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Introduction to Microfinance
It has long been a challenge for interested parties, such as government officials, nongovernmental organizations (NGOs) and philanthropists, to improve access by the poor to
financial resources that can help them increase their incomes.
3
Most of those trapped in poverty do not have enough income to open accounts with
traditional banks. As a result, many look for loans from family, friends and even loan
sharks exploiting the black market. One way to help the world's poorest comes in the form
of microfinance, which brings basic banking entrepreneurs began lending money on a large
scale to the working poor. One individual who gained worldwide recognition for his work in
microfinance is professor Muhammad Yunus who, tools to the world's most needy.
The term "microfinance" describes the range of financial products (such as microloans,
microsavings and micro-insurance products) that microfinance institutions (MFIs) offer to
their clients. Microfinance began in the 1970s when social with Grameen Bank, won the 2006
Nobel Peace Prize. Yunas and Grameen Bank demonstrated that the poor have the ability to
pull themselves out of poverty. Yunus also demonstrated that loans made to the working poor,
if properly structured, had very high repayment rates. His work caught the attention of both
social engineers and profit-seeking investors.
Historically, the goal of microfinance was the alleviation of poverty. For many years,
microfinance had this primary social objective and so traditional MFIs consisted only of nongovernmental organizations (NGO), specialized microfinance banks and public sector banks.
More recently, the marketplace has been evolving. For example, some non-profit MFIs are
transforming themselves into profit-seeking institutions to achieve greater strength,
sustainability and market reach. They are being joined in the microfinance marketplace by
consumer finance companies, like GE Finance and Citi Finance. "Big-box" consumer
retailers, like Wal-Mart, Elektra and Tesco are beginning to emerge as consumer lenders and
a few are venturing into microfinance. Although most MFIs still consider poverty alleviation
the primary goal, selling more products to more consumers is the primary motivation of many
new entrants.
Microloans: Microloans (also known as microcredit) are loans that have a small
value; most loans are less than $100 in size. These loans are generally issued to
Group (SHG) Bank linkage program. All these received mixed success and paralelly, the civil
society organizations started feeling the need to offer financial services to the poor. Credit
was getting increasingly recognized as an essential tool to break the vicious cycle of poverty.
Gradually, Microfinance Institutions emerged in 1990s and 2000s. MFIs today differ in size
and reach; some serve a few thousand clients in their immediate geographical area, while
others serve hundreds of thousands, even millions, in a large geographical region, through
numerous branches.
The Grameen Model:
The Grameen Bank started in 1976 by the Nobel Laureate, Professor Muhammad Yunus in
Bangladesh. Grameen today has some 2468 branches in Bangladesh, with a staff of 24,703
people serving 7.34 million borrowers from 80257 villages. Grameens methods are applied
in 58 countries including the United States. Grameen Bank borrowers own 94% of the bank.
The remaining 6% are owned by the government.
Working Model of Grameen Bank:
Bank Holding regular and usually weekly meetings which are supervised by a MFI worker
who maintains the records, where savings and repayments are collected and handed over to
the MFI worker, Organizing contributions to one or a number of group savings funds, which
can be used by the group for a number of purposes, usually only with the agreement of the
MFI which maintains the group fund accounts, Guaranteeing loans to their individual
members, by accepting joint and several liability, by raising group emergency funds and by
accepting that no members of a Group will be able to take a new loan if any members are in
arrears, Arising from the above, appraising fellow-members loan applications, and ensuring
that their fellow-members maintain their regular savings contributions and loan repayments.
Micro finance in India
Microfinance sector has grown rapidly over the past few decades. Nobel Laureate
Muhammad Yunus is credited with laying the foundation of the modern MFIs with
establishment of Grameen Bank, Bangladesh in 1976. Today it has evolved into a vibrant
industry exhibiting a variety of business models. Microfinance Institutions (MFIs) in India
exist as NGOs (registered as societies or trusts), Section 25 companies and Non-Banking
Financial Companies (NBFCs). Commercial Banks, Regional Rural Banks (RRBs),
cooperative societies and other large lenders have played an important role in providing
refinance facility to MFIs. Banks have also leveraged the Self-Help Group (SHGs) channel to
provide direct credit to group borrowers.
With financial inclusion emerging as a major policy objective in the country, Microfinance
has occupied centre stage as a promising conduit for extending financial services to unbanked
sections of population. At the same time, practices followed by certain lenders have subjected
the sector to greater scrutiny and need for stricter regulation.
Although the microfinance sector is having a healthy growth rate, there have been a number
of concerns related to the sector, like grey areas in regulation, transparent pricing, low
financial literacy etc. In addition to these concerns there are a few emerging concerns like
cluster formation, insufficient funds, multiple lending and over-indebtedness which are
arising because of the increasing competition among the MFIs. On a national level there has
been a spate of actions taken to strengthen the regulation of MF sector including, enactment
of microfinance regulation bill by the Government of Andhra Pradesh, implementation of
sector-specific regulation by Reserve Bank of India and most recently, release of Draft
Microfinance Institutions
Though many central government and state government poverty alleviation programs are
currently active in India, microfinance plays a major contributor to financial inclusion. In the
past few decades it has helped out remarkably in eradicating poverty. Reports show that
people who have taken microfinance have been able to increase their income and hence the
standard of living.
In India microfinance operates through two channels:
1. SHG Bank Linkage Programme (SBLP)
2. Micro Finance Institutions (MFIs)
Highlights of the Microfinance sector
- The gross loan portfolio of India's microfinance sector accounts for more than 7 percent of
the sector's worldwide loan portfolio size. As much as 30 percent of the world's microfinance
borrowers are in India.
- While the average size of a microfinance loan is $522.8 globally, according to MIX Market
data, the average loan size in India is only about a fourth of that at $144.
- India is the largest microfinance market in the world, with some 120 million homes with no
access to financial services, estimates CRISIL Research. MFIs are mostly concentrated in
India's southern states, serving about 70 million people.
- The microfinance market has grown at an average annual rate of nearly 80 percent over the
last three years, Sa-Dhan said. Drawn to the growth, private equity firms have moved in, with
MFIs accounting for about 40 percent of all Indian private equity deals in the last two years,
according to Venture Intelligence.
- There are more than 3,000 MFIs and NGO-MFIs, of which about 400 have active lending
programmes, according to CRISIL Research. The top 10 MFIs account for nearly threefourths of loans outstanding.
List of MFIs:
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Bandhan
Bandhan is a famous micro finance company started in 2001 by Mr.
Chandra Shekhar Ghosh. In 13 years company is providing services in 22
States and Union Territories. It is a Non Banking Financial Company that
provides small loans to the needed customers.
Headquarter: Kolkata, West Bengal| Number of Branches : 385
Table 1 tabulates the major regulations applicable to NBFCs as stipulated by the RBI.
Table 1: MFIs by Type of Registration
Category
Type of MFI
Not for
Profit
Section 25
Section 25 of Companies
Companies (10)
Act, 1956
Cooperatives (100)
NBFC (50)
NBFC-MFI
Mutual
Benefit
For-Profit
Registration
To alleviate the poverty and to empower the women, the micro-finance has emerged as a
powerful instrument in the new economy. With availability of micro-finance, self-help groups
(SHGs) and credit management groups have started in India. The Self Help Groups (SHGs)
are created small and homogeneous groups to reap economic benefits for members out of
mutual savings, solidarity and joint responsibility through peer monitoring. The main
advantage to banks of their links with the SHGs is the externalization of a part of work items
of credit cycle such as assessment of credit needs, appraisals, disbursal supervision and
repayment, reduction in the formal paper work and transaction costs.
Self-Help Groups (SHGs) are the thrift and credit groups formed informal way whose
members pool savings and relend within the group on rotational or needs basis. These groups
have operated on co-operative principles and do collective actions. They succeeded in
performing/providing banking services to their members door steps without any defaults.
They are formed for addressing their common problems. They make regular savings habit
and use the pooled savings for the benefit of their members through a structured process of
essential financial intermediation like prioritization of needs, setting self-determined terms
for repayment and keeping records. It builds financial discipline and credit history that then
encourages banks to lend to them in certain multiples of their own savings and without any
demand for collateral security.
Stages of Group Dynamics:
There are four stages to form an SHG:
Forming: In this stage, people come together informally and meet. They are
encouraged to talk about their problems and solutions. During this stage, based on the
felt need, homogeneous groups emerge naturally.
Storming: During this stage conflicts between individual interest and groups interest
surface and are dealt with. The leadership emerges. The procedures, rules and roles
are established.
Performing: This is the final stage when the group becomes operational and starts
functioning for the benefit of its members.
GOALS OF SHGS
Self-help groups are started by non-profit organizations (NGOs) that generally have broad
anti-poverty agendas. Self-help groups are seen as instruments for a variety of goals including
empowering women, developing leadership abilities among poor people, increasing school
enrolments, and improving nutrition and the use of birth control. Financial intermediation is
generally seen more as an entry point to these other goals, rather than as a primary objective.
This can hinder their development as sources of village capital, as well as their efforts to
aggregate locally controlled pools of capital through federation, as was historically
accomplished by credit unions.
Characteristics of SHG
The following are the charecteristics of SHG:
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Objectives
The following are the objectives of SHG Bank linkage program:
To develop mutual faith and confidence between the rural poor and bankers.
To combine sensitivity, flexibility and responses of the informal credit system with the
strength of administration capabilities, technical strength and the financial resources
of the formal financial institutions.
To expand credit flow/ financial services to the rural poor with less transaction costs.
Training program
Several factors explain the rapid increase in program outreach in recent years. Apart from
natural learning process of all actors involved, NABARDs extensive training programs to all
the actors involved played a significant role. The program faces several challenges. Most
critical is the issue of sustainability of the SHGs; many are dependent on the promoter
organizations for even routine tasks such as maintenance of account books and conducting of
meetings where transactions take place. Others operate at a low equilibrium of low savings
and low credit that is unlikely to contribute significantly to improving the lives of SHG
members
Keeping in view the expansion of SHG Bank Linkage Programme, changing needs, policies,
priorities, etc., NABARD undertook a comprehensive Training Need Assessment (TNA) with
the assistance of GIZ. A National Level Training Consultation Meet on SHG-bank Linkage
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training was also organized and findings of the study were deliberated upon with all
stakeholders. Based on the recommendations made at the consultation meet, the existing
training modules were revised and a revised handbook on Training Programmes under SHGBank Linkage was forwarded to all scheduled commercial banks and RRBs.
Grant of Assistance
The Government grants assistance to the formation and development of SHGs. The
following table shows the cumulative sanction made by the Government as on 31.03.2014 to
various agencies and also the disbursement of grant up to 31.03.2014 to such agencies.
Grant of assistance granted to partners of SHG BLP
(as on 31.03.2014)
Rs. In lakh
Agency
Cumulative sanction up to
31.03.2014
Amount
SHG (No.)
Amount
SHG (No.)
NGOs
23,375.14
574866
7229.16
378890
RRBs
764.24
49800
195.81
46164
1416.98
83069
369.97
52501
460.12
26883
82.27
11228
Farmers club
40.63
2544
20.40
9832
SHG Federation
28.61
250
1.85
46
Co-op banks
IRVs
16
PACs
394.45
8533
4.28
85
Total
26283.37
745945
7903.74
498746
Savings Balance
Loans disbursed
Loans outstanding
2010 11
6551.41
16534.77
36340
2011 12
8214.15
20585.36
39375.30
2012 - 13
9897.42
24017.36
42972.52
The above table witnesses that the savings in respect of SHG is on the increase. The loan got
by them is also in the increase. But the loan outstanding is on the increase which is not good
for the development of SHGs.
CB
(Public
sector)
31.03.13
31.03.14
2129.23
1966
6.48
8.39
7.02
CB (Pvt.
sector)
1403.72
1387.42
74.37
46.75
58.56
5.30
3.69
4.22
RRBs
426.34
430.88
691.89
4.95
4.10
6.26
Co-op
banks
1916 14
2490.16
130.97
180.06
215.85
6.84
8.13
8.67
2212.73
2786.92
2932.67
6.09
7.08
6.83
Total
1268 26
Amount of NPAs as on
2214.63
18
31.03.13
31.03.14
Amount of NPAs as on
North
1178.28
1160.68
1100.64
81.55
129.87
150.46
6.92
11.19
13.67
NE
Region
993.27
796.76
753.80
51.33
68.23
66.96
5.17
8.56
8.88
Eastern
4629.80
5538.13
4944.63
337.08
570.56
547.42
7.28
10.30
11.07
Central
2780.29
2776.85
2696.66
367.03
479.76
508.98
13.20
17.28
18.87
Western
1363.78
1467.52
1640.46
112.14
126.57
182.26
8.22
8.63
11.11
1263.59
1411.93
1476.57
4.98
5.11
4.64
2212.73
2786.92
2932.67
6.09
7.08
6.83
Southern
Total
The overall NPA percentage of loans to SHGs has come down marginally from 7.08% as on
31.3.2013 to 6.83% as on 31.03.2014 thereby reversing upward swing in NPA observed
during the last few years. However, the level of NPA is still alarmingly high compared to
position 5 years back (2.9% as on 31.3.2010). Moreover, the decline in the NPA percentage
has been reported only in the Southern Region with high progress, while all other regions
have continued with the upward swing in NPAs during the year. As efforts are being made
to spread the reach of SHG-BLP to the resource poor regions, the continued upsurge in NPAs
in these regions needs to be viewed quite seriously.
Recent Developments
Annual Report 2013-14 of NABARD says that financing of SHGs by banks has undergone a
paradigm shift with the spread of the SHG Bank linkage programme, substantial increase in
quantum of credit disbursed and adoption of cash credit system of lending which has also led
to increasing delinquencies in SHG financing. Developing appropriate norms for selection of
SHGs is critical for mitigating credit risks and ensuring the quality of financing done by
banks. Accordingly, norms were developed for assessing SHGs for credit linkage and the
same was circulated to all the banks. These norms can be followed by the financing banks at
the time of first credit linkage of SHGs and also for repeat linkage of mature SHGs including
cases where higher quantum of credit is requested (i.e. credit in excess of four times of the
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group corpus). Similar norms were also suggested to enable banks to take up appraisal of
JLGs for financing.
Mobile based accounting system for SHGs
A mobile based book keeping system which helps SHGs to maintain their financial
transaction electronically in their local language and allows monitoring of the same by all
stakeholders was implemented for 100 SHGs in Dharampuri district of Tamil Nadu. Under
this system, SHGs update their transactions, meeting details by sending SMS from their
mobile phones which is loaded with the software developed by NABARD. After the success
of the pilot to the satisfaction of all stakeholders, the project has been upscaled for 10,000
SHGs. The SHGs will be charged 35.00 per month for the services. NABARD has
sanctioned 12.00 lakh as grant for bearing a part of SHGs monthly charges for first two
years.
Tablet PC based accounting system for SHGs
Another pilot project was designed to monitor the day to day transactions of SHGs and
updation of MIS on a real time basis by entering data in tablet PC. The field staff of NGO
records the transactions and the SHGs get a copy of the records by paying fees. The pilot was
successfully completed in January 2013 in 100 SHGs of Nandurbar district of Maharashtra.
The project has now been upscaled for 50,000 SHGs where NABARD will give grant
assistance up to 60 lakh to bear part of the monthly charges of SHGs during the first two
years. The SHGs will pay a flat rate of 40 per month for the services for next three years.
Suggestions
The following are the suggestions for the improvement of SHG Bank linkage program:
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To encourage banks to take keen interest in furthering the SHG movement, perhaps a
scheme of performance-linked incentive could be considered
The performance indicator for the banks may be with reference to the credit disbursed
under the SHG-Bank linkage programme in the lagging regions.
Specific funds may be created to address the regional imbalances in the programme.
The spread of SHGs in North, Eastern and North-Eastern Region is poor. One of the
reasons for this is the weak banking network and social backwardness and less NGO
activity. There is a need to evolve SHG models suited to the local context.
Banks, with the help of NABARD, should evolve a common checklist for all SHGs
with very simple record keeping.
In the ever changing technology there is good scope for ICT tools to reduce cost of
financial inclusion. This needs to be sufficiently explored for the benefit of both banks
and rural SHG members.
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Cooperative Society:
A Co-operative Society is formed as per the provisions of the Co-operative Societies Act,
1912. At least ten persons having the capacity to enter into a contract with common economic
objectives, like farming, weaving, consuming, etc. can form a Co-operative Society.
Characteristics of Co-operative Society:
Open membership Voluntary Association State control Sources of Finance Democratic
Management Service motive Separate Legal Entity Distribution of Surplus Self-help through
mutual cooperation
Recently, the Prime Minister, Narendra Modi has asked the bankers to study the successful
micro finance models being followed in other parts of the world and try to adapt them
according to the local requirements.
Speaking after the launch of the Pradhan Mantri Mudra Yojana aimed at funding the small
entrepreneurs of India, Modi said that while there are a number of facilities provided for the
large industries in India, there is a need to focus on 5 crore 75 lakh self-employed people who
use funds of Rs 11 lakh crore, with an average per unit debt of merely Rs 17,000 to employ
12 crore Indians, reported a PIB release.
The Prime Minister said that MUDRA scheme is aimed at funding the unfunded. MUDRA
will build on experiences of some of the existing players, who have demonstrated ability to
cater to the Non Corporate Small Business segment to build a financing architecture and right
eco-system for both the entrepreneurs as well as the last mile financiers to the segment.
Access to finance in conjunction with rational price is going to be the unique customer value
proposition of MUDRA.
The establishment of MUDRA would not only help in increasing access of finance to the
unbanked but also bring down the cost of finance from the Last Mile Financiers to the
informal micro/small enterprises sector. The approach goes beyond credit only approach and
offers a credit plus solution for these myriad micro enterprises, creating a complete
ecosystem spread across the country, said the Prime Minister.
Logo of MFIN
providing advisory services and technical consultancy to Alpha in its effort to get the
credit bureau services being made available to the MFI sector.
a) The maximum number of MFIs who can lend to one client is three, and the maximum loan
outstanding from all the three MFIs together to a single client is restricted to Rs. 50,000/- at
any point of time.
b) This cap will cover only unsecured loans given within the joint liability group mechanism
c) Any secured loans or individual business loans will not be covered under this cap.
d) The code will not cover the credit norms to be fixed by individual member MFIs.
C. Data Sharing /Incident Sharing:
In addition to the formatted data supplied to the Credit Bureaus like CIBIL and High Mark,
the MFIs should agree to participate in a forum to share qualitative credit information.
a) Whenever any member comes across Incidents of High Default (IHD), the member should
inform the Association of the same so that the other members are made aware of it. However
whether any other member would further lend to clients in such an area would be the choice
of each individual MFI based on their credit policies
b) In case of any Incidents of High Default is faced by one MFI, all members shall cooperate
in a recovery drive and restrain lending in that area till things are streamlined.
D. Recruitment:
a. The code covers all MFI staff, in particular field staff up to the branch manager cadre.
b. Any member MFI should have at least 50 percent of its net new recruitment in any
particular year as people whose immediate previous job has not been with another member
MFI.
c. As a matter of free and fair recruitment practice, there will be no restriction on hiring of
staff from other MFIs by legitimate means in the public domain like general recruitment
advertisements in local newspapers, web advertisements on site, walk-in interviews, etc.
d. Whenever a member MFI recruits from any other member MFI, it will be mandatory to
seek a reference check from the previous employer.
e. All member MFIs also agree not to recruit anybody from the other members without the
relieving letter / no due certificate from the previous MFI employer.
f. All member MFIs agree to provide such relieving letter / no due certificate to the outgoing
employee in case he has given proper notice, handed over the charge and settled all the dues
towards the MFI.
g. Any staff member who is discovered to have lied about his background of working with
any other MFI, will be asked to leave immediately by the recruiting MFI.
E. Whistle Blowing:
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The Bill seeks to provide a statutory framework to regulate and develop the micro
finance industry.
The Reserve Bank of India (RBI) shall regulate the micro finance sector; it may set an
upper limit on the lending rate and margins of Micro Finance Institutions (MFIs).
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The Bill provides for the creation of councils and committees at central, state and
district level to monitor the sector.
The Bill allows MFIs to accept deposits. Unlike banks, there is no facility for
insuring customer deposits against default by MFIs. The minimum capital
requirement is also lower, though RBI may prescribe higher requirements.
The Development Fund for MFIs is to be managed by the RBI. The Bill also enables
regulatory powers to be delegated to NABARD. Both these provisions could lead to
conflict of interest.
The Bill provides for the creation of micro finance committees at central, state and
district levels to oversee the sector. However, the formations of these committees are
not mandatory.
The Bill allows MFIs to provide pension and insurance services. However, it does not
provide for regulation by or coordination of RBI with the respective sector regulators
Recovery mechanisms
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The Reserve Bank of India appointed sub-committee will examine the recovery mechanism
of microfinance institutions and their interest rate practices, amid criticism of these lenders
charging exorbitant loans rates and using strong arm tactics for recovery.
To examine the prevalent practices of MFIs regarding interest rates, lending and recovery
practices, to identify trends that impinge on borrowers' interest, the RBI said in a
notification.
The Reserve Bank had appointed a sub-panel, under the Chairmanship of Y. H. Malegam, to
look into the functioning of MFIs. The RBI will examine the conditions under which loans to
MFIs could be classified as priority sector lending and give appropriate recommendations.
At present, MFIs charge up to 34 per cent interest rate a year on loans.
Although the companies registered with the RBI cover over 80 per cent of the microfinance
business, in terms of numbers of MFI, they constitute only a small percentage.
The Finance Ministry is preparing a Bill on regulating MFIs and has finished consultations
with stakeholders to table the Bill.
But this has been delayed now, since the whole issue came under a lot of controversy after a
number of suicide cases were reported in Andhra Pradesh, allegedly due to coercive methods
adopted by these lenders to recover their money from poor borrowers.
This prompted the State to promulgate an Ordinance to rein in MFIs and the RBI to constitute
a sub-committee to look into the functioning of these lenders.
The RBI said that the sub-committee would examine and make appropriate
recommendations regarding the applicability of money lending legislation of the States and
other laws to NBFCs/ MFIs.
The sub-committ ee would also detail out the objectives and scope of regulations of NBFCs
undertaking microfinance by the RBI and the regulatory framework needed to achieve those
objectives, the RBI said
b) The use of out-sourced recovery agents was reduced and more of their own
employees were used for recovery particularly in sensitive areas.
c) The types of products were examined and recovery methods were fine tuned
to recognize the variances in these products.
d) Training and supervision were greatly enhanced.
e) Compensation methods for staff were reviewed and greater emphasis was given to areas of
service and client satisfaction than merely the rate of recovery.
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Microfinance In Bangladesh
Bangladesh has been known as the birthplace of microfinance, and competition has markedly
increased during the last decade. Since its inception, microfinance has evolved as an economic
development approach to benefit low-income people in rural and urban areas. Bangladesh has one of
the longest histories with microfinance. Since various pilot programs and experiments were conducted
by Grameen Bank and BRAC, microfinance has undergone continuous improvement in the country.
Now, Bangladesh boasts a large number of well-known microfinance institutions (MFIs) including
Grameen Bank, BRAC, and the Association of Social Advancement (ASA). Simultaneously, many
smaller MFIs have started operations throughout Bangladesh. As of December 2008, 402 MFIs
possess a license from the Microcredit Regulatory Authority (MRA) and 4,236 MFIs have applied for
a license. I
As the microfinance market has matured in recent years, competition has increased among major
MFIs. Against this backdrop of intense competition, overlapping loan problems among major MFIs
and borrowers has emerged as a problem in Bangladesh. While poor people have more choices from
which MFIs to borrow money, the number of people who use multiple loans from various MFIs has
been increasing. As a result, there are ever more heavily indebted people in Bangladesh, and this is
beginning to pose a threat to MFIs and the microfinance industry. Considering how many MFIs
operate in Bangladesh, the microfinance market seems to have become saturated.
The object of this study is to analyse the overlapping loan problems based on previous research and
interviews the author conducted with ASA borrowers and ASA field staff in Rajshahi and Comilla,
Bangladesh in 2009. It will then describe issues caused by those overlapping loan problems. In
conclusion, it will recommend measures that the whole microfinance industry in Bangladesh should
take to prevent this problem from worsening.
Microfinance is entering into a new and more dynamic phase. The launching of initial public offerings
(IPOs), innovations in mobile microfinance services, remittance through microfinance institutions
using latest communications technology are the new dimension of microfinance that bring finance and hope - to the world's least developed countries. Microfinance is rapidly shifting from a niche
product to a globally recognized form of finance and becoming more sophisticated and diverse.
Bangladesh microfinance sector is mature now and its assets constitute around 3 percent of GDP in
2010. There are four main types of institutions involved in microfinance activities in
Bangladesh:
Grameen Bank
NGO-MFIs that have received licenses from MRA
Commercial and specialized banks
Government sponsored microfinance programs (e.g. Through BRDB, cooperative societies
and programs under different ministries).
Total outstanding loan of this sector was around Tk. 210 billion (USD 3.2 billion) in December 2010
disbursed among 30 million poor people and savings worth Tk. 160 billion (USD 2.3 billion) which
helped them to be self-employed and accelerated overall economic development process of the
country.
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Microcredit Regulatory Authority (MRA) has been established by the Government of the Peoples'
Republic of Bangladesh under the "Microcredit Regulatory Authority Act -2006" to promote and
foster sustainable development of microfinance sector through creating an enabling environment for
NGO-MFIs in Bangladesh. As the statutory body MRA monitors and supervises microfinance
operations of NGO-MFIs. License from the Authority is mandatory to carry out microfinance
operations in Bangladesh. MRA publishes statistical information of microfinance sector on a regular
basis. The NGO-MFIs provide operational information on a prescribed format twice a year and
financial information annually. This publication is based on information provided for the fiscal Year
2010 by 482 NGO-MFIs.
Sales
Commercial Banks; 9%
33
Above graphs clearly depicts that the loan portfolio of Indian MFIs is increasing tremendously year
on year as compared to Bangladeshi MFIs. Leaders of MFIs in India has shown a high growth in
respect of gross loan portfolio as SKS loan portfolio has grown by more than 900 times in just four
year, Spandana loan portfolio rose to around Rs.800 million from Rs.100 million from 2006-10,
similarly Shares loan portfolio has quadrupled from 100 to around 400 million in these year.
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On the other hand, Bangladesh MFIs leader's loan portfolio is also increasing but the rate of growth is
not as such of Indian MFIs. Coming on to the comparison of overall MFIs industry in both the
countries, result were similar to that of top institutes in both the countries.
From the above graph it is evident that the loan portfolio is growing tremendously in India, which has
risen to 9.18 times (around 918%) in 2010 from 2006. Whereas in Bangladesh it has just decline from
73.66%(2006) to 63.35% in 2010 around 10.31% has decline .This might be because of the fact that
Serious charges emerged about microfinance borrowers taking on multiple loans and too much debt,
coercive collection practices by microfinance staff, and even suicides among borrowers who were
unable to meet their payments Moreover the population of India is around 8 times larger than that of
Bangladesh, therefore the absolute value of loan portfolio has to be higher in India. And the data of
last five years is showing that the microfinance activities are penetrating at a good speed in India. (As
per CIA, World Fact book Indias population (July 2011) : 1,189 million; Bangladesh : 158 million).
35
These graph reflect that the number of active clients of Bangladesh MFIs is much higher than that of
Indian MFIs. Bangladeshi MFIs are showing minuscule addition of clients, this might be because of
the fact that the concept of microfinance is older in Bangladesh, therefore these institutes may have
already reached a mature stage. Whereas clientele of Indian MFIs are increasing at a very high speed.
Because of such a high rate of growth of Indian MFIs clientele, the gross loan portfolio is growing
tremendously.
36
Average Industry figures are also showing same result that the Bangladesh MFIs are not showing any
significant growth in clients number whereas the clientele of Indian MFIs are increasing robustly.
Apart from this, average loan per borrower/ client 1 has also increased in India from Rs.106 in 2006
to Rs.165 in 2010. Similarly in Bangladesh it has increased from Rs.72 to Rs.126 in 2010. Therefore
if the Indian MFIs are penetrating more and more (increasing clientele) obviously the loan portfolio
will grow tremendously.
B) Cost of Borrower
Cost per borrower ratio is very important as it helps to analyse the efficiency of MFIs by determining
the average cost of maintaining an active client. Graph below (figure-5) shows the Cost per borrower
ratio of MFIs in India and Bangladesh. It is clear that the cost per borrower of institutes in India is
increasing, while it has shown downturn in 2010 in SKS, SHARE and BANDHAN.
37
On the hand, although the cost per borrower of MFIs in Bangladesh is showing similar trend but still
it is less than Indian MFIs as (Figure .6) below. Whereas on comparing the performance of the overall
MFIs industry, it is observed that the cost of borrowers of MFIs in India is much higher than that of
MFIs in Bangladesh.
38
39
C) Financial Stability
Upon analysis of the financial ratios of the performance of Indian MFIs with their Bangladeshi
counterparts, the comparative scenario upon their working and performance can be woven into
following facts and figures.
Comparative analysis of Return on Asset (ROA) of top MFIs in India and those in Bangladesh reflects
that Indian MFIs are outperforming on the basis of return earned on assets, implying that Indian MFIs
are using their assets much efficiently and thus generating higher returns as compared to Bangladesh.
40
Industry comparison shows that Indian MFIs are showing steady growth in ROA, thus they are
making every possible effort to effectively use their assets. While Bangladesh MFIs are undergoing
declining ROA although it has increased in 2010 but still it is much lower when compared to Indian
MFIs as depicted in above figure.
41
Similarly, upon the comparison of the average yield on a gross portfolio for all the MFIs in India and
Bangladesh, it is found that yield is much higher in India, reflecting that the Indian MFIs are charging
a much higher rate for loans. In 2006, Yield on a gross portfolio of Indian MFIs was lower than that of
Bangladesh MFIs but from then yield on loans provided by Indian MFIs has accelerated and has gone
from 16.90% in 2006 to around 25.25% in 2009. Thus the interest charged by Indian MFIs has been
increased by 8.35% in just five years. Whereas, Bangladesh MFIs is maintained somewhat similar
42
rates on their loan granted. Apart from these as discussed above ROA of Indian MFIs are increasing yo-y thus it is clear that Indian MFIs are inclined toward profit motive therefore they are increasing
their return by making their operations more efficient and charging higher interest rate on the loans
given to the poor people as in the below figure.
E) Return on Equity
Return on equity is another very significant ratio which helps to calculate the rate of return on average
equity for a particular time period. In context of microfinance institutes ROE ratio is generally used as
a proxy for commercial viability.
43
While comparing the ROE of overall microfinance industry of India and Bangladesh, it is observed
that the ROE of Indian MFIs is steadily increasing year on year, whereas the ROE of Bangladesh
MFIs is decreasing gradually. This substantiates that the MFIs in India are earning higher return on
equity and therefore reflecting that they are more inclined towards the commercial motive. On the
other hand, Bangladesh MFIs seems to be working for social motive.
Uncertainty and default risk: Uncertainty and default risk are the major
challenges faced by the Microfinance institutions in India. Most of the rural
people in India have volatile and irregular income and their expenditure patterns
are very bad. The rural people in India are highly exposed to the systematic risks
like the crop failures or the fall in the commodity prices and as a result, they face
difficulties while servicing the loans. So, the microfinance institutions have
legitimate concerns when they are dealing with the poor people living in the rural
areas and they tend to perceive the loans very risky.
Profit Motive: A paradigm shift in the focus of the MFIs from social motive
to profit motive has led to emergence of For Profit MFIs in the recent years.
This change in focus is putting a lot of stress on the managements of the MFIs to
show increased growth and astounding loan portfolios. Since these MFIs have
equity participation from fund managers and private individuals, they are faced
with increased competition to show financial growth and improved rate of return.
The new MFIs have created the appearance of being far more concerned about
doing well financially than in doing good for clients, community and nation.
STATUTORY REQUIREMENTS
CAPITALISATION, CAPITAL ADEQUACY AND EQUITY CAPITAL
MFIs registered as societies and trusts by their design lack a clear ownership structure,
hence societies and trusts can only acquire funds of their own by way of donor grants and
surpluses from operations. On the other hand, entities like cooperative societies,
cooperative banks, and companies registered under Section 8 of the Companies Act and
NBFCs do have owners and hence also equity capital that becomes the financial underpinning of their operations. Owned funds of the latter types of organisations, therefore,
consist of the sum of shareholders equity and surpluses from operations. Such
organisations rarely have donor grants but, to the extent that they receive such grants,
these would also be included in the definition of owned funds. Investments in
subsidiaries, companies in the same group and other NBFCs must be deducted from the
above to the extent that such investments exceed 10 per cent of the NOF after reducing
owned funds by any deferred revenue expenditure and other intangible assets. This
constitutes the NOF of an NBFC. The value of minimum NOF required for different
types of organisations to undertake financial operations is set out in Table:46
Cooperative Banks
Section 25 Companies
(undertaking
microfinance
activities)
Non
Banking
Finance
Companies
No minimum requirement
Rs 2 crore
While the regulations on cooperative societies and Section 8 companies do not have any
such stipulation, RBI as the regulator for NBFCs and cooperative banks has fixed strict
capital adequacy norms for such institutions under Section 45 JA of the RBI Act. Thus,
NBFCs are required to maintain a minimum capital adequacy ratio of 12 per cent,
consisting of Tier I and Tier II capital where Tier II capital should not be more than 100
per cent of Tier I. This minimum capital adequacy norm holds for cooperative banks as
well. The enforcement of these capital adequacy norms is particularly much stronger in
the case of NBFCs than it is for other entities like banks.
The Companies Act provides the regulatory platform for the equity capital holding of
NBFCs and Section 8 companies. At the time of their registration as companies such
entities need to declare their authorised and paid-up share capital. If these entities want to
alter their authorised share capital, they need to seek the approval of the Registrar of
Companies. The Companies Act, also specifies that companies must state their shareholding position in annual reports. Similarly, cooperatives must also declare their
authorised share capital to the Registrar of Cooperative Societies and get approval for any
alteration in the size of authorised share capital.
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3. The suggested conditions to be followed to classify a NBFC as a NBFC-MFI a). Not less
than 90% of MFIs total assets (other than cash and bank balances and money market
instruments) are in the nature of qualifying assets. b)The criteria suggested to be satisfy the
qualifying asset of NBFC-MFI are i) the loan is given to a borrower who is a member of a
household whose annual income does not exceed Rs. 50,000; ii)the amount of the loan does
not exceed Rs. 25,000 and the total outstanding indebtedness of the borrower including this
loan also does not exceed Rs. 25,000; iii) the tenure of the loan is not less than 12 months
where the loan amount does not exceed Rs. 15,000 and 24 months in other cases with a right
to the borrower of prepayment without penalty in all cases; iv) the loan is without collateral;
v) the aggregate amount of loans given for income generation purposes is not less than 75%
of the total loans given by the MFIs; vi) the loan is repayable by weekly, fortnightly or
monthly installments at the choice of the borrower. c) The income it derives from other
services is in accordance with the regulation specified in that behalf.
1
4. A NBFC which does not qualify as a NBFC-MFI should not be permitted to give loans to
the microfinance sector, which in the aggregate exceed 10% of its total assets.
5. The Committee recommended a margin cap of 10% in respect of MFIs which have an
outstanding loan portfolio at the beginning of the year of Rs. 100 crores and a margin cap
of 12% in respect of MFIs which have an outstanding loan portfolio at the beginning of the
year of an amount not exceeding Rs. 100 crores. It also recommended an interest cap of 24%
on individual loans.
6. In respect of transparency in Interest Charges, the committee has suggested the following
Recommendations:
a) There should be only three components in the pricing of the loan, namely (i) a
processing fee, not exceeding 1% of the gross loan amount (ii) the interest charge and
(iii) the insurance premium.
b) Only the actual cost of insurance should be recovered and no administrative charges
should be levied.
c) Every MFI should provide to the borrower a loan card which (i) shows the effective
rate of interest (ii) the other terms and conditions attached to the loan (iii) information
which adequately identifies the borrower and (iv) acknowledgements by the MFI of
payments of installments received and the final discharge. The Card should show this
information in the local language understood by the borrower.
d) The effective rate of interest charged by the MFI should be prominently displayed in
all its offices and in the literature issued by it and on its website.
e) There should be adequate regulations regarding the manner in which insurance
premium is computed and collected and policy proceeds disposed off.
f) There should not be any recovery of security deposit. Security deposits already
collected if any should be returned.
g) There should be a standard form of loan agreement.
1
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7. In order to minimize the adverse features of Multiple-lending, Over-borrowing and Ghostborrowers, the committee has made the following recommendations.
a) MFIs should lend to an individual borrower only as a member of a JLG and should
have the responsibility of ensuring that the borrower is not a member of another JLG.
b) a borrower cannot be a member of more than one SHG/JLG.
c) not more than two MFIs should lend to the same borrower.
d) there must be a minimum period of moratorium between the grant of the loan and the
commencement of its repayment.
e) recovery of loan given in violation of the regulations should be deferred till all prior
existing loans are fully repaid.
8. All sanctioning and disbursement of loans should be done only at a central location and
more than one individual should be involved in this function. In addition, there should be
close supervision of the disbursement function.
9. It is recommended to establish one or more Credit Information Bureaus (CIB) and all MFIs
are required to become members of such bureau. Till the operation of CIB, the responsibility
to obtain information from potential borrowers regarding existing borrowings should be on
the MFI.
10. In case of coercive methods used in recovery, the MFIs and their managements should be
subject to severe penalties. b) The regulator should monitor whether MFIs have a proper
Code of Conduct and proper systems for recruitment, training and supervision of field staff to
ensure the prevention of coercive methods of recovery. Field staff should not be allowed to
make recovery at the place of residence or work of the borrower and all individual loans.
11. The minimum net worth recommended for NBFC-MFI is Rs.15 crore.
12. Every MFI should be required to have a system of Corporate Governance in accordance
with rules to be specified by the Regulator.
13. Provisioning for loans should not be maintained for individual loans but an MFI should
be required to maintain at all times an aggregate provision for loan losses which shall be the
higher of: (i) 1% of the outstanding loan portfolio or (ii) 50% of the aggregate loan
installments which are overdue for more than 90 days and less than 180 days and 100% of the
aggregate loan installments which are overdue for 180 days or more.
14. NBFC-MFIs should be required to maintain Capital Adequacy Ratio of 15% and all of the
Net Owned Funds should be in the form of Tier I Capital.
15. Bank lending to the Microfinance sector both through the SHG-Bank Linkage programme
and directly should be significantly increased and this should result in a reduction in the
lending interest rates.
16. Bank advances to MFIs shall continue to enjoy priority sector lending status. However,
advances to MFIs which do not comply with the regulation should be denied priority sector
lending status. It may also be necessary for the Reserve Bank to revisit its existing
guidelines for lending to the priority sector in the context of the Committees
recommendations.
17. In respect of assignment and securitization, MFI portfolio, the following are the
recommendations:
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1
2
3
1
18. It is recommended to examine the creation of one or more "Domestic Social Capital
Funds" in consultation with SEBI to fund MFIs. Further, MFIs should be encouraged to issue
preference capital with a ceiling on the coupon rate and this can be treated as part of Tier II
capital subject to capital adequacy norms.
1
19. In order to monitor the Compliance, the following recommendations are made
1 a) The primary responsibility for ensuring compliance with the regulations should rest
with the MFI itself and it and its management must be penalized in the event of noncompliance
2 b) Industry associations must ensure compliance through the implementation of the
Code of Conduct with penalties for non-compliance.
3 c) Banks also must play a part in compliance by surveillance of MFIs through their
branches.
4 d) The Reserve Bank should have the responsibility for off-site and on-site
supervision of MFIs but the on-site supervision may be confined to the larger MFIs
and be restricted to the functioning of the organizational arrangements and systems
with some supervision of branches. It should also include supervision of the industry
associations in so far as their compliance mechanism is concerned. Reserve Bank
should also explore the use of outside agencies for inspection.
5 e) The Reserve Bank should have the power to remove from office the CEO and / or a
director in the event of persistent violation of the regulations quite apart from the
power to deregister an MFI and prevent it from operating in the microfinance sector.
f) The Reserve Bank should considerably enhance its existing supervisory
organisation dealing with NBFC-MFIs.
20. The exemption from the provisions of State Money Lending Acts was recommended on
account of interest margin caps and increased regulation suggested by the Committee
21. In respect of The Micro Finance (Development and Regulation) Bill 2010, the committee
subject to Smt.Rajagopalan's reservations above, recommend the following:
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a) The proposed Act should provide for all entities covered by the Act to be registered with
the Regulator. However, entities where aggregate loan portfolio (including the portfolio of
associated entities) does not exceed Rs. 10 crores may be exempted from registration.
b) If NABARD is designated as the regulator under the proposed Act, there must be close
co-ordination between NABARD and Reserve Bank in the formulation of the regulations
applicable to the regulated entities.
c) The micro finance entities governed by the proposed Act should not be allowed to do the
business of providing thrift services.
22. The Committee also felt that the need for a separate Andhra Pradesh Micro Finance
Institutions (Regulation of Money Lending) Act will not survive if the Committees
recommendations are accepted,
23. The cut-off date suggested for implementation of the recommendations is April 1 st, 2011.
In particular, the recommendations as to the rate of interest, it is recommended that it should
be made effective to all loans given by an MFI after March 31st 2011.
Budget 2015
Funding the unfunded
Agriculture
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Major steps take to address the two major factors critical to agricultural production,
that of soil and water.
Paramparagat Krishi Vikas Yojana to be fully supported.
Pradhanmantri Gram Sinchai Yojana to provide Per Drop More Crop.
5,300 crore to support micro-irrigation, watershed development and the Pradhan
Mantri Krishi Sinchai Yojana. States urged to chip in.
25,000 crore in 2015-16 to the corpus of Rural Infrastructure Development Fund
(RIDF) set up in NABARD; `15,000 crore for Long Term Rural Credit Fund; `45,000
crore for Short Term Co-operative Rural Credit Refinance Fund; and `15,000 crore for
Short Term RRB Refinance Fund.
Target of `8.5 lakh crore of agricultural credit during the year 2015-16.
Focus on improving the quality and effectiveness of activities under MGNREGA.
Need to create a National Agriculture Market for the benefit farmers, which will also
have the incidental benefit of moderating price rises. Government to work with the
States, in NITI, for the creation of a Unified National Agriculture Market.
Government to work towards creating a functional social security system for all
Indians, specially the poor and the under-privileged.
Pradhan Mantri Suraksha Bima Yojna to cover accidental death risk of `2 Lakh for a
premium of just `12 per year.
Atal Pension Yojana to provide a defined pension, depending on the contribution and
the period of contribution. Government to contribute 50% of the beneficiaries
premium limited to `1,000 each year, for five years, in the new accounts opened
before 31st December 2015.
Pradhan Mantri Jeevan Jyoti Bima Yojana to cover both natural and accidental death
risk of `2 lakh at premium of `330 per year for the age group of 18-50.
A new scheme for providing Physical Aids and Assisted Living Devices for senior
citizens, living below the poeverty line.
Unclaimed deposits of about `3,000 crores in the PPF, and approximately `6,000
crores in the EPF corpus. The amounts to be appropriated to a corpus, which will be
used to subsidize the premiums on these social security schemes through creation of a
Senior Citizen Welfare Fund in the Finance Bill.
Government committed to the on-going schemes for welfare of SCs, STs and Women.
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Note:
57
Here are 11 things you must know about Mudra Bank and how it will
benefit you:
Setting up
Mudra Bank is being set up through a statutory enactment and will be
responsible for developing and refinancing through a Pradhan Mantri MUDRA
Yojana.
Targets
The Finance Ministry said measures to be taken up by MUDRA are targeted
towards mainstreaming young, educated or skilled workers and entrepreneurs
including women entrepreneurs.
5.77 Crore
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The bank will cater to 5.77 crore small business units that are spread all across
India who currently find it difficult to access credit from the regular banking
system.
Recovery method
Mudra Bank will ensure clients are properly protected and will lay down principles
and methods of loan recovery in case of a default. The Bank will also rigidly
follow "responsible financing practices" so deter borrowers from indebtedness.
Corpus
The Bank will be set up with a corpus of Rs.20,000 crore and a credit guarantee
fund of Rs.3,000 crore.
Shishu/Kishor/Tarun
The Bank will nurture small businesses through different stages of growth and
development of businesses termed as Shishu, Kishor and Tarun.
Shishu
This is will be the first step when the business is just starting up. The loan cover
in this stage will be up to Rs.50,000.
Kishor
In this stage, the entrepreneur will be eligible for a loan ranging from Rs.50,000
to Rs.5 lakh.
Tarun
This last and final category will provide loans for up to Rs.10 lakh.
Bandhan:
After more than a decade, a new private sector lender will start operations from August
23. The Kolkata-based microfinancier, Bandhan Financial Services, received the final
approval from the Reserve Bank of India (RBI). The bank wont lend to the corporate
sector at least for the time being and focus on its strength, that is, serving the
bottom-of-the-pyramid category. The lender will start with 600 branches, of which 200
will be in metro and urban areas and the remaining in semi-urban and rural areas.
While RBI norms require us to open 25 per cent of the branches in the unbanked areas,
we will open 40 per cent of the branches in those areas, Chandra Shekhar Ghosh,
founder and chairman of Bandhan, told Business Standard. The bank will have 250
automated teller machines to start with.
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The bank will be profitable from day one as the present microfinance entity is in the
black. It made an Rs 428-crore profit in 2014-15. Ghosh admitted the initial period would
be challenging as the new bank would not have low-cost deposits a key component of
the liabilities of a bank, crucial for profits. The lender expects it will take two years to
build up a current and savings account (Casa) deposit base that will, in turn, help it
reduce lending rates. The micro financiers cost of the deposit, which raises funds from
banks, is 12 per cent and it charges 22.4 per cent for loans. However, bad loans are only
10 basis points of its advances. Bandhan Bank will start with an Rs 11,000-crore book
and capital of Rs 3,200 crore far above the regulatory requirement of Rs 500 crore.
Bandhan recently completed raising Rs 1,020 crore in equity from International Finance
Corporation, Singapore's sovereign wealth fund GIC and state-run Small Industries
Development Bank of India. It hopes to increase its customer base to 10 million when it
starts operations from 6.6 million now. We aim to double our customer base in two
years, Ghosh said. Our target is to increase the number of customers and not the loan
book.
Our plan is to open around 500-600 branches across the country with a special focus on the
east and north-eastern region. We will be a bank for all, but our primary objective will be to
serve the unbanked, Ghosh said.
He added that the bank will cater especially to micro, small and medium enterprises.
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Bandhan had recently raised Rs 1,020 crore equity from International Finance Corporation,
Singapores sovereign wealth fund GIC, and the state-run Small Industries Development
Bank of India (SIDBI).
Following the equity infusion, its net worth has gone up to Rs 2,700 crore, well above the
RBIs stipulation of a minimum capital base of Rs 500 crore for new banks.
It may be noted that the SLBC has drawn up an ambitious plan to cover all 4,597
unbanked gram panchayats by 2019. To facilitate this effort, the state government has
assured the banks that space would be provided in panchayat buildings and Rajiv
Gandhi Seva Kendras free of cost for five years. The total number of bank branches in
Odisha now stands at 4,672, out of which 54.43 per cent are in rural area.
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The CD (credit deposit) ratio of the banks in Odisha has declined compared to the
previous fiscal. While the CD ratio was 85.31 per cent in 2013-14, it has dipped to 73.19
per cent in the last fiscal. The CD ratio, excluding the advance sanctioned through
branches in other states and utilised in the state, is just 52.32 per cent, failing to achieve
the mandated rate of 60 per cent. Only five districts - Dhenkanal, Khurda, Sonepur,
Kalahandi and Bhadrak have CD ratio of more than 60 per cent.
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The MFIs want the government to empower them to mobilise savings accounts through the
legislation. But the RBI has expressed reservations about the efficacy of MFIs in handling public
money since it could put the interests of the depositors in jeopardy.
Though, MFIs fear that regulation might stifle an emerging sector like one, analysts are of the view
that it is important to put MFIs under the scanner, to check uncontrolled growth.
"Existing regulations for NBFCs are sufficient to regulate MFIs," chief executive of a leading micro
lender said. MFIs registered under Section 25 of the Companies Act are exempted from the core
provisions that apply to NBFCs.
If Nabard is to remain the regulator as provided in the proposed Act, then it is necessary
that there should be close co-ordination between the RBI and Nabard in the formulation
of the regulations issued by each regulator. This is necessary to ensure against the risk of
entities taking advantage of regulatory arbitrage, the panel said. The panel said, "The
problems get multiplied several-fold when we consider that the example of the AP
government could be followed by other states. If there are separate regulations governing
NBFC-MFIs in individual states, the task of regulation by the RBI of MFIs operating in
more than one state will become impossible."
Case Study
SKS Microfinance Case Study - Lakshmi's Story
SKS Microfinance Limited (SKS) is a non-banking finance company regulated by the Reserve Bank
of India and currently operating in 19 of Indias 28 states. SKS mission is to eradicate poverty by
providing financial services to the poor.
A study conducted by the Navnirman Institute of Management on the microfinance industry in India
provides case studies illustrating the human impact of SKSs work.
One such story is Bandaru Lakshmis:
When Lakshmi came to Atukula Bazaar in Suryapet with her family, they were penniless. The family
had no hope of surviving. Her husband was not doing too well at his business and no one was ready to
lend them money. Lakshmi was worried about how they would bring up their two daughters and their
son.
When Lakshmi found out about SKS operations in her village, she took an income generating loan of
INR 10,000 (USD 212). She used this money to buy and sell readymade garments in the nearby
villages. With a heavy load on her head, she went door to door and worked hard to save money.
Confident about the sales and her hard work, she took a second income generating loan of INR 12,000
(USD 255). Later, she took a loan of INR 14,000 (USD 297) to purchase the readymade cloth for
more sales. Her daily earnings grew steadily. Today, she clocks a monthly income of INR 30,000
(USD 638) per month.
Lakshmi is an inspiration to many today. A role model to others in Suryapet, Lakshmi recently felt
most rewarded when her eldest daughter secured a job in Infosys.
Thanks to the loans SKS extended to me time and again, I was able to give my children a decent
education. Today people respect our family and I am grateful, she says.
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http://www.globalhand.org/en/search/success+story/document/28296?
search=microfinance
Microinsurance
Poor households have less access to formal insurance to protect themselves against risks such
as the death of the family breadwinner, severe or chronic illness in the family, or the loss of
an asset, including livestock and housing.
Microinsurance helps people manage unexpected events in return for payments proportional
to the likelihood and level of a specific risk. Areas covered by microinsurance include health,
assets, agriculture, and death. As with all insurance, risk pooling under microinsurance allows
many individuals or groups to pool risks and redistribute the costs of the risky events within
the pool.
As microfinance institutions expand beyond credit to a broader array of financial products,
they are becoming more interested in offering clients microinsurance products in partnership
with insurance companies. While commercial insurers provide the majority of the worlds
products, mutual, cooperative, and other community-based or community-led insurance
organizations are emerging as microinsurance providers. The greatest challenge for
microinsurance schemes is finding the right balance between adequate protection and
affordability to deliver real value to the insured.
housing. Health shocks are among the largest and least predictable forms of uncertainty that a
poor family can face. In developing countries, high levels of poverty and poor health
conditions have the potential to make health shocks more frequent and dangerous. Formal
health insurance has the potential to mitigate the financial impact of health shocks, but
researchers have found that demand for insurance products has generally been low among
poor households. Additionally, insurers have been hesitant to offer any but the most basic
products, due to worries that only the riskiest and/or most unhealthy clients will take up
insurance (referred to as adverse selection) and clients taking on more risk because they
have insurance (called moral hazard). Bundling insurance with other financial products like
microcredit has been seen by some as a simple method to reduce adverse selection and moral
hazard issues, lower administrative costs for financial institutions, and provide poor
households with a package of useful financial products.
Bundling insurance products with loan renewals caused clients to reduce renewal rates. A
portion of clients gave up credit to avoid buying insurance. Microcredit clients who did
renew were, on average, neither unhealthier nor more likely to incur health expenses.
Loan renewal take up: The requirement to purchase health insurance substantially lowered
microcredit clients loan renewal rates. Within a year of the program roll-out, loan renewal
rates in treatment villages dropped to 55 percent, 16 percentage points lower than the 71
percent rate in comparison villages, suggesting that many were willing to give up microcredit
to avoid buying insurance. Following widespread discontent with the health insurance
requirement, SKS made the insurance add-on voluntary in late 2008 and removed the option
altogether in early 2009. Even after this removal, clients in treatment villages were 16
percentage points less likely to have an outstanding loan than the average 54 percent in
comparison villages. These households did not generally take out other loans, suggesting that
this was a net loss in access to microfinance.
Client riskiness: SKS Microfinances fear that only riskier or unhealthier clients would take
up health insurance packages proved unfounded, primarily because very few people wanted
the product at all. Researchers did not observe greater insurance take-up for households in
worse health at baseline. Even for pregnancy, a relatively more predictable healthcare
expense, there was no evidence of any difference in insurance take-up.
Overall these findings suggest the need for more comprehensive and reliable insurance
products. In early stages of introducing formal health insurance to the poor, researchers
recommend that institutions concern themselves less with client riskiness and more with how
best to market and manage insurance products for low-income consumers in order to increase
demand.
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