“Microfinance Institutions- Role, Contribution, Potential and Challenges in Financial Inclusion”
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DESCRIPTIONMicrofinance Institutions- Role, Contribution, Potential and Challenges in Financial Inclusion A presentation to the Ministry of Finance, Government of India, New Delhi 10 th August 2009. Sa-Dhan in Financial Inclusion. On Financial Inclusion , Sa-Dhan members - PowerPoint PPT Presentation
*Microfinance Institutions- Role, Contribution, Potential and Challenges in Financial Inclusion
A presentation to the Ministry of Finance, Government of India, New Delhi10th August 2009
*Sa-Dhan in Financial Inclusion On Financial Inclusion, Sa-Dhan members- ensure access to financial services- provide timely and adequate credit - to vulnerable groups such as weaker sections and low income groups -at an affordable cost Dr. Rangarajans Committee on Financial InclusionMFIs could play a significant role in facilitating inclusion, as they are uniquely positioned in reaching out to the rural poor. Many of them operate in a limited geographical area, have a greater understanding of the issues specific to the rural poor, enjoy greater acceptability amongst the rural poor and have flexibility in operations providing a level of comfort to their clientele.
*Services Provided by MFIs
Though the scope are wide but till now generally the MFIs are providing the services like-Micro SavingsMicro Credit Micro Insurance Micro RemittanceMicro Pension
*MFIs REACH A CRITICAL MASSMFI now serve 22.6 million clients Loan Portfolio touches INR 12000 cr 93% of MFIs clients are womenMFIs serve about 50 lakhs SC/ST borrowers and 29 lakhs of minority backgroundMFIs have reached to the 71% of the poorest districts, defined by NREGP 1st and 2nd phaseMF sector have generated direct employment of more than 62000 professionally skilled personnelFirst mile connectivity for the poor &last mile for FFIs
*Performance and Growth
*Still to achieve80% of the poor household are out of full fledged financial services Many no-frills accounts are reported to be non-functionalNo access to savings products95.5% of MSME excluded from formal bankingOnly 14% of lowest income quartile have life insuranceLess than 1% of population appears to have medical insuranceMajor source of credit for most Indians is still the moneylender
*Issues and Concerns: Issues related to provision of composite financial servicesProblems faced by CBOsRelated to not-for-profit MFIsRelated to NBFC-MFIsAddressing Regional Skewedness Other important issues
*Issues related to provision of composite financial servicesREMITTANCE Small Ticket size, Door to Door ServiceNot recognised by RBI as a financial productMFIs should be allowed to do remittance operationsMICRO INSURANCE Slow progress main hindrance is the current claim settlement process move towards a community based processAdequate marketing channels for Micro Insurance Need for awareness creation - no support available as Development Cost. Waive Service Tax to make micro insurance affordableIncrease priority sector targets for micro insuranceMICRO PENSION - Promotion and development needs policy attention
*Potential of CBOs to Promote Financial Inclusion CBOs ( SHGs, Federations and New Generation Cooperatives) reach out to the poorest of the poor not covered by other financial institutions32 lakh SHGs and 69,000 Federations exist in the country according to NABARDFinancial intermediation role of CBOs, Federations and Cooperatives enables timely accessibility of financial services CBOs / Federations are both an empowering and equitable tool for the poor.
*Problems faced by CBOsLack of Investment in Capacity Building of SHGs, Federations and CooperativesTraining HRFinancial LiteracyAccess to TechnologyLack of clarity on the legal and operational structure of CBOs hampers their ability to effectively play the role of financial intermediary.
*Not- for- Profit MFIs: RecommendationsRecognition to such institutions in Financial InclusionSource of funds- Setting up Refinance Institutions, allow savings mobilisation, equity Reduce Cost of funds Exemption from TaxationDevelop appropriate legal structures Special allocation for unreached areas eg. North East and other backward areas.
*NBFC - MFIs ARE WELL REGULATED ON PAR WITH THE BANKSRegistered with RBIFollow Prudential Norms stipulated by RBIFollow KYC Norms applicable in the case of rural borrowers Adopt Code of Conduct and Fair Business PracticesFile regular Returns and subjected to on-site and off site Inspection by RBI
*NON-REVENUE MEASURESPooling of ResourcesECBsMFIs to access SavingsLong term Funding requirementRationaleRepresentation Reduce risk weightage to 25-50% on loans to MFIs Mobile Banking & Correspondent banking to be allowed for MFI- NBFCsAllow MFIs to issue Prepaid cards with ATM access. Capital allocation of 19% Vs Basel II stipulation of 9% & impeccable asset quality Amalgam of the funding capability of banks & credit delivery skills of NBFCs.
MFIs to access External Commercial Borrowings (ECBs)
End use Vs structure Allow MFIs to accept Demand Deposit from members. Credit Saving Insurance - TriangleAllow ADB / IFC to issue Long Term guarantee to MFIs. MFIs need Long Tem moneyNBFC - MFIs Classify NBFC MFIs as a separate category Precedence NBFC AFCs*
*Control Structure for MFI NBFCsDispensations only to MFIs registered as NBFC with RBI. Other stipulationsTicket size not to exceed Rs 50,000 Deposit accepted not to exceed loan exposure at the enterprise levelBank s equity holding in NBFC- MFIs to be capped at 10%75% of net interest earning from Micro lending Dispensation to be linked to supervisory rating
* Exempt Service Tax on all Micro Finance Products including Micro Insurance. REVENUE MEASURESService Tax Provisioning by MFIs on their Non-performing assets be treated as tax deductible expenditure.Stamp DutyDr.Rangarajan Committee Report 40% tax exemption to MFIs under sec 36 (i)(vii) of the IT ActProvisioning on Non-performing Assets Waive Stamp Duty on all Debt issuance of MFI NBFCs. The poor is unlikely to avail tax exemptions on insurance premium or interest paid on housing loans, etc. To compensate, waive service tax. Level playing field with HFCs, DFIs, etc. Level playing field with Banks. Reduce cost of delivery of financial services to the Poor.RationaleRecommendation*
*Addressing Regional SkewednessLack of Financial infrastructure and technical support in the underserved regions Credit Guarantee Fund, Capacity Building and promotional fundsLack of funding support for institution building, systems and innovations, awareness and financial literacy Lack of professional and well managed a adequate number of service providersLack of Region specific rating tools and its recognitionLack of interest from mainstream FIs in lending local and indigenous institutions
*Other important issues Cost of fund is high resulting in higher pricing
Application of State Money Lenders Act and sporadic problems associated with local administration
Lack of Credit information Bureau and information sharing
Credit Guarantee Fund to promote growth of the sector
Exemption from stamp duty on the loan documentation for the MFIs
THANKS FOR THE PATIENT HEARING