Chapter 8 Micro Finance in India

8/2/2019 Chapter 8 Micro Finance in India

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Microfinance = provision of financial services

to the poor


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Micro-creditGroup lending

Social/charitableactivity

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Range of financialservices

Group and individuallending

Profitable activity

What it often is What it really should be


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Risk management challenges dueto information asymmetryproblems

Accessibility (geographicaccessibility and easiness to dealwith)

No collateral, Low value and cash

intensive nature of the business

Staff training and motivation

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High transaction

costs


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Decision to take loan Loan usage loan repayment

Adverse selectionMoral hazard


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Dont know

Clients typeInterest ratereflects proba of default

Safer clients drop outNeed to increase interestrate

Providing credit canbecomeimpossible


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Can not observe what client is doing

Bad loan usage

Strategic unwillingness

To repay


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75% population lives in rural areas:geographical access difficult

Informal activities: need access at flexible

times Illiteracy: difficult to deal with traditional

services

Low value of transactions

Lack of collateral

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Lack of trained staff

Lack of motivated staff

Difficult to incentives staff

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Deccan, late 19th Century:peasant riots on account of coercive

alienation of land by moneylenders.

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Organization of cooperative societiesas alternative institutions for providingcrdit by british government


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Credit was viewed as essential part of fightagainst poverty which led to followingmeasures:

Expansion of the institutional structureDirected lending to disadvantaged borrowers

and sectors

Interest rates supported by subsidies

Institutional vehicles: cooperatives,commercial banks and Regional Rural Banks[RRBs].

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1950 & 1969: emphasis on the promoting ofcooperatives.

1969: nationalization of the major commercialbanks: beginning of commercial bank branch

expansion in the rural and semi-urban areas. 1976: Regional Rural Banks (RRB), low cost

institutions mandated to reach the poorest incredit-deficient areas

During this period, intervention of the RBI(Reserve Bank of India) was essential: specialcredit programmes for channeling subsidizedcredit to the rural sector (concept of prioritysector)

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Enhance the areas of commercial fredon

Increase their outreach to the poor

Stimulate additional flows to the sector.

Liberalising interest rates for cooperatives andRRBs,

Relaxing controls on where, for what purposeand for whom RFIs could lend, reworking the

sub-heads under the priority sector, Introducing prudential norms

Restructuring and recapitalising of RRBs.

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Defects in policy design,

Infirmities in implementation

Inability of the government of the day to desist

from resorting to measures such as loan waivers. High defaults

The banking system - was not able to internaliselending to the poor as a viable activity but only

as a social obligation More and more difficult for commercial bankers

to accept that lending to the poor could be aviable activity.

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Against rural population of 741.0 million, 500 millionpeople un-served

Population per branch: 22,793

Penetration of savings accounts is below 18% As against 104% in urban and semi-urban areas

Number of villages per branch: 19

High dependence on informal sources 36% of rural credit from informal sources Dependence even higher for lower income households: 78%

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Demand: Rs. 450 billion/y

60% in Southto cover all parts of India

Less than 2 million

Households reached500 million un-served poor

Disbursed: 39 billion

Need employment opportunities

Need protection

against all risks

Market constraints

Insurance under-delivered

Scaling up

Increaseimpact


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Bank SHG

NGO

Loan at9%

Noliability

Groupformation/linkage

SHG-Bank linkage model


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Lack of adequate quantities of risk capital

Lack of long-term finance to pay for creationof the necessary infrastructure and pre-

operative expense Lack of well trained staff in adequate

numbers at all levels

technology

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Chapter 8 Micro Finance in India

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