Presentation on the topic

MICRO FINANCE IN INDIA (PROBLEMS, CHALLENGES & OPPORTUNITIES)

By- amit kumar shukla m.b.a. 4th semester
Roll no -5

MICRO FINANCE: INTRODUCTION

This is an area where you can do good while doing

well. -Brigit Helms To give away money is an easy matter and in any mans power. But to decide to whom to give it, and how large, and when, and for what purpose and how, is neither in every mans power nor an easy matter. Aristotle

MICROFINANCE DEFINITION:
According to International Labor Organization (ILO),

Microfinance is an economic development approach that involves providing financial services through institutions to low income clients. In India, Microfinance has been defined by The National Microfinance Taskforce, 1999 as provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards.

"The poor stay poor, not because they are lazy but because they have no access to capital. "Microfinance is the supply of loans, savings, and other basic financial services to the poor. Micro financing is not a new concept. Small microcredit operations have existed since the mid 1700s. Although most modern microfinance institutions operate in developing countries, the rate of payment default for loans is surprisingly low - more than 90% of loans are repaid. It is not just a financing system, but a tool for social change, specially for women - it does not spring from market forces alone - it is potentially welfare enhancing - there is a public interest in promoting the growth of micro finance - this is what makes it acceptable as a valid goal for public policy. Micro-Finance refers to small savings, credit and insurance services extended to socially and economically disadvantaged segments of society, for enabling them to raise their income levels and improve living standards.

DIFFERENCE BETWEEN MICRO CREDIT AND MICROFINANCE Micro credit 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 micro credit, savings, insurance, money transfers, and other financial products targeted at poor and low-income people. WHY MICROFINANCE? Subsidies are not the solution to eliminate poverty. More than subsidies poor people need access to credit and opportunity to exploit their talent. Absence of any recognized employment and hence absence of collateral make them non bankable, thus reducing the opportunities to access credit. In developing countries like India, lack of loans from any bank leaves them with no other option but to borrow money from local moneylenders, who charge them huge interest rates.

To counter this and many such problems, various financial institutions have come in to existence in the recent years. The main idea behind microfinance is that poor people, who can provide no collateral, should have access to some sort of financial services. Microfinance is often considered one of the most effective and flexible strategies in the fight against global poverty. According to the United Nations, microfinance institutions can be broadly defined as provider of small-scale financial services such as savings, credit and other basic financial services to poor and lowincome people. The term microfinance institution now refers to a wide range of organizations dedicated to providing these services and includes nongovernmental organizations, credit unions, cooperatives, private commercial banks, nonbank financial institutions and parts of State-owned banks. Microfinance is a dynamic field and there is clearly no best way to deliver services to the poor and hence many delivery models have been developed over a period of time. Each delivery model has its share of problem and success.

In India, various delivery models have been adopted by microfinance institutions. ROLE OF MICROFINANCE The micro credit of microfinance prename was first initiated in the year 1976 in Bangladesh with promise of providing credit to the poor without collateral , alleviating poverty and unleashing human creativity and endeavor of the poor people. Credit unions and lending cooperatives have been around hundreds of years. However, the pioneering of modern microfinance is often credited to Dr. Mohammad Yunus, who began experimenting with lending to poor women in the village of Jobra, Bangladesh during his tenure as a professor of economics at Chittagong University in the 1970s. He would go on to found Grameen Bank in 1983 and win the Nobel Peace Price in 2006. Since then, innovation in microfinance has continued and providers of financial services to the poor continue to evolve. Today, the World Bank estimates that about 160 million people in developing countries are served by microfinance. Grameen Bank (Bangladesh)

was formed by the Nobel Peace Prize (2006) winner Dr Muhammad Younus in 1983. This bank is now serving almost 400, 0000 poor people of Bangladesh. Not only that, but also the success of Grameen Bank has stimulated the formation of other several microfinance institutions like, ASA, BRAC and PROSHIKA . 1. Microfinance helps poor households meet basic needs and protects them against risks. 2. The use of financial services by low-income households leads to improvements in household economic welfare and enterprise stability and growth. 3. By supporting womens economic participation, microfinance empowers women, thereby promoting gender-equity and improving household well being. 4. The level of impact relates to the length of time clients have had access to financial services.

Methods Of Micro Finance

SHGS /JLGS / Farmer Clubs

Micro finance
SHG Approach
Individual Approach

By Banks
SHG Bank Linkage Model SHGs promoted & Financed by bank SHGs promoted by NGO and Financed by banks MFI Bank Linkage Model SHGs promoted by MFI Bulk loan from Bank for on-lending to SHGs

Onlending by MFIs

Micro-enterprises

SWOT ANALYSIS OF MICRO FINANCE Strength Helped in reducing the poverty: The main aim of Micro Finance is to provide the loan to the individuals who are below the poverty line and cannot able to access from the commercial banks. As we know that Indian, more than 350 million people in India are below the poverty and for them the Micro Finance is more than the life. By providing small loans to this people Micro finance helps in reducing the poverty. Huge networking available: For MFIs and for borrower, both the huge network is there. In India there are many more than 350 million who are below the poverty line, so for MFIs there is a huge demand and network of people. And for borrower there are many small and medium size MFIs are available in even remote areas. Weakness Not properly regulated: In India the Rules and Regulation of Micro Finance Institutions are not regulated properly. In the absent of the rules and regulation there would be high case of credit risk and defaults. In the shed of the proper rules and regulation the Micro finance can function

properly and efficiently. High number of people access to informal sources: According to the World Bank report 80% of the Indian poor cant access to formal source and therefore they depend on the informal sources for their borrowing and that informal charges 40 to 120% p.a. Concentrating on few people only: India is considered as the second fastest developing country after China, with GDP over 8.5% from the past 5 years. But this all interesting figures are just because of few people. Indias 70% of the population lives in rural area, and that portion is not fully touched. Opportunity Huge demand and supply gap: There is a huge demand and supply gap among the borrowers and issuers. In India around 350 million of the people are poor and only few MFIs there to serving them. There is huge opportunity for the MFIs to serve the poor people and increase their living standard. The annual demand of Micro loans is nearly Rs 60,000 crore and only 5456 crore are disbursed to the borrower.( April 09) Employment Opportunity: Micro Finance helps the poor people by not

only providing them with loan but also helps them in their business, educate them and their children etc. So in this Micro Finance helping in increase the employment opportunity for them and for the society. Huge Untapped Market: Indias total population is more than 1000 million and out of 350 million is living below poverty line. So there is a huge opportunity for the MFIs to meet the demand of that unserved customers and Micro Finance should not leave any stones unturned to grab the untapped market. Opportunity for Pvt. Banks: Many Pvt. Banks are shying away from to serve the people are unable to access big loans, because of the high intervention of the Govt. but the door open for the Pvt. Players to get entry and with flexible rules Pvt. Banks are attracting towards this segment. Threat High Competition: This is a serious threat for the Micro Finance industry, because as the more players will come in the market, their competition will rise , and we know that the MFIs has the high transaction cost and after entrant of the new players there transaction cost

will rise further, so this would be serious threat. Neophyte Industry: Basically Micro Finance is not a new concept in India, but that was all by informal sources. But the formal source of finance through Micro Finance is novice, and the rules are also not properly placed for it. Over involvement of Govt.: This is the biggest that threat that many MFIs are facing. Because the excess of anything is injurious, so in the same way the excess involvement of Govt. is a serious threat for the MFIs. Excess involvement definition is like waive of loans, make new rules for their personal benefit etc.

BUILDING SUSTAINABLE MICROFINANCE INSTITUTIONS IN INDIA India is perhaps the largest emerging market for microfinance. Over the past decade, the microfinance sector has been growing in India at a fairly steady pace. Though no microfinance institution (MFI) in India has yet reached anywhere near the scale of the well-known Bangladeshi MFIs, the sector in India is characterised by a wide diversity of methodologies and legal forms. However, very few Indian MFIs have achieved sustainability yet.

Upper class Poor (earning less than $4-5) who can during emergency spend money on health care and formal education Poor (earning less than $2 a day) who cannot afford to spend money on health care and formal education Ultra poor (earning less than $1 a day) who don't mind not living. Thus from the above graph we can see that microfinance has been working but not for the purpose for which it was intended. Only 5% of the ultra poor people have been helped with microfinance. This is the crowd which is into committing suicide. This mostly includes farmers who take loan under microfinance but are unaware of the consequences of the non repayment, which leads to the fact that there land is being hypothecated and leaving them only with the option of committing suicide. LOOPHOLES 1. Technology related hurdles such as high costs involved in small loan transactions for microfinance providers. Most of the times the rural population in not in the light of the technology being used for various transaction so either the technology which could be easy understood by the rural crowd is to be used or they need to be trained as to how the new technology id to be used. Moreover the transactions which are undertaken under the micro finance are very small that spending for each transaction becomes very costly for the bank.
2. Lack of customized solution/ microfinance models for the poor.

Government of India has centralizes plans for the entire nations microfinance which is then customized by the state government but then each village has a different mentality & financial capability which needs to be catered to. There is huge chunk of crowd which does not avail the facility of micro credit just because the scheme is not proper or suitable to them. In normal banking there are many alternatives available to the general public but in micro finance very few alternatives are available only from those the people need to choose the credit schemes. 3. Difficulty in measuring the social performance of MFIs. There are no special instruments for measuring the progress or output of microfinance. Various banks and institutions have their own models and criterion on which they measure the performance of their microfinance. But there is no specific fixed on which the effectiveness or the outcome can be measured. No proper rating is done for MFIs. 4. High interest rate of loan made to the poor. Microfinance institutions walk a thin line as they offer financial services to the poor at high costs. While high interest rates have been justified in many ways, there are now accusations about microfinance providers using aggressive loan recovery tactics that pushes clients to commit suicides (crisis in India). Furthermore, the recent wave of commercialization of microfinance has led many to question the real motive of practitioners.

5. Political Risk: The recent microfinance crisis in India is said to be politically motivated as the governments owns a rival microfinance institution in the same province where suicides have soared amongst microfinance clients. More over if the state government is not active as to the development and functioning of MFIs; the state loses a lot of opportunities for the rural development. Political support is very much important for upliftment and successful implementation of micro finance schemes. 6. Lack of understanding consequences of non repayment Most of the farmers who take microcredit are not aware of the entire structures of credit or banks do not clarify clearly what would be the consequences of non repayment. It is for this reason that there is huge non repayment and in the end leading to suicides in India. This has lead to bad name of micro credit. 7. Purpose Banks have to give certain part of their finance in the microfinance sector. It is for this reason they give loans very easily on a frequent basis. When people get loans so easily they are not using it for the very purpose for which they borrow instead they use for non productive purpose. E.g. they borrow loan for the purpose of irrigation but instead they use it for the marriage of their children or for the renovation of their house. Thus the objective of fulfillment of micro finance is not achieved.

INTENT Providing micro credit to Poor as well as Ultra Poor

REALITY Due to MFI regulation, government rules and other factors such as access to commercial banks, ultra poor (who probably need microfinance the most) are getting ignored

Engaging poor in the growth of the country

While microfinance works well for the upper poor and poor sections of society, the ultra poor sections of society need much more than finances.

Sure did poor and middle class get benefited through microfinance, but question still remains - when will the ultra poor and unreached section will receive the glorified microcredit Even though the realization about underserved ultra poor is there, but very few NBFC (Non Banking Financial Corporations) MFI works with such section of the society. This behavior is attributed to the focus of MFIs towards sustainability and profit. In reality, Microfinance is being commercialized in India.

Ideally, Microfinance's goal should be to produce social capital.

RECOMMENDATIONS AND SUGGESTIONS 1. The concept of Micro Finance is still new in India. Not many people are aware the Micro Finance Industry. So apart from Government programmes, we the people should stand and create the awareness about the Micro Finance. 2. There are many people who are still below the poverty line, so there is a huge demand for MFIs in India with proper rules and regulations. 3. There is huge demand and supply gap, in money demand by the poor and supply by the MFIs. So there need to be an activate participation by the Pvt. Sector in this Industry. 4. One strict recommendation is that there should not over involvement of the Government in MFIs. Because it will stymie the growth and prevent the others MFIs to enter. 5. the Micro Loan should be given to the women only. Because by this only, MFIs can maintain their repayment ratio high, without any collaterals. 6. Many people say that the interest rate charge by the MFIs is very high and there should be compelled cap on it. But what I felt that the high rates are justifiable. Suppose a big commercial bank gives Rs 1 million to an individual and in the same way a MFI gives Rs 100 to 10.000 customers. So its obvious that man power cost and operating cost are higher for the MFIs. So according to me rates are justifiable. But with limitations.

FUTURE OF MICRO FINANCE Microfinance expansion over the next decade can be expected to be an extension of what has been achieved so far while overcoming the hurdles that have been posing difficulty in effective microfinance operation and its expansion. There may be several participants in this process and their participation may be seen in the following forms. Existing microfinance institutions can expand their operations to areas where there are no microfinance programs. More NGOs can incorporate microfinance as one of their programs. In places where there are less micro finance institutions, the government channels at the grassroots level may be used to serve the poor with microfinance. Postal savings banks may participate more not only in mobilizing deposits but also in providing loans to the poor and on lending funds to the MFIs. More commercial banks may participate both in microfinance wholesale and retailing. They many have separate staff and windows to serve the poor without collateral. International NGOs and agencies may develop or may help develop microfinance programs in areas or countries where micro financing is not a very familiar concept in reducing poverty. Considering that the majority of the 360 million poor households (urban and rural) lack access to formal financial services, the numbers of customers to be reached, and the variety and quantum of services to be provided are really large. It is estimated that 90 million farm holdings, 30 million non-agricultural enterprises and 50 million landless households in India collectively need approx US$30 billion credit annually.

about 5% of India's GDP and does not seem an unreasonable estimate. However, 80% of the financial sector is still controlled by public sector institutions. Competition, consolidation and convergence are all being discussed to improve efficiency and outreach but significant opposition remains. Many private and foreign banks have unveiled their plans to enter the Indian microfinance sector because of its very low NPAs and high repayment rate of more than 95% in spite of offering loans without any collateral security. Microfinance is not yet at the centre stage of the Indian financial sector. The knowledge, capital and technology to address these challenges however now exist in India, although they are not yet fully aligned. With a more enabling environment and surge in economic growth, the next few years promise to be exciting for the delivery of financial services to poor people in India Development of Small-Scale Enterprises through microfinance will not only increase the outreach but will also help the generation of more employment and income for the poor. It is expected that in the following years there will be considerable deepening of microfinance in this direction along with simultaneous drives to reach and serve the poorest of the poor. But the crux of the discussion is that, if the over excess involvement of the government would be there in the Micro Finance sector, than the growth of the Micro Finance wont much possible. The Govt. involvement should limited to the important decisions only, but not to interfere in each and every matter of the management.

CONCLUSION At the end I would conclude that, Micro Finance Industry has the huge potential to grow in future, if this industry grows then one day well all see the new face of India, both in term of high living standard and happiness. One solution by which we all can help the poor people, i.e. in a whole year a medium and a rich class people spends more than Rs 10,000 on them without any good reason. Instead of that, by keeping just mere Rs, 3000 aside and donate that amount to the MFIs, then at the end of the year the total amount in the hands of poor would be ( average 500 million people *Rs 3000)=Rs 1,500,000,000,000 . Just imagine where would be India in next 10 years. At last I am concluding by presentation with a very famous saying: Dont wait; the time will never be just right. Start where you stand and work with whatever tolls you may have at your commands and the better tolls will be found as you go a long -William Surds

THANK YOU