Role of Non-Banking Financial Companies in Promoting Microfinance

RAISON SAM RAJU

Objectives 1. To study the role of Non-banking financial companies in extending

finance to poor and weaker section of the society.2. To have an understanding about NBFC.

Microfinance Microfinance is a general term to describe financial services to low-income individuals or to those who do not have access to typical banking services. Microfinance is also the idea that low-income individuals are capable of lifting themselves out of poverty if given access to financial services.

Micro Finance Challenges Risk management challenges due to information asymmetry problems

Accessibility (geographic accessibility and easiness to deal with)

75% population lives in rural areas: geographical access difficult

Illiteracy: difficult to deal with traditional services

High dependence on informal sources◦ 36% of rural credit from informal sources◦ Dependence even higher for lower income households: 78%

Lack of long-term finance to pay for creation of the necessary infrastructure and pre-operative expense

Lack of well trained staff in adequate numbers at all levels

NBFC & Micro FinanceFactors supporting NBFC in the area of

Micro FinancePresence in rural and unbanked areas.

Less restrictions

Tailor made services

Minimal Documentation

Wide range of financial services such as, Hire purchase, equipment leasing

Better infrastructural facility

Efficient management

Sufficient risk capital

NBFC-SHG LINKAGE Self-Help Group may be registered or unregistered. It typically comprises a group of micro entrepreneurs having homogenous social and economic backgrounds; all voluntarily coming together to save regular small sums of money, mutually agreeing to contribute to a common fund and to meet their emergency need.

Advantages of financing through SHG’s

An economically poor individual gains strength as part of a group.Besides, financing through SHGs reduces transaction costs for both lenders and borrowers.Lenders have to handle only a single SHG account instead of a large number of small-sized individual accounts. borrowers as part of an SHG cut down expenses on travel (to & from the branch and other places) for completing paper work and on the loss of workdays in canvassing for loans.

NBFC-SHG Linkage ModelBasic Model

Bank SHG

NBFC – SHG Model

NABARD/AGENCY NBFC SHG

Conclusion