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MICROFINANCE IN INDIA

India is one of the fastest growing economy in the world. The major population is composed of middle class people. More than 40 % of our population comes under farmers, small scale industrialists, villagers & lenders. For such an economy Micro credit lenders are one of the major portion of our economy. The need for Microfinance in the year 2009 was approx 4.2 billion while the depositors to the micro finance institutions are approximately 200 million which is not even 1 % of the total need. This was the condition almost three years back. While with the global financial crisis & increasing inflation the conditions has been even worsened. Statistics says that more than one third of our population comprises of young people of the age of below 15 years, which itself shows the increase in need of micro credit in coming years.

Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services. More broadly, it is a movement whose object is a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers. Those who promote microfinance generally believe that such access will help poor people out of poverty. Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients. Due to the broad range of microfinance services, it is difficult to assess impact, and very few studies have tried to assess its full impact.

My interest in the role of micro finance institutions & its impact on our economy in last few years has developed during the last two years, while I have been a student of MBA Banking & Investment .Micro finance or micro credit plays a vital role in Finance & banking industry as a major proportion approx 21 % of total Credit is supposed to be given to Priority Sector as per RBI guidelines . The Micro Finance Institutions called as MFIs have the major responsibility of delivering such credit facility to SMEs, & other small scale industries as well as Priority Sector also called as weaker section of our society. To further study the true impact of Micro Credit or Micro Finance Institutions in India I have started taking interest in preparing special seminar report on Priority Sector Lending. During my summer project I contributed my two months in a Public sector bank named CANARA BANK. There during my Internship I keenly studied Micro Credit Lending by Banks. I have personally dealt with Lenders . I found myself lucky to work under closed supervision of Credit manager who enabled me to work in advance section where I have studied various Loan application files for SMEs, manufacturing units. I studied their needs, purpose, net worth & a complete process of Loan application to renewal of a Loan for a Small Scale Industry Unit.

After completion of my training I visited few more Public Sector Banks & attended the Micro credit lenders visiting the Bank daily. The activity not only helped me to understand the practical approach to understand the process flow but it also made me aware of the loopholes like delay in renewal, documentation process & the issues faced by most small money lenders. I became more familiar with the role of Micro Finance Institutions which are providing loans to weaker section at a more comfortable rates. I have completed my project report by understanding the regulations set by RBI. I have gone through the set guidelines & the structured lending of weaker section . I have also visited a couple of few more public sector banks where I got the chance to meet Priority Sector Lenders. During this work I acquired a broad range of experimental experience and theoretical background necessary for renewal of Micro Credit Advances & Loan Appraisal forms that are supposed to be a part of complete Loan Processing. One of the most difficult task was to undergo authentication for sanctioning of loan. A lot of financial Analysis needs to be done. For the successful completion of my research report I had met daily visitors in bank, gone through their Loan Sanction file, done complete analysis & finally rating them based on which a loan will be sanctioned. Having succeeded in the current research, employing the knowledge from different departments of micro credit & advance section, I feel well prepared for the further challenging studies and research in the fields of Micro Finance Institutions & Priority Sector Lending, perhaps on very different topics, as well as on the topics I am familiar with. I regard structure investigations to be not only the method of obtaining a particular conclusion, but one from the collection of Lenders & Institutions which together advance our understanding of impact of Micro Finance in our economy . Therefore I want to study a range of Micro Finance Institutions that provide small scale lending to weaker section of our society or our economy as a whole. Small Help Groups (SHGs), Micro Finance Institutions (MFIs), Public Sector & private sector Banks, Micro Credit Institutions (MCIs), Non Banking Financial Companies (NBFCs)etc. together make the contribution to the priority sector lending. There existence , growth, need & impact interests me to broaden my research in this field.

Savings is an important component of Microfinance. Currently, however savings 7 offerings can be offered by only banks & co-operatives. NBFCc can raise the credit only after obtaining the license from RBI & meeting norms such as having an investment grade credit rating. Over the past few years MFIs especially in southern region such as Andhra Pradesh, Kartanataka, Tamil Nadu have been accused of charging excessively high interest rates, and have been targeted by local district administrators. This has happened because of the freedom of deciding upon the interest rates to be charged from lenders by banks.

I found myself lucky to have access to the few manufacturing units in Agra during my project research report. But found the need of Priority sector is much higher as they are in receipt of it. Some principles that summarize a century and a half of development practice were encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at the G8 Summit on June 10, 2004 1. Poor people need not just loans but also savings, insurance and money transfer services. 2. Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks. 3. "Microfinance can pay for itself." Subsidies from donors and government are scarce and uncertain, and so to reach large numbers of poor people, microfinance must pay for itself. 4. Microfinance means building permanent local institutions. 5. Microfinance also means integrating the financial needs of poor people into a country's mainstream financial system. 6. "The job of government is to enable financial services, not to provide them." 7. "Donor funds should complement private capital, not compete with it." 8. "The key bottleneck is the shortage of strong institutions and managers." Donors should focus on capacity building. 9. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit.

10. Microfinance institutions should measure and disclose their performance both financially and socially. Microfinance is considered as a tool for socio-economic development, and can be clearly distinguished from charity. Families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan, should be recipients of charity. Others are best served by financial institutions. MFIs risk management practices has been weakened over past few years on account of shift in focus towards business growth & network expansion. Some credit policies & monitoring practices has been diluted. These includes lending to clients with multiple loans from different MFIs, reduction in the average waiting period for loan etc. No systematic effort to map the distribution of microfinance has yet been undertaken. A useful recent benchmark was established by an analysis of 'alternative financial institutions' in the developing world in 2004. The authors counted approximately 665 million client accounts at over 3,000 institutions that are serving people who are poorer than those served by the commercial banks. Of these accounts, 120 million were with institutions normally understood to practice microfinance. Reflecting the diverse historical roots of the movement, however, they also included postal savings banks , state agricultural and development banks , financial cooperatives and credit unions and specialized rural banks Regionally the highest concentration of these accounts was in India (188 million accounts representing 18% of the total national population). The lowest concentrations were in Latin American and the Caribbean and Africa Considering that most bank clients in the developed world need several active accounts to keep their affairs in order, these figures indicate that the task the microfinance movement has set for itself is still very far from finished. According to recent RBI estimates, there are over 450 million unbanked people in India, most of whom live in rural areas. The term unbanked refers to people who have no access to formal financial services, but rather must rely on either family, or informal providers of finance, such as the village moneylender. It is undisputed that access to finance is critical for enabling individuals and communities to climb out of poverty. It is also generally agreed that relying on the limited resources of village moneylenders expose

Therefore the Indian Government and the RBI have a policy of financial inclusion. As part of this policy, the government requires Indian banks to lend to priority sectors, one of which is the rural poor. Until recently, banks were happy to lend money to MFIs who would then on-lend funds, primarily to poor women across rural India. The banks have welcomed this policy because historically they tended to charge MFIs average interest rates of 12-13% and benefited from 100% repayment rates. Thus, by lending to MFIs, banks have been able to meet their priority sector lending requirements

The role of donors has also been questioned. The Consultative Group to Assist the Poor (CGAP) recently commented that "a large proportion of the money they spend is not effective, either because it gets hung up in unsuccessful and often complicated funding mechanisms (for example, a government apex facility), or it goes to partners that are not held accountable for performance. In some cases, poorly conceived programs have retarded the development of inclusive financial systems by distorting markets and displacing domestic commercial initiatives with cheap or free money. Currently in India, microfinance institutions face the threat of intense regulation from the government. Up until now, the government has mostly stayed out of regulating the microfinance industry. But presently with increasing issues with multiple lending, suicide, and reports of exploitation, the government is determined to step in and regulate the industry

Some microfinance institutions have taken advantage of the scale of their large operations and could survive at a rate of 24 percent, but most institutions, especially those that serve the poorest of the poor and focus on social impact, could not survive. The industry does need some regulation to protect the clients from institutions that drift from their original social mission. But capping the interest rate will put the industry into crisis, or at least cut services to those that need it most the clients in remote villages that are the most expensive to access.

I want to continue my education at the Department of Finance in Centre of Education in Delhi University. I am convinced that my participation in your Ph.D. program will give me thorough education and excellent research experience, which will advance me to my dream discovering the new gateways to growth & findings in Micro Finance Sector. Dated : 29th July, 2011

Shalini Singh