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Contents
Microfinance - Defined Indian Economy & Social Sector Rural Poverty-- Need for Micro Finance Features of Microfinance Operating Strategies Features of Microfinance Legal Models Microfinance Market Issues in Microfinance
MICROFINANCE
Provision of credit and other financial services and products of very small amounts (not exceeding Rs. 50,000 per borrower) to the poor in rural, semi-urban and urban areas, either directly or through a group mechanism, for enabling them to improve their living standards [Definition by RBI]
Microfinance - Defined
In Indian context, microfinance is defined as provision of credit, savings, insurance and remittance facilities, to low income households so as to address the vulnerabilities in life. As per the NABARD definition, provision of credit to a maximum of Rs 50,000 (about USD 1100) per individual and Rs 500,000 (about 11000 USD) per Self Help Group comes under microfinance.
ADVANTAGES OF MICROFINANCE
COST EFFECTIVE APPROACH TO ADDRESS THE FINANCIAL REQUIREMENTS OF THE POOR ALTERNATIVE FINANCIAL DELIVERY CHANNEL TACKLES FINANCIAL EXCLUSION EMPOWERMENT OF THE POOR
Continued---
DEVELOPS COLLATERAL SUBSTITUTES MF COULD BE A PRE MICRO ENTERPRISE STAGE FOR MOST POOR - BETTER CHANCES OF SUCCESS MACRO-ECONOMIC OBJECTIVES OF GROWTH
as---- .
Continued---
Further
The impact studies show that
Access to MF have improved the economical situation of poor clients. Evidence also shows that a better financial situation leads to better nutrition ,and thus better health condition . Many MFIs are targeting women ,and there is a positive effect on the women's position in the family and the overall situation
Micro entrepreneurs
Lack -capital, skills, legal status and business security But generally havestrong survival skills shrewd business sense long experience of hard work knowledge of their markets informal support and communication networks Understanding of flexibility -- which is key to micro enterprise survival
Indian Economy-But
As per official statistics , 26.1 % of people in India are poor i.e. living Below the Poverty Line (BPL) estimating around 261 million comprising of around 60 million households. This comes about 1/3rd of world poor. Within India, there is disparity in the incidence of poverty among states. Statewise, Orissa is more vulnerable with 47.15 % poor, followed by Bihar (42.60 %), Madhya Pradesh (37.43%) and Assam (36.09%). On the other side, Kerala (12.72%), having the least
Indian Economy
As part of international community, India has made an ambitious target of achieving the Millennium Development Goals (MDGs) of reducing the incidence of poverty by half by 2015. In the Five Year Plan (2002-07) had projected a GDP growth rate of 8 % to achieve realization of this goal, There is improvement in general the economy may end up with substantial reduction in absolute number of poor by the end of 2015.
Indian Economy
In the recent Human Development Index (HDI), released by United Nations Development Programme, [UNDP] India is ranked 127th among 177 countries with an index of 0.602 on a 0 to 1 scale. The HDI is an indicator that measures a countrys average achievements in three basic aspects of Human Development longevity, knowledge and standard of living. We have long a way to go, to catch up with other countries.
CONSUMPTION CREDIT 2/3rd,of its total requirement of funds, and 3/4th of it is for a short period PRODUCTION CREDIT now nearly 75% of it is met by informal credit Institutions SAVINGS [ Not more than 5-6% of Rural House Holds avail
facility of Banks]
INSURANCE REMITTANCE
Continued-2.
Commission) 1975-76
such as---Attitudes and perceptions non-availability, of outlets/centres Lack of financial access in the form of appropriate financial products Lack of physical access due to distances involved Non-viability due to high transaction cost.
NEED FOR MF
The Rural Financial Access Survey (2003) conducted by WB and NCAER in Andhra Pradesh and Uttar Pradesh revealed that Formal financial institutions reach less than 30% of the population 44% rural households had informal borrowings at interest rates of up to 48% per annum. [preceding 12 months] Only 21% rural households had access to formal credit and majority of bank loans were collateralized.
NEED FOR MF
3. DEMAND-SUPPLY GAP Demand for micro-financial services 50,000 crores (2002)
Demand for production credit 17000 crores Outstanding credit of the Banking system to the poor 5000 crores [Report of steering committee on Micro Finance and Poverty alleviation]
Extent of Exclusion
51.4 % of farmer households in the country, out of a total of 89.3 million households do not access credit, either from institutional or non-institutional sources Despite the vast network of bank branches, only 27% of total farm households indebted to formal sources Exclusion in general is large, it also varies widely across Regions, Social groups and Asset holdings Farm households not accessing credit from formal sources as a proportion to total farm households is especially high at 95.91%, 81.26% and 77.59% in the North Eastern, Eastern and Central Regions respectivel Poorer the group, the greater is the exclusion
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Date:
25
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27
26.6%
COOPERATIVE SOCIETIES
28.6%
8.7%
64%
Why does meeting the demand matters? Continued---Provision of convenient ,secure ,micro saving services Commercial MF Inst. can become profitable &viable over the long term and Govt. need not provide credit subsides or cover the losses Financial services help people meet their household and business goals and become managers of their financial affairs
5. 6. 7. 8.
13--Cooperatives, not banks are meant for participative financial management 14-Can offer at best credit and to some extent savings facilities 15--The Planners and Executives know fairly well as to what is in the best interest of the borrowers
MF CONCEPTUAL THINKING
THE POOR CAN SAVE AND ARE BANKABLE THE POOR REQUIRE NOT ONLY CREDIT BUT ALSO OTHER FINANCIAL SERVICES MISMATCH BETWEEN THE REQUIREMENTS OF THE POOR & CAPABILITY OF THE FIs CAN BE MINIMISED SMALL AFFINITY GROUPS OF THE POOR, WITH INITIAL OUTSIDE SUPPORT CAN EFFECTIVELY MANAGE AND SUPERVISE MICRO CREDIT AMONG THEMSELVES
MF CONCEPTUAL THINKING
PARTICIPATIVE FINANCIAL SERVICES MANAGEMENT IS MORE EFFICIENT AND RESPONSIVE COLLECTIVE WISDOM OF THE GROUP AND PEER PRESSURE ARE VALUABLE COLLATERAL SUBSTITUTES MF COULD BE A PRE MICRO ENTERPRISE STAGE FOR MOST POOR SHG AS A BANK CLIENT, FACILITATES A WIDER OUTREACH, LOWER TRANSACTION COST & A MUCH LOWER RISK COST FOR THE BANK
Issues in Microfinance
1. 2. 3. 4. Regulation Appropriate Legal Structure/Entity Interest Rate Capacity Building (HR, MIS, Audit, Delinquency Management etc.) 5. Products & Services 6.. Introduction of Norms 7. Setting Standards 8. Managing Risks 9. Internal Controls 9. Enhancing Credit Absorption Capacity etc.
Market analysis ;competition and products Institutional capacity and competence Plan for reaching financial sustainability Funding Monitoring system Reporting ,audit and rating Structure and ownership
Categories of MFI
Mainstream Formal Institutions NABARD ,SIDBI, HDFC, Commercial banks, RRBs etc are some of the mainstream financial institutions involved in extending Micro Finance Alternative MFIs NGOS which are mainly engaged in promoting SHGs and their federations at a cluster level NGOs directly lending to borrowers, either organized into SHGs or into Gramin Bank style groups and centres. MFIs which are specially organized as cooperatives such as the SEWA Bank and various mutually aided cooperatives thrift and credit societies [MACTS] in AP MFIs ,which are organized as non banking finance companies in India
Leading alternative MFIs in this segment are SEWA Bank in Gujarat, which also runs federations of SHGs and its Sarva Jana Seva Kosh Ltd; the ASA in Tamilnadu; Share ,Basix ,CARE and MACTs in AP
Donors
Donor agencies, Donor NGOs, Professional Investors and entities providing, Technical assistance, guidelines and practical tools
Networks
Microcredit summit[the network of MFI. INAFI [international network for Alternative Finance Institutions, AMFIN [The Africa Microfinance Network] with 380 MFIs from 13 countries as members
Microfinance penetration Index(MPI)-The southern states has more than proportionate coverage of microfinance. West Bengal is the new entrant in the top five states under MPI Commercial banks share of borrowing SHG remain same at 67 per cent as in the last year In terms of volume of loans CBs had a proportionately high share of 68 per cent
SHG is a Socio-financial Product with Credit-plus Approach CreditA SMALL ECONOMICALLY HOMOGONEOUS AND AFFINITY GROUP OF RURAL POOR VOLUNTARILY COMING TOGETHER
TO SAVE SMALL AMOUNTS REGULARLY CONFLICT SOLVING THROUGH COLLECTIVE LEADERSHIP AND MUTUAL DISCUSSION
Programme Impact
Economic Empowerment Social Empowerment Political Empowerment
Participation In CBO
Eradication of Social Evils Education Better Health Care & Nutrition Participation in relief measures
Watershed
Development
Credit
Wadi
Development
Insurance
continued-----
Institution involved in MF have a significant role to play to reduce this disparity and lead to more equitable growth
Assessment of Microfinance
After a basic need assessment ,the business plan for a MFI should include at least the following items Market analysis ;competition and products Institutional capacity and competence Plan for reaching financial sustainability Funding Monitoring system Reporting ,audit and rating Structure and ownership
Continued--Depth of outreach by an MFI ,will depend upon the objectives and its ability to design products and services, suitable to the level of poverty, it is targeting Serving the ultra poor may be possible in a financially sustainable way but time frame to reach Financial self sufficiency will be shorter for MFIs serving the eco. active poor For serving poorest of poor the donors and practitioners need to be committed to supporting over a longer period
Investments in Microfinance
The investments in MF have been on the rise due to the involvement of capital market and private sector investors Microfinance is fast emerging as a hot opportunity for global players with an estimated $20 billion to be invested globally and around $3billion in India by 2010
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