MICROFINANCE-SERVICE PROVIDERS

“A SMALL BUSINESS INVESTMENT COOPERATIVE”

PAPER SUBMITTED BY

M.TULASINADH

R.MAHESH

  II –MBA,

K.B.N PG COLLEGE,

VIJAYAWADA.                

ABSTRACT     

Microfinance refers to small-scale financial services including both credits and deposits

provided to people farm or fish or herd; operate small or micro enterprises where goods are

produced recycled, repaired or traded; provide services; work for wages or commission; gain

income renting for out small amount of land, vehicles, draft animals, or machinery and tools;

in both rural and urban areas.

Introduction:

Micro finance means the provision of banking services to lower income people, especially the

poor and very poor. Micro finance is a financial service of small quantity provided by

financial institutions to the poor. This financial services may include savings, credit,

insurance, leasing, money transfer etc. i.e., any financial service provided to customers to

meet their normal financial needs unlike normal credit, microcredit limited with collateral

substitute and credit plan services. Despite the expansion of the organized banking system

deep into rural areas it was found that a very large number of the poor continued to remain

outside the fold of the formal baking system .thus began the search for an alternative delivery

mechanism which would meet the requirements of the poor and especially the women

members of such households.

The first official interest in group lending in India took shape during 1986-87.when national

bank for agricultural and rural development (NABARD) Supported and financed research

project on saving and credit management of self help group of Mysore resettlements and

development agency. so it is finally clear that the role of microfinance institution are very

important in rural development and poverty eradication. It is in this context, that one needs

to appreciate the role-played by microfinance institution government NGOs and social

organizations.

HISTORY OF MICRO FINANCE:

The pioneering of modern microfinance of often credited to Dr Mohd Yunus, who

began experimenting by lending to poor women in the village of jobra,

Bangladesh, during his tenure as a professor of economist at Chittagong university

in1970s. He went on to find Grameen Bank in 1983, and won Noble Peace Prize in

2006.Since then, innovations of micro finance have continued and providers of

financial services to the poor continue to evolve. Today the world bank estimates that

about 160 million people in developing countries are served by microfinance.

Key Features Of Microfinance:

LEND TO THE POOR PEOPLE & DONT TAKE SECURITY

PREFER SAVING OVER BORROWING & SMALL SHORT TERM LOANS

COST COVERING INTEREST RATES &GROUP APPARAISAL AND GUARENTEE

PREFER WOME N CUSTOMERS OVER MEN

K E Y F E A T U R E S O F M I C R O F I N A N C E

FINANCING MODEL IN MICROFINANCE INDUSTRY:

SHG- BANK LINKAGE PROGRAMME:

The SHG-BANK linkage programme which commenced as a pilot programme during 1992

to the link 500 SHG banks, has grown exponentially during the last two decades and the over

97 million rural households have now access to regular savings through 74.62 lakh SHGs

linked to different banks.

Over BANK linkage programme all programs under SHGs

2008-09 2009-10 2010-110

1020304050607080

Fig 2: SHG- Bank Linkage Programme - Number of SHGs

Saving linked SHGsLoans Disbursed During the YearLoans Outstanding 31st March

SHG Bank Linkage Programme - Amount of Saving’s and Credit

2008-2009 2009-2010 2010-20110

5000

10000

15000

20000

25000

30000

Saving linked SHGsLoans Disbursed During the yearLoans Outstanding 31st March

Service providers:

Informal financial service providers:

These include moneylenders, pan brokers, savings, collectors, money guards, rotating savings

and credit associations (ROSCAs), accumulations and credit associations(ASCAs) and input

supply shops. Because they know each other well and live in the same community, the

understand each other’s financial circumstances and can offered very flexible, convinent and

fast services. These services can also be costly and the choice of financial products limited

and short term. Informal services that involve savings are also risky.

Formal financial institutions:

In addition to commercial banks these include state banks, agricultural banks, savings banks,

rural banks, on- bank financial institutions. They are regulated and supervised, offer a wider

range of financial services, and control a branch network that can extend across the country

and internationally. However, they have proved reluctant to adopt social mission due to their

high costs of operation, often cannot deliver services to poor or remote populations. The

increasing use of alternative data credit scoring such as trade credit, is increasing commercial

banks interest in microfinance.

DEVELOPMENTS IN MICROFINANCE – INDIA:

Micro finance in India has started to evolve in early 1980’s with an effort of forming

informal small help group (SHG) to provide access of financial services to needy.

India is 2nd most populous country behind china with a large number of un-financed

poor people. In 1992 --NABARD conducts pilot project refinancing SHG

programmes.1996-encouraged by the above pilot project, the govt. appoints the

working group- made important recommendations including inclusion in the priority

sector list.

1999- A task force on NBFCs made recommendations on microfinance.2000-The

RBI announces broad guidelines to banks on microfinance in its credit and monetary

policy.2005- KHAN report(RBI) on policy options, on development and regulations

issues. MFIS are increasing their share in India microfinance supply as of comparison

to SGHs where their share has gone down to 53% in March 2008, from 72% in the

year March 2003.

The challenges in building a sound microfinance industry include:

Inappropriate donor subsidies

Poor regulation and supervision of deposit-talking microfinance institutions(MFIs)

Few MFIs that meet the needs for saving remittance or insurance

Limited management capacity of MFIs

Institutional inefficiencies

Need for more dissemination and rural agricultural finance methodologies.

RECOMMENDATIONS AND SUGGESITIONS:

There is need to bill strong and efficient microfinance institution this requires

governance professionalism management strengtning internal control and accounting

introducing low cost ways of doing business. The biggest hope of cost reduction

comes from new technology. For example transferring funds via mobile phones.

Micro financing needs the financial infrastructure to support it. Microfinance

institutions looking to commercial funding sources, require independent assessments

for credit rating agencies. now there is no credit rate agency , a few which are not

adequate in number to access the credit worthiness of micorfinancing institutions. so a

better credit rating methodology is needed.

Microfinance interest rate are high which range about 25%. The best way to lower

interest rate ,would be encourage more MFIs because the more competition the more

will be the innovative idea for the reduction of the interest rate by way of reducing the

cost of the management.

The local and the national government have a n important role ensuring the growth

and improvement of microfinance, each Indian state could consider forming a multi

party working group to meet with the microfinance leaders and have a dialogue with

then about how the policy environment we made more supportive and to clear up

misperception.

RBI regulates financial services in India currently various aspects of microfinance are

handled by various departments. This multiplicity has not ensured suffiencicy in

supervision as well as MFIS remain regulated. Compliance to the regulation needs to

made simpler. Regulation of all aspects( financial services ,insurance services, ratings

and foreign borrowing approvals) of microfinance should be a single a entity. So the

regulating environment of microfinance need to be simplify.

A new category of NBFC should be created. MFIs need to actively manage their

growth and provide legal and operational comfort to banks and potential equity

investors. Greater legitimacy, acceptability and transparency and enable to use

savings as a low cost source of lending

. A new NBFC category should be created for the provision of microfinance services

with a minimum of equity capital and subsequently the equity capital base should be

raised in proportions to the growth of microfinance services.

Special incentives should be provided to NGOs working particularly in hilly and

backward districts. Some special prices schemes should be introduced for the better

performance of NGOs in the formation of SHGs in the backward regions.

All SHGs particularly in the backward regions should be consider under one umbrella

by adopting E-chou pal system monitoring activities are to be performed by

appointing computer machines, a new modified system that is now prevailing in some

of the states in India.

FUTURE OUTLOOK:

size and growth: The indian micro finance sector has expected to grow nearly ten

times by 2012 by a size of about Rs 325 billion from the current market size Rs 27

billion, at a compounded annual grwoth rate of 76%, with out populations of the

people living below $1.25 day the country , the total demand of the micro credit in the

country is Rs550 billion at an annual average loan size of Rs 6,000. Thus even 2012

only about 50% of the market demand may be covered

2008 2009 2010 2011 20120

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Column2

CONCLUSION:

Microfinancing is going to put poverty in to the museum” Muhammad Yunus, Noble Prize

winner & founder of Grameen Bank.

How much is going to be true only time will tell, but one thing is certain where ever there

will be poor people wanting loans, there will be lenders ready to oblige!

Bibliography:

Web links:

www.indiamicrofinance.com

www.capital.ifmr.co.in

www.microfinancefoucs.com

References:

Yunus Mohamad. Creating a world without poverty: social business and the future of

capitalism. Public affairs, New York, 2008.

The future of microfinance in India: By Sukwinder Sing Arora, Financial Sector Team,

Policy Division, DFID.

Doug Johnson, The Geographic Distribution Of Microfinance Services In India 2007.

Microfinance In India State of the Sector Report 2009.