intro Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the

self-employed, who traditionally lack access to banking and related services. More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers."[1] Those who promote microfinance generally believe that such access will help poor people out of poverty. Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients. Although microcredit is one of the aspects of microfinance, conflation of the two terms is epidemic in public discourse. Critics often attack microcredit while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad range of microfinance services, it is difficult to assess impact, and very few studies have tried to assess its full impact.

Financial inclusion is the delivery of financial services at affordable costs to sections of disadvantaged and low income segments of society. The Reserve Bank of India has set up a commission (Khan Commission) in 2004 to look into financial inclusion and the recommendations of the commission were incorporated into the mid-term review of the policy (2005 06). In the report RBI exhorted the banks with a view of achieving greater financial inclusion to make available a basic "no-frills" banking account. In India, Financial Inclusion first featured in 2005, when it was introduced, that, too, from a pilot project in UT of Pondicherry, by K C Chakraborthy, the chairman of Indian Bank. Mangalam Village became the first village in India where all households were provided banking facilities. In addition to this KYC (Know your Customer) norms were relaxed for people intending to open accounts with annual deposits of less than Rs. 50,000. General Credit Cards (GCC) were issued to the poor and the disadvantaged with a view to help them access easy credit. In January 2006, the Reserve Bank permitted commercial banks to make use of the services of non-governmental organizations (NGOs/SHGs), micro-finance institutions and other civil society organizations as intermediaries for providing financial and banking services. The campaign states or U.T.s like Puducherry, Himachal Pradesh and Kerala have announced 100% financial inclusion in all their districts.

Grameen Bank. In Bangladesh, Professor Muhammad Yunus addressed the banking problem faced by the poor through a programme of action-research. With his graduate students in Chittagong University in 1976, he designed an experimental credit programme to serve them. It spread rapidly to hundreds of villages. Through a special relationship with rural banks, he disbursed and recovered thousands of loans, but the bankers refused to take over the project at the end of the pilot phase. They feared it was too expensive and risky in spite of his success. Eventually, through the support of donors, the Grameen Bank was founded in 1983 and now serves more than 4 million borrowers. The initial success of Grameen Bank also stimulated the establishment of several other giant microfinance institutions like BRAC, ASA, Proshika, etc. Through the 1980s, the policy of targeted, subsidized rural credit came under a slow but increasing attack as evidence mounted of the disappointing performance of directed credit programs, especia lly poor loan recovery, high administrative costs, agricultural development bank insolvency, and accrual of a disproportionate share of the benefits of subsidized credit to larger farmers. The basic tenets underlying the traditional directed credit approach were debunked and supplanted by a new school of thought called the "financial systems approach", which viewed credit not as a productive input necessary for agricultural development but as just one type of financial service that should be freely priced to guarantee its permanent supply and eliminate rationing. The financial systems school held that the emphasis on interest rate ceilings and credit subsidies retarded the development of financial intermediaries, discouraged intermediation between savers and investors, and benefited larger scale producers more than small scale, low-income producers. Meanwhile, microcredit programs throughout the world improved upon the original methodologies and defied conventional wisdom about financing the poor. First, they showed that poor people, especially women, had excellent repayment rates among the better programs, rates that were better than the formal financial sectors of most developing countries. Second, the poor were willing and able to pay interest rates that allowed microfinance institutions (MFIs) to cover their costs. 1990s These two features - high repayment and cost-recovery interest rates - permitted some MFIs to achieve long-term sustainability and reach large numbers of clients. Another flagship of the microfinance movement is the village banking unit system of the Bank Rakyat Indonesia (BRI), the largest microfinance institution in developing countries. This state-owned bank serves about 22 million microsavers with autonomously managed microbanks. T microbanks of BRI he are the product of a successful transformation by the state of a state-owned agricultural bank during the mid-1980s. The 1990s saw growing enthusiasm for promoting microfinance as a strategy for poverty alleviation. The microfinance sector blossomed in many countries, leading to multiple financial services firms serving the needs of microentrepreneurs and poor households. These gains, however, tended to concentrate in urban and densely populated rural areas. It was not until the mid-1990s that the term "microcredit" began to be replaced by a new term that included not only credit, but also savings and other financial services. "Microfinance" emerged as the term of choice to refer to a range of financial services to the poor, that included not only credit, but also savings and other services such as insurance and money transfers. ACCION helped found BancoSol in 1992, the first commercial bank in the world dedicated solely to microfinance. Today, BancoSol offers its more than 70,000 clients an impressive range of financial services including savings accounts, credit cards and housing loans - products that just five years ago were only accessible to Bolivia's upper classes. BancoSol is no longer unique: more than 15 ACCION-affiliated organizations are now regulated financial institutions. Today, practitioners and donors are increasingly focusing on expanded financial services to the poor

in frontier markets and on the integration of microfinance in financial systems development. The recent introduction by some donors of the financial systems approach in microfinance - which emphasizes favorable policy environment and institution-building - has improved the overall effectiveness of microfinance interventions. But numerous challenges remain, especially in rural and agricultural finance and other frontier markets. Today, the microfinance industry and the greater development community share the view that permanent poverty reduction requires addressing the multiple dimensions of poverty. For the international community, this means reaching specific Millennium Development Goals (MDGs) in education, women's empowerment, and health, among others. For microfinance, this means viewing microfinance as an essential element in any country's financial system.

History of MF

In the 1800s, various types of larger and more formal savings and credit institutions began to emerge in Europe, organized primarily among the rural and urban poor. These institutions were known as People's Banks, Credit Unions, and Savings and Credit Co -operatives.

The concept of the credit union was developed by Friedrich Wilhelm Raiffeisen and his supporters. Their altruistic action was motivated by concern to assist the rural population to break out of their dependence on moneylenders and to improve their welfare. From 1870, the unions expanded rapidly over a large sector of the Rhine Prov ince and other regions of the German States. The cooperative movement quickly spread to other countries in Europe and North America, and eventually, supported by the cooperative movement in developed countries and donors, also to developing countries. In the early 1900s, various adaptations of these models began to appear in parts of rural Latin America. Over the years, these institutions became inefficient and at times, abusive. Meanwhile, starting in the 1970s, experimental programs in Bangladesh, Brazil , and a few other countries extended tiny loans to groups of poor women to invest in micro -businesses These "microenterprise lending" programs had an almost exclusive focus on credit for income generating activities (in some cases accompanied by forced sav ings schemes) targeting very poor (often women) borrowers.

Microfinance Institutions (MFIs)

Indian MFIs range from Grameen-replicator NGOs to for-profit entrepreneurial ventures to developmental NGOs which moved from SHG promotion to direct financial intermediation. M F I s ' primary lending methodology is through the Grameen Methodology, in which four to six members come together to form a group and access a loan. MFIs loan to individuals within the group, however, the entire group is responsible for repaying the loan.

SHG A socio-financial product

Rural people have very low access to institutionalized credit (from commercial bank) due to: A considerable gap between demand and supply for all financial services. A sizable number of the poor are excluded from the financial services because: o o
y

y y

The bankers feel that it is risky and uncertain A high transaction cost

From the point of view of MFIs they have the following observations: o o o o o o o Lack of appropriate legal vehicle Limited access to equity Difficulty in identifying low cost lending funds 56% of the poor still prefer borrowings from informal sources 70% of the rural poor do not have any deposit accounts 87% cannot access to any form of credit Less than 50% are insured for life, crop and property

Some of the other Provisions of the Andhra Pradesh MicroFinance Institutions Ordinance 2010 are :

MFIs will now have to specify the area of their operations, the rate of interest and their system of operation and recovery while registering with the Registering Authority.

The Registering Authority may, at any time, either suomoto or upon receipt of complaints by Self-Help Groups (SHGs) or the general public can cancel the registration of the MFI after assigning sufficient reasons .

The MFIs cannot seek collateral from a borrower by way of pawning or any other security and they will now be required to display the rates of interest rates charged by them in prominent places at their offices.

MFIs cannot charge any other amount from t he borrower except the charge prescribed in the Rules for submission of an application for grant of a loan.

The ordinance also states that the amount of interest should not be in excess of the principal amount.

MFIs cannot extend a second loan unless the first loan has been fully paid off.

The MFIs will now be required to submit a monthly statement to the Registering Authority giving the list of loanees, the loan given to them and the amount of interest charged on these new loans.

MFI clients can now complain to the Registering Authority in case of any problems and they can also call the grievance cell through a toll free number 15532.

The Ordinance also mandates that only those staff members with identity cards can go for recovery and which can be done only in a public place. This is to check the use of rowdy elements by MFIs for loan recovery.

The state government will soon establish fast track courts after consultation with the High Court for settlement of disputes of civil nature.

All those connected with errant MFIs would be liable for punishment of imprisonment for upto three years or a fine uptoRs 1 lakh or both if they resort to any coercive measures.

The Ordinance also mandates SHG members cannot take a second loan without the permission of the Registering Authority.

The bill does not specify a cap on Interest Rates that can be charged.

limitations of micro finance Microfinance helps women. Thats good, but not good enough to transform communities. Communities are formed of equal parts of men and women, who have a strong affinity for forming bonds with each other. Development that helps women but doesnt involve men has a natural self-limitation. You cant have transformational community development without transforming men and women. (For more on this, see my article Where are the Men?

Microfinance is small scale. True, small businesses become large businesses sometimes. But more often they dont. A family may be greatly helped by the extra income from selling sandals at the market. Creating something larger, something that fully supports the family and creates jobs, is rare. (This is probably one reason men dont participate. They are attracted to larger enterprises outside the home.)

Microcredit loans are expensive. Interest rates charged by microfinance programs are often over 20%. They have to be, because overhead is high for administering tiny loans. That means its hard for borrowers to make enough profit to really get ahead, after they pay loan costs. My friend Wachira counsels poor people to start with what resources they have or can borrow interest-free from family members.