Microfinance in India Dr Shikha Tripathi
MICROFINANCE IN INDIA India : poverty alleviation is our main priority • 51.4% of farmer households are financially excluded from both formal / informal sources. • Of the total farmer households, only 27% access formal sources of credit; one third of this group also borrow from non-formal sources. • Overall, 73% of farmer households have no access to formal sources of credit.
MICROFINANCE IN INDIA (contd..) • Access to finance by the poor and vulnerable groups is a prerequisite for poverty reduction and social cohesion. • Many policy initiatives were introduced to facilitate poverty reduction • The banking sector witnessed large scale branch expansion after the nationalization of banks in 1969, which facilitated a shift in focus of banking from class banking to mass banking.
It was, however, realized that, notwithstanding the wide spread of formal financial institutions, these institutions were not able to cater completely to the small and frequent credit needs of most of the poor.
Findings from Research studies ….. …… in the 1980s • Savings and credit products did not suit the needs of the poor • Procedures were complicated and cumbersome • High transaction costs for the poor and the delivery system • Even special poverty alleviation programmes did not recognise importance of savings • Resources handled were often larger than the poor’s capacity to handle • “Others” decided everything
Findings from Research studies ….. the POOR just wanted…. • Mechanism to keep their limited resources safely • Credit to meet emergencies • Credit for mEs So we were looking for… Sustainable approaches Products that match Needs & capacities Reduce transaction costs Collateral free Lending Or just Hassle free financial services
Micro finance is the provision of thrift, credit and other financial services and products of very small amounts to the poor for enabling them to raise their income levels and improve their living standards MICROFINANCE
The beginning of micro finance movement in India could be traced to the self-help group (SHG) - bank linkage programme (SBLP) started as a pilot project in 1992 by National Bank for Agricultural and Rural Development (NABARD). • This programme not only proved to be very successful, but has also emerged as the most popular model of micro finance in India. Other approaches like micro finance institutions (MFIs) also emerged subsequently in the country. • Recognising the potential of micro finance to positively influence the development of the poor, the Reserve Bank, NABARD and Small Industries Development Bank of India (SIDBI) have taken several initiatives over the years to give a further fillip to the micro finance movement in India.
MICROFINANCE IN INDIA • The informal and flexible services offered to low-income borrowers for meeting their modest consumption and livelihood needs have not only made micro finance movement grow at a rapid pace across the world, but in turn has also impacted the lives of millions of poor positively
Micro Finance Delivery Models in India SHG-Bank Linkage Programme • The concept of micro finance implies informal and flexible approach to the credit needs of the poor. As such, each model has to be tailored according to the circumstances and the local needs. • One of the oldest and most successful models internationally has been the Grameen Bank Model in Bangladesh.
The Grameen Model • Launched in 1976 in Bangla Desh • To assist the poor families to overcome poverty through credit • Transformed into a formal bank under a special law in 1986 • Owned by poor borrowers of the bank- mostly women • Reversed conventional practice of banks by doing away the need of collaterals • Created a new banking with mutual trust, accountability, transparency, participation and creativity • Door step banking
The Grameen Model (contd..) • The loan can be obtained by a person as a member of 5 member group. • Loan can be received in a continuous sequence. • New loans can be obtained if previous loan is repaid. • All loans are paid in weekly or fortnightly installments. • Initially more focus on credit facilities and less focus on deposit mobilisation but with policy change in 2000 now focus on deposit mobilization also.
The Grameen Model (contd..) • Four kind of savings: • Personal • Special • Grameen Pension • Credit life insurance • Grameen II- Switched to individual lending • More flexible for the products more suitable for every day money management and micro enterprise • GB II has general loans, seasonal loans, family loans and a variety of other loans.
Does SHG mode empowers women? • As early as December 1984, the Fifth General Assembly of the Asia Pacific Regional Agricultural Credit Association (APRACA) held at Bangkok exhorted the agricultural and rural development finance institutions in the region to mobilise savings from the rural areas with the objective of providing loanable funds for agriculture and rural development. • The experience in some of the countries where informal self help groups (SHGs) of rural people which promoted savings among members and used these resources for meeting their credit needs, were considered useful innovations.
Further, the Third Consultation on the Scheme for Agricultural Credit Development (SACRED) held at Rome in 1985 called for active promotion of linkages between banking institutions and SHGs as a mean of improving the access of low income group to banking services. • The Executive Committee Session of APRACA held at Seoul in October 1985 approved the holding of a South-East Asian sub-regional workshop to devise ways and means of improving such linkages.
APRACA Regional Workshop held at Nanjing, China in May 1986 recommended national level consultation and organisation of national surveys of SHGs in collaboration with APRACA + other agencies. • The Sixth General Assembly of APRACA held at Kathmandu, Nepal in December 1986 considered a project proposal on ‘promotion of linkages between banking institutions and SHGs in rural savings mobilisation & credit delivery to rural poor’. It was decided that each member country would form a Task Force to conduct a survey of SHGs, thereafter, formulate suitable national level programmes.
Consequent upon this, a Task Force was set up in India in the Ministry of Agriculture, to identify the existing SHGs, undertake a survey of the groups and draw a plan of action for channeling the flow of savings and credit between the rural poor and banks through SHGs and identify concrete projects for action research in this field. • Accordingly, in February 1987, it was decided that a study team led by NABARD and comprising of representatives from various financial institutions, should be constituted to undertake the survey.
The survey was undertaken in September 1987 and the report discussed at the 18th Executive Committee Session and 10th Foundation Anniversary of APRACA held at New Delhi in November 1987. • This survey report laid the foundation of the SHG-bank linkage programme in India and thereafter was launched as a pilot project in 1992. • The pilot project launched by NABARD after extensive consultations with RBI, commercial banks and NGOs with the following objectives;
(i) to evolve supplementary credit strategies for meeting the credit needs of the poor by combining the flexibility, sensitivity and responsiveness of the informal credit system with the strength of technical and administrative capabilities and financial resources of the formal credit institutions; • (ii) to build mutual trust and confidence between the bankers and the rural poor; • (iii) to encourage banking activity, both on the thrift as well as on credit sides, in a segment of the population that the formal financial institutions usually find difficult to cover.
The Core Strategy of SHG-Bank Linkage Programme • Basic human feeling of Self Worth at its Core. • Building financial capabilities and self confidence in the rural poor, through internal savings and lending from the owned funds of the SHGs. • Leveraging the strength of the formal banking system and the flexibility of informal Self Help Groups (SHGs) in providing adequate financial services to the rural poor.
Enables exclusion of rich Self-selection Focus on women (85% of SHGs) Savings first and credit later Group financed only after 6 months Intra group appraisal systems and prioritization Shorter repayment terms Design features of SHGs
Progressive lending • Multi-layered operation • Maintenance of accounts by SHGs • Developing a relationship with Banks • Market rates of interest • AND ABOVE ALL… FLEXIBILITY IN APPROACH
Model I: SHGs promoted, guided and financed by banks. • Model II: SHGs promoted by NGOs/ Government agencies and financed by banks. • Model III: SHGs promoted by NGOs and financed by banks using NGOs/formal agencies as financial intermediaries.
Micro Finance Institution Approach • The MFI model in India is characterised by a diversity of institutional and legal forms. • MFIs in India exist in a variety of forms like - Trusts registered under the Indian Trust Act, 1882 / Public Trust Act, 1920; - Societies registered under the Societies Registration Act, 1860; - Co-operatives registered under the Mutually Aided Cooperative Societies Acts of the States; - Non-banking financial companies (NBFC)-MFIs, which are registered under Section 25 of the Companies Act, 1956 or NBFCs registered with the Reserve Bank.
As per the Bharat Micro Finance Report of Sa-Dhan, in March 2008, the 223 member MFIs of Sa-Dhan had an outreach of 14.1 million clients with an outstanding micro finance portfolio of Rs.5,954 crore.
Bank Partnership Model • Banks can use MFIs as their agent for handling credit, monitoring, supervision and recovery. • In this model, the bank is the lender and the MFI acts as an agent for handling items of work relating to credit monitoring, supervision and recovery, while the borrower is the individual. • The MFI acts as an agent – it takes care of all relationships with the client, from first contact through final repayment.
Policy Initiatives in India • In Jan. 1993, SHGs, registered or unregistered were allowed by the Reserve Bank to open savings bank a/c with banks. • RBI constituted a ‘Working Group on NGOs and SHGs’ in 1994 to study the potential of the micro finance movement. • Based on its recommendations, banks were advised, inter alia, that financing of SHGs should be included by them as part of their lending to the weaker sections and that SHG lending should be reviewed at the State level banker’s committee (SLBC) level and by the banks at regular intervals.
Policy Initiatives in India (contd..) • To further promote the SHG momentum in the country, banks were advised by the Reserve Bank in 1998 that SHGs which were engaged in promoting the savings habits among their members would be eligible to open savings bank accounts and that such SHGs need not necessarily have availed of credit facilities from banks before opening savings bank accounts.
Policy Initiatives in India (contd.. • Subsequent to the Monetary and Credit Policy announcement for the year 1999-2000, banks were also advised that interest rates applicable to loans given by banks to micro credit organisations or by the micro credit organisations to SHGs/ member beneficiaries, would be left to their discretion.
Policy Initiatives in India (contd..) • Task Force on Supportive Policy & Regulatory Framework for micro finance set up by NABARD in 1999 having RBI as a member. • Task Force looked into the entire gamut of issues related to micro finance, particularly regulatory issues. • RBI constituted a micro credit special cell in 1999 to suggest measures for mainstreaming micro credit & accelerating flow of credit to MFIs.
Policy Initiatives in India (contd..) • The special cell has since been converted into a micro finance and financial inclusion division in the Reserve Bank. • Based on the reports of the special cell constituted in the Reserve Bank and the Task Force on Supportive Policy and Regulatory Framework, the RBI issued comprehensive guidelines to banks in February 2000 for mainstreaming micro credit and enhancing the outreach of micro credit providers.
Policy Initiatives in India contd..) • These guidelines, inter alia, stipulated that micro credit extended by banks to individual borrowers directly or through any intermediary would from then onwards be reckoned as part of their priority sector lending. • Banks were given freedom to formulate their own model/s or choose any conduit/intermediary for extending micro credit.
Policy Initiatives in India contd..) • Banks were also permitted to prescribe their own lending norms so as to provide maximum flexibility with regard to micro lending. Such credit was to cover not only consumption and production loans for various farm & non-farm activities of the poor, but also include their other credit needs. • Banks were asked to delegate adequate sanctioning powers to branch managers & to keep the loan procedures & documents simple for providing prompt and hassle free micro credit.
Policy Initiatives in India contd..) • The rapid development of the sector necessitated addressing the various issues associated with the sector. In October 2002, the Reserve Bank set up four informal groups to look into issues relating to: (i) structure and sustainability; (ii) funding; (iii) regulations; and (iv) capacity building of micro finance institutions. • Taking into consideration the recommendations of the groups, banks were advised that they should provide adequate incentives to their branches for financing the SHGs and that the group dynamics of working of the SHGs should be left to them.
Policy Initiatives in India contd..) • Based on the recommendations of the Advisory Committee on Flow of Credit to Agriculture and Related Activities from the Banking System (Chairman: Prof. V S Vyas), which submitted its final report in June 2004, it was announced in the Annual Policy Statement for the year 2004-05 that in view of the need to protect the interest of depositors, MFIs would not be permitted to accept public deposits unless they complied with the extant regulatory framework of the Reserve Bank.
Policy Initiatives in India contd..) • However, as an additional channel for resource mobilisation, the Reserve Bank in April 2005 enabled NGOs engaged in micro finance activities to access the external commercial borrowings (ECBs) up to US$ 5 million during a financial year for permitted end use, under the automatic route.
Policy Initiatives in India contd..) • In order to examine issues relating to rural credit and micro finance, an internal group (Chairman: Shri H.R. Khan) was set up in 2005. • Based on the recommendations of the group and with the objective of ensuring greater financial inclusion and increasing the outreach of the banking sector, banks were permitted in January 2006 to use the services of NGOs/SHGs, MFIs (other than NBFCs) and other civil society organisations as intermediaries in providing financial and banking services through business facilitator and business correspondent models.
All Regional Directors of the Reserve Bank were advised in April 2006 that whenever issues relating to micro finance were noticed in the areas under their jurisdiction, they may offer to constitute a coordination forum comprising representatives of SLBC convenor banks, NABARD, SIDBI, State Government officials, & representatives of MFIs (including NBFCs) and NGOs/SHGs to facilitate discussion on the issues affecting the operations in the sector and find local solutions to the local problems.
Policy Initiatives in India contd..) • In May 2006, a joint fact-finding study was conducted by Reserve Bank and a few major banks. • It was observed during the study that some of the MFIs financed by banks or acting as their intermediaries/partners were focussing on relatively better banked areas and trying to reach out to the same set of poor, resulting in multiple lending and overburdening of rural households.
Policy Initiatives in India contd..) • Further, many MFIs supported by banks were not engaging themselves in capacity building and empowerment of the groups to the desired extent and banks did 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. • Guidelines were, therefore, issued to banks in November 2006, advising them to take appropriate corrective action.
Policy Initiatives in India contd..) • The Union Budget for the year 2008-09 announced that banks would be encouraged to embrace the concept of total financial inclusion. • The Government would request all scheduled commercial banks to follow the example set by some public sector banks and meet the entire credit requirements of SHG members, namely: (a) income generation activities; (b) social needs like housing, education, marriage: and (c) debt swapping. Consequent upon this, in April 2008, banks were advised by the Reserve Bank to meet the entire credit requirements of SHG members, as envisaged in the Union Budget.
Recent Initiatives by NABARD • Organising/ sponsoring training programmes and exposure visits for the benefit of bank officials, NGOs, SHGs and Government agencies to enhance their effectiveness in the field of micro finance. • The best practices and innovations with respect to the sector are widely circulated among Government agencies, banks and NGOs. • NABARD also provides support for capacity building, exposure and awareness building of the SHGs and NGOs.
Recent Initiatives by NABARD (contd..) • launched the ‘Micro-Enterprise Development Programme’ (MEDP) for skill development in March 2006. • Basic objective was to enhance the capacities of matured SHGs to take up micro enterprises through appropriate skill upgradation. • The programme envisaged development of enterprise management skills in existing or new livelihood activities, both in farm and non-farm sectors.
Recent Initiatives by NABARD (contd..) • Duration of training can vary between 3 to 13 days depending upon the objective and the nature of training. • In 2005-06, a pilot project for ‘promotion of micro-enterprises’ was launched among members of matured SHGs. • Provides marketing support to the SHGs for exhibiting their products. • During the year 2007-08, NABARD supported three exhibitions of products prepared by various SHGs at Bhopal, Chennai and Navi Mumbai.
Recent Initiatives by NABARD (contd..) • In addition, NABARD also provides promotional grant support to NGOs, RRBs, DCCBs, farmer’s clubs and individual volunteers and assists in developing capacity building of various partner agencies. NABARD has been making efforts to increase the number of partner institutions as self-help promoting institutions.
Recent Initiatives by NABARD (contd..) • NABARD launched a pilot project in December 2003 to link post-offices with the SHGs with the objective of examining the feasibility of utilising the vast network of post offices in rural areas for disbursement of credit to rural poor on an agency basis. • The SHG Federations are emerging as important players in nurturing SHG, increasing the bargaining power of group members and livelihood promotion. The features and functions of SHG federation models promoted in the country vary, depending on the promoting agencies.
Recent Initiatives by NABARD (contd..) • Recognising the growing role of the SHG Federations and their value addition to SHG functioning, NABARD, in 2007-08 decided to support the Federations on a model neutral basis. • Support is extended to the Federation by way of grant assistance for training, capacity building & exposure visits of SHG members. • NABARD has also formulated the broad norms for deciding the grant of financial assistance to SHG Federations.
Recent Initiatives by NABARD (contd..) • Recognising the role played by MFIs, in extending micro finance services in the unbanked areas, NABARD extends support to these institutions through grant and loan based assistance. • NABARD provides loan funds in the form of revolving fund assistance (RFA) on a selective basis to MFIs to be used by them for on-lending to SHGs or individuals. This loan has to be repaid along with service charge, within a period of 5 to 6 years.
Recent Initiatives by NABARD (contd..) • In order to identify, classify and rate MFIs, NABARD introduced a scheme for commercial banks and RRBs to enable them to avail the services of accredited rating agencies for rating of MFIs. • Banks can avail the services of credit rating agencies like CRISIL, M-CRIL, ICRA, CARE and Planet Finance for rating of MFIs and avail financial assistance by way of grant to the extent of 100 per cent of the total professional fees of the credit rating agency, subject to a maximum of Rs. one lakh.
Recent Initiatives by NABARD (contd..) • The assistance is available for the first rating of MFIs with a minimum loan outstanding of Rs.50 lakh and maximum loan outstanding of Rs.500 lakh. • Recognising the need for upscaling the micro finance intervention in the country, the Union Finance Minister, in the budget for the year 2000-01, announced creation of a Micro Finance Development Fund (MFDF).