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Microfinance institutions, also known as MFI, offer financial services to undeserved and
impoverished communities.



  
An Increasing number of microfinance institutions (MFIs) are seeking non-banking finance
company (NBFC) status from RBI to get wide access to funding, including bank finance

 
   

   
The Task Force on Supportive Policy and Regulatory Framework for Microfinance setup by
NABARD in 1999 provided various recommendations. Accordingly, it was decided to exempt
NBFCs which are engaged in micro financing activities, licensed under Section 25 of the
Companies Act, 1956, and which do not accept public deposits, from the purview of Sections 45-
IA (registration), 45-IB (maintenance of liquid assets) and 45-IC (transfer of profits to the
Reserve Fund) of the RBI Act, 1934.

  

In a joint fact-finding study on microfinance conducted by the Reserve Bank of India and a few
major banks, the following observations were made:

R| Some of the microfinance institutions (MFIs) financed by banks or acting as their

intermediaries or partners appear to be focusing on relatively better banked areas,
 including areas covered by the SHG-Bank linkage programme. Competing MFIs were
operating in the same area, and trying to reach out to the same set of poor, resulting in
multiple lending and overburdening of rural households.

R| Many MFIs supported by banks were not engaging themselves in capacity building and
empowerment of the groups to the desired extent. The MFIs were disbursing loans to the
newly formed groups within 10±15 days of their formation, in contrast to the practice

obtaining in the SHG ± Bank linkage programme, which takes about six to seven months for
group formation and nurturing. As a result, cohesiveness and a sense of purpose were not being
built up in the groups formed by these MFIs.

R| Banks, as principal financiers of MFIs, do not appear to be engaging them with regard to
their systems, practices and lending policies with a view to ensuring better transparency
and adherence to best practices. In many cases, no review of MFI operations were
undertaken after sanctioning the credit facility.[6]

!

 
NBFCs registered with the Reserve Bank of India may take part in the insurance agency business
on a fee basis and without risk participation or the need to seek the bank's approval.

In a notification issued, the RBI said such NBFCs should obtain permission from the Insurance
Regulatory and Development Authority and comply with IRDA regulations for acting as a
"composite corporate agent" with insurance companies.[7][8]


 
Forbes magazine named seven microfinance institutes in India in the list of the world's top 50
microfinance institutions.

Bandhan, as well as two other Indian MFIs²Microcredit Foundation of India (ranked 13th) and
Saadhana Microfin Society (15th) ± have been placed above Bangladesh-based Grameen Bank
(which along with its founder Mohammed Yunus, was awarded the Nobel Prize). Besides
Bandhan, the Microcredit Foundation of India and Saadhana Microfin Society, other Indian
entries include Grameen Koota (19th), Sharada's Women's Association for Weaker Section
(23rd), SKS Microfinance Private Ltd (44th) and Asmitha Microfin Ltd (29th)

Microfinance is growing in popularity both among donors and the aid world. If you¶re uncertain
about how microfinance works or what are its strengths and weaknesses, see my post What is
Microfinance?
Before you donate, use these four questions to help you determine whether the charity is
following best practices. These questions and all quotes are based upon CGAPµs Good Practice
Guidelines for Funders of Microfinance iwhich is well worthreading if you¶re serious about
funding microfinance programs.

"# $%&'(  )

Microloans are not always the best choice, does the charity provide other financial services such
as savings accounts or insurance policies? Savings accounts and insurance policies provide a
safety net during the bad times and can build value over time. Another plus is that savings
accounts pay interest rather than charging it. Money transfer services are also important as they
help family members support each other financially.

According to CGAP¶s Key Principles of Microfinance in their Good Practice Guidelines for
Funders of Microfinance the first principle is:

1. Poor people need a variety of financial services,not just loans. In addition to credit, they want
savings, insurance, and money transfer services.

In their lessons learned section they state:

R| Poor clients need and are willing to pay for a variety of financial services (e.g., credit,
savings, money transfers, payments, insurance), not only microenterprise loans.
R| Poor people, even very poor people, save. Often savings are made informally, in kind, or
in other relatively insecure ways (e.g., animals, jewelry, cash under the mattress).
R| The destitute have very limited absorptive capacity for debt and often no income to repay
loans. Microcredit thus may not be the most appropriate solution for them. Similarly,
microcredit may not be appropriate for every situation (e.g.,refugee resettlement).

"# $*&(( +#  (
   )

Charities providing microfinance services rarely administer the loans or savings accounts
themselves but instead work through local microfinance institutions (MFI). What has the charity
done to vet the microfinance institutions it works with? How has the charity determined that the
institution has the capacity and ability to handle the number of loans or other financial services it
has to administer? Has enough information been gathered to determine that the MFI is something
more than just a loan shark?

From CGAP¶s Operational Guidelines Section:

R| Conduct due diligence to ensure financial service providers have sufficient institutional
capacity and commitment before engaging in product development; do not push financial
institutions to develop services that overload their capacity.

"# $,&-(# # )

What consumer protection measures would you want if you were applying for a loan, opening a
savings account, or paying for insurance? Does the charity you are considering supporting ensure
that these measures are in place in every MFI they support?

From CGAP¶s Operational Guidelines:

R| Support consumer protection measures aimed at safeguarding poor clients from predatory
lenders.The range of measures includes clear disclosure of the true costs of lending,
guidance on lender practices, mechanisms for handling complaints and disputes, and
consumer education/financial literacy.

"# $.&¦(( +# +#  
(/)

The ultimate goal of charities working with microfinance should be to ensure that microfinance
institutions become self-sustaining and are able to continue to provide quality financial services
indefinitely. Although it may feel great to think that your donation helps fund a specific project
or person, you would not want your access to loans and other financial services to be affected by
the whims and preferences of people half way around the world. People in developing countries
should not have to live with that uncertainty either. How does the charity support capacity
building and self-sufficiency of the MFI¶s it partners with?

From CGAP¶s Lessons Learned:

4. Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor
people. Unless microfinance providers charge enough to cover their costs, they will always be
limited by the scarce and uncertain supply of subsidies from donors and governments.

5. Microfinance is about building permanent local financial institutions that can attract domestic
deposits, recycle them into loans,and provide other financial services.

 
0#     #i## 

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#  
  

It is critical that donors see past the allure of donating to a single individual and look at whether
the charity is following best practices. Having access to reliable and fair financial services can
help people 12  i# ( i#( ( 
(34 For this to happen charities needs to be investing in the development of a variety of
financial services, ensuring that the MFI¶s have the capacity and ability to offer reliable and fair
financial services, that consumer protection measures are working, and that the MFI will remain
viable long after donor interest wanes.