Microfinance

MICROFINANCE

Table of Content

Definition, Features and Need of the Microfinance

Evolution of Microfinance in India

Difference between Microcredit vs. Microfinance

Microfinance Institutions (MFIs)

Self Help Group (SHG) and Joint Liability Group (JLG)

Channels for Microfinance

Regulatory Framework – Priority Sector Lending, Malegam

Committee Recommendations, Regulators

Andhra Pradesh Microfinance Crisis of 2010

Data about Microfinance India

Microfinance: Definition

“Microfinance is an economic development tool whose

objective is to assist the poor to work their way out of

poverty. It covers a range of services which include, in

addition to the provision of credit, many other services

such as savings, insurance, money transfers,

counselling, etc.” – Reserve Bank of India

In other words, Microfinance serves as a tool for providing

financial services to the low-income population., which do

not have access to the mainstream financial services.

Microfinance: Definition

The proposed Microfinance Services Regulation Bill defines

microfinance services as “providing financial assistance to an

individual or an eligible client, either directly or through a group

mechanism for :

i. Rs. 50000 or lesser amount, for an individual for small and

tiny enterprise, agriculture, allied activities (including for

consumption purposes of such individual) or

ii. Rs. 150000 or lesser amount for an individual for housing

purposes, or

iii. any other purpose nor exceeding Rs. 150000

Salient features of Microfinance

Beneficiaries are from low income group.

Loans are of small amount.

Short duration loans

Loans are offered without collateral.

High frequency of payment

Loans are generally taken for income generation

purposes.

Financial Needs

Disasters: Such as flood, fire, cyclone and man-made events

like war

Investment Opportunities: Such as expanding a business,

buying land or equipments, improving housing, securing a job

(may require giving a large amount of money)

Lifestyle Needs: Such as wedding, funerals, childbirth,

education of children, widowhood, homebuilding or old age

Personal Emergencies: Such as sickness, injury, death,

sudden unemployment, theft or harassment

Need for Microfinance - Demand

India’s poverty estimates range from 26% to 50%. Out of

these, 87% do not have access to credit.

Demand for microfinance is $30 Bn. whereas supply is

only $2.2 Bn.

Only 5% people in rural India has access to microfinance.

Even deposit account facility is out of reach by 70% of

rural poor.

Less than 15% of people have access to insurance.

Healthcare access is negligible.

Need for Microfinance - Supply

Total user base

as on 31st

March 2012 was

22.56 million.

Source: Microscape Nov 2012, Microfinance Institutions

Network

Need for Microfinance - Supply

Source: Department of Financial Services, Ministry of Finance,

GoI

Number of Bank Branches as on 31-March-2013

Bank

Group

Rural Semi-

Urban

Urban Metropolita

n

Total

Public

Sector Bank

23286 18854 14649 13632 70421

Private

Sector Bank

1937 5128 3722 3797 14584

Foreign

Bank

8 9 65 249 331

Regional

Rural Bank

12722 3228 891 166 17007

Total 37953 27219 19327 17844 102343

Total Villages in India as per 2011 census: More than 6 Lakh


1974 – Establishment of Self-Employed Women’s Association

(SEWA) in Gujarat.

Sep 26, 1975 – Rural bank Ordinance was passed.

Oct 02, 1975 – Prathama bank (first RRB) came into existence.

1976 – Ordinance was replaced by Regional Rural Bank Act.

July 12, 1982 – NABARD was established on the recommendations

of Shivaraman Committee, by an act of Parliament to implement the

National Bank for Agriculture and Rural Development Act 1981.


Apr 02, 1990 – SIDBI was established through Small Industries

Development Bank of India Act 1989.

1992 – NABARD launched SHGs-Bank Linkage program.

1999 – SIDBI created Microcredit (SFMC) to create a national

network of strong, viable and sustainable Microfinance Institutions

from the informal and formal financial sector to provide microfinance

services to the poor, especially women’’.

2006 – NABARD launched the ‘Micro-Enterprise Development

Programme’ (MEDP) for skill development.

Microcredit vs. Microfinance

Microcredit refers to very small loans for unsalaried

borrowers with little or no collateral, provided by legally

registered institutions. Currently, consumer credit

provided to salaried workers based on automated credit

scoring is usually not included in the definition of micro

credit, although this may change.

Microfinance typically refers to microcredit, savings,

insurance, money transfers, and other financial products

targeted at poor and low-income people.


The proposed Microfinance Services Regulations Bill defines MFI as

“an organization of association of individuals including the following if

it is established for the purpose of carrying on the business of

extending microfinance services:

A society registered under Societies Registration Act 1860

A trust created under Indian Trust Act 1880 or public trust registered

under any state enactment governing trust or public, religious or

charitable purposes.

A cooperative society/mutual benefit society/mutually aided society

registered under any state enactment relating to such societies or

any multistate cooperative society registered under Multi State

Cooperative Society Act 2002 but not including:

A cooperative bank as defined in clause (cci) of section 5 of Banking

Regulation Act 1949 or

A cooperative society engaged in agricultural operations or industrial activity

or purchase or sale of any goods or services.”


Microfinance institutions in India are registered as one of

the following five entities:

Non Government Organizations engaged in microfinance (NGO-MFIs),

comprised of Societies and Trusts

Cooperatives registered under the conventional state-level cooperative acts,

the national level multi-state Cooperative Legislation Act (MSCA 2002), or

under the new state-level Mutually Aided Cooperative acts (MACS Act)

Section 25 Companies (not-for-profit)

For-profit Non-Banking Financial Companies (NBFCs)

NBFC-MFIs

NGO-MFIs, Cooperatives and Section 25

Companies

Microfinance institutions operating as a non-profit company

operate as either an NGO-MFI, Cooperative, or Section

25. Each is structured slightly differently in terms of ability

to accept equity investments and dividends. There exists

little regulation that applies to these structures, aside

from registration requirements.

NBFCs

The NBFC encompasses many different types of financial

companies, which are all subject to the same regulatory

requirements. Many microfinance institutions have

recently registered as NBFCs to take advantage of

access to capital markets. Microfinance institutions

operating as NBFCs account for the great majority of the

microfinance market in India.

NBFC-MFIs

For-profit institutions that qualify for priority sector lending

funds are registered as NBFC-MFIs. This NBFC sub-

category was created by RBI in May 2011 as a way to

classify NBFCs operating as microfinance institutions

which meet certain requirements. Currently, it is unclear

how many NBFCs will elect to register as NBFC-MFIs,

and how many will continue to operate as NBFCs.

Self Help Group (SHGs)

A SHG is a group of 15 to 20 members from very low

income families, usually women, which mobilises savings

from members and uses the pooled funds to give loans to

those members who need them, with the interest rates on

deposits and loans being determined entirely by

members.

- Reserve Bank of India

Joint Liability Group (JLGs)

JLG is an informal group of individuals coming together for

the purpose of availing of bank loan either singly or

through the group mechanism against mutual guarantee

in order to engage in similar type of economic activities.

- Reserve Bank of India

Difference between SHG and JLG

The SHG would normally consist of 10 to 20 members whereas a

JLG would normally have between 4 and 10 members.

The maximum amount of loan to SHGs should not exceed four

times of the savings of the group. The limit may be exceeded in

case of well managed SHGs subject to a ceiling of ten times of

savings of the group. JLGs are not obliged to keep deposits with

the bank and hence the amount of loan granted to JLGs would be

based on the credit needs of the JLG and the bank's assessment

of the credit requirement.

In case of a SHG the individual carries the responsibilities

whereas in case of JLG all members share responsibility and

stand as guarantee for each other.

Channels for Microfinance

The players in the Microfinance sector can be classified as falling into

three main groups:

The SHG-Bank Linkage Model

Non-Banking Finance Companies

Others including trusts, societies, etc

58%34%

8%

Outstanding Loan Portfolio as on 31-Mar-2011

SHG-Bank LinkageModel

NBFC

Others

Source: RBI

SHG-Bank Linkage Model

The SHG-Bank Linkage Model was pioneered by NABARD in 1992.

Under this model, women in a village are encouraged to form a Self

help Group (SHG) and members of the Group regularly contribute

small savings to the Group. These savings which form an ever

growing nucleus are lent by the group to members, and are later

supplemented by loans provided by banks for income-generating

activities and other purposes for sustainable livelihood promotion.

The Group has weekly/monthly meetings at which new savings come

in, and recoveries are made from members towards their loans from

the SHGs, their federations, and banks. NABARD provides grants,

training and capacity building assistance to Self Help Promoting

Institutions (SHPI), which in turn act as facilitators/ intermediaries for

the formation and credit linkage of the SHGs.


Model 1: In this model, the bank itself acts as a Self Help

Group Promoting institution (SHPI). 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.


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.


Model 3: Due to various reasons, banks in some areas

are not in a position to even finance SHGs promoted and

nurtured by other agencies. In such cases, the NGOs act

as both facilitators and microfinance intermediaries.

First, they promote the groups, nurture and train them

and then approach banks for bulk loans for on-lending to

the SHGs.

Progress of SHG-Bank Linkage Model

70.16

145.48

312.21

65.51

165.35

363.4

82.17

205.85

393.75

0

50

100

150

200

250

300

350

400

450

2010-11 2011-12 2012-13

SHG saving with banks as on 31st March

Loans disbursed to SHGs during the year

Loans outstanding against SHGs as on 31st March

Amt in Rs. Hundred Crore

Source: NABARD

Non-Banking Financial Companies (NBFCs)

Under the NBFC model, NBFCs encourage villagers to form Joint

Liability Groups (JLG) and give loans to the individual members of

the JLG. The individual loans are jointly and severally guaranteed by

the other members of the Group. Many of the NBFCs operating this

model started off as non-profit entities providing micro-credit and

other services to the poor. However, as they found themselves

unable to raise adequate resources for a rapid growth of the activity,

they converted themselves into for-profit NBFCs. Others entered the

field directly as for-profit NBFCs seeing this as a viable business

proposition. Significant amounts of private equity funds have

consequently been attracted to this sector.

Priority Sector Lending

Priority sector refers to those sectors of the economy which may not get

timely and adequate credit in the absence of this special

dispensation. Typically, these are small value loans to farmers for

agriculture and allied activities, micro and small enterprises, poor

people for housing, students for education and other low income

groups and weaker sections. - RBI

Priority Sector includes the following categories:

Agriculture

Micro and Small Enterprises

Education

Housing

Export Credit

Others

Priority Sector Lending

Categories Domestic Commercial

Banks/Foreign Banks

with 20 or more

branches (as % of ANBC

or credit equivalent)

Foreign Banks with

less than 20

branches (as % of

ANBC or credit

equivalent)

Total Priority Sector 40 32

Total Agricultural 18 No specific target

Advances to weaker

sections

10 No specific target

Source: Reserve bank of India

Adjusted Net Bank Credit (ANBC) or credit equivalent of Off-Balance

Sheet Exposures denotes the outstanding as on March 31 of the

previous year.

Malegam Committee Recommendations

The RBI appointed Mr. Y. H. Malegam Committee (the Sub-

Committee of the Central Board of Directors of Reserve Bank

of India to study issues and concerns in the MFI Sector related

to the entities regulated by the Bank) has submitted its report

to the RBI in January 2011. The composition of the committee

was:

Sh. Y. H. Malegam – Chairman

Sh. Kumar Manglam Birla

Dr. K. C. Chakrabarty

Smt. Shahsi Rajagopalan

Prof. U. R. Rao

Sh. V. K. Sharma (Executive Director) – Member Secretary


The subcommittee recommended creation of a separate category of

NBFCs operating in the microfinance sector to be designated as

NBFC-MFIs. To qualify as an NBFC-MFI, the NBFC should be “a

company which provides financial services pre-dominantly to low-

income borrowers, with loans of small amounts, for short-terms, on

an unsecured basis, mainly for income-generating activities, with

repayment schedules which are more frequent than those normally

stipulated by commercial banks” and which further satisfies the

regulations specified in that behalf. The subcommittee has also

recommended some additional qualifications which are:

The NBFC-MFI will hold not less than 85% of its total assets (other than

cash and bank balances and money market instruments) in the form of

qualifying assets.

There are limits of an annual family income of Rs. 50,000 and an individual

ceiling on loans to a single borrower of Rs. 25, 000.

Not less than 75% of the loans given by the MFI should be for income-

generating purposes.


The Sub-Committee has recommended that bank lending to NBFCs

which qualify as NBFC-MFIs will be entitled to “priority lending”

status. With regard to the interest chargeable to the borrower, the

Sub-Committee has recommended an average “margin cap” of 10

per cent for MFIs having a loan portfolio of Rs. 100 crore and of 12

per cent for smaller MFIs and a cap of 24% for interest on individual

loans. It has also proposed that, in the interest of transparency, an

MFI can levy only three charges, namely,

Processing fee

Interest and

Insurance charge


The Sub-committee has made a number of recommendations to mitigate the

problems of multiple-lending, over borrowing, ghost borrowers and coercive

methods of recovery. These include:

A borrower can be a member of only one SHG or a Joint Liability Group

JLG.

Not more than two MFIs can lend to a single borrower.

There should be a minimum period of moratorium between the disbursement

of loan and the commencement of recovery.

The tenure of the loan must vary with its amount.

A Credit Information Bureau has to be established.

The primary responsibility for avoidance of coercive methods of recovery

must lie with the MFI and its management.

The Reserve Bank must prepare a draft Customer Protection Code to be

adopted by all MFIs.

There must be grievance redressal procedures and establishment of

ombudsmen.

All MFIs must observe a specified Code of Corporate Governance.

Regulators in Indian Microfinance

The NBFC-MFIs are regulated by the Reserve Bank of India.

The insurance products offered by NBFC-MFIs come under the

purview of Insurance Regulatory and Development Authority (IRDA).

The pension products offered by NBFC-MFIs come under the

purview of Pension Fund Regulatory and Development Authority

(PFRDA).

Section 35(6) of the Banking Regulation Act, 1949, empowers

NABARD to conduct inspection of State Cooperative Banks (SCBs),

Central Cooperative Banks (CCBs) and Regional Rural Banks

(RRBs). In addition, NABARD has also been conducting periodic

inspections of state level cooperative institutions such as State

Cooperative Agriculture and Rural Development Banks (SCARDBs),

Apex Weavers Societies, Marketing Federations etc., on a voluntary

basis.

Currently very little or no regulation to not-for-profit organizations.

Proposed Microfinance Bill recommends RBI to be sole regulator for

microfinance industry.


The state of Andhra Pradesh experienced a impressive expansion of

microfinance operations from the 1990s into the 2000s, becoming

known as the ‘Mecca of Microfinance’ in India.

In October of that year a media storm blew up over the suicides of

close to 50 microcredit clients whom, it was claimed, had taken their

lives under the duress of crippling debt burdens and coercive

repayment tactics initiated by microfinance employees.

Considerable anger was vented at microfinance institutions that were

seen to be accumulating riches at the expense of the poor.

One government official quipped that, “The money lender lives in the

community, at least you can burn down his house. With these companies, it

is loot and scoot.”


In response, the Andhra Pradesh government clamped down on

MFIs. The government passed and ordinance and later Andhra

Pradesh Microfinance Institutions (Regulation of Money Lending) Act

2010, effectively shutting down all private sector microfinance

operations.

key restriction posed by the act were:

Every MFI has to register before the Registering Authority of the district.

No member of an SHG can be a member of more than one SHG.

All loans by MFIs have to be without collateral.

All MFIs have to display the rates of interest in their premises.

The recovery towards interest cannot exceed the principal amount.

No MFI can give a further loan to a SHG or its member without the

approval of the registering authority where there is an outstanding bank

loan.

Every MFI has to give to the borrower a statement of his account and

acknowledgements for all payments received from him.


All repayments have to be made at the office of the Gram Panchayat or at

a designated public place.

MFIs cannot use agents for recovery or use coercive methods of

recovery.

All MFIs have to submit to the Registering Authority a monthly statement

giving specified details.

In each district, a Fast-Track Court is to be established for protection of

debtors and settlement of disputes.

These are penalties for failure to register and for coercive acts of

recovery.

Loan recoveries have to be made only by monthly instalments.

The main rationale was that these MFIs are using SHG to expand

their borrowers through predatory lending, charging usurious interest

rates and using weekly recovery system, recovery agents and

coercive techniques.


Andhra Pradesh Microfinance

suffered heavily due to the crisis

and growth rate went into negative,

The spillover effect was also felt

by overall sector as even the total

growth went downwards.

Source: Micro-Credit Rating

International Ltd. (M-CRIL)

Some data about Microfinance in India

As on Mar 31 2012, total employee strength of MFIs was 72765, 11%

of them being women.

Around 97% of MFI clients are women.

Average loan outstanding in FY 2011-12 was Rs. 7509, up by 10%

from previous year.

As on Mar 31 2012, there was 9743 MFI branches across 26 states.

One microfinance branch served 2070 clients on average. There was

307 clients per employee.

In percentage terms NPA against loans to SHGs increased from

6.09% in 2011-12 to 7.08% during 2012-13.

Thank You

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