A Presentation on Microfinance in india

Group Members Are:

Nitesh Praveen Priyanka Agarwal Priyanka Modi Rahul Arya Rahul Ostwal Rakesh Kumar Rashmi Bapna Rashmi Dhall

DEFINITION

Microfinance is the provision of a broad range of financial services to poor and low-income people who do not have access to formal financial services such as: - deposits - loans - payment services - money transfers - insurance

HISTORY OF MICROFINANCE MOVEMENT

Microfinance has suddenly become a part of everyones vocabulary. The credit for this, in large measure, should go to 2006 Nobel Peace Prize Winners, Muhammad Yunus and the Grameen Bank of Bangladesh. The origin of the idea can be traced to the mid- 1800s. But in 1970s the idea was put to implementation.

Organizations like Opportunity International and ACCION International started extending small loans to the poor in South America.

HISTORY (Contd.)

Dr. Yunus founded the Grameen Bank in 1976. Today the Grameen Bank is the public face of a heterogeneous movement that spans the globe. His first micro loan of $27 was to a group of women, who used it as capital to start business. The idea has become has so popular so that it has found currency even in UN where it has been mooted as a method of reviving the New Orleans economy that was devastated by Hurricane Katrina.

SERVICES OF MICROFINANACE
Regulated financial institutions, such as banks, credit unions, consumer finance companies, postal savings banks and cooperatives Nongovernmental organizations (NGOs) Informal sources such as money lenders, shopkeepers, and traditional savings groups

Characteristics of Successful MFI

Commitment from board and management. Knowledge of MF best practices and how to serve micro credit clientele. Delivery channels located as per the convenience of the clientele. Innovative loan, deposit, remittance and insurance products especially adapted for low income groups.

Systems and procedures adapted to the microfinance operations. Appropriate training and incentives for staff. Transparent policies and procedures which enables all the stakeholders to scan through. Appropriate risk management techniques and practices. Solid foundations for governance.

The Impact of Microfinance

When capital is scarce, marginal productivity is very high. Thus, an extra Rs 1000 in capital may not make too much of difference to the productivity of a big corporation, but can make a significant difference to the productivity of a poor entrepreneur. This phenomenon explains part of why microfinance has made an impact. Anecdotal evidence suggests that microfinance has indeed played a role in pulling people out of poverty. Microfinance has also had an impact on national economies.

Microfinance in India
Evolution of Microfinance in India

Microfinance has been in practice for ages ( though informally). Legal framework for establishing the co-operative movement set up in 1904. Reserve Bank of India Act, 1934 provided for the establishment of the Agricultural Credit Department. Nationalisation of banks in 1969 Regional Rural Banks created in 1975. NABARD established as an apex agency for rural finance in 1982. Passing of Mutually Aided Co-op. Act in AP in 1995.

The Profile of Microfinance in India

The scenario

Estimated that 350 million people live Below Poverty Line This translates to approximately 75 million households. Annual credit demand by the poor in the country is estimated to be about Rs. 78,000 crores. Cumulative disbursements under all microfinance programmes is only about Rs. 8600 crores.(Mar. 07) Total outstanding of all microfinance initiatives in India estimated to be Rs. 2800 crores. (March 07) Only about 7 % of rural poor have access to microfinance.

The Profile of MF in India (Contd.)

Though a cumulative of about 20 million families have accessed microfinance to the extent of Rs. 5000 crores, the total outstanding is estimated to be only about Rs. 1600 crores. The active borrowers are estimated to have a per capita outstanding of only Rs. 2500. While 10 % lending to weaker sections is required for commercial banks, they neither have the network for lending and supervision on a large scale nor the confidence to offer term loans to big MFIs. The non poor comprise of 29 % of the outreach.

The Status of Microfinance in India

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Considerable gap between demand and supply for all financial services Majority of poor are excluded from financial services. This is due to, inter-alia, the following reasons Bankers feel that it is fraught with risks and uncertainties. High transaction costs Unfavourable policies like caps on interest rates which effectively limits the viability of serving the poor. While MFIs have shown that serving the poor is not an unviable proposition there are issues that have constrained MFIs while scaling up. These include Lack of an appropriate legal vehicle Limited access to equity Difficulty in accessing low cost on-lending funds (as of now they are unable to offer savings services in a legitimate manner.

1. 2. 3.

The Status of MF in India (Contd.)

Limited access to Capacity Building support which is an important variable in terms of quality of the portfolio, MIS, and the sustainability of operations. About 56 % of the poor still borrow from informal sources. 70 % of the rural poor do not have a deposit account 87 % have no access to credit from formal sources. Less than 15 % of the households have any kind of insurance. Negligible numbers have access to health insurance (0.4 %) and crop insurance (0.2 %).

Features of Indian MF

About 60 % of the MFIs are registered as societies. About 20 % are Trusts About 65 % of the MFIs follow the operating model of SHGs. Large concentration in South India 600 MFI initiatives have a cumulative outreach of 1.25 crore poor hoseholds NABARDs bank linkage program has cumulatively reached a total of 9.4 lakh SHGs with about 1.4 crore households.

Projections for the future

Annual growth rate of about 20 % during the next five years. 75 % of the total poor households of 80 million (i.e. about 60 million will be reached in the next five years. The loan outstanding will consequently grow from the present level of about 1600 crores to about 42000 crores.

Challenges ahead

Appropriate legal structures for the structured growth of MF operations Finding adequate levels of equity for the new entities to leverage loan funds Ability to access loan funds at reasonably low rates of interest. Ability to attract and retain professional and committed human resources. Design of apt MIS including user friendly software for tracking accounts and operations. Appropriate loan products for different segments.

Challenges (Contd.)

Ability to innovate, adapt and grow. Bring out a compendium of small and micro enterprises for the MF clients. Identify and prepare a panel of locally available trainers. Ability to train trainers. Capacity to provide backward linkages or create support structures for marketing.

Related Issues

Designing financially sustainable models Aim for community participation & ownership Increase outreach and scale up operations Demonstrate that banking with the poor is viable Build professional systems and processes. Ensure transparency and enhance credibility through disclosures. Provide support for capacity building initiatives.

Delivery Models

Grameen model SHG model Joint Liability Group Non Government Organization Rotating Savings and Credit Associations Village Banking

The Entry of Investors

Private and Institutional investor International Microcredit Fund Microcredit Intermediary The Village-Level Society The Really Poor Guy

CONCLUSION

It is clear that over the past three decades, the microfinance movement has emerged from obscurity to being considered as a tool that has the potential to significantly reduce poverty around the globe. It is an idea that has truly arrived . The manner is which this tool is employed by policy makers and microfinance practitioners will determine the extent and permanence of its impact.