INTERMEDIATION

SUBMITTED TO: Dr. Karamjit Singh

SUBMITTED BY: Deepinder Kaur M.com(Hons) Sem- 2nd Roll No. 4

Intermediaries: Not-for-profit institutions. obtain capital in the form of low interest loans from public & private commercial banks and national and international donors to form a lending pool. serve as wholesalers who process large number of small loans to lend them to poor clients who have no access to formal banking. thus, often more efficient than a foundation or a funder because of economies of scale.

 Microfinance intermediaries operate under the umbrella of financial system of a country . financial intermediation is provided by MFIs. financial intermediaries vary in their legal structure, mission & methodology but share the common purpose of providing financial products & services to poorer & more vulnerable bank clients. they study about their competitors and what is their effect on marketplace. Outreach of MFIs growing at the rate of 20%p.a.& estimated to reach 75% of poor households with loan outstanding of Rs.42000crores by 2012.

Financial intermediation service providers

Formal sector it includes banks i.e. public and private commercial banks, postal saving banks etc. and non-banking institutions.

Semi-formal sector- it consists of saving & credit cooperatives, NGOs, registered SHGs & development projects. Non-formal sector- financial institutions include saving associations , combined saving & credit associations and financial firms include non registered SHGs, money lenders, traders and shopkeepers.

Major role in financial and social intermediation- NGOs non-profit organizations Registered as trusts or societies. catalytic agents to organize poor into groups called SHGs/JLGs. get funds from donors in microfinance like SIDBI, NABABRD, RMK , FWWB, commercial banks etc. Face certain problems regarding legal structure, lack of commercial orientation, lack of efficient organizational structure.

Some of the intermediaries are as follows:-

1.GRAM promoting SHGs since 1990. SHGs were linked to banks. 3700 groups were federated into 20 MACs taking up financial intermediation services. staff of MACs was originally from NGOs . 2. SERP(Society for Elimination of Rural Poverty) implemented Indira Kranthi Patham(IKP). promoted more than 30000 SHG federations involved in financial intermediation & livelihood promotion.

3. CASHPOR Micro Credit-

started operations in 1996 through CASHPOR Financial and Technical Services(CFTS). to give access to financial products in the form of small amounts of credit & services to poor rural women . objective was to reduce poverty in eastern U.P.& western Bihar . Ist six branches were set up in July1997 to cover southern part , which was the poorest district and the next six branches opened in October1998 to cover rest of the district.

MICRO FINANCE DISTRIBUTION MODELS

BANK TO MICROFINANCE CLIENTS

BANK TO INTERMEDIARY TO CLIENTS

BANK TO PRIMARY INTERMEDIARY TO SECONDARY INTERMEDI. TO CLIENTS

REGULATIONS AND SUPERVISION

Regulation of MFIs is the legal registration by the govt. to perform as a MFI. regulation focuses on assessment of access adequacy which covers the range of financial services provided, target groups served, type of financial products and services provided and their demand by clients. subject to regulations when it is mobilizing savings from the clients. Have to maintain compliance with the prudential regulatory norms relating to operations and reporting systems.

Why Regulation is necessary?

to protect the interests of small savers.

to ensure proper terms of credit. to ensure financial discipline to ensure proper institutional reporting system and disclosures.

NGOs not-for-profit organisations. provide microfinance products to poor who are organized into groups. develop a habit of saving through SHGs, thus only intermediate saving mobilization by linking them with banks. if providing products on credit, then have to furnish periodical statements &MFIs who receive loans from banks have to comply with prudential norms in relation to asset classification and income recognition . no supervisory & regulatory framework for monitoring NGOs engaged in deposit mobilization but must comply with RBI norms.

 For the need of increasing outreach and commercial operations, NGO should be transformed into a legal entity to satisfy RBI norms and thus were transformed into MFIs like Spandana Sphoorty Financial Limited( provides six lines of micro loansGeneral loans, Business loans, Microenterprise loans, Dairy loans, Agri-family loans and farm equipment loans), BANDHAN into BANDHAN Microfinance Ltd., SHARE(Society for Helping and Awakening Rural Poor Through Education) into SHARE microfinance Ltd. etc.

NON-BANKING FINANCIAL INSTITUTIONS/ NON-BANKING FINANCIAL COMPANIES

Registered under Companies Act, 1956. In 1997, it became mandatory to apply to RBI to obtain certificate of registration, thus regulated by RBI . RBI conducts both Online and offsite supervision of NBFCs through scrutiny of quarterly/half yearly/annual statutory returns, balance sheets, P&L a/c, auditors report etc. CAMELS model is used for rating NBFCs. NBFI is exempted from RBI registration if not disbursing credit more than Rs. 50000 for business enterprises & Rs. 25000 for poor household & these are registered u/s25 of Companies Act,1956 & are not allowed to mobilize public savings. For eg. NIDHI organization .

MUTUALLY AIDED COOPERATIVE SOCIETIES(MACs)

Regulated by Registrar of cooperative societies and State governments.. have legal sanctions to work as MFIs. MACs are a form of Self-financing Cooperative Societies. management is vested in BODs. Mutually Aided Cooperative Societies(MACs) Acts are enacted by concerned State Governments . If it wishes to enter Banking, it will be subjected to provisions of Banking Regulations Act. States where MACs are functioning:- Andhra Pradesh, Jharkhand, Bihar, J&K, M.P., Chhattisgarh, Orissa , Karnataka and Uttaranchal.

MFIs AS BANKS
have to get registered under RBI.

regulated by RBI. initial capital requirement for a bank to work as MFI is Rs 100-300crores.

LOCAL AREA BANKS

governed by RBI Act,1934. Under Act 1956, LABs are registered as public limited companies. Licensed and governed by Banking Regulation Act, 1949. initial capital requirement of Rs.5crores to set up a LAB. liquidity requirements and interest rate of LABs are governed by provisions as applicable to RRBs. norms regarding asset classification and provisioning of LABs are applicable as like other banks.

REGULATION OF MFIs

THE MICRO FINANCE INSTITUTIONS (DEVELOPMENT AND REGULATION) BILL, 2011 as on June5,2011
As micro finance sector lacks a formal statutory framework for its financial activities, therefore to provide a formal statutory framework for the promotion, development, regulation and orderly growth of the micro finance sector and thereby to facilitate universal access to integrated financial services for the unbanked population, RBI had constituted a panel to look into the sector and had adopted the recommendation of the Malegam Committee to put a cap on interest rates charged and the business margins of microlenders. & had asked the Andhra Pradesh government to withdraw its rules to remove regulatory ambiguity. The federal government bill proposed to override all existing laws and, if passed by the parliament, will remove the

uncertainty caused by the rules imposed by Andhra Pradesh state. It envisioned a larger regulatory role for the central bank & proposes that all microfinance companies to register with the RBI. The bill also proposed that microlenders should operate at business margins as suggested by the RBI who would be having the power to inspect the books of these companies at any time. All registered microfinance institutions would be required to create a reserve fund and would transfer to it a specified percentage of money as asked by the RBI.

The Bill was finally passed by Parliament which stated that

RBI will now directly regulate Microfinance Regulatory Norms: RBI decided to bunch together the beleaguered microfinance sector as a niche segment within the category of non-banking financial companies (NBFC). Under these guidelines issued on December 5,2011, the RBI directed all existing microfinance institutions (MFIs) who can meet its new regulatory norms to register as NBFC-MFIs by April 2012. Those who do not meet the norms cannot, henceforth, lend more than 10 percent of their total assets to the sector.

Conditions set for NBFC-MFIs include the following:

must have minimum net owned funds of Rs 5crore (Rs 2crore if they operate in

the North-East). capital adequacy ratio (CAR) -15 percent {measure of a banks capital weighed against its risk assets (loans)}. cannot lend at more than 26 percent interest, and margins on borrowed funds cannot exceed 12 percent. This means if MFIs can borrow cheap say at 10 percent, the interest rate cap on lending is 22 percent, and not 26 percent. As far as lending is concerned, not more than two MFIs can lend to the same borrower while one borrower cannot be a member of two groups simultaneously. The frequency of repayment installments can be decided by the borrower. should have higher cutoffs for lending in urban and semi-urban areas. have to start provisioning for defaults, and loans that are not serviced for more than 90 days should be classified as non-performing.