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MICROFINANCING

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INTRODUCTION

Microfinance is the provision of financial

servicesto low-incomeclients, includingconsumers and the self-employed, who

traditionally lack access to bankingand

related services

http://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Low-incomehttp://en.wikipedia.org/wiki/Self-employedhttp://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Self-employedhttp://en.wikipedia.org/wiki/Self-employedhttp://en.wikipedia.org/wiki/Self-employedhttp://en.wikipedia.org/wiki/Low-incomehttp://en.wikipedia.org/wiki/Low-incomehttp://en.wikipedia.org/wiki/Low-incomehttp://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Financial_services

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FEATURES OF MICRO-FINANCE

It is a tool for empowerment of the poorest.

Delivery is normally through Self Help Groups (SHGs).

It is essentially for promoting self-employment, generally used for: Direct income generation

Consumption smoothing.

It is not just a financing system, but a tool for social change, specially

for women.

Because micro credit is aimed at the poorest, micro-finance lendingtechnology needs to mimic the informal lenders rather than the formal

sector lending. It has to:

Provide for seasonality

Allow repayment flexibility

Fix a ceiling on loan sizes.

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SCOPE OF MICROFINANCE

Micro Financing has greatest scope in the world especially in

developing countries. Because mostly people dont have high

income and low purchasing power and MF institutions target

market as low income group and it is common impression that

poor people need and use a variety of financial services

including deposits, loans etc. they use financial services for

some reason like seize business opportunities, improve homer

and living standard, deal with large cope with emergencies.

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FUNCTIONS OF MICRO FIANANCE

Small loans, typically for working capital;

Informal appraisal of borrowers and investments;

Access to repeat and larger loans based on debt capacity and repaymentperformance;

Secure savings products.

To provide financing facilities, with or without collateral Security

To accept deposits

To encourage investments in such cottage industries and income generating

projects for poor persons as maybe prescribed; To mobilize and provide financial and technical assistance and training to micro

enterprises

To invest in shares of any body corporate, the objective of which is to provide

microfinance services to poor persons

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KEY PLAYERS IN MF SYSTEM

NABARD

Reserve Bank of India Self Help Groups

Micro Finance Institutions (MFIs)

NGOs

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Models of microfinance

The SHG-Bank Linkage Model

Partnership Model Service company model

Banking Correspondents

Bank Partnership Model

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SELF HELP GROUPS (SHGS)

Self- help groups (SHGs) play today a major role in poverty

alleviation in rural India. A growing number of poor people

(mostly women) in various parts of India are members of SHGsand 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 SHG is the most prominent element and

offers a chance to create some control over capital. The SHGsystem has proven to be very relevant and effective in offering

women the possibility to break gradually away from exploitation

and isolation.

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BANK PARTNERSHIP MODEL

This model is an innovative way of financing MFIs. The bank is

the lender and the MFI acts as an agent for handling items ofwork relating to credit monitoring, supervision and recovery.

The model has the potential to significantly increase the amount

of funding that MFIs can leverage on a relatively small equity

base.

A sub - variation of this model is where the MFI, as an NBFC,holds the individual loans on its books for a while before

securitizing them and selling them to the bank. Such

refinancing through securitization enables the MFI enlarged

funding access

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BANKING CORRESPONDENTS

The proposal of banking correspondents could take

this model a step further extending it to savings. It

would allow MFIs to collect savings deposits fromthe poor on behalf of the bank. It would use the

ability of the MFI to get close to poor clients while

relying on the financial strength of the bank to

safeguard the deposits.

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BANK LED MODEL

The bank led model was derived from the SHG-Bank

linkage program of NABARD. Through this program,

banks financed Self Help Groups (SHGs) which hadbeen promoted by NGOs and government agencies.

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PARTNERSHIP MODELS

This model aimed at synergizing the comparative

advantages and financial strength of the bank and

infrastructure of MFIs and NGOs.

Through this model, ICICI Bank could save on the

initial costs of developing rural infrastructure and

micro credit distribution channels and could take

advantage of the expertise of these institutions inrural areas.

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SERVICE COMPANY MODEL

Under this model, the bank forms its own MFI, perhaps as an

NBFC, and then works hand in hand with that MFI to extend

loans and other services. Service Company Model has the potential to take the burden of

overseeing microfinance operations off the management of the

bank and put it in the hands of MFI managers who are focused

on microfinance to introduce additional products, such as

individual loans for SHG graduates, remittances and so onwithout disrupting bank operations and provide a more

advantageous cost structure for microfinance.

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Challenges in Micro Finance

High Volume of Financial Transaction but value wisevery low

Majority of the financial transactions are off-site innature

Geographic spread of operations and density ofcustomers

Lack of infrastructure facilities like power, broadband

etc Unsecured lending and no documented financial

history is available

Combination of above, lead to high operating cost

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Role in poverty alleviation

The key to alleviating poverty is how effectively the tools offood, shelter, basic education, opportunities foremployment, health and medical services, financialservices, infrastructure, markets and communication aredeployed either singularly or severally to the poor. Povertyis a pervasive problem in our society. Spanning across theworld, poverty exists in different levels and various forms.At the current threshold of $1.25 a day, the World Bank

estimates that around 25% of the population in developingregions lives below the poverty line. This figure translatesto 1.3 billion people living in poverty, or about 20% of theglobal population

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Contd

Microfinance is the provision of financial services to the poor,aiming to empower low-income populations by providing themwith access to credit and other financial services. Through

microfinance institutions (MFI), the poor can obtain collateral-free loans at relatively low interest rates and use the money forcreating micro enterprises (small businesses owned by poorpeople), funding childrens education, and improving homes,among others. Aside from micro credit, MFIs have alsodeveloped numerous financial products, such as micro-insurance and micro-mortgage that are designed toaccommodate the poors financial needs.

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THANK YOU