were suitably taken care of by the respective banks and their concurrent/statutory audit systems. Off-site Surveillance As a part of the new strategy of supervision, a system of `Off-site Surveillance' has been introduced as a supplementary tool to the on-site inspection. Its objectives are to obtain and analyse critical data on a continuous basis, to identify areas of supervisory concern and to identify early warning signals and risky areas requiring further probe. The system basically envisages desk scrutiny of operations of cooperative banks and RRBs through a set of statutory and non-statutory

returns. While the periodical statutory onsite inspections attempt an overall evaluation of the performance of the banks with a stipulated period, off-site surveillance envisages continuous supervision supplementing the on-site inspections with additional instruments of supervision. Board of Supervision (for SCBs, DCCBs and RRBs) Board of Supervision (for SCBs, DCCBs and RRBs) has been constituted by NABARD under Section 13(3) of NABARD Act, 1981 as an Internal Committee to the Board of Directors of NABARD. go to top The broad powers and functions of the Board of Supervision are : Giving directions and guidance in respect of policies and on matters relating to supervision and inspection, reviewing the inspection findings, suggesting appropriate measures Reviewing the follow-up action taken by Department of Supervision (DoS) on matters of frauds and internal checks and control Identifying the emerging supervisory issues in the functioning of cooperative banks/RRBs such as NPAs recovery, investment portfolio, credit monitoring system, management practices, frauds, etc. Suggesting necessary follow-up measures Recommending appropriate training for Inspecting Officers of NABARD for imparting necessary skills and knowledge Suggest measures for strengthening of DoS Recommend issue of directions by RBI Oversee the quality of inspections carried out and the reports issued Review the information generated through off-site surveillance and other supplementary vehicles, action taken thereon Undertake any other functions entrusted from time to time by the Board of

Directors of NABARD The Board of Supervision, since its formation on 20 November 1999 , has held 45 meetings till 21 September 2010 and reviewed the financial position of Cooperative Banks and RRBs. Based on the observations of BoS, authorities concerned have been apprised of the weaknesses. Other Initiatives The day-to-day functioning of the supervised banks is being monitored through various statutory returns prescribed by the RBI/NABARD including OSS returns Periodic coordination Meets are conducted with RPCD, RBI to discuss the policy and operational matters relating to supervision State level groups comprising RCS, Apex NABARD role and functions

Institutional Building Help cooperative banks and RRBs to prepare development actions plans for themselves

Enter into MoU with state governments and cooperative banks specifying their respective obligations to improve the affairs of the banks in a stipulated timeframe Help RRBs and the sponsor banks to enter into MoUs specifying their respective obligations to improve the affairs of the RRBs in a stipulated timeframe Monitor implementation of development action plans of banks and fulfillment of obligations under MoUs. Provide financial assistance to cooperatives and RRBs for establishment of technical, monitoring and evaluations cells. Provide organisation development intervention (ODI) through reputed training institutes like Bankers Institute of Rural Development (BIRD), Lucknow, National Bank Staff College, Lucknow, College of Agriculture Banking, Pune, etc. Provide financial support for the training institutes of cooperative banks Provide training for senior and middle level executives of commercial banks, RRBs and cooperative banks Create awareness among the borrowers on ethics of

repayment through Vikas Volunteer Vahini/farmer's clubs Provide financial assistance to cooperative banks for building improved management information system, computerisation of operations, development of human resources, etc. NABARD and its Role in Training National Bank Staff College, Lucknow National Bank Training Centre, Lucknow Zonal Training Centre, Hyderabad Regional Training Centre, Mangalore Regional Training Centre, Bolpur Bankers Institute of Rural Development (BIRD), Lucknow The provisions of the Act as stated below very clearly indicate the nature and scope of the developmental mandate of the Bank and its role in training and capacity building with the underlying belief that the process of development cannot be accomplished by credit/refinance alone. Section 38 of the NABARD Act provides that the Bank shall: maintain expert staff to study all problems relating to agriculture and rural development and be available for consultation to the Central Government, the Reserve Bank, the State Governments and the other institutions engaged in the field of rural development. provide facilities for training, for dissemination of information and the promotion of research including the undertaking of studies, researches, techno-economic and other surveys in the field of rural banking, agriculture and rural development. provide technical, legal, financial, marketing and administrative assistance to any person engaged in agriculture and rural development activities; may provide consultancy services in the field of agriculture and rural development and other related matters in or outside India, on such terms and against such remuneration, as may be agreed upon; In this context, the role of training in NABARD and the role played by it for capacity building in client institutions, partner agencies and other developmental agencies is important. For maintaining 'Expert Staff', the bank needs to provide continuous exposure to its officers and staff for upscaling their knowledge and skills in core areas. However, in the initial years the Bank had recruited expert staff from various technical disciplines and created a separate cadre of officers. These officers were involved in formulating, appraising, monitoring and evaluating different agricultural projects implemented by different credit agencies.These officers, irrespective of their academic background, were imparted similar type of training as all other officers. Their placements and the regular job rotations helped in grooming them to take up assorted assignments, get involved in a variety of roles and functions including credit, developmental, promotional, supervisory and necessary support and information for decision making. The Bank also had access to their specialised skills which were utilised whenever needed.

In pursuance of the Bank's mandate as stated in the Act, the Bank provides training facilities for the RFIs and agencies involved in rural development through BIRD and the two RTCs. With a view to broadbase the training and capacity building efforts, the Bank encourages the RFIs to set up their own training systems and provides these training institutes the necessary support to conduct meaningful and quality training. Options and avenues for strengthening the training interventions at the client level are continuously examined so that the human resources in these institutions are developed to take on the challenges, reckon with the competition, improve customer service, expand outreach, develop suitable products and thereby contribute to rural development. As NABARD primarily functions through other agencies, the needs of the client institutions largely determine the knowledge and skill requirements of NABARD officers. NABARD endeavours to blend the experiences of client bank training with the training for NABARD officers so as to make training meaningful and relevant to their roles. Efforts are also made to blend the study findings with the outcome from training to periodically measure the overall impact of the investments made in the training efforts.

microFinance

mF Conference I . High Level Policy Conference on Micro finance in India - 03 to 05 May 2005

After witnessing a massive growth in expansion of the SHG - Bank Linkage in the past few years, NABARD organized a National Level Policy Conference at New Delhi India to take stock of:

How far have we traveled in the field of microFinance? What is the road map for the future? What could be the future role of NABARD

This was a major event after the National level Conference on SHG - Bank Linkage in November 2002 in New Delhi. The present high level policy conference was a combined effort of two key support agencies for the microFinance movement in the country viz. GTZ and SDC. The present conference was attended by 99 participants representing government, banks, parastatal bodies, NGOs, microFinance experts, donors & domain experts and academics from India & abroad. Presentation of theme papers and deliberations were held on core themes like

Micro Finance mF Institutions

Present Status of microFinance: Future Challenges SHG - Bank Linkage Programme: New Directions mFIs in India: Future Scenario Government Sponsorship and Regulatory Issues Innovations in microFinance Forecasting the Future

Introduction A range of institutions in public sector as well as private sector offers the micro finance services in India. They can be broadly categorized in to two categories namely, formal institutions and informal institutions. The former category comprises of Apex Development Financial Institutions, Commercial Banks, Regional Rural Banks, and Cooperative Banks that provide micro finance services in addition to their general banking activities and are referred to as micro finance service providers. On the other hand, the informal institutions that undertake micro finance services as their main activity are generally referred to as micro Finance Institutions (mFIs). While both private and public ownership are found in the case of formal financial institutions offering micro finance services, the mFIs are mainly in the private sector. micro Finance Service Providers

The micro finance service providers include apex institutions like National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and, Rashtriya Mahila Kosh (RMK). At the retail level, Commercial Banks, Regional Rural Banks, and, Cooperative banks provide micro finance services. Today, there are about 60,000 retail credit outlets of the formal banking sector in the rural areas comprising 12,000 branches of district level cooperative banks, over 14,000 branches of the Regional Rural Banks (RRBs) and over 30,000 rural and semi-urban branches of commercial banks besides almost 90,000 cooperatives credit societies at the village level. On an average, there is at least one retail credit outlet for about 5,000 rural people. This physical reaching out to the far-flung areas of the country to provide savings, credit and other banking services to the rural society is an unparalleled achievement of the Indian banking system. In the this paper an attempt is made to deal with various aspects relating to emergence of private micro finance industry in the context of prevailing legal and regulatory environment for private sector rural and micro finance operators. The Emergence of Private Micro finance Industry

The micro finance initiative in private sector can be traced to the initiative undertaken by Ms.Ela Bhat for providing banking services to the poor women employed in the unorganised sector in Ahmedabad City of Gujarat State. Shri Mahila SEWA (Self Employed Womens Association) Sahakari Bank was set up in 1974 by registering it as a Urban Cooperative Bank. Since then, the bank is providing banking services to the poor self-employed women working as hawkers, vendors, domestic servant etc. As on March 2003, the mFI had a membership of 30,000, seventy per cent of whom are from urban area. The deposit and loan portfolio stood at Rs 623.9 million ($ 13.86 million) and Rs133.6 million ($2.97 million) respectively. Though the mFI is making profit, yet the SEWA bank model of mFI has not been replicated elsewhere in the country. In the midst of the apparent inadequacies of the formal financial system to cater to the financial needs of the rural poor, NABARD sponsored an action research project in 1987 through an NGO called MYRADA. For this purpose a grant of Rs. 1 million ($22,222) was provided to MYRADA for an R&D programme related to credit groups. Encouraged by the results of field level experiments in group based approach for lending to the poor, NABARD launched a Pilot Project in 1991-92 in partnership with Non-governmental Organisations (NGOs) for promoting and grooming self help groups (SHGs) of homogeneous members and making savings from existing banks and within the existing legal framework. Steady progress of the pilot project led to the mainstreaming of the SHGBank Linkage Programme in 1996 as a normal banking activity of the banks with widespread acceptance. The RBI set the right policy environment by allowing savings bank accounts of informal groups to be opened by the formal banking system. Launched at a time when regulated interest rates were in vogue, the banks were expected to lend to SHGs at the prescribed rates, but the RBI advised the banks not to interfere with the management of affairs of SHGs, particularly on the terms and conditions on which the SHGs disbursed loans to their members. The uniqueness of the micro finance through SHG is that it is a partnership based approach and encouraged NGOs to undertake not only social engineering but also financial intermediation especially in areas where banking network was not satisfactory. The rapid progress achieved in SHG formation, which has now turned into an empowerment movement among women across the country, laid the foundation for emergence of mFIs in India.

go to top mFIs and Legal Forms With the current phase of expansion of the SHG Bank linkage programme and other mF initiatives in the country, the informal micro finance sector in India is now beginning to evolve. The mFIs in India can be broadly sub-divided into three categories of organizational forms as given in Table 1. While there is no published data on private mFIs operating in the country, the number of mFIs is estimated to be around 800. However, not more than 10 mFIs are reported to have an outreach of 100,000 micro finance clients. An overwhelming majority of mFIs are operating on a smaller scale with clients ranging between 500 to 1500 per mFI. The geographical distribution of mFIs is very much lopsided with concentration in the southern India where the rural branch network of

formal banks is excellent. It is estimated that the share of mFIs in the total micro credit portfolio of formal & informal institutions is about 8 per cent. Table 1: Legal Forms of mFIs in India Types of mFIs 1. Not for Profit mFIs a.) NGO - mFIs b.) Non-profit Companies 2. Mutual Benefit mFIs a.) Mutually Aided Cooperative Societies (MACS) and similarly set up institutions 3. For Profit mFIs a.) Non-Banking Financial Companies (NBFCs) Total 700 - 800 10 200 to 250 Estimated Number* 400 to 500 Legal Acts under which Registered Societies Registration Act, 1860 or similar Provincial Acts Indian Trust Act, 1882 Section 25 of the Companies Act, 1956 Mutually Aided Cooperative Societies Act enacted by State Government

Indian Companies Act, 1956 Reserve Bank of India Act, 1934

* The estimated number includes only those mFIs, which are actually undertaking lending activity.

NGO mFIs: There are a large number of NGOs that have undertaken the task of financial intermediation. Majority of these NGOs are registered as Trust or Society. Many NGOs have also helped SHGs to organise themselves into federations and these federations are registered as Trusts or Societies. Many of these federations are performing non-financial and financial functions like social and capacity building activities, facilitate training of SHGs, undertake internal audit, promote new groups, and some of these federations are engaged in financial intermediation. The NGO mFIs vary significantly in their size, philosophy and approach. Therefore these NGOs are structurally not the right type of institutions for undertaking financial intermediation activities, as the byelaws of these institutions are generally restrictive in allowing any commercial operations. These organisations by their charter are non-profit organisations and as a result face several problems in borrowing funds from higher financial institutions. The NGO mFIs, which are large in number, are still outside the purview of any financial regulation. These are the institutions for which policy and regulatory framework would need to be established.

Non-Profit Companies as mFIs: Many NGOs felt that combining financial intermediation with their core competency activity of social intermediation is not the right path. It was felt that a financial institution including a company set up for this purpose better does banking function. Further, if mFIs are to demonstrate that banking with the poor is indeed profitable and sustainable, it has to function as a distinct institution so that cross subsidisation can be avoided. On account of these factors, NGO mFIs are of late setting up a separate Non-Profit Companies for their micro finance operations. The mFI is prohibited from paying any dividend to its members. In terms of Reserve Bank of Indias Notification dated 13 January 2000, relevant provisions of RBI Act, 1934 as applicable to NBFCs will not apply for NBFCs (i) licensed under Section 25 of Companies Act, 1956, (ii) providing credit not exceeding Rs. 50,000 ($1112) for a business enterprise and Rs. 1,25,000 ($2778) for meeting the cost of a dwelling unit to any poo person, and, (iii) not accepting public deposits.

Mutual Benefit mFIs: The State Cooperative Acts did not provide for an enabling framework for emergence of business enterprises owned, managed and controlled by the members for their own development. Several State Governments therefore enacted the Mutually Aided Co-operative Societies (MACS) Act for enabling promotion of self-reliant and vibrant co-operative Societies based on thrift and self-help. MACS enjoy the advantages of operational freedom and virtually no interference from government because of the provision in the Act that societies under the Act cannot accept share capital or loan from the State Government. Many of the SHG federations, promoted by NGOs and development agencies of the State Government, have been registered as MACS. Reserve Bank of India, even though they may be providing financial service to its members, does not regulate MACS. For Profit mFIs: Non Banking Financial Companies (NBFC) are companies registered under Companies Act, 1956 and regulated by Reserve Bank of India. Earlier, NBFCs were not regulated by RBI but in 1997 it was made obligatory for NBFCs to apply to RBI for a certificate of registration and for this certificate NBFCs were to have minimum Net Owned funds of Rs 25 lakhs and this amount has been gradually increased. RBI introduced a new regulatory framework for those NBFCs who want to accept public deposits. All the NBFCs accepting public deposits are subjected to capital adequacy requirements and prudential norms. There are only a few mFIs in the country that are registered as NBFCs. Many mFIs view NBFCs more preferred legal form and are aspiring to

be NBFCs but they are finding it difficult to meet the requirements stipulated by RBI. The number of NBFCs having exclusive focus on mF is negligible. Capital Requirements NGO-mFIs, non-profit companies mFIs, and mutual benefit mFIs are regulated by the specific act in which they are registered and not by the Reserve Bank of India. These are therefore not subjected to minimum capital requirements, prudential norms etc. NGO mFIs to become NBFCs are required to have a minimum entry capital requirement of Rs. 20 million ($ 0.5 million). As regards prudential norms, NBFCs are required to achieve capital adequacy of 12% and to maintain liquid assets of 15% on public deposits. Foreign Investment Foreign investment by way of equity is permitted in NBFC mFIs subject to a minimum investment of $500,000. In view of the minimum level of investment, only two NBFCs are reported to have been able to raise the foreign investment. However, a large number of NGOs in the development - empowerment are receiving foreign fund by way of grants. At present, over Rs.40, 000 million ($ 889 million) every year flows into India to NGOs for a whole range of activities including micro finance. In a way, foreign donors have facilitated the entry of NGOs into micro finance operations through their grant assistance. Deposit Mobilisation Not for profit mFIs are barred, by the Reserve Bank of India, from mobilising any type of savings. Mutual benefit mFIs can accept savings from their members. Only rated NBFC mFIs rated by approved credit rating agencies are permitted to accept deposits. The quantum of deposits that could be raised is linked to their net owned funds. Borrowings

Initially, bulk of the funds required by mFIs for onlending to their clients were met by apex institutions like National Bank for Agriculture and Rural Development, Small Industries Development Bank Of India, and, Rashtiya Mahila Kosh. In order to widen the range of lending institutions to mFIs, the Reserve Bank of India has roped in Commercial Banks and Regional Rural Banks to extend credit facilities to mFIs since February 2000. Both public and private banks in the commercial sector have extended sizeable loans to mFIs at interest rate ranging from 8 to 11 per cent per annum. Banks have been given operational freedom to prescribe their own lending norms keeping in view the ground realities. The intention is to augment flow of micro credit through the conduit of mFIs. In regard to external commercial borrowings (ECB) by mFIs, not-for-profit mFIs are not permitted to raise ECB. The current policy effective from 31 January 2004, allows only corporates registered under the Companies Act to access ECB for permitted end use in order to enable them to become globally competitive players.

go to top Interest Rates The interest rates are deregulated not only for private mFIs but also for formal baking sector. In the context of softening of interest rates in the formal banking sector, the comparatively higher interest rate (12 to 24 per cent per annum) charged by the mFIs has become a contentious issue. The high interest rate collected by the mFIs from their poor clients is perceived as exploitative. It is argued that raising interest rates too high could undermine the social and economic impact on poor clients. Since most mFIs have lower business volumes, their transaction costs are far higher than that of the formal banking channels. The high cost structure of mFIs would affect their sustainability in the long run. Collateral requirements

All the legal forms of mFIs have the freedom to waive physical collateral requirements from their clients. The credit policy guidelines of the RBI allow even the formal banks not to insist on any type of collateral and margin requirement for loans upto Rs 50,000 ($1100). Regulation & Supervision

India has a large number of mFIs varying significantly in size, outreach and credit delivery methodologies. Presently, there is no regulatory mechanism in place for mFIs except for those that are registered as NBFCs. As a result, mFIs are not required to follow standard rule and it has allowed many mFIs to be innovative in its approach particularly in designing new products and processes. But the flip side is that the management and governance of mFIs generally remains weak, as there is no compulsion to adopt widely

accepted systems, procedures and standards. Because the sector is unregulated, not much is known about their internal health. Following Committees have examined the road map for regulation and supervision of mFIs

Task Force (appointed by NABARD) Report on Regulatory and Supervision Framework for mFIs, 1999. (Kindly see publications Section for a complete report Working Group (constituted by Government of India) on Legal & Regulation of mFIs, 2002 Informal Groups (appointed by RBI) on Micro Finance which studied issues relating to (i) Structure & Sustainabilty, ii) Funding (iii) Regulations and (iv) Capacity Building, 2003 Advisory Committee (appointed by RBI) on flow of credit to agriculture and related activities from the Banking System, 2004

To address the issue of need for a differential regulatory framework, the latest committee sought answers to the following questions and concerns facing private mFIs in the Country: (i) Is non-existence of a separate differential regulatory framework a critical bottleneck hindering the growth of the sector? (ii) Will MFIs be sustainable in medium term? If so, will they continue to focus on the poor? (iii) Is access to public / member deposit the key issue for their sustainability? (iv) Can MFIs finance loans for income generation at interest rates, which are sustainable by the rural poor? (v) Is it possible to evolve commonly agreed standards for MFI sector covering performance, accounting and governance issues, which can open up possibilities of self-regulation? (vi) Has the sector reached a critical mass where regulation becomes important? The Committee observed that while a few of the MFIs have reached significant scales of outreach, the MFI sector as a whole is still in evolving phase as is reflected in wide debates ranging around (i) desirability of NGOs taking up financial intermediation, (ii) unproven financial and organizational sustainability of the model, (iii) high transaction costs leading to higher rates of interest being charged to the poor clients, (iv) absence of commonly agreed performance, accounting and governance standards, (v) heavy expectations of low cost funds, including equity and the start up costs, etc.

The current debate on development of a regulatory system for the MFIs focuses on three stages. Stage one - to make the MFIs appreciate the need for certain common performance standards, stage two - making it mandatory for the MFIs to get registered with identified or designated institutions and stage three - to encourage development of network of MFIs which could function as quasi Self-Regulatory Organisations (SROs) at a later date or identifying a suitable organisation to handle the regulatory arrangements. The Committee recommended that while the MFIs may continue to work as wholesalers of microCredit by entering into tie-ups with banks and apex development institutions, more experimentation have to be done to satisfy about the sustainability of the MFI model. Such experimentation needs to be encouraged in areas where banks are still not meeting adequate credit demand of the rural poor.

In regard to offering thrift products, the Committee felt that, while the NGO-MFIs can continue to extend micro credit services to thei clients, they could play an important role in facilitating access of their clients to savings services from the regulated banks. As regards allowing NGO-MFIs to access deposits from public / clients, the Committee considers that in view of the need to protect the interests of depositors, they may not be permitted to accept public deposits unless they comply with the extant regulatory framework of the Reserve Bank of India. As no depositors' interest is involved where they do not accept public deposits, the Reserve Bank of India need not regulate MFIs. As regards the high interest rates being charged by the MFIs, the Committee felt that the lenders to MFIs may ensure that these institutions adopt a cost-plus- reasonable-margin approach in determining the rates of interest on loans to clients.

Conclusions

Private mFIs in India, barring a few exceptions, are still fledgling efforts and are therefore unregulated. Their outreach is uneven in terms of geographical spread. They serve micro finance clients with varying quality and using different operating models. Regulatory framework should be considered only after the sustainability of mFI model as a banking enterprise for the poor is clearly established. Experimentation of mFI model needs to be encouraged especially in areas where formal banks are still not meeting adequate credit demand of the rural poor. Extracts from an article written and presented at the APRACA Seminar at Manila on Regulation of mFIs in July 2004 by K.Muralidhara Rao, General Manager, NABARD, Mumbai. The views expressed are personal and attempts to capture the present thinking of regulating institutions.

go to top NABARD's Support to microFinance Institutions (mFIs)

Realizing the importance of mFIs in the delivery of financial services to the poor and their potential for expansion of services in remote and lesser-banked areas, NABARD has been extending technical and fund support to this sector. Some of the concerns that necessitated NABARD to commence this support in 1993 were: 1) the need to provide timely credit to the poor in under banked regions and ii) to further improve the outreach of rural credit delivery system through alternate credit delivery mechanisms. NABARD's support is being provided to various forms of microFinance institutions covering mFIs, second tier mF lending institutions, Grameen bank replicators, NGO-mFIs, SHG Federations etc. NABARD provides loan funds in the form of Revolving Fund Assistance (RFA) to NGO-mFIs on a very selective basis. The RFA is generally provided for a period of 5 to 6 years and is necessarily to be used for on lending to mF clients (SHGs or individuals). In addition, the agencies are also sanctioned, on a caseto-case basis, grant assistance for partly meeting the salary of field level staff, infrastructure development and operational deficits during the initial years.

Cumulatively, as at the end of June 2004, Rs 26.98 crore (Rs 269.80 million) has been sanctioned as RFA to 31 NGO-mFIs and Rs 0.58 crore (Rs 5.8 million) has been sanctioned as grant to various NGOs. The amount excludes Rs 3.4 million sanctioned under SHG Post Office linkage programme in Tamilnadu. . ( For details click here ) During the year 2003-04, loan support of Rs. 84 million was sanctioned to two agencies viz. 1) Friends of World Women Banking, India (Rs. 74 million) for on-lending to small NGOs & 2) Kalanjiam Development Financial Services-a section 25 company promoted by DHAN Foundation (Rs 10 million) for on lending to SHGs. NABARD also provides technical support in the form of capacity building of staff of mFIs and also bankers in appraisal of mFIs for providing wholesale resource support. Since 2002, training programmes on "Appraisal of mFIs" are being conducted through Bankers Institute of Rural Development (BIRD), Lucknow. These training programmes are intended to equip the stakeholders to appreciate the nuances in financing NGO-mFIs and also enhance the flow of loanable funds from mainstream financial Institutions like banks. Specially designed capacity building programmes are also being organised for Chief Executives & other staff of NGOs on promotion as well as managing of self help groups on a regular basis through our regional offices, in association with reputed resource NGOs & training establishments. Micro Finance MF in India - An Overview The post nationalisation period in the banking sector witnessed substantial amount of resources being earmarked towards meeting the credit needs of the poor. The banking network underwent an expansion phase without comparables in the world. The branch expansion was synergised with massive manpower recruitment drive for manning such branches. Credit came to be recognized as a remedy for many of the ills of the poverty. Credit packages and programmes were designed based on the perceived needs of the poor. Programmes also underwent qualitative changes based on the experiences gained. Besides the programmes initiated by the Central Government, a large number of credit-based programmes were introduced by the state governments with large resource allocations. NABARDs Vision and Mission

Vision To facilitate sustained access to financial services for the unreached poor in rural areas through various microFinance innovations in a cost effective and sustainable manner. Mission By the end of year 2015, we have planned to link nearly 9.2 crore households which would ensure coverage of more than 50% women through SHG Bank linkage programme. Departments Micro Credit Innovation Department SHGs Assessment Methods Design Features Success Stories NABARD Support

NABARD'S Support for Capacity Building and Loanable Funds NABARD provides capacity building assistance and financial support to its partners for the promotion and broad basing of microFinance operations. As part of its efforts to link larger number of SHGs to the banking system, NABARD also focuses on training and sensitization of partner agencies, through various interventions.

Liquidity Support to Banks for SHG-bank Linkage The National Bank continued to provide 100 per cent refinance assistance to banks for financing SHGs. During 2008-09, Rs.122535.1 million was disbursed as loan to SHGs by various banking institutions. Banks had availed of refinance to the tune Rs. 26200.3 million from NABARD. As on 31 March 2009, the bank loans outstanding to the SHGs aggregated Rs. 226798.50 million , while cumulative refinance availed of by the banks aggregated Rs. 96880.90 million. Financial Support to Partner Agencies Promotional Grant Assistance to NGOs to function as SHPIs

NGOs already working in the social sector are encouraged to take up SHG promotion as an "add-on" activity. This not only helped in complementing the core areas of activities of the participating NGOs but also reduced overheads costs in formation and nurturing of groups. NABARD provides a grant assistance of Rs 4500/- to NGOs for promotion and linking of each SHG. This amount broadly covers training of members o SHG, stationery for the group, incentive/part salary of NGO staff etc.

Supporting RRBs as SHPIs In order to widen the spectrum of SHPIs, NABARD assisted five branches of Cauvery Grameena Bank (CGB), an RRB in Mysore, in the year 1994, to test the feasibility of RRBs themselves taking on the role of SHPIs. Under this programme, the bank staff at the identified branches were provided with specific training in promotion, nurturing and financing of SHGs. This experiment succeeded in grooming RRB staff to form SHGs. Having successfully oriented a few RRBs to take up the role of SHPIs, it was felt necessary to find ways of reducing the per SHG cost involved in promotion and nurturing of SHGs by bank staff, if the programme were to be broad based across the country. Therefore, an alternative module was developed by NABARD, involving lower cost, to support more RRBs. This module envisages support from NABARD for training of staff of ten identified branches for each RRB, with provision to partly meet the costs of awareness building, training and stationery for the SHGs, which are promoted by them. NABARD provides grant assistance @ Rs2500/- per SHG to RRBs for formation and linkage.

DCCBs as SHPIs In India cooperative institutions like District Cooperative Central Banks (DCCBs) and Primary Agricultural Cooperative Credit Societies (PACS) have a long history being in existence for the past several decades. They have the potential to emerge as major partners considering their strong presence in rural areas for integrating SHG bank linkage programme in their existing business activity. NABARD has therefore formulated a scheme for assisting DCCBs to form, nurture and link self-help groups. NABARD provides grant assistance @ Rs2500/- per SHG to DCCBs for formation and linkage.

Farmers' Clubs as SHPI . NABARD has been encouraging informal forums called Farmers' Clubs (FCs) to spread the message of 'Development through Credit' and inculcate the repayment ethics among borrowers. These clubs also have significant potential to work as SHPIs. Accordingly, a module was developed to support them to function as SHPIs. The module envisages financial support to nodal bank branches and FCs for meeting expenditure on (i) awareness building on SHGs among volunteers and nodal branch staff, (ii) training of identified FC volunteers to work as facilitators (iii) required stationery for SHGs promoted, (iv) reimbursement of expenditure incurred by the facilitators in promotion of SHGs, and (v) incentives to the Farmers' clubs for acting as SHPI. The module is now helping available independent facilitators like schoolteachers and primary health workers to form and nurture SHGs.

Individual Rural volunteers as SHPIs

In regions of the country, where NGOs are not adequately represented, a special initiative has been launched by NABARD in the year 2003 to rope in socially committed individual volunteers like retired and active school teachers, post masters, village elders, anganwadi workers, members of existing credit linked SHGs etc for formation o self help groups and linking them with banks. This scheme is being implemented in 20 states of the country through regional rural banks/ district central cooperative banks. Volunteers are provided with a grant assistance of Rs 1200/- per SHG for formation and linking them. Additional Promotional Grant assistance for hand holding at a maximum rate of Rs 500/- per SHG to NGOs, RRBs, DCCBs and UCBs and Rs 300/- per SHG to Farmers Club can be sanctioned seperately. Agency

NGOs RRBs Co-operative 12 136.92 Banks IRVs 6 46.62 Farmers ----Clubs Total 331 1768.53

Sanctions during the Cumulative Sanctions Cumulative Progress Year Amount No of Amount No of Amount No of No No No SHGs SHGs SHGs 311 1564.29 46504 2318 6405.71 291780 2773.93 214927 134861 2 20.70 800 113 389.30 44590 181.16 53595 35942 9465 2590 --95 563.13 66 529.76 ----53875 207.15 40327 31233 --52.32 8607

22835

4566

61.06 14544

7836

59359 2592 7887.90 421478 3275.62 332000

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