Microfinance in India provides small loans, savings, and insurance to low-income individuals who lack access to traditional financial services. Common microfinance models in India include self-help groups and programs based on the Grameen Bank in Bangladesh. The microfinance sector has grown substantially over the past decade but still reaches only a small portion of the rural poor. Ongoing challenges include expanding access to remote areas, developing new products, and attracting long-term financing for continued growth.
2. Introduction
According to famous economist Robinson, Microfinance refers to small-scale financial
services for both credits and deposits - that are provided to unemployed or low-
income individuals or groups who would otherwise have no other means of gaining
financial services .
Ultimately, the goal of microfinance is to give low income people an opportunity to
become self- sufficient by providing a means of saving money, borrowing money and
insurance.
“Microfinance is thus an economic Development approach that involves providing
financial services through institutions to low income clients”.
3. Example:
Mrs. Bharti, 48 years old
• Unemployed husband
• 4 children
• No savings
• Good sewing skills
• Mrs. Bharti decides to start a home based sewing business
• She goes to the bank and makes a demand for a loan at her bank
MRS. Bharti’s DEMAND IS REJECTED
4. MRS. Bharti’s DEMAND IS REJECTED
Traditionally banks and Lending Institutions do not lend money to low income
Individuals
The reasons being
• High Transaction cost of processing
• Lack collateral or guarantors
• Gap in the communication / lack of confidence in the Banks
• Doubt of the bank of the repayment capacity
• Lack of access to financial infrastructure and services in remoted areas
Microfinance provides a solution for the above problem
5. Need for Microfinance
Reluctant to provide financial services to clients.
Lack of loan and other financial services from banks and other institutes.
According to a 1995 World Bank estimate, in most developing countries the
formal financial system reaches only the top 25% of the economically active
population.
India is said to be the home of one third of the world’s poor.
About 87 percent of the poorest households do not have access to credit.
6. Microfinance Clients
In India, generally microfinance is sought by:
Small and marginal farmers
Rural artisans
Economically weaker sections
Women constitute a vast majority of users of microcredit and micro savings
facilitates 10% 90% Microfinance facilities Men Women
7. Microfinance In India
Major Microfinance activities followed in India are -
Micro
Credit
Micro
Savings
Small Scale
Insurance
8. Role of RBI, NABARD and SIDBI
• Prudential regulation and
supervision.
• Collecting data and
advocacy
• Framing policy and
guidelines for rural
financial Institutions
• Providing credit facilities
to issuing organizations
• Preparation of potential-
linked credit plans for all
districts
• Overseeing the linking
programme of banks to
SHGs and offers refinance
for it
• Lends to MFIs through
SIDBI foundation for
microcredit
9. MICRO-FINANCE LENDING MODELS
Associations , Ex : Self Help Groups, SHGs (India)
Community Banking , Ex: Grameen Bank (Ban.)
Cooperatives , Ex: Co-operative Bank (England)
For-profit Banks , Ex: Khushali Bank (Pakistan)
10. GRAMEEN BANK
The Grameen Bank started in 1976 by the Nobel Laureate, Professor
Muhammad Yunus in Bangladesh
Working model of Grameen bank
Grameen has some 2,468 branches in Bangladesh, with a staff of
24,703 people serving 7.34 million borrowers from 80,257 villages.
Grameen‘s methods are applied in 58 countries — including the United
States.
16 decisions
14. SELF HELP GROUPS
A self-help group (SHG) is a village-based financial intermediary committee usually
composed of 10–20 local women or men
Formation and development of SHG
Operational models :
i. NABARD's 'SHG Bank Linkage' program
ii. By banks directly
iii. MFI-bank linkage model
16. MICRO-FINANCE PRESENT IMPACT
350 Million people live Below Poverty Line and this translates to
approximately 75 million households.
850 million people living on less than US$ 2 a day.
MFI’s overall reach in India is 15-20 million clients with only 35% of poor
families being served.
Annual credit demand by the poor in the country is estimated about Rs
60,000 crores.
Only about 5% of rural population has access to Micro-finance and non-poor
comprise of 28% of outreach.
About 60% of MFI’s are registered as societies and 20% MFI’s as trusts.
About 65% of MFI’s follow operating model of SHG’s.
17. Extreme gap between demand and supply for all financial services.
Majority of poor are excluded from financial services therefore 56%of poor still
borrow from informal sources.
70% of rural poor do not have a deposit account.
87% of rural poor do not have access to credit from formal sources.
About only 15% of the all actual rural poor households have any kind of
insurance.
Only 0.4% of rural poor have health insurance and 0.2% have crop
insurance.
High transactions costs and unfavourable policies like caps on interest rates.
Lack of an appropriate legal vehicle and limited access to equity market.
20. CHALLENGES FACED BY MICRO-FINANCE
Appropriate legal structures for structured growth of Micro-finance operations.
Ability to access loan funds at reasonably low rates of interest.
Appropriate loan products for different segments and Ability to innovate, adapt and
grow.
Bring out a compendium of small and micro enterprises for micro-finance clients.
Ability to attract and retain professional and committed human resources.
Identify and prepare a panel of locally available trainers and Ability to train trainers.
Capacity to provide backward linkages or create support structures for marketing.
Finding adequate levels of equity for the new entities to leverage loan funds.
21. Phases in Microfinance sector in India
Phase 1
• Characterised by high growth
• Large availability of funds.
• Low entry barriers
• Ended with AP Ordinance in October 2010.
Phase 2
• Highly volatile period from October 2010 till 2011
• MFI's experienced funding constraints
• Deterioration in asset quality.
Phase 3
• Consolidation phase in operations by MFI's started with regulatory intervention in 2011.
• Funding environment started improving with banks resuming funding and equity infusion from private equity/
social sector funds.
Phase 4
• Stable growth expected with regulatory framework in place and other state governments not following similar
ordinance as Andra Pradesh.
• Margins are expected to stabilize and profitability expected to improve.
23. Key Developments
Dates Key Development
October 2010 Formation of Malegam Committee by RBI to study the issues
and concerns in microfinance sector.
January,2011 RBI released Malegam Committee recommendations for the
microfinance sector.
May,2011 Acceptance of broad framework of Malegam Committee
recommendations in monetary policy Statements 2011-2012
December,20
11
RBI Introduced new category of NBFC and termed as ‘Non-
Banking Financial Company-Micro Finance
Institutions’(NBFC-MFIs)
August,2012 Amendment to NBFC MFI guidelines by RBI which included
• Registration compulsory for NBFCs intending to operate as
NBFC MFIs by October 2012.
July,2013 Amendment to NBFC MFI Guidelines by RBI
Nov,2013 RBI has allowed recognition of industry association of NBFC
MFIs as Self-Regulatory Organisation (SRO).
Feb,2014 Amendment to NBFC MFI guidelines by RBI with respect to
pricing of credit: It would be lower of two
• The cost of funds plus margin.
• The average base rate of the five largest commercial banks
by assets multiplied by 2.75
24. Performance of the Microfinance Sector
Objective:
To understand the performance of the MFIs.
To understand the trends for future growth and development of
the microfinance sector.
Total loan portfolio3 in the microfinance sector is 70%
26. Future Aspects
Microfinance Companies in India to witness strong growth in 2014 – 2015 –
Crisis
Loan Portfolio is set to grow at a annual rate of 35% (to reach Rs.450 billion
by end-March 2016
MFIs will have to raise equity.
A CRISIL analysis indicates that the MFIs need to raise equity of at least Rs.18
billion over the next two years to maintain growth momentum and gearing at
current levels.
For this, the sector needs to address the following two elements:
1. Promoter Shareholding.
2. Potential reduction in investor appetite.
27. Conclusion
Microfinance is not just giving credits but also providing services. Gone are
the days when poor people were believed to be non-bankable. Microfinance
has proved that poor are bankable.
Microfinance mainly came into existence with an intention to relieve the poor
people from the clutches of money lenders.
