Summary about Microfinance in India

1. MICROFINANCE
SUBMITTED BY KARTIK PRAKASH
20135028

2. MICROFINANCE: THE PARADIGM
• In 1976, Dr Mohammed Yunus came up with the concept of lending to groups
of poor women.
• This group was loaned money without any collateral but with high interest
rates of 20-24 percent.
• If any group member defaulted, the group was denied further credit.
• This joint liability produced a very high repayment rate of 98 percent.

3. MICROFINANCE: THE PARADIGM
• In Grameen Bank Model, members of the groups are also the owners of the
bank.
• The loan is given based on trust and no agreement or document is required.
• This pioneering experiment cam eto be later known as “Microfinance”.
• The Grameen bank lends US$ 30 million a month to 1.8 million needy
borrowers.
• Today, there are over 7000 microfinance institutions across the globe, serving
16 million poor households.

4. INTRODUCTION
• Microfinance is provision of financial services to the poor. These financial
services may take form of micro-savings, micro-credit, micro-insurance.
• The Task Force on Supportive Policy and Regulatory Framework for
Microfinance (NABARD) 1999 defines microfinance as ‘Provision of thrift,
credit and other financial services and products of very small amounts to the
poor in rural, semi-urban or urban areas for enabling them to raise their
income levels and improve living standards.
• The clients of microfinance, are landless labors, small marginal farmers, rural
artisans and weavers, self-employed, and women.

5. MICROFINANCE IN INDIA
• Shree Mahila SEWA Sahakari Bank in Ahmedabad and Working women’s
Forum in Tamil Nadu were the pioneers in 1970s.
• The SEWA Bank was setup in 1974 as an Urban Cooperative Bank providing
banking services to the poor self-employed women. It has deposits over
Rs100 crore, mobilized from nearly 2,50,000 women.
• NABARD designed the SHG-Bank linkage concept wherein the SHGs are linked
with banks for funds.

6. NGO AND SHG
• NGOs are the key players in the microfinance sector. It undertakes social
intermediation like organizing SHGs of micro-entrepreneurs and entrusting
them to banks for credit linkage or financial intermediation, like borrowing in
bulk funds from banks for on-lending to SHGs.
• SHG is a group of 15-20 members who have voluntarily come together to save
small amounts regularly to meet their emergency needs on mutual-help basis.

7. MICROFINANCE DELIVERY MECHANISMS
• Conventional Weaker-section Lending by Banks.
• MFIs
• SHG-bank linkage programmes.

8. CONVENTIONAL WEAKER-SECTION LENDING BY
BANKS
• The cooperative banks and regional banks were set up specifically to cater to
the needs of rural as well as urban poor.
• The commercial banks got motivated by the success of many MFIs and SHG-Bank
linkage programmes and now actively participate in Microfinance.
• ICICI Bank is a prominent player. It has doubled its rural microfinance and
agricultural business loans. It has partnered with around 400 MFIs.

9. MICROFINANCE INSTITUTIONS
• NABARD defines MFIs as ‘those which provide thrift, credit and other financial
services and products of very small amounts, mainly to the poor in rural, semi-urban
or urban areas, for enabling them to raise income level and improve
living standards.’
• MFIs can be classified as:
• Not-for-profit MFIs
• Mutual-benefit MFIs
• For-Profit MFIs
• Cooperative MFIs

10. SHG-BANK LINKAGE PROGRAMME
• This model has attracted attention as a possible way of delivering micro-finance
services to poor populations that have been difficult to reach directly
through banks or other institutions.
• By aggregating their individual savings into a single deposit, self-help groups
minimize the bank's transaction costs and generate an attractive volume of
deposits. Through self-help groups the bank can serve small rural depositors
while paying them a market rate of interest.
• NABARD estimates that there are 2.2 million SHGs in India, representing 33
million members, that have taken loans from banks under its linkage program
to date.

11. SHG-BANK LINKAGE PROGRAMME
• NABARD operates three models under this programme:
• Model I-SHGs are formed and financed by banks. No NGO intervention.
• Model II- NGOs will promote SHGs and link them with the banks.
• Model III- The SHGs are financed by NGOs.

12. RESOURCES FOR SUPPORTING MICROFINANCE
• Microfinance Development Fund:
• It was set up for promotion and development of microfinance sector with initial
contribution of Rs100 crores.
• This fund supports following activities:
• Training
• Providing start up funds.
• Meeting cost of formation and nurturing of SHGs.
• Designing new delivery mechanisms
• Promoting research

13. RESOURCES FOR SUPPORTING MICROFINANCE
• Collaboration with External agencies:
• NABARD has collaborated with external agencies such as SDC and GTZ.
• Objective was to improve efficiency of credit delivery and capacity building.
• SIDBI is one of the largest providers of microfinance through MFIs.

14. THE POSITIVE SIDE OF MICROFINANCE
• The success of SHG-bank linkage programme has proved that poor are credit
worthy and bankable.
• It has reduced household vulnerability to risks, provide higher income and
greater security.
• Corporates such as HLL have successfully penetrated the rural markets
through SHGs.

15. THE DOWNSIDE OF MICROFINANCE
• High interest rates charged by MFIs.
• Unethical recovery methods.
• Lack of transparency and absence of governance structure.
• The growth of microfinance is skewed with large proportion in southern states
of India.