MICROFINANCESharad Srivastava

MBA 2nd Year (2012-2014) - 12810076

Table of Content

Definition, Features and Need of the Microfinance Evolution of Microfinance in India Difference between Microcredit vs. Microfinance Microfinance Institutions (MFIs) Self Help Group (SHG) and Joint Liability Group (JLG) Channels for Microfinance Regulatory Framework – Priority Sector Lending, Malegam

Committee Recommendations, Regulators Andhra Pradesh Microfinance Crisis of 2010 Data about Microfinance India

Microfinance: Definition

“Microfinance is an economic development tool whose objective is to assist the poor to work their way out of poverty. It covers a range of services which include, in addition to the provision of credit, many other services such as savings, insurance, money transfers, counselling, etc.” – Reserve Bank of India

In other words, Microfinance serves as a tool for providing financial services to the low-income population., which do not have access to the mainstream financial services.

Microfinance: Definition

The proposed Microfinance Services Regulation Bill defines microfinance services as “providing financial assistance to an individual or an eligible client, either directly or through a group mechanism for :

i. Rs. 50000 or lesser amount, for an individual for small and tiny enterprise, agriculture, allied activities (including for consumption purposes of such individual) or

ii. Rs. 150000 or lesser amount for an individual for housing purposes, or

iii. any other purpose nor exceeding Rs. 150000

Salient features of Microfinance

Beneficiaries are from low income group.

Loans are of small amount.

Short duration loans

Loans are offered without collateral.

High frequency of payment

Loans are generally taken for income generation purposes.

Financial Needs

Disasters: Such as flood, fire, cyclone and man-made events like war

Investment Opportunities: Such as expanding a business, buying land or equipments, improving housing, securing a job (may require giving a large amount of money)

Lifestyle Needs: Such as wedding, funerals, childbirth, education of children, widowhood, homebuilding or old age

Personal Emergencies: Such as sickness, injury, death, sudden unemployment, theft or harassment

Need for Microfinance - Demand

India’s poverty estimates range from 26% to 50%. Out of these, 87% do not have access to credit.

Demand for microfinance is $30 Bn. whereas supply is only $2.2 Bn.

Only 5% people in rural India has access to microfinance. Even deposit account facility is out of reach by 70% of rural poor.

Less than 15% of people have access to insurance. Healthcare access is negligible.

Need for Microfinance - Supply

Total user base as on 31st March 2012 was 22.56 million.

Source: Microscape Nov 2012, Microfinance Institutions Network

Need for Microfinance - Supply

Source: Department of Financial Services, Ministry of Finance, GoI

Number of Bank Branches as on 31-March-2013

Bank Group

Rural Semi-Urban

Urban Metropolitan

Total

Public Sector Bank

23286 18854 14649 13632 70421

Private Sector Bank

1937 5128 3722 3797 14584

Foreign Bank

8 9 65 249 331

Regional Rural Bank

12722 3228 891 166 17007

Total 37953 27219 19327 17844 102343

Total Villages in India as per 2011 census: More than 6 Lakh

Evolution of Microfinance in India 1974 – Establishment of Self-Employed Women’s

Association (SEWA) in Gujarat.

Sep 26, 1975 – Rural bank Ordinance was passed.

Oct 02, 1975 – Prathama bank (first RRB) came into existence.

1976 – Ordinance was replaced by Regional Rural Bank Act.

July 12, 1982 – NABARD was established on the recommendations of Shivaraman Committee, by an act of Parliament to implement the National Bank for Agriculture and Rural Development Act 1981.

Evolution of Microfinance in India Apr 02, 1990 – SIDBI was established through Small

Industries Development Bank of India Act 1989.

1992 – NABARD launched SHGs-Bank Linkage program.

1999 – SIDBI created Microcredit (SFMC) to create a national network of strong, viable and sustainable Microfinance Institutions from the informal and formal financial sector to provide microfinance services to the poor, especially women’’.

2006 – NABARD launched the ‘Micro-Enterprise Development Programme’ (MEDP) for skill development.

Microcredit vs. Microfinance

Microcredit 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 microcredit, savings, insurance, money transfers, and other financial products targeted at poor and low-income people.

Microfinance Institutions (MFIs)The proposed Microfinance Services Regulations Bill defines

MFI as “an organization of association of individuals including the following if it is established for the purpose of carrying on the business of extending microfinance services:

A society registered under Societies Registration Act 1860 A trust created under Indian Trust Act 1880 or public trust

registered under any state enactment governing trust or public, religious or charitable purposes.

A cooperative society/mutual benefit society/mutually aided society registered under any state enactment relating to such societies or any multistate cooperative society registered under Multi State Cooperative Society Act 2002 but not including: A cooperative bank as defined in clause (cci) of section 5 of Banking

Regulation Act 1949 or A cooperative society engaged in agricultural operations or

industrial activity or purchase or sale of any goods or services.”

Microfinance Institutions (MFIs)Microfinance institutions in India are registered as

one of the following five entities:

Non Government Organizations engaged in microfinance (NGO-MFIs), comprised of Societies and Trusts

Cooperatives registered under the conventional state-level cooperative acts, the national level multi-state Cooperative Legislation Act (MSCA 2002), or under the new state-level Mutually Aided Cooperative acts (MACS Act)

Section 25 Companies (not-for-profit)

For-profit Non-Banking Financial Companies (NBFCs)

NBFC-MFIs

NGO-MFIs, Cooperatives and Section 25 Companies

Microfinance institutions operating as a non-profit company operate as either an NGO-MFI, Cooperative, or Section 25. Each is structured slightly differently in terms of ability to accept equity investments and dividends. There exists little regulation that applies to these structures, aside from registration requirements.

NBFCs

The NBFC encompasses many different types of financial companies, which are all subject to the same regulatory requirements. Many microfinance institutions have recently registered as NBFCs to take advantage of access to capital markets. Microfinance institutions operating as NBFCs account for the great majority of the microfinance market in India.

NBFC-MFIs

For-profit institutions that qualify for priority sector lending funds are registered as NBFC-MFIs. This NBFC sub-category was created by RBI in May 2011 as a way to classify NBFCs operating as microfinance institutions which meet certain requirements. Currently, it is unclear how many NBFCs will elect to register as NBFC-MFIs, and how many will continue to operate as NBFCs.

Self Help Group (SHGs)

A SHG is a group of 15 to 20 members from very low income families, usually women, which mobilises savings from members and uses the pooled funds to give loans to those members who need them, with the interest rates on deposits and loans being determined entirely by members. 

- Reserve Bank of India

Joint Liability Group (JLGs)

JLG is an informal group of individuals coming together for the purpose of availing of bank loan either singly or through the group mechanism against mutual guarantee in order to engage in similar type of economic activities.

- Reserve Bank of India

Difference between SHG and JLG The SHG would normally consist of 10 to 20 members

whereas a JLG would normally have between 4 and 10 members.

The maximum amount of loan to SHGs should not exceed four times of the savings of the group. The limit may be exceeded in case of well managed SHGs subject to a ceiling of ten times of savings of the group. JLGs are not obliged to keep deposits with the bank and hence the amount of loan granted to JLGs would be based on the credit needs of the JLG and the bank's assessment of the credit requirement.

In case of a SHG the individual carries the responsibilities whereas in case of JLG all members share responsibility and stand as guarantee for each other.

Channels for MicrofinanceThe players in the Microfinance sector can be classified as

falling into three main groups: The SHG-Bank Linkage Model Non-Banking Finance Companies Others including trusts, societies, etc

58%

34%

8%

Outstanding Loan Portfolio as on 31-Mar-2011

SHG-Bank Linkage ModelNBFCOthers

Source: RBI

SHG-Bank Linkage Model

The SHG-Bank Linkage Model was pioneered by NABARD in 1992. Under this model, women in a village are encouraged to form a Self help Group (SHG) and members of the Group regularly contribute small savings to the Group. These savings which form an ever growing nucleus are lent by the group to members, and are later supplemented by loans provided by banks for income-generating activities and other purposes for sustainable livelihood promotion. The Group has weekly/monthly meetings at which new savings come in, and recoveries are made from members towards their loans from the SHGs, their federations, and banks. NABARD provides grants, training and capacity building assistance to Self Help Promoting Institutions (SHPI), which in turn act as facilitators/ intermediaries for the formation and credit linkage of the SHGs.

SHG-Bank Linkage Model

Model 1: In this model, the bank itself acts as a Self Help Group Promoting institution (SHPI). It takes initiatives in forming the groups, nurtures them over a period of time and then provides credit to them after satisfying itself about their maturity to absorb credit.  

SHG-Bank Linkage Model

Model 2: In this model, groups are formed by NGOs (in most of the cases) or by government agencies. The groups are nurtured and trained by these agencies. The bank then provides credit directly to the SHGs, after observing their operations and maturity to absorb credit. While the bank provides loans to the groups directly, the facilitating agencies continue their interactions with the SHGs. Most linkage experiences begin with this model with NGOs playing a major role. This model has also been popular and more acceptable to banks, as some of the difficult functions of social dynamics are externalized.

SHG-Bank Linkage Model

Model 3: Due to various reasons, banks in some areas are not in a position to even finance SHGs promoted and nurtured by other agencies. In such cases, the NGOs act as both facilitators and micro- finance intermediaries. First, they promote the groups, nurture and train them and then approach banks for bulk loans for on-lending to the SHGs.  

Progress of SHG-Bank Linkage Model

2010-11 2011-12 2012-130

50

100

150

200

250

300

350

400

450

70.16

145.48

312.21

65.51

165.35

363.4

82.17

205.85

393.75

SHG saving with banks as on 31st March

Loans disbursed to SHGs during the year

Amt in Rs. Hundred Crore

Source: NABARD

Non-Banking Financial Companies (NBFCs)

Under the NBFC model, NBFCs encourage villagers to form Joint Liability Groups (JLG) and give loans to the individual members of the JLG. The individual loans are jointly and severally guaranteed by the other members of the Group. Many of the NBFCs operating this model started off as non-profit entities providing micro-credit and other services to the poor. However, as they found themselves unable to raise adequate resources for a rapid growth of the activity, they converted themselves into for-profit NBFCs. Others entered the field directly as for-profit NBFCs seeing this as a viable business proposition. Significant amounts of private equity funds have consequently been attracted to this sector.

Priority Sector Lending

Priority sector refers to those sectors of the economy which may not get timely and adequate credit in the absence of this special dispensation. Typically, these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections. - RBI

Priority Sector includes the following categories: Agriculture Micro and Small Enterprises Education Housing Export Credit Others

Priority Sector LendingCategories Domestic

Commercial Banks/Foreign Banks with 20 or more branches (as % of ANBC or credit equivalent)

Foreign Banks with less than 20 branches (as % of ANBC or credit equivalent)

Total Priority Sector 40 32

Total Agricultural 18 No specific target

Advances to weaker sections

10 No specific targetSource: Reserve bank of India

Adjusted Net Bank Credit (ANBC) or credit equivalent of Off-Balance Sheet Exposures denotes the outstanding as on March 31 of the previous year.

Malegam Committee Recommendations

The RBI appointed Mr. Y. H. Malegam Committee (the Sub-Committee of the Central Board of Directors of Reserve Bank of India to study issues and concerns in the MFI Sector related to the entities regulated by the Bank) has submitted its report to the RBI in January 2011. The composition of the committee was:

Sh. Y. H. Malegam – Chairman Sh. Kumar Manglam Birla Dr. K. C. Chakrabarty Smt. Shahsi Rajagopalan Prof. U. R. Rao Sh. V. K. Sharma (Executive Director) – Member Secretary

Malegam Committee RecommendationsThe subcommittee recommended creation of a separate

category of NBFCs operating in the microfinance sector to be designated as NBFC-MFIs. To qualify as an NBFC-MFI, the NBFC should be “a company which provides financial services pre-dominantly to low-income borrowers, with loans of small amounts, for short-terms, on an unsecured basis, mainly for income-generating activities, with repayment schedules which are more frequent than those normally stipulated by commercial banks” and which further satisfies the regulations specified in that behalf. The subcommittee has also recommended some additional qualifications which are:

The NBFC-MFI will hold not less than 85% of its total assets (other than cash and bank balances and money market instruments) in the form of qualifying assets.

There are limits of an annual family income of Rs. 50,000 and an individual ceiling on loans to a single borrower of Rs. 25, 000.

Not less than 75% of the loans given by the MFI should be for income-generating purposes.

Malegam Committee Recommendations

The Sub-Committee has recommended that bank lending to NBFCs which qualify as NBFC-MFIs will be entitled to “priority lending” status. With regard to the interest chargeable to the borrower, the Sub-Committee has recommended an average “margin cap” of 10 per cent for MFIs having a loan portfolio of Rs. 100 crore and of 12 per cent for smaller MFIs and a cap of 24% for interest on individual loans. It has also proposed that, in the interest of transparency, an MFI can levy only three charges, namely,

Processing fee Interest and Insurance charge

Malegam Committee Recommendations

The Sub-committee has made a number of recommendations to mitigate the problems of multiple-lending, over borrowing, ghost borrowers and coercive methods of recovery. These include:

A borrower can be a member of only one SHG or a  Joint Liability Group JLG.

Not more than two MFIs can lend to a single borrower. There should be a minimum period of moratorium between the

disbursement of loan and the commencement of recovery. The tenure of the loan must vary with its amount. A Credit Information Bureau has to be established.  The primary responsibility for avoidance of coercive methods of

recovery must lie with the MFI and its management. The Reserve Bank must prepare a draft Customer Protection Code

to be adopted by all MFIs. There must be grievance redressal procedures and establishment

of ombudsmen. All MFIs must observe a specified Code of Corporate Governance.

Regulators in Indian Microfinance The NBFC-MFIs are regulated by the Reserve Bank of India. The insurance products offered by NBFC-MFIs come under

the purview of Insurance Regulatory and Development Authority (IRDA).

The pension products offered by NBFC-MFIs come under the purview of Pension Fund Regulatory and Development Authority (PFRDA).

Section 35(6) of the Banking Regulation Act, 1949, empowers NABARD to conduct inspection of State Cooperative Banks (SCBs), Central Cooperative Banks (CCBs) and Regional Rural Banks (RRBs). In addition, NABARD has also been conducting periodic inspections of state level cooperative institutions such as State Cooperative Agriculture and Rural Development Banks (SCARDBs), Apex Weavers Societies, Marketing Federations etc., on a voluntary basis.

Currently very little or no regulation to not-for-profit organizations.

Proposed Microfinance Bill recommends RBI to be sole regulator for microfinance industry.

Andhra Pradesh Microfinance Crisis of 2010 The state of Andhra Pradesh experienced a impressive

expansion of microfinance operations from the 1990s into the 2000s, becoming known as the ‘Mecca of Microfinance’ in India.

In October of that year a media storm blew up over the suicides of close to 50 microcredit clients whom, it was claimed, had taken their lives under the duress of crippling debt burdens and coercive repayment tactics initiated by microfinance employees.

Considerable anger was vented at microfinance institutions that were seen to be accumulating riches at the expense of the poor.

One government official quipped that, “The money lender lives in the community, at least you can burn down his house. With these companies, it is loot and scoot.”

Andhra Pradesh Microfinance Crisis of 2010 In response, the Andhra Pradesh government clamped down

on MFIs. The government passed and ordinance and later Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act 2010, effectively shutting down all private sector microfinance operations.

key restriction posed by the act were: Every MFI has to register before the Registering Authority of the district.

No member of an SHG can be a member of more than one SHG. All loans by MFIs have to be without collateral. All MFIs have to display the rates of interest in their premises. The recovery towards interest cannot exceed the principal

amount. No MFI can give a further loan to a SHG or its member without

the approval of the registering authority where there is an outstanding bank loan.

Every MFI has to give to the borrower a statement of his account and acknowledgements for all payments received from him.

Andhra Pradesh Microfinance Crisis of 2010

All repayments have to be made at the office of the Gram Panchayat or at a designated public place.

MFIs cannot use agents for recovery or use coercive methods of recovery.

All MFIs have to submit to the Registering Authority a monthly statement giving specified details.

In each district, a Fast-Track Court is to be established for protection of debtors and settlement of disputes.

These are penalties for failure to register and for coercive acts of recovery.

Loan recoveries have to be made only by monthly instalments.

The main rationale was that these MFIs are using SHG to expand their borrowers through predatory lending, charging usurious interest rates and using weekly recovery system, recovery agents and coercive techniques.

Andhra Pradesh Microfinance Crisis of 2010

Andhra Pradesh Microfinance suffered heavily due to the crisis and growth rate went into negative,

The spillover effect was also felt by overall sector as even the total growth went downwards.

Source: Micro-Credit Rating International Ltd. (M-CRIL)

Some data about Microfinance in India As on Mar 31 2012, total employee strength of MFIs was

72765, 11% of them being women.

Around 97% of MFI clients are women.

Average loan outstanding in FY 2011-12 was Rs. 7509, up by 10% from previous year.

As on Mar 31 2012, there was 9743 MFI branches across 26 states. One microfinance branch served 2070 clients on average. There was 307 clients per employee.

In percentage terms NPA against loans to SHGs increased from 6.09% in 2011-12 to 7.08% during 2012-13.

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