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Chapter 1:
Introduction
DisThe borrower is responsible for implementing the project according to the loanagreement and other agreements. On its part, ADB monitors the project and
reviews its progress to ensure that the loan proceeds are spent as agreed upon.
Loan Account
When a loan becomes effective, the loan amount is not paid to the borrower.
Instead, a loan account is opened in ADB¶s books in the name of the borrower and
the loan amount is credited to that account.
Discussion of Disbursement Procedures
During project appraisal and loan negotiations, ADB¶s different disbursement
procedures are discussed in detail by the borrower and ADB. These discussions are
important because they allow the borrower and ADB to identify the disbursement
procedures most suitable for the project.
Disbursement Letter
After the loan agreement is signed, Loan Administration Division
(CTLA) sends a disbursement letter (see Appendix 4) to the borrower outlining the
disbursement procedures and other related arrangements for financial
administration of the project. A copy of ADB¶s Disbursement
Handbook is enclosed with the letter.
Actions to Be Taken by the Borrower
As soon as the loan has become effective, and to expedite the disbursement, the borrower
� recruits qualified accountants and establishes sound internal control and
accounting systems in executing and implementing agencies; reviews Schedule 3
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of the loan agreement. The Schedule provides details of ADB financing such as
amount, percentages, items of financing, and applicable conditions of financing;
� maintains records for all signed contracts in a contract ledger for reference;
Loan Disbursement Handbook
DISBURSEMENT GUIDELINES AND PRACTICES
1 ³US$100,000´ in this Handbook refers to US dollars 100,000 or its equivalent.
2 Refer to ADB Procurement Guidelines, April 2006, Appendix 1 paragraph 3.
� forwards to ADB (sector division or resident mission concerned) two copies of
each signed contract with a value of more than US$100,000.1 For contracts
US$100,000 or less, forwards copies of the signed contract to
ADB only if requested (see paragraph 9.17); and
� obtains ADB¶s approval for contract variations that are subject to ADB¶s prior
review and would in aggregate increase the original value of the contract by more
than 15% of the original amount.2
Basic Requirements for Disbursement
The first withdrawal from the loan account requires that
� ADB declared the loan effective;
� The borrower submitted to ADB sufficient evidence of the authority of the
person(s) who will sign withdrawal applications on behalf of the borrower,
together with the authenticated specimen signature of each authorized person. (Any
subsequent change in the list of authorized representatives must be reported
immediately and authenticated specimen signatures of new representatives must
also be provided); and
� Disbursement conditions as specified in the loan agreements are met.
Preparation of withdrawal application for final disbursement(s) of project loan and
tranche disbursement of a program loan should be closely coordinated between
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ADB and borrower/EA especially if the remaining unutilized balance is expected
to be fully utilized.
Withdrawal Application
4.8 For all withdrawals, ADB must receive a withdrawal application in the
prescribed form. A withdrawal application is a written request from the borrower
to ADB to pay funds against the borrower¶s loan account. The application must
reach ADB before the loan closing date.
A withdrawal application consists of
� The application itself in letter form (see Appendixes 5, 6, and 7 for sample
formats);
� Summary sheet(s) for each category claimed (see Appendixes 8 and 9 for sample
formats); and
� supporting documents, if required (see Appendix 10).
Loan Disbursement Handbook
Eligible/Ineligible Expenditures
ADB will only finance eligible expenditures (see Appendix 11).
Expenditures eligible for financing are generally detailed in the RRP.
Disallowances/Nonpayments
Where ADB disallows or adjusts the amount of withdrawal the borrower
requested, ADB sends an advice by fax or e-mail to the borrower and/or EA citing
the loan and withdrawal application number, amount applied for, amount paid, and
reason for nonpayment or partial payment.
For nonpayment or adjusted settlement of condiment claims, ADB sends an advice
to the negotiating or advising bank by authenticated SWIFT or tested telex citing
the commitment letter number, letter of credit (LC) number, and reason for
nonpayment or adjusted settlement. Copy of this advice is furnished to the EA for
information.
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guarantee provided by the contractor or supplier to the EA. The unconditional bank
guarantee is issued in compliance with the borrowing government¶s financial rules
and regulations, by a reputable bank in the country of the borrower in a manner
acceptable to ADB.
Audited Project Accounts and Financial Statements
ADB loan proceeds shall be used only for the purposes for which the loan was
approved with due attention to economy and efficiency (Article 14 [xi]). To meet
these requirements, EAs are to submit audited project accounts (APA) regularly
during project implementation.
EAs are required to submit audited project accounts and financial statements
(AFS) not more than 6 months3 after the close of the fiscal/financial year, as
specified in the relevant loan agreement, to sector division or RM for their review
and necessary action.
Follow-up Action for Audit Findings of Serious Nature
20 In case of audit findings of serious nature, e.g., misappropriation or diversion of
funds, non-submission of supporting documents, use of funds for non project
related activities, etc., suitable action shall be immediately initiated/ taken by the
executing agency, under intimation to the auditor and ADB.
Delay in Submission of APA or AFS
When the APA or AFS is not received within 6 months after the due date,
ADB will hold processing of requests for new contract awards, and disbursement
of replenishment to imprested accounts, reimbursement, and issuance of
commitment letters. When the APA or AFS is not received within
12 months after the due date, ADB may suspend borrower¶s rights to withdraw
loan proceeds. However, the suspension of withdrawal does not affect
disbursements committed through outstanding letters of credit under the ADB¶s
commitment procedure. Such commitments are irrevocable and
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ADB is obliged to disburse even after the loan has been suspended.
The reporting period can be extended to nine 9 months
Microfinance is defined as any activity that includes the provision of financial
services such as credit, savings, and insurance to low income individuals which fall
just above the nationally defined poverty line, and poor individuals which fall
below that poverty line, with the goal of creating social value. The creation of
social value includes poverty alleviation and the broader impact of improving
livelihood opportunities through the provision of capital for micro enterprise, and
insurance and savings for risk mitigation and consumption smoothing. A large
variety of actors provide microfinance in India, using a range of microfinance
delivery methods. Since the ICICI Bank in India, various actors have endeavored
to provide access to financial services to the poor in creative ways. Governments
also have piloted national programs, NGOs have undertaken the activity of raising
donor funds for on-lending, and some banks have partnered with public
organizations or made small inroads themselves in providing such services. This
has resulted in a rather broad definition of microfinance as any activity that targets poor and low-income individuals for the provision of financial services. The range
of activities undertaken in microfinance include group lending, individual lending,
the provision of savings and insurance, capacity building, and agricultural business
development services. Whatever the form of activity however, the overarching
goal that unifies all actors in the provision of microfinance is the creation of social
value.
Microfinance Definition
According to International Labor Organization (ILO), ³Microfinance is an
economic
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development approach that involves providing financial services through
institutions to low income clients´. In India, Microfinance has been defined by
³The National Microfinance Taskforce, 1999´ as ³provision of thrift, credit and
other financial services and products of very small amounts to the poor in rural,
semi-urban or urban areas for enabling them to raise their income levels and
improve living standards´.
"The poor stay poor, not because they are lazy but because they have no access to
capital."
The dictionary meaning of µfinance¶ is management of money. The management of
money denotes acquiring & using money. Micro Finance is buzzing word, used
when financing for micro entrepreneurs. Concept of micro finance is emerged in
need of meeting special goal to empower under-privileged class of society, women,
and poor, downtrodden by natural reasons or men made; caste, creed, religion or
otherwise. The principles of Micro Finance are founded on the philosophy of
cooperation and its central values of equality, equity and mutual self-help. At the
heart of these principles are the concept of human development and the
brotherhood of man expressed through people working together to achieve a better
life for themselves and their children.
Traditionally micro finance was focused on providing a very standardized credit
product. The poor, just like anyone else, (in fact need like thirst) need a diverse
range of financial instruments to be able to build assets, stabilize consumption and
protect themselves against risks. Thus, we see a broadening of the concept of micro
finance--- our current challenge is to find efficient and reliable ways of providing a
richer menu of micro finance products.
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Micro Finance is not merely extending credit, but extending credit to those who
require most for their and family¶s survival. It cannot be measured in term of
quantity, but due weight age to quality measurement. How credit availed is used to
survive and grow with limited means.
Activities in Microfinance
Microcredit: It is a small amount of money loaned to a client by a bank or other
institution.
Microcredit can be offered, often without collateral, to an individual or through
group lending.
Micro savings: These are deposit services that allow one to save small amounts of
money for future use. Often without minimum balance requirements, these savings
accounts allow households to save in order to meet unexpected expenses and plan
for future expenses.
Micro insurance: It is a system by which people, businesses and other
organizations make a payment to share risk. Access to insurance enables
entrepreneurs to concentrate more on developing their businesses while mitigating
other risks affecting property, health or the ability to work.
Remittances: These are transfer of funds from people in one place to people in
another, usually across borders to family and friends. Compared with other sources
of capital that can fluctuate depending on the political or economic climate,
remittances are a relatively steady source of funds.
1.4 Legal Regulation
Banks in India are regulated and supervised by the Reserve Bank of India (RBI)
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at around Rs 7000 crores in the Indian banks¶ credit outstanding. As against this,
according to even the most conservative estimates, the total demand for credit
requirements for this part of Indian society is somewhere around Rs 2,00,000
crores.
Microfinance changing the face of poor Nigerian
Micro-Finance is emerging as a powerful instrument for poverty alleviation in the
new economy. In India, micro-Finance scene is dominated by Self Help Groups
(SHGs) - Banks linkage Programme, aimed at providing a cost effective
mechanism for providing financial services to the 'unreached poor'. In the Indian
context terms like "small and marginal farmers", " rural artisans" and
"economically weaker sections" have been used to broadly define micro-finance
customers. Research across the globe has shown that, over time, microfinance
clients increase their income and assets, increase the number of years of schooling
their children receive, and improve the health and nutrition of their families.
A more refined model of micro-credit delivery has evolved lately, which
emphasizes the combined delivery of financial services along with technical
assistance, and agricultural business development services. When compared to the
wider SHG bank linkage movement in India, private MFIs have had limited
outreach. However, we have seen a recent trend of larger microfinance institutions
transforming into Non-Bank Financial Institutions (NBFCs). This changing face of
microfinance in India appears to be positive in terms of the ability of microfinance
to attract more funds and therefore increase outreach.
In terms of demand for micro-credit or micro-finance, there are three segments,
which demand funds. They are:
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�At the very bottom in terms of income and assets, are those who are landless and
engaged in agricultural work on a seasonal basis, and manual laborers in forestry,
mining, household industries, construction and transport. This segment requires,
first and foremost, consumption credit during those months when they do not get
labor work, and for contingencies such as illness. They also need credit for
acquiring small productive assets, such as livestock, using which they can generate
additional income. The next market segment is small and marginal farmers and
rural artisans, weavers and those self-employed in the urban informal sector as
hawkers, vendors, and workers in household micro-enterprises. This segment
mainly needs credit for working capital, a small part of which also serves
consumption needs. This segment also needs term credit for acquiring additional
productive assets, such as irrigation pumpsets, borewells and livestock in case of
farmers, and equipment (looms, machinery) and worksheds in case of non-farm
workers. The third market segment is of small and medium farmers who have gone
in for commercial crops such as surplus paddy and wheat, cotton, groundnut, and
others engaged in dairying, poultry, fishery, etc. Among non-farm activities, thissegment includes those in villages and slums, engaged in processing or
manufacturing activity, running provision stores, repair workshops, tea shops, and
various service enterprises. These persons are not always poor, though they live
barely above the poverty line and also suffer from inadequate access to formal
credit.
Well these are the people who require money and with Microfinance it is possible.Right now the problem is that, it is SHGs' which are doing this and efforts should
be made so that the big financial institutions also turn up and start supplying funds
to these people.
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Today Nigeria is facing major problem in reducing poverty. About 25 million
people in India are under below poverty line. With low per capita income, heavy
population pressure, prevalence of massive unemployment and underemployment ,
low rate of capital formation , misdistribution of wealth and assets , prevalence of
low technology and poor economics organization and instability of output of
agriculture production and related sectors have made Nigeria one of the poor
countries of the world.
Nigeria falls under low income class according to World Bank. It is firth populated
country in the world and around 70 % of its population lives in rural area. 60% of
people depend on agriculture, as a result there is chronic underemployment and per
capital income is only $ 3262. This is not enough to provide food to more than one
individual. The obvious result is abject poverty, low rate of education, low sex
ratio, and exploitation. The major factor account for high incidence of rural
poverty is the low asset base. According to Reserve Bank of India, about 51 % of
people house possess only 10% of the total asset of Nigeria .This has resulted low
production capacity both in agriculture (which contribute around 22-25% of GDP )and Manufacturing sector. Rural people have very low access to institutionalized
credit ( from commercial bank).
Poverty alleviation programmes and concepualisation of Microfinance:
There has been continuous efforts of planners of Nigeria in addressing the poverty
. They Have come up with development programmes like Integrated Rural
Development progamme (IRDP), National Rural Employment Programme (NREP)
, Rural Labour Employment Guarantee Programme (RLEGP) etc. But these
progamme have not been able to create massive impact in poverty alleviation. The
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production oriented approach of planning without altering the mode of production
could not but result of the gains of development by owners of instrument of
production. The mode of production does remain same as the owners of the
instrument have low access to credit which is the major factor of production. Thus
in Nineties National bank for agriculture and rural development (NABARD)
launches pilot projects of Microfinance to bridge the gap between demand and
supply of funds in the lower rungs of rural economy. The buzzing word of this
decade was meant to cure the illness of rural economy. With this concept of Self
Reliance, Self Sufficiency and Self Help gained momentum.
Debt and Investment Survey, GoI, 1992
The households with a lower asset size were unable to find financing options from
formal credit disbursement sources. This was due to the requirement of physical
collateral by banking and financial institutions for disbursing credit. For
households with less than Rs 20,000 worth of physical assets, the most convenient
source of credit was non institutional agencies like landlords, moneylenders,
relatives, friends, etc.
Looking at the findings of the study commissioned by Asia technical Department
of the World Bank (1995), the purpose or the reason behind taking credit by the
rural poor was consumption credit, savings, production credit and insurance.
Consumption credit constituted two-thirds of the credit usage within which almost
three-fourths of the demand was for short periods to meeting emergent needs such
as illness and household expenses during the lean season. Almost entire demand
for the consumption credit was met by informal sources at high to exploitive
interest rates that varied from 30 to 90 per cent per annum.
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the system functions. This system is called the existing system. Now the existing
system is subjected to close study and problem areas are identified. The designer
now functions as a problem solver and tries to sort out the difficulties that the
enterprise faces. The solutions are given as proposals. The proposal is then
weighed with the existing system analytically and the best one is selected. The
proposal is presented to the user for an endorsement by the user. The proposal is
reviewed on user request and suitable changes are made. This is loop that ends as
soon as the user is satisfied with proposal.
Preliminary study is the process of gathering and interpreting facts, using the
information for further studies on the system. Preliminary study is problem solving
activity that requires intensive communication between the system users and
system developers. It does various feasibility studies.
FEASIBILITY STUDY
Feasibility study is made to see if the project on completion will serve the
purpose of the organization for the amount of work, effort and the time that spendon it. Feasibility study lets the developer foresee the future of the project and the
usefulness. A feasibility study of a system proposal is according to its workability,
which is the impact on the organization, ability to meet their user needs and
effective use of resources. Thus when a new application is proposed it normally
goes through a feasibility study before it is approved for development.
The document provide the feasibility of the project that is being designed and
lists various areas that were considered very carefully during the feasibility study
of this project such as Technical, Economic and Operational feasibilities. The
following are its features:
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TECHNICAL FEASIBILITY
The system must be evaluated from the technical point of view first. The
assessment of this feasibility must be based on an outline design of the system
requirement in the terms of input, output, programs and procedures. Having
identified an outline system, the investigation must go on to suggest the type of
equipment, required method developing the system, of running the system once it
has been designed.
Technical issues raised during the investigation are:
Does the existing technology sufficient for the suggested one?
Can the system expand if developed?
The project should be developed such that the necessary functions and
performance are achieved within the constraints. The project is developed within
latest technology. Through the technology may become obsolete after some period
of time, due to the fact that never version of same software supports older versions,
the system may still be used. So there are minimal constraints involved with this
project. The system has been developed using Java the project is technically
feasible for development.
ECONOMIC FEASIBILITY
The developing system must be justified by cost and benefit. Criteria to ensure
that effort is concentrated on project, which will give best, return at the earliest.
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The role of micro-finance bank
Micro-finance bank play today a major role in poverty alleviation in rural Nigeria.
A growing number of poor people (mostly women) in various parts of Nigeria are
members of micro-finance bank and actively engage in savings and credit (S/C), as
well as in other activities (income generation, natural resources management,
literacy, child care and nutrition, etc.). The S/C focus in the micro-finance bank is
the most prominent element and offers a chance to create some control over
capital, albeit in very small amounts. The micro-finance bank system has proven to
be very relevant and effective in offering women the possibility to break gradually
away from exploitation and isolation.
3.1 How self-help groups work
NABARD (1997) defines micro-finance bank as "small, economically
homogenous affinity groups of rural poor, voluntarily formed to save and mutually
contribute to a common fund to be lent to its members as per the group members'
decision".
23
Most micro-finance bank in India have 10 to 25 members, who can be either only
men, or only women, or only youth, or a mix of these. As women's SHGs or sangha have been promoted by a wide range of government and non- governmental
agencies, they now make up 90% of all micro-finance bank
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The rules and regulations of micro-finance bank vary according to the preferences
of the members and those facilitating their formation. A common characteristic of
the groups is that they meet regularly (typically once per week or once per
fortnight) to collect the savings from members, decide to which member to give a
loan, discuss joint activities (such as training, running of a communal business,
etc.), and to mitigate any conflicts that might arise. Most micro-finance bank have
an elected chairperson, a deputy, a treasurer, and sometimes other office holders.
Most micro-finance bank start without any external financial capital by saving
regular contributions by the members. These contributions can be very small (e.g.
10 Rs per week). After a period of consistent savings (e.g. 6 months to one year)
the micro-finance bank start to give loans from savings in the form of small
internal loans for micro enterprise activities and consumption. Only those micro-
finance bank that have utilized their own funds well are assisted with external
funds through linkages with banks and other financial intermediaries.
However, it is generally accepted that SHGs often do not include the poorest of the
poor, for reasons such as:
(a) Social factors (the poorest are often those who are socially marginalized
because of caste affiliation and those who are most skeptical of the potential
benefits of collective action).
(b) Economic factors (the poorest often do not have the financial resources to
contribute to the
savings and pay membership fees; they are often the ones who migrate during the
lean season,
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thus making group membership difficult).
(c) Intrinsic biases of the implementing organizations (as the poorest of the poor
are the most difficult to reach and motivate, implementing agencies tend to leave
them out, preferring to focus on the next wealth category).
Sources of capital and links between micro-finance bank and Banks
Micro-finance bank can only fulfill a role in the rural economy if group members
have access to financial capital and markets for their products and services. While
the groups initially generate their own savings through thrift (whereby thrift
implies savings created by postponing almost necessary consumption, while
savings imply the existence of surplus wealth), their aim is often to link up with
financial institutions in order to obtain further loans for investments in rural
enterprises. NGOs and banks are giving loans to SHGs either as "matching loans"
(whereas the loan amount is proportionate to the group's savings) or as fixed
amounts, depending on the group's record of repayment, recommendations by
group facilitators, collaterals provided, etc.
How micro-finance bank save
Self-help groups mobilize savings from their members, and may then on-lend these
funds to one another, usually at apparently high rates of interest which reflect the
members¶ understanding of the high returns they can earn on the small sums
invested in their micro-enterprises, and the even higher cost of funds from money
lenders. If they do not wish to use the money, they may deposit it in a bank. If the
members¶ need for funds exceeds the group¶s accumulated savings, they may
borrow from a bank or other organization, such as a micro-finance non-
government organization, to augment their own fund.
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The system is very flexible. The group aggregates the small individual saving and
borrowing requirements of its members, and the bank needs only to maintain one
account for the group as a single entity. The banker must assess the competence
and integrity of the group as a micro-bank, but once he has done this he need not
concern himself with the individual loans made by the group to its members, or the
uses to which these loans are put. He can treat the group as a single customer,
whose total business and transactions are probably similar in amount to the average
for his normal customers, because they represent the combined banking business of
some twenty µmicro-customers¶. Any bank branch can have a small or a large
number of such accounts, without having to change its methods of operation.
Unlike many customers, demand from SHGs is not price-sensitive. Illiterate village
women are sometimes better bankers than some with more professional
qualifications. They know that rapid access to funds is more important than their
cost, and they also know, even though they might not be able to calculate the
figures, that the typical micro-enterprise earns well over 500% return on the small
sum invested in it (Harper, M, 1997, p. 15). The groups thus charge themselveshigh rates of interest; they are happy to take advantage of the generous spread that
the NABARD subsidized bank lending rate of 12% allows them, but they are also
willing to borrow from NGO/MFIs which on-lend funds from SIDBI at 15%, or
from µnew generation¶ institutions such as Basix Finance at 18.5% or 21%.
micro-finance bank Bank Linkage Model
NABARD is presently operating three models of linkage of banks with SHGs and
NGOs:
Model ± 1: In this model, the bank itself acts as a Self Help Group Promoting
Institution (SHPI).
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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. About 16% of SHGs and 13% of loan amounts are using this model (as of
March 2002).
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. About 75% of SHGs and 78% of
loan amounts are using this model.
Model ± 3: Due to various reasons, banks in some areas are not in a position to
even finance
micro-finance bank 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 micro-finance bank. About 9% of SHGs and 13% of loan
amounts are using this model.
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Comparative Analysis of Micro-finance Services offered to the poor
Source: R. Arunachalam - Alternative Technologies in the Indian Micro- finance
Industry
3.5 Life insurances for self-help group members
The United India Insurance Company has designed two PLLIs (personal line life
insurances) for women in rural areas. The company will be targeting self-help
groups, of which there are around 200,000 in the country, with 15-20 women in a
group. The two policies are
(1) the Mother Teresa Women & Children Policy, with the aim of giving to the
woman in the event of accidental death of her husband and to support her minor
children in the event of her death, and
(2) The Unimicro Health Scheme, giving personal accident and hospitalization
covers besides
cover for damage to dwelling due to fire and allied perils.