Micr finance final ppt

The Microfinance

Industry in India …

Presented by:Group 5

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Introduction

India has one of the most extensive banking infrastructure in the world. However, in mid 1990s,70 % of population living in rural areas do not have access to basic banking services like savings and credit

During same period, share of non instituitional agencies including traders, money lenders, friends & relatives in outstanding cash dues of rural households was 36%

Rural banking is perceived as HIGH RISK and HIGH COST BUSINESS.

Regional rural banks were incorporated in 1976 to cater to credit needs of rural poor

By mid 1970s ,the banking sector was operating as a three-tier system - First Tier consisted of – Commercial Banks Second Tier consisted –Regional Rural Banks (RRBs) Third Tier was formed by –Cooperative Banks

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In 1980’s Govt. realized need for micro finance to provide rural poor with savings and microcredit services.

Loans through microcredit schemes were made more accessible compared to banks loans

In late 1990s, Microfinance business was boosted by innovative initiatives taken up by MicroFinance Instituitions (MFIs), Non-Governmental Institutions(NGOs) and banks.

What is Microfinance ? Microfinance is provision of financial Services to low-income clients, including consumers and the self-employed.

Microfinance Products• Micro savings • Micro insurance

• Micro leasing• Money transfer

Microfinance Products

Micro savings – A possibility to save money without no minimum balance. Allows people to retain money for future use. In SHGs the members save small amounts of money, as little as a few rupees a month in a group fund. Members may borrow from the group fund for a variety of purposes ranging from household emergencies to school fees. As SHGs prove capable of managing their funds well, they may borrow from a local bank to invest in small business or farm activities. Banks typically lend up to four rupees for every rupee in the group fund

Micro insurance – Gives the entrepreneurs the chance to focus more on their corebusiness which drastically reduces the risk affecting their property, health or working possibilities. The different types of insurance services are life insuranc , property insurance, healt insurance and disability insurance. The spectrum of services in this sphere is constantly expanded, as schemes and terms of providing insurance services are determined by each company individually

Micro leasing – For entrepreneurs or small businesses who can´t afford buy at full cost they can instead lease equipment, agricultural machinery or vehicles. Often no limitations of minimum cost of the leased object

Money transfer – A service for transferring money, overseas to family or friends. Money transfers without opening current accounts are performed by a number of commercial banks through international money transfer systems such as Western Union , Money Gram, and Anelik. On the surface they may seem like small money transfers, but when one considers that such transactions take place millions of times around the world each week, the numbers become impressive. Remittances are also an important source of income for many developing countries including India, China and Mexico, all of which receive over 20 billion dollars each year in remittances form

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Background In early 1980, it was found that though network of rural banks branches had been trying to

create self employment opportunities by providing bank credit for over two decades, many poor people remained outside the purview of formal banking system.

Existing banking policies and procedures were not tailored to the requirements of the poor.

RBI and NABARD were involved in spreading the network of commercial banks in rural areas.

They made it compulsory for all private sectors to open at least 25 % of their branches in rural and semi-urban areas.

It also stipulated that 40% of net bank credit should be allotted to priority sectors –housing, rural development and agriculture

With RBI and NABARD measures, commercial banks moved into rural areas but advances given to poor were very low.

Self help groups(SHG)-Bank Linkage Model was launched in 1992 to facilitate empowerment of poor and overall economic growth.

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In 1995,RBI set up working group to study possibility of linkages between informal SHGs and banks. On working group recommendation-

RBI instructed banks to treat loans under the SHGs–bank linkage model as a part of their main stream lending.

Allowed SHGs to open savings A/c with banks

RBI also simplified loan documentation and encouraged decentralization of loans

Microfinance also provides other financial services to poor like savings & loans to meet consumption needs, housing loans and micro-insurance services.Its Objective was to increase income of poor in rural,semi-urban and urban areas and inturn improve their living standards

In 1996- banks provided SHGs with term loans and other credit support through mediation of NGOs or MFIs

RBI instructed to cover SHG financing under priority sector lending portfolio.SHG –

Bank linkages program received a boost and banks lent to SHG with or without support of NGOs

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Concentration More in South India

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SHGs witnessed rapid growth in AP, Karnataka & Tamil Nadu

Key Reasons – The origination of the bank SHG linkage program in Karnataka largely through the initiatives of the

nongovernment organization (NGO) MYRADA and the consequent greater participation of Karnataka-based banks, such as the Syndicate and Canara Banks, in the program

More vibrant local economies in the southern states compared to the less developed states in the north and east

Higher literacy and participation rates of women in the local economy making them more suitable clients for MFIs.

42%

11%12%

9%

AAs on March 2004

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Three SHGs models1. SHGs were formed and monitered by banks which acted as SHG promoting

instituitions(SHPIs)- banks provide savings A/C & line of credit2. NGOs and other agencies acted as facilitators and worked towards formation of

SHGs- they trained the groups in thrift & credit management3. NGOs AND MFIs acted as facilitators & financial intermediaries to form and

nurture SHGs- they also trained group in thrift and credit management.

Distribution of SHGs among different bank financing models

9/12/2010

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Contd By 1999,there were 33000 SHGs linked to banks. By 2003, this no. rose to 800000 with

banks assisting 58 million poor people with cumulative credit disbursement of Rs.20 bn

About 48 commercial banks, 196 RRBs and 316 cooperative banks with 35,294 branches had become a part of SHG bank linkage program which was spread across 563 districts in India by 2004

Penetration of SHGs can be seen from the facts-

In March 2004, banks had financed 3,61,731 SHGs and cumulative no. of SHGs was 1,079,091.

About 90% SHGs comprised of women and program had reached 16 mn households.

By 2005, 400 women of India joined a SHG every hour and every day one new NGO became a part of the program

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Types of Microfinance Institutions

Non Profit MFIS/NGO MFIS: These are societies under the Societies Registration Act, 1860. they carry out both non financial & financial activities apart from financial intermediation as they are prohibited from carrying out financial activities

For Profit MFIs: They include NBFCs registered under Companies Act, 1956 & banks which provide microfinance apart from other banking services.

Mutual Benefit MFIs: This category includes state credit co-operatives, national credit cooperatives & mutually aided cooperative societies (MACS)

During 1980s & 1990s, several NGOs entered the microfinance sector providing micro loans. NABARD & Small Industries Development Bank of India(SIDBI) became intermediaries b/w the

poor borrowers & the banks.

During the late 1990s there was a growing trend of NGOs transforming into microfinance organizations.

By 2004 there were about 1000 private MFIs of which only 10 had more than 1,00,000 microfinance clients.

Banks were not willing to lend to the MFIs as they were not sure of their credit worthiness. Thus M-CRIL(Micro Credit Ratings International Limited) was launched.

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Poverty Outreach

80% women clients – 2008, 2009 & Active borrowers in 2009 – 93% women

An increase in the percentage of borrowers above Rs.10,000/ from 2008 to 2009

Decrease in percentage of borrowers below Rs.5,000/ 7.7 million clients from SC/ST & minority community background

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Microfinance- Major Players NABARD SIDBI Rashtriya Mahila Kosh FWWB SHARE Microfin Limited

MFIs could lend to SHGs or individuals directly or through any other channel partner. Loans given were to be used for non-farm activities and for financing

microenterprises. Each MFI was eligible for a loan of minimum Rs. 1 million. Loans were given @ 9-11% and could be lent to borrowers taking into account their

cost of operations.

NGOs Under Different Organizational Forms Organizational Form NGO

Not For Profit Company IASC, Sanghamithra

For Profit Company (NBFC) Samruddhi, SHARE Microfin, CFTS, Asmitha

Local Area Banks KBS Lab, A.P.

Cooperatives:

Cooperative Society AMCCS, JMSSM, Bhuttico, VYCCU, ICNW

Cooperative Bank SEWA Bank

Mutually aided Cooperative Society (MACS)

SWDMACTS, Sneha MACS, PWDMACS, APDSFLMACS Share India MACS & men women thrift cooperatives

Public Society/ Trust ADS, RASS, ASA, FWWB, GDS, RGVN, WWF, VWS, YCO

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National Bank for Agriculture & Rural Development (NABARD)

NABARD was established in 1982 to provide credit to the rural sector.

By 2005, NABARD’s SHG Bank Linkage program had emerged as one of the largest microfinance programs in the world.

Financial assistance of ` 2000 was provided by NABARD to NGOs for promoting & linking each SHG with the bank.

In order to minimize costs NABARD came up with a module where staff from 10 selected branches of RRBs were trained in SHG formation.

In another scheme to promote & develop SHGs, NABARD assisted District Cooperative Central Banks (DCCB) & Primary Agricultural Cooperative Credit Societies (PACS).

NABARD came up with the novel idea of farmers clubs that helped in promoting, linking & monitoring SHGs.

NABARD authorities identified the areas where farmers clubs could be implemented & volunteers were selected.

After selecting them training was provided by the regional office of NABARD which included imparting them the skills & knowledge required to promote & nurture SHGs.

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Contd After the SGH was organized savings bank account was opened & started providing credit

facilities 6 months after the beginning of savings activities.

NABARD reimbursed the total cost of the training program within `3000 per program. By march 2004, NABARD had about 3,00,000 credit linked SHGs which had been

functioning for more than 3 years.

Microenterprises concentrated on income generating activities based on the skills, knowledge & resources of the SHG members.

Resource mapping was carried out to identify resources available with the groups & the resources needed to take up the income generating activities.

The group members were helped to select the right kind of economic activity & provided training for the skill required.

NABARD started a pilot project linking SHGs through post offices in1992 : a landmark development in banking with the poor.

The post offices would extend loans at simple interest of 9% p.a. retaining an interest margin of 3% & duration of the loan was 24 months.

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Small Industries Development Bank of India (SIDBI) Established in 1990 for financing development of small scale industries.

With the Objective – “to encourage reaching out financial services to the poor through the informal sector institutions.”

SIDBI launched Foundation for Micro Credit (SFMC) ,which acted as wholesaler for microfinance & provided a wide range of services.

SIDBI Foundation For Micro Credit (SFMC ) It provided loans to large & medium Micro Finance Instituitions (MFIs)

Qualification for loan : MFI to obtain loan from SFMC -I. Have existed for a minimum of 5 years.II. Have run microfinance programs for a minimum 3 years.III. Have reached a minimum of 3000 members.IV. Maintain transparent accounting, MIS and audit systems.

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Liquidity Management Support (LMS) Many MFIs faced liquidity crunch. To cater to this problem, SFMC launched

LMS. In order to obtain LMS, the MFI had to have at least 2 years of partnership

with SFMC. And should not have defaulted on loans from any lending agency or bank. LMS was provided on annual basis. The amount provided was equal to 15% of

the loan o/s as of 31st March of the previous year or Rs. 2.5 million whichever was less.

Transformational Loan (TL)

SFMC provided TL to selected top level non-corporate MFIs, to help them transform themselves into corporate entities with a formal organizational set-up.

TL comprised of an interest free loan which could be converted into equity after a specified time.

To obtain TL, MFIs had to be in partnership with SFMC for at least 3 years, with minimum loans o/s of Rs.10 million.

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Rashtriya Mahila Kosh (RMK)

Estd. In 1993 by Ministry Of HRD to provide financial assistance to poor women using NGO channels adopting the SHG approach.

RMK provided interest bearing loans to NGOs, cooperative societies etc.

RMK provided loans at 8% to NGO. The NGOs gave loans to women at 12%.

Loan amount was Rs.5000 for short term loans and Rs.7500 for medium term

To be eligible to take loans from RMK, the NGOs had to have experience of 3 years in credit & savings, with a recovery rate greater than 90%

For small organizations, RMK started a loan promotion scheme, under which Rs. 200000 was provided as a loan at 8%, with quarterly interest repayment.

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Features Of RMK A maximum of Rs.50 million per NGO would be provided as a loan. To get credit beyond the limit of Rs.10 million, NGO should have drawn at least

Rs.20 million in loans under microcredit schemes of any of the financial institution.

RMK provided loans to franchisee @ 5%p.a. SHGs took loans from MFIs/NGOs @ 18%p.a.

Different Schemes under RMK

Revolving Fund Scheme- loans could be rotated for 3 years and the amount provided was Rs.5 million. Support Scheme- where an NGO was given interest free loan upto Rs.100000 to develop & establish 25 SHGs.

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FRIENDS OF WOMEN’S WORLD BANKING(FWWB)

Incorporated in 1992 as a not for profit organization under the sponsorship of SEWA bank

Its mission is to assist information and strengthening of people’s organization, bringing them into mainstream of the economy an facilitating their participation in the process of nation building

Earlier its facilities were limited only to Gujarat but today its operations are everywhere in the country

FWWB financed & provided loans to poor, rural women micro entrepreneurs, including vendors, traders, house based workers and agricultural producers

It also worked with NGOs, SHGs and federations

It provides loan guarantees and securities to banks so that women could take loans RLF of FWWB provides collateral free loans to poor women, organized in SHGs and cooperatives RLF motivated small savings groups to build their resource base, manage funds and provide

support to undertake employment generation activities

FWWB introduced educational loans to encourage literacy & In 1999, it started micro insurance (in association with German Technical Cooperation) to provide women a wide range of financial service apart from credit and savings

It acted as a facilitator to MFIs in micro insurance project by providing orientation, exposure visits, linkages with insurance companies etc

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It came up with social security scheme for unorganized workers. This scheme offered health insurance and old age pension schemes

The main aim of this was to make available social security services for poor women and their families for reducing vulnerability to social and economic crisis

It acted as a facilitator to MFIs in micro insurance project by providing orientation, exposure visits, linkages with insurance companies etc

With the initiatives of FWWB, several new insurance products were introduced. Some MFIs were able to negotiate with insurance companies to obtain affordable premium

It came up with social security scheme for unorganized workers. This scheme offered health insurance and old age pension schemes.

This scheme was launched in 50 selected districts and covered workers in unorganized sectors with wages of Rs. 650 per month

Two insurance product namely Anisha Jeevan and Anisha Nivaran were introduced Under Anisha Jeevan members were provided with accidental death coverage, life cover and under anisha

nivaran funeral expenses were also covered

Other unique scheme is where family protection are offered to poor women in SHGs in association with ICICI prudential life insurance company

Coverage of Rs. 5000 in case of natural death and Rs. 10000 in case of accidental death was provided. The outstanding loan of the SHG members were written off on death

9/12/2010

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Share Microfin Ltd (SML) Incorporated in 1999, it provides financial and support services to women living below the

poverty line enabling them to use their skills by undertaking income generation activities

Targeted those women whose asset holding is less than Rs. 20000 and per capita income less than Rs. 300 a month

It is promoted by SHARE. Under this women are motivated to form groups . The members of the group agreed upon disbursement and repayment terms

To overcome the limitation of tax laws which did not allow any charitable organization to carry out microfinance activities, SHARE Microfin Ltd. (SML) was formed.Its equity was from contribution of poor women members

Each branch of SHARE targeted around 2500 women in a radius of 25km A unique feature of SML is that none of its loan has been written off and the repayment

rate was 100%

SHARE as per a one year agreement with ICICI in 2004, acted as a collection agent enabling ICICI to receive payment from individual micro credit borrowers

This further increased access to new 25000 new borrowers at a lower interest rate

Following is the table which shows the SML position in June 2004. it shows the total amount of loan disbursed, the number of states, villages, members catered to by SML

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Road Ahead

Many public and foreign banks plan to enter microfinance sector due to its very low NPAs and high repayment rate of more than 95% inspite offering loans without a collateral security.

Chairman and MD of SHARE Microfin Ltd said-” In all cases there is no security. We build a relationship with the client. We ensure that money is used for the purpose that customers have taken a loan for. We ensure that they make profits in turn ensuring repayment”

Several measures proposed by Union Budget like commercial banks were urged to appoint more MFIs as banking correspondents in rural areas, redesign Microfinance Development Fund as Microfinance Development Equity fund with additional corpus of Rs 2 billion,it was recognized that linking SHGs to the banks had emerged as one of major finance programs in the country and increased the target for credit linking from 0.25 million SHGs by 2006

In April 2005, RBI announced that NGOs involved in microfinance activities are permitted to raise external commercial borrowings of US$ % million p.a. NGOs could utilise these proceeds for lending to SHGs, MFIs or any other microfinance bonafide activities.T his would result in flow of low cost funds to the sector which is in dire need of funds

Securitization deal by ICICI bank ushered a new era in Microfinance Industry of India. Many other private banks have followed like ABN Amro, HSBC, HDFC Bank etc.

With Increasing competition in this sector, banks need to take initiative in asset building through micro credit and intermediary MFIs to play role of sales agents. Optimum microfinance model expected to emerge from this will have adequate financial resources and regulation of formal banking system combined with grassroot delivery services spread all across the country

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Challenges

The spread of SHGs needs to be increased significantly while maintaining and improving their sustainability.Linkage of SHGs to banks happened mostly in South India and Andhra Pradesh and accounted for 39% in 2003 as against north eastern region which accounted for only 5%

MFIs should also look at developing agricultural sector in India by providing poor farmers sufficient funds to carry out agricultural activities which would further reduce their migration to urban areas

Lack of strong financial reporting regulations for MFIs .There is a need for Govt. to provide a regulatory and legal framework to develop and supervise microfinance instituitions,to enable them act as recognized financial intermediaries

To streamline demand for microfinance , development of community based developmental financial institutions(CDFI) is neccesary. CDFIs are formed when around 20 SHGs join together while maintaining their autonomy

Microfinance has not yet made inroads in many parts of India. Formation and Maintenance of SHGs is very expensive. For entire rural areas of India to be covered , another 1 million SHGS are needed which in turn require investment of about Rs.10 billion

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