MICROFINANCE

Sharad Srivastava
MBA 2nd Year (2012-2014) - 12810076
Table of Content
 Definition, Features and Need of the Microfinance
 Evolution of Microfinance in India
 Difference between Microcredit vs. Microfinance
 Microfinance Institutions (MFIs)
 Self Help Group (SHG) and Joint Liability Group (JLG)
 Channels for Microfinance
 Regulatory Framework – Priority Sector Lending, Malegam
Committee Recommendations, Regulators
 Andhra Pradesh Microfinance Crisis of 2010
 Data about Microfinance India
Microfinance: Definition
“Microfinance is an economic development tool whose
objective is to assist the poor to work their way out of
poverty. It covers a range of services which include, in
addition to the provision of credit, many other services
such as savings, insurance, money transfers,
counselling, etc.” – Reserve Bank of India

In other words, Microfinance serves as a tool for providing

financial services to the low-income population., which do
not have access to the mainstream financial services.
Microfinance: Definition
The proposed Microfinance Services Regulation Bill defines
microfinance services as “providing financial assistance to an
individual or an eligible client, either directly or through a group
mechanism for :
i. Rs. 50000 or lesser amount, for an individual for small and
tiny enterprise, agriculture, allied activities (including for
consumption purposes of such individual) or
ii. Rs. 150000 or lesser amount for an individual for housing
purposes, or
iii. any other purpose nor exceeding Rs. 150000
Salient features of Microfinance
 Beneficiaries are from low income group.

 Loans are of small amount.

 Short duration loans

 Loans are offered without collateral.

 High frequency of payment

 Loans are generally taken for income generation

purposes.
Financial Needs
 Disasters: Such as flood, fire, cyclone and man-made events
like war

 Investment Opportunities: Such as expanding a business,

buying land or equipments, improving housing, securing a job
(may require giving a large amount of money)

 Lifestyle Needs: Such as wedding, funerals, childbirth,

education of children, widowhood, homebuilding or old age

 Personal Emergencies: Such as sickness, injury, death,

sudden unemployment, theft or harassment
Need for Microfinance - Demand
 India‟s poverty estimates range from 26% to 50%. Out of
these, 87% do not have access to credit.

 Demand for microfinance is $30 Bn. whereas supply is

only $2.2 Bn.

 Only 5% people in rural India has access to microfinance.

Even deposit account facility is out of reach by 70% of
rural poor.

 Less than 15% of people have access to insurance.

Healthcare access is negligible.
Need for Microfinance - Supply

Total user base

as on 31st
March 2012 was
22.56 million.

Source: Microscape Nov 2012, Microfinance Institutions

Network
 Need for Microfinance - Supply
Total Villages in India as per 2011 census: More than 6 Lakh

Number of Bank Branches as on 31-March-2013

Bank Rural Semi- Urban Metropolita Total
Group Urban n
Public 23286 18854 14649 13632 70421
Sector Bank
Private 1937 5128 3722 3797 14584
Sector Bank
Foreign 8 9 65 249 331
Bank
Regional 12722 3228 891 166 17007
Rural Bank
Total 37953 of Financial
Source: Department 27219 19327 of Finance,
Services, Ministry 17844 102343
GoI
Evolution of Microfinance in India
 1974 – Establishment of Self-Employed Women‟s Association
(SEWA) in Gujarat.

 Sep 26, 1975 – Rural bank Ordinance was passed.

 Oct 02, 1975 – Prathama bank (first RRB) came into existence.

 1976 – Ordinance was replaced by Regional Rural Bank Act.

 July 12, 1982 – NABARD was established on the recommendations

of Shivaraman Committee, by an act of Parliament to implement the
National Bank for Agriculture and Rural Development Act 1981.
Evolution of Microfinance in India
 Apr 02, 1990 – SIDBI was established through Small Industries
Development Bank of India Act 1989.

 1992 – NABARD launched SHGs-Bank Linkage program.

 1999 – SIDBI created Microcredit (SFMC) to create a national

network of strong, viable and sustainable Microfinance Institutions
from the informal and formal financial sector to provide microfinance
services to the poor, especially women‟‟.

 2006 – NABARD launched the „Micro-Enterprise Development

Programme‟ (MEDP) for skill development.
Microcredit vs. Microfinance
Microcredit refers to very small loans for unsalaried
borrowers with little or no collateral, provided by legally
registered institutions. Currently, consumer credit
provided to salaried workers based on automated credit
scoring is usually not included in the definition of micro
credit, although this may change.

Microfinance typically refers to microcredit, savings,

insurance, money transfers, and other financial products
targeted at poor and low-income people.
Microfinance Institutions (MFIs)
The proposed Microfinance Services Regulations Bill defines MFI as
“an organization of association of individuals including the following if
it is established for the purpose of carrying on the business of
extending microfinance services:
 A society registered under Societies Registration Act 1860
 A trust created under Indian Trust Act 1880 or public trust registered
under any state enactment governing trust or public, religious or
charitable purposes.
 A cooperative society/mutual benefit society/mutually aided society
registered under any state enactment relating to such societies or
any multistate cooperative society registered under Multi State
Cooperative Society Act 2002 but not including:
 A cooperative bank as defined in clause (cci) of section 5 of Banking
Regulation Act 1949 or
 A cooperative society engaged in agricultural operations or industrial activity
or purchase or sale of any goods or services.”
Microfinance Institutions (MFIs)
Microfinance institutions in India are registered as one of
the following five entities:

 Non Government Organizations engaged in microfinance (NGO-MFIs),

comprised of Societies and Trusts

 Cooperatives registered under the conventional state-level cooperative acts,

the national level multi-state Cooperative Legislation Act (MSCA 2002), or
under the new state-level Mutually Aided Cooperative acts (MACS Act)

 Section 25 Companies (not-for-profit)

 For-profit Non-Banking Financial Companies (NBFCs)

 NBFC-MFIs
NGO-MFIs, Cooperatives and Section 25
Companies

Microfinance institutions operating as a non-profit company

operate as either an NGO-MFI, Cooperative, or Section
25. Each is structured slightly differently in terms of ability
to accept equity investments and dividends. There exists
little regulation that applies to these structures, aside
from registration requirements.
NBFCs

The NBFC encompasses many different types of financial

companies, which are all subject to the same regulatory
requirements. Many microfinance institutions have
recently registered as NBFCs to take advantage of
access to capital markets. Microfinance institutions
operating as NBFCs account for the great majority of the
microfinance market in India.
NBFC-MFIs

For-profit institutions that qualify for priority sector lending

funds are registered as NBFC-MFIs. This NBFC sub-
category was created by RBI in May 2011 as a way to
classify NBFCs operating as microfinance institutions
which meet certain requirements. Currently, it is unclear
how many NBFCs will elect to register as NBFC-
MFIs, and how many will continue to operate as NBFCs.
Self Help Group (SHGs)

A SHG is a group of 15 to 20 members from very low

income families, usually women, which mobilises savings
from members and uses the pooled funds to give loans to
those members who need them, with the interest rates on
deposits and loans being determined entirely by
members.

- Reserve Bank of India

Joint Liability Group (JLGs)

JLG is an informal group of individuals coming together for

the purpose of availing of bank loan either singly or
through the group mechanism against mutual guarantee
in order to engage in similar type of economic activities.

- Reserve Bank of India

Difference between SHG and JLG
 The SHG would normally consist of 10 to 20 members whereas a
JLG would normally have between 4 and 10 members.

 The maximum amount of loan to SHGs should not exceed four

times of the savings of the group. The limit may be exceeded in
case of well managed SHGs subject to a ceiling of ten times of
savings of the group. JLGs are not obliged to keep deposits with
the bank and hence the amount of loan granted to JLGs would be
based on the credit needs of the JLG and the bank's assessment
of the credit requirement.

 In case of a SHG the individual carries the responsibilities

whereas in case of JLG all members share responsibility and
stand as guarantee for each other.
 Channels for Microfinance
The players in the Microfinance sector can be classified as falling into
three main groups:
 The SHG-Bank Linkage Model
 Non-Banking Finance Companies
 Others including trusts, societies, etc

8%

SHG-Bank Linkage
Model
NBFC
34%
58%
Others

Source: RBI
Outstanding Loan Portfolio as on 31-Mar-
2011
SHG-Bank Linkage Model
The SHG-Bank Linkage Model was pioneered by NABARD in 1992.
Under this model, women in a village are encouraged to form a Self
help Group (SHG) and members of the Group regularly contribute
small savings to the Group. These savings which form an ever
growing nucleus are lent by the group to members, and are later
supplemented by loans provided by banks for income-generating
activities and other purposes for sustainable livelihood promotion.
The Group has weekly/monthly meetings at which new savings come
in, and recoveries are made from members towards their loans from
the SHGs, their federations, and banks. NABARD provides
grants, training and capacity building assistance to Self Help
Promoting Institutions (SHPI), which in turn act as facilitators/
intermediaries for the formation and credit linkage of the SHGs.
SHG-Bank Linkage Model
 Model 1: In this model, the bank itself acts as a Self Help
Group Promoting institution (SHPI). It takes initiatives in
forming the groups, nurtures them over a period of time
and then provides credit to them after satisfying itself
about their maturity to absorb credit.
SHG-Bank Linkage Model
 Model 2: In this model, groups are formed by NGOs (in
most of the cases) or by government agencies. The
groups are nurtured and trained by these agencies. The
bank then provides credit directly to the SHGs, after
observing their operations and maturity to absorb credit.
While the bank provides loans to the groups directly, the
facilitating agencies continue their interactions with the
SHGs. Most linkage experiences begin with this model
with NGOs playing a major role. This model has also
been popular and more acceptable to banks, as some of
the difficult functions of social dynamics are externalized.
SHG-Bank Linkage Model
 Model 3: Due to various reasons, banks in some areas
are not in a position to even finance SHGs promoted and
nurtured by other agencies. In such cases, the NGOs act
as both facilitators and micro- finance intermediaries.
First, they promote the groups, nurture and train them
and then approach banks for bulk loans for on-lending to
the SHGs.
Progress of SHG-Bank Linkage Model
450
393.75
400 363.4
350 Amt in Rs. Hundred Crore
312.21
300
250
205.85
200 165.35
145.48
150
100 70.1665.5182.17
50
0
2010-11 2011-12 2012-13

Source: NABARD SHG saving with banks as on 31st March

Loans disbursed to SHGs during the year
Loans outstanding against SHGs as on 31st March
Non-Banking Financial Companies (NBFCs)
Under the NBFC model, NBFCs encourage villagers to form Joint
Liability Groups (JLG) and give loans to the individual members of
the JLG. The individual loans are jointly and severally guaranteed by
the other members of the Group. Many of the NBFCs operating this
model started off as non-profit entities providing micro-credit and
other services to the poor. However, as they found themselves
unable to raise adequate resources for a rapid growth of the
activity, they converted themselves into for-profit NBFCs. Others
entered the field directly as for-profit NBFCs seeing this as a viable
business proposition. Significant amounts of private equity funds
have consequently been attracted to this sector.
Priority Sector Lending
Priority sector refers to those sectors of the economy which may not get
timely and adequate credit in the absence of this special
dispensation. Typically, these are small value loans to farmers for
agriculture and allied activities, micro and small enterprises, poor
people for housing, students for education and other low income
groups and weaker sections. - RBI

Priority Sector includes the following categories:

 Agriculture
 Micro and Small Enterprises
 Education
 Housing
 Export Credit
 Others
Priority Sector Lending
Categories Domestic Commercial Foreign Banks with
Banks/Foreign Banks less than 20
with 20 or more branches (as % of
branches (as % of ANBC ANBC or credit
or credit equivalent) equivalent)
Total Priority Sector 40 32
Total Agricultural 18 No specific target
Advances to weaker 10 No specific target
sections
Source: Reserve bank of India

Adjusted Net Bank Credit (ANBC) or credit equivalent of Off-Balance

Sheet Exposures denotes the outstanding as on March 31 of the
previous year.
Malegam Committee Recommendations
The RBI appointed Mr. Y. H. Malegam Committee (the Sub-
Committee of the Central Board of Directors of Reserve Bank
of India to study issues and concerns in the MFI Sector related
to the entities regulated by the Bank) has submitted its report
to the RBI in January 2011. The composition of the committee
was:

 Sh. Y. H. Malegam – Chairman

 Sh. Kumar Manglam Birla
 Dr. K. C. Chakrabarty
 Smt. Shahsi Rajagopalan
 Prof. U. R. Rao
 Sh. V. K. Sharma (Executive Director) – Member Secretary
Malegam Committee Recommendations
The subcommittee recommended creation of a separate category of
NBFCs operating in the microfinance sector to be designated as
NBFC-MFIs. To qualify as an NBFC-MFI, the NBFC should be “a
company which provides financial services pre-dominantly to low-
income borrowers, with loans of small amounts, for short-terms, on
an unsecured basis, mainly for income-generating activities, with
repayment schedules which are more frequent than those normally
stipulated by commercial banks” and which further satisfies the
regulations specified in that behalf. The subcommittee has also
recommended some additional qualifications which are:

 The NBFC-MFI will hold not less than 85% of its total assets (other than
cash and bank balances and money market instruments) in the form of
qualifying assets.
 There are limits of an annual family income of Rs. 50,000 and an individual
ceiling on loans to a single borrower of Rs. 25, 000.
 Not less than 75% of the loans given by the MFI should be for income-
generating purposes.
Malegam Committee Recommendations
The Sub-Committee has recommended that bank lending to NBFCs
which qualify as NBFC-MFIs will be entitled to “priority lending”
status. With regard to the interest chargeable to the borrower, the
Sub-Committee has recommended an average “margin cap” of 10
per cent for MFIs having a loan portfolio of Rs. 100 crore and of 12
per cent for smaller MFIs and a cap of 24% for interest on individual
loans. It has also proposed that, in the interest of transparency, an
MFI can levy only three charges, namely,
 Processing fee
 Interest and
 Insurance charge
Malegam Committee Recommendations
The Sub-committee has made a number of recommendations to mitigate the
problems of multiple-lending, over borrowing, ghost borrowers and coercive
methods of recovery. These include:
 A borrower can be a member of only one SHG or a Joint Liability Group
JLG.
 Not more than two MFIs can lend to a single borrower.
 There should be a minimum period of moratorium between the disbursement
of loan and the commencement of recovery.
 The tenure of the loan must vary with its amount.
 A Credit Information Bureau has to be established.
 The primary responsibility for avoidance of coercive methods of recovery
must lie with the MFI and its management.
 The Reserve Bank must prepare a draft Customer Protection Code to be
adopted by all MFIs.
 There must be grievance redressal procedures and establishment of
ombudsmen.
 All MFIs must observe a specified Code of Corporate Governance.
Regulators in Indian Microfinance
 The NBFC-MFIs are regulated by the Reserve Bank of India.
 The insurance products offered by NBFC-MFIs come under the
purview of Insurance Regulatory and Development Authority (IRDA).
 The pension products offered by NBFC-MFIs come under the
purview of Pension Fund Regulatory and Development Authority
(PFRDA).
 Section 35(6) of the Banking Regulation Act, 1949, empowers
NABARD to conduct inspection of State Cooperative Banks
(SCBs), Central Cooperative Banks (CCBs) and Regional Rural
Banks (RRBs). 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.
 Currently very little or no regulation to not-for-profit organizations.
 Proposed Microfinance Bill recommends RBI to be sole regulator for
Andhra Pradesh Microfinance Crisis of 2010
 The state of Andhra Pradesh experienced a impressive expansion of
microfinance operations from the 1990s into the 2000s, becoming
known as the „Mecca of Microfinance‟ in India.

 In October of that year a media storm blew up over the suicides of

close to 50 microcredit clients whom, it was claimed, had taken their
lives under the duress of crippling debt burdens and coercive
repayment tactics initiated by microfinance employees.

 Considerable anger was vented at microfinance institutions that were

seen to be accumulating riches at the expense of the poor.

One government official quipped that, “The money lender lives in the
community, at least you can burn down his house. With these companies, it
is loot and scoot.”
Andhra Pradesh Microfinance Crisis of 2010
 In response, the Andhra Pradesh government clamped down on
MFIs. The government passed and ordinance and later Andhra
Pradesh Microfinance Institutions (Regulation of Money Lending) Act
2010, effectively shutting down all private sector microfinance
operations.

 key restriction posed by the act were:

 Every MFI has to register before the Registering Authority of the district.
 No member of an SHG can be a member of more than one SHG.
 All loans by MFIs have to be without collateral.
 All MFIs have to display the rates of interest in their premises.
 The recovery towards interest cannot exceed the principal amount.
 No MFI can give a further loan to a SHG or its member without the
approval of the registering authority where there is an outstanding bank
loan.
 Every MFI has to give to the borrower a statement of his account and
acknowledgements for all payments received from him.
Andhra Pradesh Microfinance Crisis of 2010
 All repayments have to be made at the office of the Gram Panchayat or at
a designated public place.
 MFIs cannot use agents for recovery or use coercive methods of
recovery.
 All MFIs have to submit to the Registering Authority a monthly statement
giving specified details.
 In each district, a Fast-Track Court is to be established for protection of
debtors and settlement of disputes.
 These are penalties for failure to register and for coercive acts of
recovery.
 Loan recoveries have to be made only by monthly instalments.

 The main rationale was that these MFIs are using SHG to expand
their borrowers through predatory lending, charging usurious interest
rates and using weekly recovery system, recovery agents and
coercive techniques.
 Andhra Pradesh Microfinance Crisis of 2010

Andhra Pradesh Microfinance

suffered heavily due to the crisis
and growth rate went into negative,

The spillover effect was also felt

by overall sector as even the total
growth went downwards.

Source: Micro-Credit Rating

International Ltd. (M-CRIL)
Some data about Microfinance in India
 As on Mar 31 2012, total employee strength of MFIs was 72765, 11%
of them being women.

 Around 97% of MFI clients are women.

 Average loan outstanding in FY 2011-12 was Rs. 7509, up by 10%

from previous year.

 As on Mar 31 2012, there was 9743 MFI branches across 26 states.

One microfinance branch served 2070 clients on average. There was
307 clients per employee.

 In percentage terms NPA against loans to SHGs increased from

6.09% in 2011-12 to 7.08% during 2012-13.
Thank You