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Micro-finance

B.V.Raghunandan,SVS College,

Bantwal

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Micro-Finance: the Background

• Loans from Organised Sector was security oriented, big in size,and procedure-ridden

• Mohammad Yunus getting a Nobel Prize for the activities of Grameen Bank of Bangla Desh attracted the attention of the financial world

• C.K.Prahlad advocating the Bottom of the Pyramid approach to inclusive development

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Money-lenders: the Fore-runners

• Money lenders adopted a flexible system to suit the borrowers of micro-finance

• Instead developing a similar model, the Government and RBI tried to curb their activities

• Only NBFC institutions were regulated• Individuals operated as ever• Only after 2000, there is a change in the

policy

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Definition of Micro-finance

• MICROCREDIT IS THE EXTENSION OF SMALL LOANS TO ENTREPRENEURS TOO POOR TO QUALIFY FOR TRADITIONAL BANK LOANS. IN DEVELOPING COUNTRIES ESPECIALLY, MICROCREDIT ENABLES VERY POOR PEOPLE TO ENGAGE IN SELF-EMPLOYMENT PROJECTS THAT GENERATE INCOME - WIKIPEDIA

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Features of Microfinance

• Borrowers are the poor• Small Amounts of loans• For Production, Consumption or House

Construction and Shelter Improvement• Lenders use Intermediaries• Group Based Lending• A large Number of Financial Services• Simple Procedure• No Security

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Functions/Role of Microfinance Institutions

• Providing loans• Accepting deposits• Remittance of Funds• Issue of credit

cards/debit cards/ATM cards

• Life-Insurance products

• Non-life insurance products

• Pensions• Factoring• Bills Discounting• Financial Counselling

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Types of MFIs

• Savings and Credit Organization (SCO)• Small Farmers Development Program (SFDP) • Small Farmers Cooperative Limited (SFCL)

model• Savings and Credit Cooperative (SCC) models, • Government programs• Donor supported models, and• Financial Intermediary Non-Government

Organization (FINGO) models

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Microfinance in India

• NABARD is recognised as the regulator of microfinance

• 1987, NABARD sponsored a research project

• Group Based Approach(GBA) for lending to the poor was accepted

• In 1994, RBI working group advised banks to lend through SHG, which came to be known as SHG-Bank linkage

Finanial Institutions

MF Service Providers (MFSP)

Apex Dev

Institutions

Commercial Banks, RRBs and Co-

operative Banks

MF Institutions (MFIs)

For Profit -NBFCs

For Mutual Benefit-SHG and Co-op Societies

Non-Profit-Public Trust and Co-operatives

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Four Tier Approach• Tier I- SHGs• Tier II-NGOs• Tier III- Sec 25

NBFCs• Tier

IV-MCI/Other NBFCs

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Tier I-SHG Bank Linkage

• SHG is a voluntary group not exceeding 20 formed to promote the common economic welfare of the group members

• Banks do not interfere in the management of SHG

• Three models: Bank-SHG (20%) , Bank-SHG through intermediation by an NGO (72%) and Bank-SHG through intermediation by NGO,NBFC, MCI intermediation

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Tier II-NGO-SHG

• NGOs are non-profit organisations• Registered under Societies Act/Trust

Act/Sec 25 of Companies Act• NGOs provide finance to the SHGs• They also assisted SHGs to organise

themselves as Federations• Banks follow parameters while providing

finance through NGOs

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Tier III-NBFCs U/S 25 of CA

• Many NGOs want to convert to NBFCs to provide credit directly

• They also want to accept deposits• To do that, they should have a minimum

capital of Rs.200 lakhs• They have to wait for three years after

registration to accept deposits• Again they can accept only time deposits

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Tier IV-NBFCs and Micro-Co-operative Institutions

• NBFCs and MCI are allowed to collect deposits

• MCIs are registered under Co-operative Societies Act or Mutually aided Co-operative Societies Act

• MCIs enjoy operational freedom from government

• NBFCs are registered under Companies Act and regulated by RBI

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RBI Guidelines

• Interest rates are left to the discretion of SHG or MFI• Banks may choose their own intermediary• Microfinance by banks is priority sector lending• Banks can have their own criteria in selecting the

intermediary• Banks may have their own lending norms• Banks can devise loan and saving products• MF for consumption, production and housing• Simple procedure and documentation• Delegatory powers to branches to expedite loans

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“Unless all the discoveries that you make have the welfare of the poor as the end in view, all your workshops will be really no better than Satan’s”-Mahatma Gandhi