MICRO-FINANCE AND RURAL CREDIT SYSTEM (2+1)

COURSE OUTLINE

There are FIVE sections of the subject as under: Section I Micro-finance needs of the poor. Section II-Role of Micro-finance in Rural Credit. Section III- Strengthening of Self Help Groups. Section IV- Financial services under Micro-finance. Section V- Role of NABARD in Development of Micro-finance

SECTION I - MICRO-FINANCE NEEDS OF THE POOR

1.

2. 3. 4.

Meaning and definition of Microfinance, Salient features of Microfinance, benefits of Microfinance, target groups in Microfinance. Credit requirements for farm, Non-farm activities, for livelihood of poor person. Need for savings, credit and Insurancerole of financial intermediation. Formal financial institutions and rural credit such as Commercial Banks, RRBs, Cooperative Banks and MFIs.

SECTION IIROLE OF MICROFINANCE IN RURAL CREDIT

Role of Microfinance in poverty alleviation in village area. Micro-finance Institutions, functions and impact. NGOs, Government and financial institutions in microfinance scenario.

SECTION IIISTRENGTHENING SELF HELP GROOUPS (SHGS)

Microfinance and SHGs collective action for poverty alleviation and empowerment of rural people. Issues of SHGs grading, Role of Federations of SHGs. Issues of SHGs information problems, Joint Liabilities Group, Collection of Information from SHGs and their reporting to financing institutions.

SECTION IVFINANCIAL SERVICES UNDER MICROFINANCE

Savingsneed, method and approaches, importance of regular savings. Creditneed, options and approaches, sanction & disbursement of credit. Micro-InsuranceConcept , design and emerging issuesrole of Insurance Regulatory & Development Authority (IRDA) Activities of various NGOs & MFIs like BASIX(BASICS), MYRADA,Grameen Bank, SEWA Bank, Sangamitra etc.

SECTION VROLE OF NABARD IN THE DEVELOPMENT OF MICROFINANCE

NABARDs Directives regarding Microfinance to various institutions. Microfinance institutions- Bank Linkages. Non-Banking Financial Companies(NBFC) and Microfinance. NABARDs refinance supportpromotional support- Training and Capacity building- skill development grant support to partner agencies for promotion and nurturing of SHGs Revolving funds assistance to MFIs.

REFERENCES

Karmakar, 1994 Rural Credit & Self Help Groups, SAGE PUBLICATION, New Delhi. Microcredit, poverty and empowerment linking the triad by Neera Burra, Joy Deshmukh, Ranadive, Ranjani K. Murthy, SAGA PUBLICATION, New Delhi. Management of Non-governmental organizations by J.M. Ovasdi, MACMILLAN INDIA LTD., New Delhi

SUGGESTIVE READINGS:

Information Asymmetry and trust: a frame work for studying Microfinance in India, M.S.Sharma, working paper , IIM, Ahmedabad. Development of rural poor through Self Help Groups by Shankar Chatterjee, RBSA Publishers, Jaipur. Rural Transformation: Infrastructure and Microfinance by Harsh Bhargava and Deepak Kumar, ICFAI University press, Hyderabad. Rural Transformation : Socio-economic issues by Harsh Bhargava and Deepak Kumar, ICFAI University press, Hyderabad. Rural Credit and Microfinance by Katuri Nageshwar Rao, ICFAI University press, Hyderabad. Microfinance in India; a state of the sector report, 2007 by Prabhu Ghate, A SAGA PUBLICATION, New Delhi.

JOURNALS

Kurukshetra :A journal on Rural Development Yojna- A Development monthly. Transforming INDIA, Quarterly Magazine, Mumbai. Economic & Political Weekly. Vikalp, IIM Ahmedabad , Journal.

SECTION I MICROFINANCE NEEDS OF THE POOR.

MEANING AND DEFINITION OF MICRO FINANCDE: Micro means small size of the loans, Small size of savings, The smaller frequency of loans, Shorter repayment periods and amounts, The micro/small local level activities.

DEFINITION OF MICROFINANCE :
The RBI has defined Microfinance as Provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban areas for enabling them to raise their income levels and improve living standards. Micro-credit means small loans to entrepreneurs too poor to qualify for

bank loans. The poor person is struggling against poverty. He want to start small business at affordable interest rates. Microfinance Institutions are those that provide these facilities i.e. Small loans, for small business at affordable interest rates with reasonable repayment period without security.

Dr. C. Rangarajan, Chairman, Economic Advisory Council of the Government of India, points out Microfinance can aid employment and sustain households giving them opportunities they never had before.

There are formal and informal financial institutions giving Microfinance. The Formal Financial institutions are providing microfinance for income generating activities at low rate of interest with easy and periodical repayments and moratorium(delay) period. But at the same time, microfinance from formal financial system is not easily available.

Micro-credit institutions means formal institutions like banks, both Commercial and Non-commercial, which are in the business of finance. Non-Governmental Organizations often fall in the category of intermediaries which constitute the link between banks and the clients (the borrower). NGOs are not formal financial institutions themselves.

Recent developments in the design of MicroCredit schemes have generated enthusiasm, since innovative features in design are supposed to reduce the costs and risks of extending loans to the poor. These innovations lie in the reliance on social collateral as against physical collateral. Small groups of poor people are formed who then engage in savings -

Activities and rotate small loans amongst themselves. Among the real and potential clients of microcredit, women are seen as the most appropriate targeted beneficiaries, since it is argued that in contrast to men, the entire household benefits when the loans are given to women.

MICRO-CREDIT INSTITUTIONS: 1. Commercial Banks (Pub. & Pvt. Sector) 2. Regional Rural Banks and 3. Cooperative Banks and 4. Micro Financing Institutions (MFIs). These institutions are financing to SHGs for financing to their members.

PILOT PROJECT OF NABARD: The NABARD launched a pilot project for the purpose and supported it by way of refinance to Banks in 1991-92 which was a successful test. It also provided guidance and Training to the agencies i.e. Banks.

The following criteria would be adopted by NABARD for selecting SHGs: 1. The Group should be in existence for at least six months. 2. The group should have promoted the Saving habit (monthly basis). 3. Group could be formal (registered) or informal (un-registered).

4. Membership of the group could be between 10 to 20 persons. SALIENT FEATURES: (a) All banks have followed the Grameen Bank Model of Bangladesh i.e. banks lend micro-credit through SHGs and to local Micro finance institutions (MFIs) that have contacts in small villages.

(b) Indias Bank-SHG link programme is now the biggest in the world. (c) The cumulative number of SHGs linked to banks stood at 69.53 lakh Saving-linked SHGs and 53.10 lakh Credit linked SHGs as on 31st March, 2010 (d) Leading Commercial Banks such as ICICI Bank, HDFC Bank, UTI Bank and

The SBI have begun focusing on this sector. (e) Foreign Banks such as ABN Amro, Standard Chartered, HSBC and Citibank have started financing SHGs.

Micro-credit is the extension of small loans to entrepreneurs too poor to qualify for traditional bank loans. Micro-finance is a broader concept, encompassing, not only the extension of credit to the poor, but also the provision of other financial services, like savings, cash withdrawals and insurance.

STATUS OF MICROFINANCE DURING 2009-2010.

Total No. of SHGs Saving-linked with Banks : 69.53 lakh Out of total (of which) exclusive women SHGs : 53.10 lakh Out of total (of which) SGSY SHGs : 16.94 lakh Total no. of SHGs credit-linked during 200910: 15.87 lakh Of which Women SHGs : 12.94 lakh

Estimated number of families covered upto 31-3-2010 : is 97 millions. Total Savings of SHGs with Banks as on 313-2010: 6198.71 crore. Women SHGs savings:4498.66 crore. Total Amount of loans disbursed during 200910 : 14,453.30 crore. Loan disbursed to Women :12429.37 Cr.

Average loan amount outstanding per SHG as on March,2010:Rs.57,795 Average loan amount outstanding per member as on March,2010 : Rs.4128

Total loan outstanding against SHGs as on 31-3-2010 :-Rs.28,038 Crore

SHGs LINKED IN LAST 3 YEARS: 2007-08 50.09 lakh 2008-09 61.21 lakh 2009-10 69.53 lakh (growth rate is 13.6%) MFIs LINKED WITH BANKS IN 3 YEARS: 2007-08 518 (Rs.1970.15 Crore) 2008-09 581 (Rs.3732.33 Crore) 2009-10 691 (Rs.8062.74 Crore) Growth rate is 18.9%. Amount wise growth is 116%.

Participating Banks in Micro-finance are: 1. Commercial Banks (Public Sector): 27 2. Commercial Banks (Foreign &Pvt): 19 3. RRBs: 81 4. Cooperative Banks: 318 5. SIDBI 1

Different Models of Micro-finance: There are TWO models: (i) SHG-Bank-Linkage Model: SHGs are financed directly by the Banks viz. Commercial Banks, RRBs, and Cooperative Banks. (ii) MFI-Bank Linkage Model: Financing of MFI by Banking agencies for on-lending to SHGs & other small borrowers.

TOPIC : Credit Requirement for Farm, Non-Farm activities for livelihood of poor person: 1. Credit requirements for Farm Activities: Since the personal resources of the farmers are inadequate, therefore he needs credit for farm activities. Credit may be for productive & unproductive purposes:

Finance in Agriculture is as important as development of technologies. Technical inputs can be purchased and used by farmers only if he has money (funds). But his own money is always inadequate and he needs outside finance or credit. The RBI as the Central Bank of the country took lead in making credit available to agriculture through Banks,

by laying suitable policies. Agriculture credit, through multi agency approach has come to stay. Crop loans (short term loan) has the major share for Agriculture activities. Farmer get loans for purchase of electric motor with pump, tractor and other machinery, digging wells or boring wells,

Installation of pipe lines, drip irrigation, planting fruit orchards, purchase of dairy animals and feeds/fodder for them, poultry, sheep/goat keeping and for many other allied enterprises. Unproductive credit needs include celebration of marriages and other social and religious functions and litigation.

FARM PRODUCTIVE PURPOSES

(a) For purchase of Seed (Hybrid), (b) For purchase of Fertilizers (organic and Inorganic fertilizer) (c) Pesticides & Insecticides (d) For Irrigation payment of Electricity Bills or Diesel Bill (EPS/DPS) (e) Payment of labour cost, if needed. (f) Payment of Transportation cost.

(g) Payment of rent to keep in Warehouse (h) Payment of rent if land is on rental basis for raising crop. NON-FARM ACTIVITIES FOR POOR PERSON FOR HIS LIVELIHOOD: 1. Poor person in rural area needs economic activity which generate income.

2. His needs are small which generate employment and increased income in the rural areas. 3. NABARD has identified financing, developing and promotion of Rural Non Farm Sector activities as one of its thrust areas. 4. The focus has been on greater credit flow and provision of linkages for small,

Cottage, and village industries, handicrafts and other rural crafts and services sector in the decentralized sector in the rural areas for poor people. 5. Non Farm Activities credit can be given by financial institutions upto Rs.50,000/- under Microfinance without collateral security. More Credit can be given with collateral security for any Eco. Activity.

6. Credit for NFS includes for purchase of small Tools and Equipments and Raw Material required to do some economic activity. Indicative list of Income Generating Activities is as below: I- Agriculture & Allied Activities: (1) Vegetable Cultivation

(2) (3) (4) (5) (6) (7) (8) (9)

Banana Cultivation Herbal Garden Paddy Cultivation (group farming) Pine Apple Cultivation Horticulture (fruit plants) Cattle rearing Goat/Sheet rearing Piggery

(10) (11) (12) (13) (14) (15) (16) (17)

Fresh water Fish culture Poultry Farming Bee-keeping Nursery development Mushroom cultivation Coconut selling Vegetable selling Fruit juice counters.

(18) (19) (20) (21) (22) (23) (24) (25)

Chips Making unit Food products making unit Minor Forest Produce counters Pine/Det Mat making Basket making (Bamboo) Bamboo Furniture making Flower vending and cut flowers Fruit vending

NON-FARM ACTIVITIES: (1) Wooden Furniture making (2) Toy manufacturing unit (3) Candle making (4) Agarbathi rolling unit (5) Beedi rolling unit (6) School bag making unit (7) Petty Shop

(8) Pottery (9) Brick making (10) Gas welding unit (11) Repair and Service shop (12) Book binding unit (13) Paper bag making unit (14) Saree Zaree making unit

(15) (16) (17) (18) (19) (20) (21)

Courier Service Eatery Centre Tea Stall Road side Dhaba Center Provision Stores Ready-made garment selling Doll making unit.

(22) (23) (24) (25) (26) (27) (28)

Telephone Booth Xerox centers Grill & welding work Electrical works Plumbing works Auto-Riksha (Taxi service) Any other Economic activity.

(29) (30) (31) (32) (33) (34)

Tailoring Work Embroidary Work. Laundry Service Rural Artisan work (any activity) Weavers work (carpet making) Handicrafts work (patch work, glass work and stitching work.

Other points to be remembered when financing Farm and Non-Farm credit to poor person : (a) Insurance of person & assets created out of credit facility. (b) Marketing facilities to get better price of his products. (c) Repayment in easy instalment. ###