MICRO FINANCE

COMPANIES- MONEY
LENDER OR PARA BANKER

Presented by:
SUMITA MONDAL [10DF023]
MUKUL ANURAG HORO [10DF025]
SUMEET JAMUAR [10DF029]
SWAROCHIS PANDEY [10DF032]
PANKAJ KUMAR [10DF035]
 CONTENT
Micro finance & micro credit
Micro finance product
Para banking
Money lenders
Micro Fin Cos: Moneylenders Or Para bankers?
Micro finance lending models
General features – micro finance
conclusion
 MICRO FINANCE V$ MICRO
CREDIT
Microcredit refers to very small loans for unsalaried borrowers
with little or no collateral, provided by legally registered
institutions. Currently, consumer credit provided to salaried
workers based on automated credit scoring is usually not included
in the definition of microcredit, although this may change.

Microfinance typically refers to microcredit, savings, insurance,

money transfers, and other financial products targeted at poor and
low-income people.
 MICROFINANCE
PRODUCTS
 Micro savings

 Micro insurance 

 Micro leasing

 Money transfer 
 PARA BANKING
Para Banking is a kind of banking wherein money is
accepted for the purpose of saving from an individual as
in case of a normal banking function. The acceptance of
money under Para Banking is scheduled daily, monthly,
quarterly, half yearly, yearly and even for fixed period
more than one year. Para banking also provides secured
loan and pre-maturity facilities against the amount in
the saving scheme.
 NORMAL BANKING VS PARA
BANKING
The only major differentiation between a normal
banking and Para Banking is that, under Para
Banking one cannot option for current account
facility and carry its day-to-day transaction for
accepting and withdrawal of funds. Also, a
depositor can’t issue any cheque’s against the
amount in its Para banking saving schemes.
Rather there is no concept of cheque system in
Para banking.
 MONEYLENDER
A moneylender offers small personal loans at high rates of
interests, usually higher rates than the market rate charged
on credit cards or on bank overdrafts. Moneylenders are an
important source of credit to a category of borrowers who would
normally be refused credit by most financial institutions because
their income may be at or below the poverty threshold or
whose credit score indicates that the borrower might be unable to
repay the loan. Because personal loans offered are unsecured and
the risk of default by the borrower is high, moneylenders charge
an effective interest rate that is in the range anywhere between
100% to 400% APR.
 CHARACTERISTICS OF MONEY
LENDING
 It is collected credit, usually on a weekly basis and
from the borrower's home. This collected dimension
may serve the target population well but it adds to
the costs of the credit;
 The loans are usually quite small and unsecured:
moneylenders, unlike most other lenders, do not
demand security
 There are high costs attaching to it given the short
duration of the loans
 Advantages of money lenders
 Provide short-term small loans - suited to low-
income groups.
 Provide loans to borrowers in a flexible manner,
immediately when needed and with a minimum
paper-work and official requirements.
They function in close physical proximity to
the borrower,
Provide loans as and when requests are made.
Disadvantages of money lender
They are unorganized and do not have any contact with other
sections of the banking industry
They combine money lending with trading and commission
activities and thus introduce risk into their business.
They do not distinguish between short-term and long-term
finance and also in the purpose of the loans.
They follow traditional methods of keeping accounts and do
not give receipts in most cases.
They charge high rates of interest in proportion to banking
institutions
Micro Fin Cos: Moneylenders Or
Para-bankers?
Since the principal business activity of NBFC-MFIs is lending, is
it more appropriate that they are treated as moneylenders rather
than companies engaged in non-banking financial business.

The non-corporate MFIs are also implementing various RBI

schemes, acting as business correspondents and availing bank
loans for on lending under financial inclusion schemes. There is a
strong case for treating MFI lending activity on par with non-
banking financial activity. But since RBI is not their regulator,
such MFIs will end up being branded as moneylenders
 CONT…..
A Reserve Bank of India report on trend and progress
of banking 2009-10 states that micro finance
institutions (MFIs) such as non-government
organisations and non-banking finance companies
have emerged as important sources of microfinance
delivery in India.
NBFC-MFIs are registered with and regulated by
RBI. Are they subjected to dual regulation by state
governments and RBI.
 CONT…..
If objectives of national policy on financial
inclusion have to be achieved, there is no
alternative but to treat MFI activity as para-
banking and decide which national level
regulator shall regulate it.
Since the number of MFIs to be regulated is
too large, it may be difficult for RBI or
NABARD to regulate MFIs.
 CONT…..
It is for RBI and the central government to
decide whether to surrender powers to regulate
MFIs engaged in para-banking to states or
issue an ordinance based on pending MFI bill
and exercise powers to regulate the MFI sector
pursuant to the legislative power on the subject
of banking provided in the Union list under the
Constitution
8 Microfinance Lending Models
 Model 1: Associations
 Model 2: Bank Guarantees
 Model 3: Community Banking/ Grameen
Bank/ Village Banking
 Model 4: Cooperatives
 Model 5: Credit Unions
 Model 6: (NGOs)
 Model 7: For-profit Banks
 Model 8: ROSCAs
General Features Of
Microfinance
 Legal Framework of Micro
Finance Institutions in India

Charitable
Institutions Co-Operatives Companies Banking
(State and
(Societies, National Co-
Trust etc) Operatives) (NBFC) ( LAB)
 MFIs as Charitable Institutions
They work on grants. They are not able to
handle funds of SHGs or act as an intermediary
beyond a level. They are not allowed to raise
equity and mobilize deposits. These structural
restrictions limit the availability of capital to
these MFIs. Often, these institutes are found to
survive on foreign grants
 MFIs as Co-Operatives
Co-operatives have legal sanction to work as
financial intermediaries. The activities of State
Co-operatives are restricted in the State. Their
activities are heavily controlled by the controlling
authority, Registrar of the Cooperative Societies
and the State Government. National Co-
operatives need lesser Govt. Control than State
Cooperatives for multi-state operations.
 MFIs as Companies:
MFIs have to have Rs.2 Crore as its initial funds if
these are operating as Non Banking Financial
Companies (NBFC). These MFIs are required to
obtain a registration certificate from RBI (under
Section 45-1A of the RBI Act) after satisfying the
initial conditions. They are allowed to mobilize
deposits after satisfying conditions stipulated by
RBI.
 MFIs as Banking Institutions:

The MFIs who are operating as banks are

registered under RBI but it is very difficult to
obtain this registration. These institutions are
regulated by RBI on daily affairs. To set up a
MFI as a bank it would require initial capital
from Rs.100 to 300 crore. For Local Area Bank
the amount is Rs. 5 crore.
 Conclusion
The success of MFIs encouraged the Reserve Bank of
India to take the programme of financing MFIs in India.
The Indian MFIs have proved that lending to the poor is
possible and profitable. Now MFIs have not only
delivered credit to the poor and mobilized deposits but
also they have started to provide insurance to the poor,
which help the poor to meet the uncertain events. These
organizations improve the socio-economic environment
of India. They are able to empower poor women and to
reduce the gender discrimination among the poor people.