MICRO FINANCE AND RURAL BANKING

By Sreerupa Rath

• Micro finance aims at assisting communities of the economically excluded to achieve greater levels of asset creation and income security at the household and community level.

• Microfinance is usually understood to entail the provision of financial services to micro-entrepreneurs and small businesses, which lack access to banking and related services due to the high transaction costs associated with serving these client categories.

MICRO-FINANCE AS A DEVELOPMENT TOOL

• Access to financial services – savings, credit, insurance, money transfers is one element of human development.

• Micro-finance as a developmental concept provides such access to the so far unserved strata of the population i.e. those who earn low incomes, own few assets and are constrained in voicing out their interests.

Essentials of micro and small savings mobilization in India

• Security• Liquidity• Convenience• Yeild

ACHIEVEMENTSMicro finance is assumed to yield positive effects on various developmental objectives:• Clients are capable to save• Are able to diversify their risks• Are able to provide regular and more years of schooling to their

children• Are better capable, financially and knowledge-wise to handle health

care• Have been able to grow their businesses and assets.• Females tend to have strengthened their say in family decisions, in

particular regarding schooling and marriage of daughters.• People having entrepreneurship quality have often created

employment beyond their family members

SOCIAL RATING

• It can be referred as the assessment of the extent to which MFIs have shown their effort in social performance.

• Social Rating mainly covers the rating of Social mission and development objectives Outreach Organizational operations

SOCIAL RATING COMPONENTS

• Organizational history and track record• Legal status of the organization• Type of ownership and management • Organizational alliances and networking• Human Resources• Key personnel and management type• Range of products and services• Level of organizational control• Management information system• Transparency in the governance systems• Profitability

IMPACT ASSESSMENT

• It is a kind of structured study, which measures the impact on employment, income generation, nutrition, education, health, consumption and gender equity on MFI’s clients.

Impact Assessment should be designed to assess the impact on the following three levels:• Household Level• Individual Level• Enterprise Level

Impact Assessment is done by two methods:• Qualitative Method• Quantitative Method

Characteristics for effective impact assessments:• Mix of qualitative and quantitative approach • Emphasis on cross verification of information gathered for the impact

assessment for more reliability• Designing the impact assessment for a wide range of objectives including

both primary and secondary objectives• Carrying out impact assessments on a continuous basis rather than a one-

time activity

Regional Rural Banks

• A vast segment of the rural population comprising of weaker sections and economically backward classes were deprived of banking facilities as their requirements were insignificant and financing them by commercial banks was perceived to be a non-viable proposition. Therefore, a special category bank was set up by the Government in 1975 known as Regional Rural Bank.

Objectives of RRBs:• To make credit available to rural households for agriculture

and allied activities.• To reduce dependence of weaker sections on the private

moneylenders.• To open branches in unbanked rural areas particularly in

economically backward areas including tribal areas.• To mobilize rural savings and channelize them for supporting

productive activities in rural areas.• To develop rural economy.

FUNCTIONS OF RRBs• Granting of loans and advances to small and marginal farmers

and agricultural labourers, either individually or in groups.•  Granting of loans and advances to co-operative societies, agricultural processing

societies and co-operative farming societies primarily for agricultural purposes or for agricultural operations and other related purposes.

•  Granting of loans and advances to artisans, small entrepreneurs and persons of small means engaged in trade, commerce and industry or other productive activities within a specified region.

•  Accepting various types of deposits. The credit policy of regional rural banks is more liberal than co-operative banks. It is not necessary for the borrower to mortgage property.

PERFORMANCE OF RRBs

The performance of RRBs during the last 3 decades can be categorized into four phases:• Expansion Phase (1975-1985)• Declining Phase (1986-1995)• Turn around Phase(1996-2005)• Consolidation Phase (2006-2011)

MANAGEMENT AND FUNCTIONING OF RRBs

• Govt. of India• NABARD• RBI• Sponsor Bank• State Govt.