MICROFINANCING

INTRODUCTION

Microfinance is the provision of financial services to low-income clients, including consumers and the self-employed, who traditionally lack access to banking and related services

FEATURES OF MICRO-FINANCE

It is a tool for empowerment of the poorest. Delivery is normally through Self Help Groups (SHGs). It is essentially for promoting self-employment, generally used for:

Direct income generation Consumption smoothing.

It is not just a financing system, but a tool for social change, specially for women. Because micro credit is aimed at the poorest, micro-finance lending technology needs to mimic the informal lenders rather than the formal sector lending. It has to:

Provide for seasonality Allow repayment flexibility

Fix a ceiling on loan sizes.

SCOPE OF MICROFINANCE

Micro Financing has greatest scope in the world especially in developing countries. Because mostly people dont have high income and low purchasing power and MF institutions target market as low income group and it is common impression that poor people need and use a variety of financial services including deposits, loans etc. they use financial services for some reason like seize business opportunities, improve homer and living standard, deal with large cope with emergencies.

FUNCTIONS OF MICRO FIANANCE

Small loans, typically for working capital; Informal appraisal of borrowers and investments; Access to repeat and larger loans based on debt capacity and repayment performance; Secure savings products. To provide financing facilities, with or without collateral Security To accept deposits To encourage investments in such cottage industries and income generating projects for poor persons as maybe prescribed; To mobilize and provide financial and technical assistance and training to micro enterprises To invest in shares of any body corporate, the objective of which is to provide microfinance services to poor persons

KEY PLAYERS IN MF SYSTEM

NABARD Reserve Bank of India Self Help Groups Micro Finance Institutions (MFIs) NGOs

Models of microfinance

The SHG-Bank Linkage Model Partnership Model Service company model Banking Correspondents Bank Partnership Model

SELF HELP GROUPS (SHGS)

Self- help groups (SHGs) play today a major role in poverty alleviation in rural India. A growing number of poor people (mostly women) in various parts of India are members of SHGs and actively engage in savings and credit (S/C), as well as in other activities (income generation, natural resources management, literacy, child care and nutrition, etc.). The S/C focus in the SHG is the most prominent element and offers a chance to create some control over capital. The SHG system has proven to be very relevant and effective in offering women the possibility to break gradually away from exploitation and isolation.

BANK PARTNERSHIP MODEL

This model is an innovative way of financing MFIs. The bank is the lender and the MFI acts as an agent for handling items of work relating to credit monitoring, supervision and recovery. The model has the potential to significantly increase the amount of funding that MFIs can leverage on a relatively small equity base. A sub - variation of this model is where the MFI, as an NBFC, holds the individual loans on its books for a while before securitizing them and selling them to the bank. Such refinancing through securitization enables the MFI enlarged funding access

BANKING CORRESPONDENTS

The proposal of banking correspondents could take this model a step further extending it to savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank. It would use the ability of the MFI to get close to poor clients while relying on the financial strength of the bank to safeguard the deposits.

BANK LED MODEL

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

PARTNERSHIP MODELS

This model aimed at synergizing the comparative advantages and financial strength of the bank and infrastructure of MFIs and NGOs. Through this model, ICICI Bank could save on the initial costs of developing rural infrastructure and micro credit distribution channels and could take advantage of the expertise of these institutions in rural areas.

SERVICE COMPANY MODEL

Under this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in hand with that MFI to extend loans and other services. Service Company Model has the potential to take the burden of overseeing microfinance operations off the management of the bank and put it in the hands of MFI managers who are focused on microfinance to introduce additional products, such as individual loans for SHG graduates, remittances and so on without disrupting bank operations and provide a more advantageous cost structure for microfinance.

Challenges in Micro Finance

High Volume of Financial Transaction but value wise very low Majority of the financial transactions are off-site in nature Geographic spread of operations and density of customers Lack of infrastructure facilities like power, broadband etc Unsecured lending and no documented financial history is available Combination of above, lead to high operating cost

Role in poverty alleviation

The key to alleviating poverty is how effectively the tools of food, shelter, basic education, opportunities for employment, health and medical services, financial services, infrastructure, markets and communication are deployed either singularly or severally to the poor. Poverty is a pervasive problem in our society. Spanning across the world, poverty exists in different levels and various forms. At the current threshold of $1.25 a day, the World Bank estimates that around 25% of the population in developing regions lives below the poverty line. This figure translates to 1.3 billion people living in poverty, or about 20% of the global population

Contd

Microfinance is the provision of financial services to the poor, aiming to empower low-income populations by providing them with access to credit and other financial services. Through microfinance institutions (MFI), the poor can obtain collateralfree loans at relatively low interest rates and use the money for creating micro enterprises (small businesses owned by poor people), funding childrens education, and improving homes, among others. Aside from micro credit, MFIs have also developed numerous financial products, such as microinsurance and micro-mortgage that are designed to accommodate the poors financial needs.

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