Microfinance - An Introduction

Microfinance services should mean providing thrift, credit of small amounts (say, Rs50000 for small and tiny enterprise, agriculture, allied activities, including consumption purposes; or Rs.150000 for housing purposes) or micro insurance services to any individual or a member of a SHG or a SHG itself or any such other groups formed for the purpose of providing micro finance services.

2. NABARD Task Force (1999) has defined microfinance "provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi urban and urban areas for enabling them raise their income levels and improve their living standards."

3. Microfinance institutions (MFIs) engaged in such activities are mostly incorporated under one of the following forms:

(a) Non Banking Financial Companies (NBFCs) registered under Section 25 of the Companies Act, 1956;
(b) Other NBFCs engaged in microfinance activities;
(c) Societies registered under Societies Registration Act; and
(d) Trusts registered under the Trusts Act/Indian Trusts Act.

4. Multiple models have emerged in different parts of the country. Most of the banks follow Self Help Group model and SHG Bank linkage programme has emerged as an acclaimed and successful model. The scheme was launched in 1992 by NABARD and the progress can be seen in the post "NABARD on Microfinance" on this Blog. As can be seen from from NABARD figures, 2.2 million SHGs, involving approximately 33 million households have been credit linked with credit flow of Rs 11,398 crores by end of March 2006. Other microfinance initiatives are estimated to have a total disbursements of around Rs 2000 crores by aroung 800 non government organizations, not for profit companies and some for profit non banking finance companies.


5. It may be noted that Reserve Bank has advised the banks that they may not impose any models for financing by them. However, under the SHG-Bank Linkage Programme, the following three models had evolved:

a) Where banks promote, nurture and finance the SHGs
b) Where NGOs promote and nurture SHGs, but banks do direct financing to the SHGs; and
c) Where Non Government Organizations (NGOs) not only promote and nurture SHGs, but also act as financial intermediaries on behalf of financing banks.

6. Among the above three models, the second model wherein NGOs promote the SHGs and banks provide credit directly to the groups is the most popular model.

Regulatory Initiatives

Five most important policy prescription by Reserve Bank for promoting MFIs need to be recognised:

1 Banks have been advised that financing of SHGs should be included by them as part of their lending to the weaker sections and that SHG lending should be reviewed at the SLBC level and by the banks at regular intervals.

2 To further promote the Self Help Group momentum in the country, banks were advised in 1998 that SHGs which are engaged in promoting the savings habits among their members will be eligible to open savings bank accounts and that such SHGs need not necessarily have availed of credit facilities from banks before opening savings bank accounts.

3 Subsequent to the Monetary and Credit Policy announcement for the year 1999-2000, banks were also advised that interest rates applicable to loans given by banks to micro credit organizations or by the micro credit organizations to SHGs/ member beneficiaries will be left to their discretion.

4 In January, 2000 all NBFCs and RNBCs were advised that those NBFCs which are engaged in microfinancing activities, licensed under Section 25 of the Companies Act, 1956, and which are not accepting public deposits are exempted from the purview of Sections 45-IA (registration), 45-IB (maintenance of liquid assets) and 45-IC (transfer of a portion of profits to Reserve Fund) of RBI Act, 1934.


5 In view of the need to protect the interests of depositors, MFIs would not be permitted to accept public deposits unless they comply with the extant regulatory framework of the Reserve Bank. However, as an additional channel for resource mobilization for them, the Reserve Bank, in April 2005 has enabled NGOs engaged in microfinance activities to access the ECBs up to US$ 5 million during a financial year for permitted end-use, under automatic route.

NABARD on Micro Finance

Micro Finance - As described and seen by the National Bank for Agriculture and Rural Development:

MF in India - An Overview

Background: The post nationalisation period in the banking sector witnessed substantial amount of resources being earmarked towards meeting the credit needs of the poor. The banking network underwent an expansion phase without comparables in the world. The branch expansion was synergised with massive manpower recruitment drive for manning such branches. Credit came to be recognized as a remedy for many of the ills of the poverty. Credit packages and programmes were designed based on the perceived needs of the poor. Programmes also underwent qualitative changes based on the experiences gained. Besides the programmes initiated by the Central Government, a large number of credit-based programmes were introduced by the state governments with large resource allocations.
While the underlying objectives were laudable and substantial progress was achieved, credit flow to the poor, and especially to poor women, remained low. This led to initiatives that were institution led, that attempted to converge of the existing strengths of rural banking infrastructure and leverage this to better serve the unbanked poor. The pioneering efforts at this were made by National Bank for Agriculture and Rural Development (NABARD).
NABARD during the early eighties conducted a series of research studies in association with MYRADA (a leading NGO from South India) and also independently which showed that despite having a wide network of rural bank branches that implemented specific poverty alleviation programmes and self-employment opportunities through bank credit for almost two decades, a very large number of the poorest of the poor continued to remain outside the fold of the formal banking system. These studies also showed that the existing banking policies, systems and procedures, and deposit and loan products were perhaps not well suited to meet the most immediate needs of the poor. It also appeared that what the poor really needed was a better access to these services and products, rather than cheap subsidised credit. Against this background, a need was felt for alternative policies, systems and procedures, savings and loan products, other complementary services, and new delivery mechanisms, which would fulfill the requirements of the poorest, especially of the women members of such households. The emphasis therefore was on improving the access of the poor to microFinance (mF) rather than just micro-credit.

The launching of its Pilot phase of the SHG (Self Help Group) Bank Linkage programme in February 1992 could be considered as a landmark development in banking with the poor. The SHG-informal thrift and credit groups of poor came to be recognised as bank clients under the

Pilot phase.
The strategy involved forming small, cohesive and participative groups of the poor, encouraging them to pool their thrift regularly and using the pooled thrift to make small interest bearing loans to members, and in the process learning the nuances of financial discipline. Subsequently, bank credit also becomes available to the Group, to augment its resources for lending to its members. It needs to be emphasised that NABARD sees the promotion and bank linking of SHGs not as a credit programme but as part of an overall strategy for providing financial services to the poor in a sustainable manner and also an empowerment process for the members of these SHGs. NABARD, however, also took a conscious decision to experiment with other successful strategies such as replicating Grameen model, financing NGO-mFIs to enable them to onlend to the groups.

The NABARD commenced a Pilot Project country in1992 aimed at promoting and financing 500 SHGs across the country. Since then the SHG- bank linkage strategy has come a long way. The strategy includes financing of SHGs promoted by external facilitators like NGOs, bankers, socially spirited individuals and government agencies, as also promotion of SHGs by banks themselves and financing SHGs directly by banks or indirectly where NGOs and similar organisations act as financial intermediaries.


Mainstreaming of SHG Bank linkage programme

The Pilot phase was followed by setting up of a Working Group on NGOs and SHGs by the Reserve Bank of India in 1994, which came out with wide ranging recommendations on internalisation of the SHG concept as a potential intervention tool in the area of banking with the poor. The Reserve Bank of India accepted most of the major recommendations and advised the banks to consider lendings to the SHGs as part of their mainstream rural credit operations. Based on very successful feedback of the pilot run of the Programme, NABARD in 1998 crystalised its Vision for providing access to one third of the rural poor through linking of 1million SHGs by 2007. What followed was massive scaling up of the training and capacity building awareness programmes by NABARD covering a large number of officials and staff of NGOs, banks, government agencies and rural volunteers in SHG promotion, nurturing, appraisal and financing. The vision of linking 1 million SHGs was achieved in the year 2004
(microFinance is be defined by the as "provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards").


Shift to the New Paradigm

The poor

Perceived thrift as their strength as also as the bonding factor among themselves
Realised that timely and adequate credit was preferable and productive than subsidies and doles. They needed hassle-free delivery mechanisms.


NGOs

Acted as catalysts of change. Combined social and economic agenda with synergistic effect
Recognised sustainability as the core factor in development.


Banking system - Accepted SHG-bank linkage as a cost effective means of reaching the poor
Accepted peer pressure as collateral substitute for excellent recovery of loans.


Government - Formulated supportive policy framework
Encouraged routing of social programmes through SHGs


Reserve Bank of India - RBI policy pronouncements on micro Finance led to increased involvement of banks.

Liberalised interest rates and deregulated interest rate structure for micro credit, leading to flexibility in lending rates.


NABARD - Provided inputs in capacity building for banks and partner agencies
Promoted the idea of organising thrift and credit groups among the NGOs as an add-on activity and encouraged linking them with banks. Provided loanable funds to banks and financial support to eligible mFIs, to ease the fund flow position to the sector.


Highlights of SHG bank linkage programme as on 31 March 2006.

During the period April 2005 to March 2006, 620109 new SHGs were financed by banks to the tune of Rs 44.99 billion by way of loans. Cumulatively, banks have lent Rs 113.97 billion to 2238565 SHGs.

NABARD has extended a refinance of Rs 10.68 billion to banks during 2005-06 bring the cumulative refinance amount to Rs 41.60 billion.

44362 branches of 545 banks (Commercial banks- 47; Regional Rural banks-158; & Cooperative banks - 340) situated in 583 districts in 30 states of the country are participating in the programme.

About 32.98 million poor households have gained access to formal banking system through SHG bank linkage programme.

Nearly 90% of the groups are women groups.


Promotional grant assistance

Capacity building

During 2005-06, bank officials numbering 30,363 and 4339 NGO staff, 8331 government officials and 2,03,431 Self help group members have been trained with grant support from NABARD. Cumulatively 1.3 million participants have been trained through various SHG related capacity building programmes since inception of the programme from 1992.

Source: http://nabard.org/microfinance/mfoverview.asp