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PROJECT

ON

MICRO-MICRO-FINANCE(INDIA)FINANCE(INDIA)

Project Submitted to the Satyawati College, University of Delhi

In fulfillment of the requirement ofB.COM. (HONS.)-3rd Year

BY: NIRMALA ADITIMAHAVITHYALYA COLLEGE ROLL NO.-3088

SATYAWATI COLLEGE ROLL NO. - 9SECTION-A

B.COM (HONS.) 3RD Year

UNDER THE SUPERVISION OF

Mr.SHAILANDRA SAXENA,SATYAWATI COLLEGEUNIVERSITY OF DELHI

DELHI

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DECLARATION

I,NIRMALA hereby declare that I, a student of ADITIMAHAVIDHYALYA College have prepared the following project on “MICRO-FINANCE(INDIA)” and have submitted this project to my mentor Mr. SHAILANDRA SAXENA the information presented in this report is true and original to the best of my knowledge

NIRMALA

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ACKNOWLEDGEMENT

I would like to express my sincere thanks and deep felt gratitude to my mentor Mr.SHAILANDRA SAXENA whose help, support and encouragement has been instrumental for the completion of this project.My sincere thanks to the staff members of the College and the head of department for the necessary departmental assistance and support.I am also grateful to my friends PUNEET AND ANKUSH for their generous help and support in conducting the research and helping me complete the project.

NIRMALA

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TABLE OF CONTENTS:-

S.no NAME OF THE TOPIC Page No.

1. Overview of the Microfinance Sector 6

2. Definition of Microfinance and MFIs 7

3. Top 50 MICROFINANCE INSTITUTIONS 8

4. Legal and Regulatory Framework for the Microfinance Institutions in India

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5. The Micro Credit Model

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6. Business model of GRAMEEN bank 13

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Loan Insurance 14

8. The Repayment Mechanism 15

9. Self help group (SHG) 16

10. Joint liability group (JLG) 17

11. NABARD Initiative in Micro Finance 18

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12. Product Design 19

13. What is Risk Management? 20

14. Major Risks to Microfinance Institutions: 21

15. SWOT Analysis of micro finance

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16. Why micro finance provides loan to the women only?

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Why MFI’s is being criticized for providing loans to the women only?

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18. Malegam Committee Microfinance Report 25

19.Some major recommendations of the Committee are:

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20. Comments on the Recommendations of the Malegam Committee

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Recommendations and suggestions 28

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Main Highlights Of This Project:-[MICRO-FINANCE(INDIA)]

(i). Use Of Very Simple Language to increase the level of understanding. (ii). The Entire Project of 30 pages Can be Revised in just 25 minutes by reading the bold and highlighted words covered under different topics.(ii). Latest Data as available has been fully utilized for the purpose of making this project “A RICH SOURCS OF KNOWLEDGE”.(iv).Pointwise and Tabular presentation is done wherever necessary to increase the understanding of topic.

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(v). Topics are discussed very briefly with suitable examples.

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Overview of the Microfinance

INTODUCTION

Micro- finance’s concept was first given by the nobel laureate prof. Mohammad yunus in 1976. India's population is more than 1000 million, and it's the second largest in term of population after China. India's GDP ranks among the top 15 economies of the world.However, around 300 million people or about 80 million households, are living below the poverty line, i.e. less than $2 per day according to the World Bank and the poorest are which earns $1 per day . It is further estimated that of these households, only about 20% have access to credit from the formal sector. Out of these 80 million house hold, 80% takes credit from the informal sources i.e. local Zamidars, Chit Funds etc.

In the Indian context terms like "small and marginal farmers", " rural artisans" and “economically weaker sections" have been used to broadly define micro-finance

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customers. Women constitute a vast majority of users of

micro-credit and savings services. In short, Micro Finance means providing very poor families with very small loans to help them engage in productive activities or grow their very small businesses .

It is firstly (and this is essential) a tool in the fight against poverty.

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Defination of MF

Micro-Finance refers to ―small savings, credit and insurance services extended to socially and economically disadvantaged segments of society, for enabling them to raise their income levels and improve living standards.

The main aim of Micro-Finance is too provide loan to the poor people or to below poverty line, who are not able borrow from other sources and to make their living standard better.

“providing financial assistance to an individual or an eligible client, either directly or through a group mechanism for:

an amount, not exceeding rupees fifty thousand in aggregate per individual, for small and tiny enterprise, agriculture, allied activities (including for consumption purposes of such individual) or

an amount not exceeding rupees one lakh fifty thousand in aggregate per individual for housing purposes,

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The proposed regulations further define an MFI as “an organization or 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 the Societies Registration Act, 1860,

a trust created under the Indian Trust Act,1880 or public trust registered

a cooperative society / mutual benefit society / mutually aided society registered under any State enactment:

a) a cooperative bank as defined in clause (CCI) of section 5 of the Banking

Regulation Act, 1949 or b) a cooperative society engaged in agricultural

operations or industrial activity or purchase or sale of any goods and services.”

Microcredit, Microfinance and Micro plus

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Microcredit refers specifically to loans and the credit needs of clients,

Microfinance covers a broader range of financial services Examples savings, insurance, housing loans and remittance transfers.

Microfinance plus activities such as entrepreneurial and life skills training

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Top 50 MICROFINANCE INSTITUTIONS:

Rank Name Country 1 ASA Bangladesh

2Bandhan (Society and NBFC)

India

3 Banco do Nordeste Brazil

4Fundación Mundial de la Mujer Bucaramanga

Colombia

5 FONDEP Micro-Crédit Morocco

6Amhara Credit and Savings Institution

Ethiopia

7Banco Compartamos, S.A., Institución de Banca Múltiple

Mexico

8Association Al Amana for the Promotion of Micro-Enterprises Morocco

Morocco

9Fundación Mundo Mujer Popayán

Colombia

10 Fundación WWB Colombia – Colombia

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Cali

11Consumer Credit Union 'Economic Partnership'

Russia

12Fondation Banque Populaire pour le Micro-Credit

Morocco

13Microcredit Foundation of India

India

14 EKIBosnia and Herzegovina

15 Saadhana Microfin Society India16 Jagorani Chakra Foundation Bangladesh17 Grameen Bank Bangladesh

18 PartnerBosnia and Herzegovina

19 Grameen Koota India

20Caja Municipal de Ahorro y Crédito de Cusco

Peru

21Bangladesh Rural Advancement Committee

Bangladesh

22 AgroInvest Serbia23 Caja Municipal de Ahorro y Peru

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Crédito de Trujillo

23Sharada's Women's Association for Weaker Section

India

24 MIKROFIN Banja LukaBosnia and Herzegovina

25Khan Bank (Agricultural Bank of Mongolia LLP)

Mongolia

26 INECO Bank Armenia27 Fondation Zakoura Morocco

28Dakahlya Businessmen's Association for Community Development

Egypt

29 Asmitha Microfin Ltd. India

30Credi Fe Desarrollo Microempresarial S.A.

Ecuador

31Dedebit Credit and Savings Institution

Ethiopia

32 MI-BOSPO TuzlaBosnia and Herzegovina

33 Fundacion Para La Promocion Nicaragua

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y el Desarrollo34 Kashf Foundation Pakistan

35Shakti Foundation for Disadvantaged Women

Bangladesh

36 enda inter-arabe Tunisia37 Kazakhstan Loan Fund Kazakhstan

38Integrated Development Foundation

Bangladesh

39Microcredit Organization Sunrise

Bosnia and Herzegovina

40 FINCA – ECU Ecuador

41Caja Municipal de Ahorro y Crédito de Arequipa

Peru

42 Crédito con Educación Rural Bolivia43 BESA Fund Albania

44 SKS Microfinance Private Limited

India

45Development and Employment Fund

Jordan

46 Programas para la Mujer – Peru

Peru

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47Kreditimi Rural i Kosoves LLC (formerly Rural Finance Project of Kosovo)

Kosovo

48BURO, formerly BURO Tangail

Bangladesh

49Opportunity Bank A.D. Podgorica

Serbia

50 Sanasa Development Bank Sri Lanka

There are seven companies of India in top 50 companies in the world. poor people getting beneficial from the micro finance , 80 to 90 million are from India only. So there is still a huge market and opportunities in this segment.

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Legal and Regulatory Framework for the Microfinance Institutions in India :

1. SOCIETIES REGISTRATION ACT, 1860:

NGOs are mostly registered under the Societies Registration Act, 1860. Since these entities were established as voluntary, not-for-profit development organizations, their microfinance activities were also established under the same legal umbrella..

2. INDIAN TRUSTS ACT, 1882:

Some MFIs are registered under the Indian Trust Act, 1882 either as public charitable trusts or as private, determinable trusts with specified beneficiaries/members.

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3. NOT-FOR-PROFIT COMPANIES, SEC 25 OF COMPANIES

ACT,1956

An organization given a license under Section 25 of the Companies Act 1956 is allowed to be registered as a company with limited liability without the addition of the words ‗Limited' or Private Limited' to its name. It is also eligible for exemption from some of the provisions of the Companies Act, 1956.

If objects of that company are restricted to the promotion of science, art, religion, charity or any other useful purpose; and the constitution of such company provides for the application of funds or other income in promoting these objects and prohibits payment of any dividend to its members,

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The micro-credits model

• The model is fairly straightforward and simple.

• Focus on self-employment, providing the capital for poor women to use their innate "survival skills" to pull themselves out of poverty.

• Lend to women in small groups (credit circles), say of five or seven.

• Draw up a weekly or bi-weekly repayment schedule.

• In case any member defaults the 20

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entire circle is denied access to credit.

• Banks have been given freedom to formulate their own lending norms keeping in view ground realities. Regarding unit cost, unit size, maturity period, grace period, margins, etc.

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Business model of GRAMEEN bank:

The Grameen Bank is a Microfinance Organization and community development bank started in 1976 by the Nobel Laureate, Professor Muhammad Yunus in Bangladesh that makes small loans (known as microcredit) to the weaker sections, without requiring collateral or any deposit. The word "Grameen", derived from the word "gram" or "village", means "of the village.Grameen Bank borrowers own 94% of the Bank. The remaining 6% are owned by the government.

Working model of Grameen bank:

The manager first makes a round to the 22

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appointed area to introduce Grameen policies and programs. When one approaches with genuine interests Bank manager asks her to gather 4 more members to form a group. Every group has 5 members, one as its head.

Only two members can obtain loan at

first. After 6 weeks of successful repayment another two can apply for loan..

Each borrower must belong to a five-member group. These groups do not provide any guarantee for a loan to one of their members; repayment responsibility solely rests on the individual borrower. However if one member of a group defaults, that group will never receive a loan from Grameen. So it's a kind of social pressure exerted by the group members. Grameen enjoys very high payback rates—over 98 percent.

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Grameen bank is not only a Micro financing institution but it is Micro financing plus, provide to the poor needs more than just money to transform their lives. Typical services to supplement the credit include discounted health care services, preventative health care education, literacy courses, vocational training courses, technology courses, youth programs for children of borrowers, life/disability insurance, and savings programs.

Grameen Bank is owned by the borrowers themselves —owned by women who rely on the microcredit loans for income generation. each branch has to be self-sustaining.no borrowing from the head office.Profit goes back to the borrowers.

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Grameen bank has 21,000 students with student loans, studying in medical schools and elsewhere. They have also provided some scholarships to the children of our borrowers each year. They even give loans to beggars(struggling members).

Loan Insurance

All the borrowers of Grameen bank have to pledge the ―16 Decisions. The ―16 Decisions are mentioned under:

1. We shall follow the four principles of 25

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Grameen Bank: Discipline, Unity, Courage and Hard work - in all walks of our lives. 2. Prosperity we shall bring to our families.

3. We shall not live in dilapidated houses. We shall repair our houses and reconstruct

4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus. 5. During the plantation seasons, we shall plant as many seedlings as possible. 6. We shall plan to keep our families small. We shall minimize our expenditures. We shall look after our health. 7. We shall educate our children and ensure that they can earn to pay for their education. 8. We shall always keep our children and the environment clean. 9. We shall build and use pit-latrines. 10. We shall drink water from tube wells. If it is not available, we shall boil water or use alum. 11. We shall not take any dowry at our sons' weddings; neither shall we give any dowry at

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our daughter's wedding. We shall keep our centre free from the curse of dowry. We shall not practice child marriage. 12. We shall not inflict any injustice on anyone; neither shall we allow anyone to do so. 13. We shall collectively undertake bigger investments for higher incomes. 14. We shall always be ready to help each other. 15. We shall all go there and help restore discipline. 16. We shall take part in all social activities collectively

The Repayment Mechanism

Following method is followed by Grameen for loan and repayment.

- One year loan

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- Equal weekly installments - Repayment starts one week after the loan - Interest rate of 20% - Repayment amounts to 2% per week for fifty weeks - Interest payment amounts to 2 taka per week for a 1000 taka loan

Criticism of Grameen Bank:

There were also criticisms of the gender achievements of the Bank: did it merely get women to take loans that they gave straight to their husbands?

Then, there were criticisms of the idea by Yunus that, of every Grameen Bank loan being used for micro enterprise, and every micro

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enterprise being successful. Independent fieldwork showed that Grameen Bank clients used their loans for many different purposes - business, food consumption, health, education and even dowry.

as clients stayed with Grameen Bank, they were under pressure to take bigger, ordinary loans alongside new housing loans. As a result, they took on levels of debt they could not service from their income. they were issued with larger loans by Grameen branch managers to repay earlier loans.

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Self help group (SHG)

"A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs having homogenous social and economic background voluntarily, coming together to save small amounts regularly, to mutually agree to contribute to a common fund and to meet their emergency needs on mutual help basis:"

Need of SHG's:

There are needs for SHGs, which in specific terms are as under:-

To mobilize the resources of the individual members for their collective

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economic development. To uplift the living conditions of the

poor. To create a habit of savings. Utilization of local resources. To mobilize individual skills. To assist the members financially at the

time of need. To identify problems, analyzing and

finding solutions in the group. To develop linkages with institutions of

NGOs.

(1).Structure of SHGs:

The ideal size of an SHG is 10 to 20 members. The disadvantage of having high number is that, members cannot actively participate. Also, legally it is required that an informal group should not be of more than 20

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people. The group need not be registered.

(2).Condition required for membership for SHG's:

From one family, only one person can become a member of an SHG.

The group normally consists of either only men or only women.

Women's groups are generally found to perform better. (They are better in savings and they usually ensure better end use of loans).

Members should be homogenous i.e. should have the same social and financial background. (Advantage: This makes it easier for the members to interact freely with each other, if members are both from

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rich as well as poor class, the poor may hardly get an opportunity to express themselves).

Members should be rural poor (By poor one should be guided by the living conditions).

Joint liability group (JLG)

"Joint Liability Group (JLG) is a group of individuals coming together to borrow from the financial institution. They share responsibility and stand as guarantee for each other."

The individual wanting loans will have to form into a group where each member will be providing cross guarantee for each other.

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JLG features :

3-5 members group. The group should be either all male or

female only in exception cases can there be a mixed group.

Members within a group should have similar turnover/profit and group should be economically homogeneous.

The group member should be well known to each other.

The group member should have their own business.

Lending may start from group size of not less than three members.

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NABARD Initiative in Micro Finance

Introduction

National Bank for Agriculture and Rural Development (NABARD) was established as an apex rural development bank in the year 1982, through an Act of Parliament.

provide refinance for agriculture, allied activities, small scale industries, cottage and village industries, rural artisans and crafts in an integrated manner. Earlier, RBI and GOI managed the loans and credits.i.e. distribution of loans and credits to the poor people. It was set up with an initial capital of Rs 100 crore,enhanced to Rs 2,000 crore, fully subscribed by the Government of India and the RBI.

The bank's vision is "to facilitate sustained access to financial services for the unreached poor in rural areas through various microfinance innovations in a

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cost effective and sustainable manner."

Role of NABARD

Providing refinance to lending institutions in rural areas.

Bringing about or promoting institutional development.

Evaluating, monitoring and inspecting the client banks.

NABARD is an apex institution accredited with all matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas.

It prepares, on annual basis, rural credit plans; these plans form the base for annual credit plans of all rural financial institutions.

It promotes research in the fields of rural 36

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banking, agriculture and rural development.

For MFI's:

NABARD gives loans to the MFI's after analyzing there rating and balance sheet.

Conduct the workshop where the executive of the NABARD meet the executive and employees of different Banks and MFI's and bring them together on the same podium.

NABARD gives the refinance to the MFI's also.

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Product Design

How do MFIs decide what products to offer?

The actual loan products need to be designed according to the demand of the target market. Besides the important question of what risks to cover, organizations also have to decide whether they want to bundle many different benefits into one basket policy, or whether it is more appropriate to keep the product simple.

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(i.)Techniques of product design:

To design a loan product to meet borrower needs it is important to understand the cash pattern of the borrowers. cash pattern is important so far as they effect the debt capacity of the borrowers. Lenders must ensure that borrowers have sufficient cash inflow to cover loan payments when they are due.

Efficiency depends less on the delivery model than on the simplicity of the product or product menu.

Simple products work best because they are easier to administer and easier for clients to understand.

Another efficiency strategy is to use technology to reduce paperwork, manual processing and errors.

MFIs need to conduct a costing analysis to determine how much they need to earn in

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commission to cover their administrative expenses.

How MFI's manage their repayment and risk management?

Risk is an integral part of financial services. When financial institutions issue loans, there is a risk of borrower default. When banks collect deposits and on-lend them to other clients (i.e. conduct financial intermediation), they put clients' savings at risk. Most MFIS's provides the loans without or with smaller portion of deposit or, so for them repayment of interest or principal is very risky. All MFI's face risks that they must manage efficiently and effectively to be successful. When poorly managed

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risks begin to result in financial losses, donors, investors, lenders, borrowers and savers tend to lose confidence in the organization and funds begin to dry up. When funds dry up, an MFI is not able to meet its social objective of providing services to the poor and quickly goes out of business.

What is Risk Management?

Risk management is a discipline for dealing with the possibility that some future event will cause harm.

It provides strategies, techniques, and an approach to recognizing and confronting any threat faced by an organization in fulfilling its mission. Risk management may be as uncomplicated as asking and answeringThree basic questions:

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What will we do (both to prevent the harm from occurring and in the aftermath of an "incident")?

If something happens, how will we pay for it?

Benefit of Risk Management :

Early warning system for potential problems :

A systematic process for evaluating and measuring risk identifies problems early on, before they become larger problems or drain management time and resources. Less time fixing problems means more time for production and growth.

Better information on potential consequences, both positive and negative. A proactive and forward-thinking organizational culture will help managers identify and assess new market

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opportunities, foster continuous improvement of existing operations, and more effectively performance incentives with the organization's strategic goals.

Encourages cost-effective decision-making and more efficient use of resources.

Major Risks to Microfinance Institutions:

(1). Fin ancial Risks:

Most MFIs focus on financial risks, including credit, liquidity, Interest rate, and investment risks. Mentioned under are the risks which are very critical for the MFI's.

Credit risk:

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The risk to earnings or capital due to borrowers' late and non-payment of loan obligations.

Transaction risk:

Transaction risk refers to the risk within individual loans. MFIs mitigate transaction risk through borrower screening techniques, underwriting criteria, and quality procedure for loan disbursement, monitoring, and collection.

Portfolio risk refers to the risk inherent in the composition of the overall loan portfolio. Policies on diversification, maximum loan size, types of loans, and loan structures lessen the portfolio risk.

Liquidity risk is the ―risk that an MFI 44

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cannot meet its obligations on a timely basis‖. Liquidity risk usually arises from management's inability to adequately anticipate and plan for changes in funding sources and cash needs.

Interest rate risk is the risk of financial loss from changes in market interest rates.

How to manage interest rate risk?

Managers may refinance some of the short-term borrowings with long-term fixed rate borrowings. This might include offering one and two-year term deposits as a product and borrowing five to 10 year funds from other sources. Such a step reduces interest rate risk and liquidity risk, even if the MFI pays a slightly higher rate on those funding sources.

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To boost profitability,

MFIs may purposely ―mismatch assets and liabilities in anticipation of changes in interest rates. If the asset liability managers think interest rates will fall in the near future, they may decide to make more long-term loans at existing fixed rates, and shorten the term of the MFI's liabilities. By lending long and borrowing short, the MFI can take advantage of the cheaper funding in the future, while locking in the higher interest rates on the asset side. In this case, the MFI has increased the interest rate risk in the hope of improving the profitability of the bank.

Fraud risk:

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Fraud risk is the risk of loss of earnings or capital as a result of intentional deception by an employee or client. The most common type of fraud in an MFI is the direct theft of funds by loan officers.

How to minimize fraud risk?

Introduced an education campaign to encourage clients to speak out against corrupt staff and group leaders.

Standardized all loan policies and procedures.

Established an inspection unit that performs random operational checks.

SWOT Analysis of micro finance

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SWOT stands for Strength, Weakness, Opportunity, and Threat.

Strength

Helped in reducing the poverty: By providing small loans to this people Micro finance helps in reducing the poverty.

Huge networking available: For MFIs and for borrower, both the huge network is there In India.

Weakness

Not properly regulated: there would be high case of credit risk and defaults.

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High number of people access to informal sources: According to the World Bank report 80% of the Indian poor can't access to formal source and therefore they depend on the informal sources for their borrowing and that informal charges 40 to 120% p.a.

Concentrating on few people only: India's 70% of the population lives in rural area, and that portion is not fully touched.

Opportunity

Huge demand and supply gap:. In India around 350 million of the people are poor and only few MFIs there to serving them.

Employment Opportunity: Micro Finance helps the poor people by not only providing

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them with loan but also helps them in their business, educate them and their children etc. So in this Micro Finance helping in increase the employment opportunity for them and for the society.

Huge Untapped Market: India's total population is more than 1000 million and out of 350 million is living below poverty line

Opportunity for Pvt. Banks: Many Pvt. Banks are shying away from to serve the people are unable to access big loans, because of the high intervention of the Govt.

Threat

High Competition: As the more players will come in the market, their competition will rise

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Over involvement of Govt.

Why micro finance provides loan to the women only?

A majority of microfinance programs generally target women—often more financially responsible at repaying than men—as clients, providing them with direct control over resources.

Why MFIs typically targeted women. These factors included:

Repayment rates are higher than men,51

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Women are on average poorer than men, so focusing on women can help achieve poverty targets.

Women's activities contribute to a community's economic growth, so lending to women is more efficient.

The members in a group are selected so as to be in the same age group and residing in the same locality being friends but not from family. In case of problems in recovery from even one of the members, the system of joint liability ensures recovery of the dues from all the members within a group.

Women are better borrowers because they repay their loans more faithfully than men repay and tend to spend money on improving the standard of living of their family.

It has been proved that women are those who are the most able to manage the money of the household. Experience has shown that women are a good credit risk, and that women invest their income surround the well being of their families.

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Women have proven to be the best poverty fighters. Experience and studies have shown that they use the profits from their businesses to send their children to school, improve their families' living conditions and nutrition, and expand their businesses.

By providing access to financial services only through women—making women responsible for loans, ensuring repayment through women, maintaining savings accounts for women, providing insurance coverage through women—microfinance programs send a strong message to households as well as to communities.

Why MFI’s is being criticized for providing loans to the women only?

It was found that while women were 53

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getting the loans, a "significant portion" of those loans are directly invested by male relatives (although women bear the liability for repayment)

Only 37% of the cases had women retained full or significant control over the businesses that were in their names..

One more reason why MFI's critized for giving loans to the women only because, women's are weak compared to men's and by coerce them the MFI's can easily repayment their loans.

Another reason might be that the women not often change their whereabouts, because they have the many responsibilities like children etc. and they easily found at home also.

Malegam Committee Microfinance Report

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Background

The Reserve Bank of India in October 2010 set up a Sub-Committee of its Central Board of Directors to study the issues and concerns in microfinance sector, under the Chairmanship of   Shri Y H Malegam, a senior member on the Reserve Bank’s Central Board of Directors.

RBI regulates only those MFIs which are registered with it as non-banking finance companies. Although registered companies cover over 80% of the microfinance business , in terms of number of companies, they constitute a small percentage of the total number of MFIs in the country. The RBI, however, does not prescribe lending rates for these institutions.

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The terms of reference of the Sub-Committee were as under:-

1. To review the definition of ‘microfinance’ and ‘Micro Finance Institutions

2. To examine the prevalent practices of MFIs in regard to interest rates, lending and recovery practices

3. To delineate the objectives and scope of regulation of NBFCs undertaking microfinance by the Reserve Bank and the regulatory framework needed to achieve those objectives.

4. To examine and make appropriate recommendations in regard to applicability of money lending legislation of the States and other relevant laws to NBFCs/MFIs.

7. To examine the conditions under which loans to MFIs can be classified as priority sector lending and make appropriate recommendations.

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8. To consider any other item that is relevant to the terms of reference.

Some major recommendations of the Committee are:

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

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

2.There is a restriction on the other services to be provided by the MFI which has to be in accordance with the type of service and the maximum percentage of total income as may be prescribed.

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

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“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.

A borrower can be a member of only one Self-Help Group (SHG) or a Joint Liability Group (JLG)

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

2.There should be a minimum period of moratorium between the disbursement of loan and the commencement of recovery

3.The primary responsibility for avoidance of coercive methods of recovery must lie with the MFI and its management

4.The Reserve Bank must prepare a draft Customer Protection Code to be adopted by all MFIssmen

5.For monitoring compliance with regulations, the Sub-Committee has proposed a four-pillar approach with the responsibility being shared by (a) MFI (b) industry associations (c) banks and (d) the Reserve Bank.

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Comments on the Recommendations of the Malegam Committee

In that sense this is an opportunity missed.  The following are some specific comments within this broad framework.

1.  Definition of microfinance clients as those with annual income of less than Rs 50,000 – will exclude large numbers of low income families.

2. Cap of Rs. 25,000 as the maximum loan amount – needs to be customised regionally and adjusted for inflation

3. Cap of only two lenders (1 MFI + 1 SHG or 2 MFIs) – should not be necessary

4. Pricing cap (lower of mark‐up of 10% / 12% and 24% interest) – is restrictive and difficult to implement

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5. Net Own Funds of Rs. 15 crores and the requirement that smaller NBFCs not undertake microfinance beyond 10% of their assets – does not conform with the spirit of financial inclusion

Recommendations and suggestions

Under mention are the few recommendations and suggestions, which I felt during my project on Micro Finance are:-

1. The concept of Micro Finance is still new in India. Not many people are aware the Micro Finance Industry.

So apart from Government programmes, we the people should stand and create the awareness about the Micro Finance.

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2. There are many people who are still below the poverty line, so there is a huge demand for MFIs in India with proper rules and regulations.

3. There is huge demand and supply gap, in money demand by the poor and supply by the MFIs. So there need to be an activate participation by the Private Sector in this Industry.

6. One strict recommendation is that there should not over involvement of the Government in MFIs. Because it will stymie the growth and prevent others MFIs to enter.

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Conclusion

There is no doubt that the last few years saw a gold rush in the Indian microfinance industry. This should necessarily be followed by a period of moderation, sound consultation and policy rationalisation. It may be noted that the incidence of indebtness, particularly among small and marginal farming households, in Andhra Pradesh is the highest in India. The rural distress in the state has been more than evident in reported incidents of farmers’ suicides and hunger deaths. This distress cannot be seen as resulting from “leaving out” or “excluding” the rural poor from the process of liberalisation. Instead, they have been “forced into market relations that are intrinsically loaded against them”. They have not been marginalized and excluded; instead, they have been incorporated and integrated into

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market systems in which their lack of assets, low bargaining power have operated to make their material conditions more adverse.This is perhaps the time to restart the older debates as to how to help the poor build and strengthen their resource base. This is also the time to ask under what circumstances and in what institutional form should microfinance figure in the list of anti poverty strategies.The MFIs are able to offer credit at lower interest rates to the poor compared to the traditional players. The relevance of microfinance in a developing country is that it helps the poor reduce their financial burden so that they can channelise their meager resources productively to improve livelihood situation. At the end I would conclude that, Micro Finance Industry has the huge potential to grow in future, if this industry grows then one day we'll all see the new face of India, both in terms of high living standard and happiness.

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At last I am concluding by project with a very famous saying:

"Do not wait; the time will never be just right. Start where you stand and work with whatever tools you may have at your command, and better tools will be found as you go along"

Napolean Hill

References

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Economic and political weekly, Commentary, Tara Nair

www.rbi.org.in/press releasewww.forbes.comwww.google.comwww.microfinanceinsight.com www.indiamicrofinance.com www.ifmr.ac.in www.gdrc.org www.accion.org www.nabard.org/microfinance

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