mukherjee sir presentation 2
TRANSCRIPT
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Presentation on Microfinance
:By Vinay Kumar Mishra
MBA-Rural development G.B.Pant Social Science
Institute (University of Allahabad)
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Introduction
The concept of microfinance originated inBangladesh, around 1976 through apioneering experiment by Dr. Muhammad
Yunus
He was inspired during the terribleBangadesh famine of 1974 to make asmall loan to a group of families to createsmall items for sale as he believed thatmaking such loans available to a wide
population could ameliorate the rampantrural poverty in Bangladesh
Grameen Bank is the outgrowth ofMuhammad Yunuss ideas
Microfinance seen as the latest magic bulletagainst poverty
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About Microfinance
The modern microfinance movement dates back to the 1970s
when experimental programs in Bangladesh, Brazil, and a fewother countries began to extend tiny loans to groups of poorwomen to invest in microenterprises.
As a result, the microfinance institutions providing the serviceswere able to develop business models that were sustainable, nolonger needing subsidy. These institutions showed that the poorwere "bankable".
Since then, the range of products - credit, savings, moneytransfers, micro- insurance- has increased as we have come to
recognize that poor people need a range services to meetdifferent needs. And in recent years, microfinance has attractedthe attention of commercial banks, investors, and a host of newservice providers. So today microfinance is, quite simply, retail
banking for poor people.
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What Is Microfinance?
Microfinance offers poor people access to basicfinancial services such as loans, savings,money transfer services and micro insurance.People living in poverty, like everyone else,need a diverse range of financial services to
run their businesses, build assets, smoothconsumption, and manage risks.
Different types of financial services providers forpoor people have emerged - non-governmentorganizations (NGOs); cooperatives;community-based development institutions likeself-help groups and credit unions; commercialand state banks; insurance and credittelecommunications and wire services; card
companies; post offices; and other points of-
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Meaning
Microfinance is a term used to refer to theactivity of provision of financial services toclients who are excluded from the traditionalfinancial system on account of their lowereconomic status
Both RBI and NABARD define microfinance asthe provision of thrift, credit and otherfinancial services and products of very smallamounts to the poor in rural, semi-urban orurban areas enabling them to raise theirincome levels and improve living standards
More broadly, microfinance is a movementwhose object is a world in which as manypoor and near-poor households as possiblehave permanent access to an appropriate
range of high quality financial services,includin not ust credit but also savin s
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Need for micro finance
Traditionally, banks have not providedfinancial services to clients with littleor no cash income. Banks must incursubstantial costs to manage a clientaccount, regardless of how small thesums of money involved
There is a break-even point in providingloans or deposits below which banks
lose money on each transaction theymake. Poor people usually fall belowit.
In addition, most poor people have few
assets that can be secured by a bankas collateral.
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Who Are the Clients ofMicrofinance?
Microfinance clients are often described according to their povertylevel - vulnerable non-poor, upper poor, poor, very poor. This canobscure the fact that microfinance clients are a diverse group of
people and require diverse products.
women clients make up a majority of clients - and in some instances
comprise 100 percent of an MFIs clientele, 33 percent of allmicrofinance clients are men.
Success in reaching poorer people with microfinance is determined by the mission of a microfinance institution, and its ability totranslate that mission into effective products and services. Withthe industrys renewed focus on social performance the term
used within the microfinance industry to mean the effectivetranslation of mission into action MFIs expect to see moreclients overall, and very poor people in particular, served withappropriate, varied products from a variety of institutions.
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Joint liability Group
Joint liability Group: By lending to groups ofwomen where every member of the groupguaranteed the repayment of all members,
these microcredit programs challenged theprevailing conventional wisdom and provedthat poor people without collateral could be"creditworthy". When offered theopportunity, they would repay loans withinterest, at extraordinary rates of repayment.
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What Do We Know about theImpact of Microfinance?
Eradicate extreme poverty andhunger
Achieve universal primary education
Promote gender equality andempower women
Reduce child mortality and Improvematernal health
Develop a global partnership fordevelopment
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What Is a MicrofinanceInstitution (MFI)?
A microfinance institution (MFI) isan organization that providesfinancial services to the poor. This
very broad definition includes a widerange of providers that vary in theirlegal structure, mission and
methodology However, all share thecommon characteristic of providingfinancial services to clients who arepoorer and more vulnerable thantraditional bank clients.
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Present Status
600 MFI initiatives have acumulative outreach of 1.25
crore poor households NABARDs SHG-Bank linkage
programme has cumulatively
reached a total of 9.4 lakhSHGs with about 1.4 crorehouseholds
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Indian microfinance sector
Microfinance in India started evolvingin the early 1980s with theformation of informal self help
groups for providing access tofinancial services to the needypeople who are deprived of thecredit facilities
Expected to grow nearly 10timesby2011 to a size of aboutRs.250billion from the current market size
of Rs.60 billion ,at a compoundannual rowth rate of 76%
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Why Do MFIs Charge HighInterest Rates?
The problem is that the administrative costs are inevitably higher for tinymicro lending than for normal bank lending. Lending out a million inRs. 100,000 loans of Rs.100 each will obviously require a lot more instaff salariesthan making a single loan for the total amount. As a result,interest rates in sustainable microfinance institutions (MFIs)are
substantially higher than the rates charged on normal bank loans. There are three kinds of costs the MFI has to cover when it makes
microloans. The first two, the cost of the money that it lends and thecost of loan defaults, are proportional to the amount lent.
For instance, if the cost paid by the MFI for the money it lends is 10
percent, and it experiences defaults of 1 percent of the amount lent, thenthese two costs will total Rs.11 for a loan of Rs.100, and Rs.55 for aloan of Rs.500. An interest rate of 11percent of the loan amount thuscovers both these costs for either loan.
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Continue.............
The third type of cost, transaction costs, is notproportional to the amount lent. Thetransaction cost of the Rs. 500 loan is notmuch different from the transaction cost ofthe Rs. 100 loan. Both loans require roughlythe same amount of staff time for meetingwith the borrower to appraise the loan,processing the loan disbursement andrepayments, and follow-up monitoring.
Example: Suppose that the transaction cost is
Rs. 25 per loan and that the loans are for oneyear. To break even on the Rs. 500 loan, theMFI would need to collect interest of Rs.(50+5 +25) =Rs. 80, which represents an annualinterest rate of 16 percent.To break even on
the Rs. 100 loan, the MFI would need tocollect interest of Rs. (10 + 1 + 25 )= Rs. 36,
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Aren't Poor People too Poor toSave?
Poor people save because their income is rarely sufficient tomanage crises(a sudden illness or a flood, for example),toinvest when an opportunity appears ,or to pay for largeexpected expenses, such as school fees ,a weeding or a newroof.
Poor people save mostly in informal ways. They invest inassets such as gold, jewelry, domestic animals, buildingmaterials, and things that can be easily exchanged for cashThey also participate in informal savings groups.
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How do financial services helpthe poor?
Household income
Asset building
Reducing vulnerability
Empowering women
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Microfinance Models
Grameen Model Grameen model emerged from the poor-focussed
grassroots institution, Grameen Bank, started byprof. Mohammed Yunus in Bangladesh
This system is now at work in over 43 countries.
Each group of 5 -20 members are loaned moneybut the whole group is denied further credit if oneperson defaults
SHG-Bank linkage(SBL) model Collective responsibility and security afforded by the
formation of a group of individuals
Collective coming together of individual members isused for a number of purposes such as educatingand awareness building, collective bargainingpower, peer pressure etc.
NABARD is known for its SBL programme whichencourages Indias banks to lend to self-help
groups(SHGs)
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Grameenmodel(JLG) :
The Grameen model emerged from thepoor focused grassroots institution,
Grameen Bank, started by Prof.Mohammed Yunus in Bangladesh,Thismodel is based on joint liabilityconcept .
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Group Model or SHGModel :
The Group Model's basic philosophy lies inthe fact that shortcomings and weaknesses atthe individual level are overcome by the
collective responsibility and securityafforded by the formation of a group of suchindividuals.
The collective coming together of individualmembers is used for a number of purposes:educating and awareness building, collectivebargaining power,peer pressure etc.
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SHG Grameen Model Group
Plusses for clients
Flexible No need for literacy
No need for bank at all No need for members initiative
Highly empowering No need for members initiative
Members can save and borrow asneeded
Protected from internal and externalexploiters
Free to chose suppliers Poorer people are included
Can evolve from existing groups, chitfunds, credit unions etc.
Belong to and are supported by thebank
Can access the full range of bankservices
Bank can offer a range of additionaltailor-made services
Can evolve into Federations, and Co-operatives
What is the difference between SHGmodel and Grameen model
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SHG Grameen Model Group
Plusses for Banks
Lower transaction costs Can resist subsidized schemes
Can fit into any branch Tighter control
Can build on existing groups Standardized MIS
Savings mobilization easier Standardized procedures
Groups can absorb odium of expellingmembers
Easier to forecast need for funds
Can use lower-grade staff
Continue................
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SHG Grameen ModelGroup
Minuses for clients
Need managementskills and time
Must meetfrequently
Depend on good
accounts
Little freedom or
flexibilityCan be hijackedinternally orexternally
Group compositionnot wholly undermembers control
Cash may not besecure
Pressure to borrow
Interest rates
inflexible
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SHG Grameen Model Group
Minuses for Banks
Hard to monitor Higher transaction costs
May be tempted by otherbanks or by politicians
Need continuous guidanceand presence
Slow to develop Need dedicated system
May form own federations Hard to evolve and change
Continue................
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SHG Grameen Model Group
Suitable conditions
Existing bank network in rural andpoor areas
Very poor, homogeneous communities
Diffused communities, castes, wealthlevels Marginalized people, with little hopeand initiative
Tradition of informal financial services Few traditional informal financialmechanisms
Wide variety of scale and nature ofinvestment opportunities
Lack of financial institutions
Some local leadership Resource poor, little hope of graduation
NGOs and/or committed bank staff Large numbers of small businessopportunitiesFew NGOs
Continue................
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Scope
Only about 5% of the rural poor haveaccess to microfinance
About 56% of the poor still borrow from
informal sources 70 % of the rural poor do not have a
deposit account
Less than 15% of the households have
any kind of insurance out of whichnegligible numbers have access tohealth insurance(0.4%) and cropinsurance(0.2%)
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Limitations
SBL model is largely a Government pushedmodel and hide a lot of poor quality work
Lack of adequate transparency andempowerment of borrowers
Enormous pressure to lend at all costs
High rates of interest (18% to 24%)
MFIs charge borrowers interest on the entireremaining period ,even if they were to returna loan early
Few MFIs that meet the needs for savings,remittances or insurance
Limited management capacity in MFIs
Institutional inefficiencies
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Limitations
Need for more dissemination and adaption of rural,agricultural microfinance methodologies
A survey of 191 MFIs ranked Lack of funding as thebiggest constraint to growth
The biggest barrier to funding being not enough
contact with social investors / donors The main sources of capital are grants and commercial
capital.Young institutions have difficulty accessingcommercial capital
Those that can secure commercial capital do so atrelatively high interest rates, which are thenpassed onto the borrower
Institutions can build equity to borrow against byaccepting customer deposits, but this takes asignificant amount of time, and subjects them tocomplex laws
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Suggestions Muhammad Yunus, in his latest book,
argues that microfinance institutionsthat charge more than 15% above theirlong-term operating costs should facepenalties
Donors should observe vigilance.TheConsultative Group to Assist the Poor(CGAP) recently commented that "alarge proportion of the money theyspend is not effective, either because it
gets hung up in unsuccessful and oftencomplicated funding mechanisms or itgoes to partners that are not heldaccountable for performance. In somecases, poorly conceived programs have
retarded the development of inclusivefinancial systems"
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Conclusion
Micro finance lenders are working to bringabout a sustainable uplift in the income ofthe rural population
Public investments can help microfinance
providers meet the challenges offinancing for agriculture which requireadaptations to conventional financialproducts and delivery mechanisms
The rapid growth of the agriculture portfolio
of MFIs suggests that there was significantunmet demand for financing foragriculture.
MFIs can offer credit not just for agriculture
but also for nonfarm, household, andemergency needs, as well as savings and
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Thank you