• S aving as partial collateral. B • ank loan to the SHG for on lending to members. • C redit decision or on-lending to SHG members. •I nterest rates and other terms and conditions for loans to members to be decided by the SHG. • J oint liability as a substitute of physical collateral. • S mall loans to begin with and difficult credit cycles clearly defined. 4.3.1 Progress of SHG Bank Linkage Programme in India NABARD has been playing a leading role in promoting the microfinance programme for the last two decades. It has been instrumental in facilitating the formation and nurturing of SHG‘s involving all possible partners in this arena. For this group formation, NABARD has been encouraging involved voluntary agencies, bankers, socially spirited individuals, other formal and informal entities and also Government functionaries to promote and nurture such groups. The focus was on building capacities of the partners and providing assistance in meeting the incremental costs of nurturing of SHG‘s. NABARD had developed a special fund named ‗Microfinance Development Fund ‘for microfinance of Rs. 100 crore which was basically meant for capacity building of MFIs. In February 2005, the fund was increased to Rs. 200 crore and the name of the fund was remained as ‗Microfinance Development and Equity Fund ‘. b. S warna Jayanti Gram Swarozgar Yojana (SGSY) The Government of India has introduced an effective self-employment programme named ‘Swarna Jayanti Gram Swarozgar Yojana ‘, or SGSY from 1st April 1999. Under the SGSY, assistance is given to the poor families living below the poverty line in rural areas for taking up self-employment. The persons taking up self-employment are called ―Swarozgaris‘‘. They may take up the activity either individually or in group, called the Self-Help Groups. For successful self-employment, it is necessary to take up the right activity. For this purpose, 4 to 5 activities are selected in each Block with the help of officials, non-officials and the bankers. These are called ‗Key Activities‘, and should be such that they give the Swarozgaris an income of Rs. 2000 per month, net of bank loan repayment. If any Below Poverty Level (BPL) person feel that he/she can gainfully take up any activity he/she 51 CU IDOL SELF LEARNING MATERIAL (SLM)
should immediately approach the Sarpanch or the BDO or the Branch Manager of the nearest bank for assistance under SGSY. The Government of India has restructured the Swarna Jayanti Gram Swarozgar Yojana (SGSY) a National Rural Livelihoods Mission (NRLM) from June, 2011 to provide greater focus and momentum for poverty reduction. National Rural Livelihoods Mission (NRLM) the new form of SGSY. The Ministry of Rural Development (MoRD), Government of India (GoI) constituted a Committee on Credit Related Issues under SGSY (under the Chairmanship of Prof. Radhakrishna) to look into various aspects of scheme implementation. The Government has accepted the recommendations of the Committee and accordingly, SGSY is being restructured as National Rural Livelihoods Mission (NRLM) from June, 2011 to provide greater focus and momentum for poverty reduction and to achieve the Millennium Development Goals (MDG) by 2015. An ambitious target of mobilizing and building the skills and capacities of nearly 28 lakh SHGs has been set towards this end. GOVERNANCE AND THE CONSTITUTION OF THE BOARD OF VARIOUS FORMS OF MFIS IN INDIA a. J oint Liability Group (JLG) Joint Liability Group can be explained as the informal group consists of 4-10 individuals who try to avail loans against mutual guarantee from banks for the purpose of agricultural and allied activities. This category generally consists of tenants, farmers and other rural workers. They work primarily for lending purposes, although they also offer the savings facility. In this type of institution every individual of a borrowing group is equally liable for the credit (Singh, 2010). This kind of institution is simple in nature and requires little or no financial administration (UBI, no date). However, one of the serious problems of this structure is personal preferences in lending credit which resulted in a partial failure of the system. Of late due to various promotional initiatives taken by banks such as Indian bank, Karur Vysya Bank and Indian Overseas Bank, the credibility of Joint Liability Group model has received a boost (The Hindu, 2016). It still remains a landmark movement in the area of protection of farmer’s land ownership rights. b. S elf Help Group (SHG) Self Help Group is a type of formal or informal group consisting of small entrepreneurs with similar kind of socio-economic backgrounds. Such individuals temporarily come together and generate a common fund to meet the emergency needs of their business. These groups are generally non-profit organizations. The group assumes the responsibility of debt recovery. The advantage of this micro- lending system is that there is no need for collateral. Interest rates are also generally low and fixed especially for women (Chowdhury, 2013; Business Standard, 2017). In addition various tie-ups of 52 CU IDOL SELF LEARNING MATERIAL (SLM)
banks with SHGs have been implemented for the hope of better financial inclusion in rural areas (Jayadev and Rao, 2012). One of the most important ones is NABARD SHG linkage program where many self-help groups can borrow credit from bank once they successfully present a track record of regular repayments of their borrowers. It has been very successful especially in Andhra Pradesh, Tamil Nadu, Kerala and Karnataka and during the year of 2005-06. These states received approximately 60% of SGH linkage credit (Taruna and Yadav, 2016). c. T he Grameen Bank Model Grameen Model was introduced by the Nobel laureate Prof. Muhammad Yunus in Bangladesh during 1970s. It has been widely adopted in India in the form of Regional Rural Banks (RRB). The goal of this system has been the overall development of the rural economy which generally consists of financially backward classes. But this model has not been fully successful in India as rural credit and system of recovery are a real problem. Huge amount of non-performing assets also led to failure of these regional banks (Shastri, 2009). Compared to this model Self Help Groups have been more successful as they are more suited to the population density of India and far more sustainable (Dash, 2013). d. R ural Cooperatives Rural Cooperatives in India were set up during the time of independence by the government. They used the mechanism to pool the resources of people with relatively small means and provide financial services. Due to their complex monitoring structure, their success has been limited. In addition, this system only catered to the credit-worthy individuals of rural areas, not covering a large part of the country’s financially backward section (Rajendran, 2012). Joint Liability Self Help Group Grameen Bank Rural Group Model Cooperatives Size 5-10 members per 10-20 members per Starts with only 2 70-80 members group group members per group per group in a village, eventually increased after loan is successfully repaid 53 CU IDOL SELF LEARNING MATERIAL (SLM)
Services Generally lending Regular savings in Savings and Primarily lending only, irrespective of deposit accounts deposits to services for savings amount with the financial extremely poor agricultural institutions. sections of the purposes society for business, health and housing Model Members invest All individuals of Field Manager Cooperative loan amount for group work visits villages to society consisting different purposes, together on the form groups of 5 of members are but are guarantors of same activity and lends to 2. formed for a each other Amount recovered singular purpose; is reinvested in such as real further lending and estate, agriculture, infrastructure infrastructure, etc. development in villages Structure All members More formal with Formal structure All members interact with the defined positions in consisting of Unit interact with the financial institution each group like Manager, Field financial individually treasurer and Manager, etc. Who institution jointly secretary interact with every family in a village SUMMARY •T he future of microfinance lies in sustainability. Since microfinance organizations do not typically issue large loan amounts, and since interest payments are used to fund administrative expenses and new loans, it is imperative that these organizations engage in wide scale use of funding sources that tap into the market. Moreover, for microfinance to have a large spread of impact and become widely used as a development tool and a poverty alleviation option, it is imperative that these organizations have a continuous flow of funds. Microfinance institutions have proven their success in different aspects of welfare improvement and economic development, and so there is no doubt that these organizations play a role in improving the economic status of loan recipients and by extension, their 54 CU IDOL SELF LEARNING MATERIAL (SLM)
families especially their children. Microfinance backed bonds have proven their feasibility in the market. •C rippling poverty is a characteristic trait of the modern Indian economy. Both the central government and state government-run multiple poverty alleviation programs. The microfinance sector has seen sustained growth over the past few decades. What we see as a vibrant industry empowering a variety of business models today, had humble beginnings. Today, Microfinance allows the provision of financial services to low-income clients or solidarity lending groups, including consumers and the self-employed, who lack convenient access to banking and related services. It not only helped out in eradicating poverty but also improving the standard of living. All Microfinance Institutions (MFIs) today either function as an NGO registered under societies or trusts, Section 25 companies and Non-Banking Financial Companies (NBFCs). Despite the thriving growth rate, the Microfinance sector is marred by numerous ills in its functioning. • A large section of the population is still unbanked • Grey areas in regulations • Ambiguous pricing models • Insufficient funds • Cluster formation • Over-indebtedness • Higher interest rates • Financial Illiteracy of People •M icrofinance is a unique economic development tool that was introduced with an objective to assist low-income strata who aim to work their way out of poverty. India today is underway a major policy objective shift towards financial inclusivity. Thus, Microfinance has taken centre stage for extending financial services to unbanked and under banked sections of the Indian population. This is why microfinance institutions serve as a better supplement to banks. Not only do they serve microcredit but also help the poor with allied financial services like savings, insurance, remittance and non-financial services like individual counseling, training, and support to start their own business in accessible ways. What works in favour of borrowers is that all these services can be availed right at their doorstep, and borrowers are at liberty to choose 55 CU IDOL SELF LEARNING MATERIAL (SLM)
their own repayment schedule. KEYWORDS •C ooperative Bank - According to the dictionary of banking and finance, an organization where customers and workers are partners and share profit. •M icro Finance Institution (MFI) - According to Investor words.com, Micro Finance Institution is a financial institution specializing in banking services for low-income groups or individuals. A microfinance institution provides account services to small-balance accounts that would not normally be accepted by traditional banks, and offers transaction services for amounts that may be smaller than the average transaction fees charged by mainstream financial institutions. LEARNING ACTIVITY 1. N ote on microfinance in India 2. N ote on Bank Linkup & Programmes in microfinance UNIT END QUESTIONS Explain Discuss A. Descriptive Questions Analyse 1. Compare the state intervention in rural credit in India 2. 56 NABARD led SHG and Bank Linkage Programme 3. Swarnajayanti Gram Swarozgar Yojana 4. JLG & Rural Cooperatives CU IDOL SELF LEARNING MATERIAL (SLM)
5. Compare JLG & SHG SGSY is B. Multiple Choice Questions (MCQs) Agricultu Self- 1. Personal given for a. SGSY is re purpose National b. National employment National c. use NRLM MDG 2. Full- being restructured as Education a. Rural Livelihoods Mission JLG b. True Employment Mission False c. Rural Education Mission Education 3. 57 has been aimed to achieve a. b. employment c. to all 4. provides lending irrespective of the savings amount. a. b. 5. purpose Cooperatives provide loan primarily for a. CU IDOL SELF LEARNING MATERIAL (SLM)
b. Marriage c. Agricultu Livelihoo re d. b 2. d 4. a 5. c Answers: 1. a 3. a SUGGESTED READINGS • Branch, Brian & Janette Klaehn. (2002). Striking the Balance in Microfinance: A Practical Guide to Mobilizing Savings. Washington: PACT Publications. • Dowla, Asif & Dipal Barua. (2006). The Poor Always Pay Back: The Grameen II Story. Bloomfield, Connecticut: Kumarian Press Inc. • Hirschlan d, Madeline. (2005). Savings Services for the Poor: An Operational Guide. Bloomfield CT: Kumarian Press Inc. • Sapovadi a, Vrajlal K., (2006). Micro Finance: The Pillars of a Tool to Socio-Economic Development. New Delhi: Prentice Hall of India. • Ledgerwo od, Joanna and Victoria (2006). Transforming Microfinance Institutions: Providing Full Financial Services to the Poor. World Bank, 2006. • Rutherfor d, Stuart. (2000). The Poor and Their Money. New Delhi: Oxford University Press. 58 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT -5 MICROFINANCE MODELS Le arn Structure ing Ob CU IDOL SELF LEARNING MATERIAL (SLM) jec tiv es Int rod uct ion Mi cro fin anc e De liv ery Mo del s an d Ba nks Lin ka ges Pro gra m me Int er me dia rie s for Mi 59
cro fin anc e W hat is a mi cro fin anc e int er me dia ry? U. S. ver sus Eu rop e Cal ver t Fo un dat ion ’s ap pro ach Fin anc ial inc lus ion int er me dia rie s in Ind 60 CU IDOL SELF LEARNING MATERIAL (SLM)
ia Su m ma ry Ke yw ord s Le arn ing Ac tivi ty Un it En d Qu esti ons Su gg est ed Re adi ngs LEARNING OBJECTIVES After studying this unit, you will be able to: • Explain the Microfinance Delivery Models • Give details of the Banks Linkages Programme • State the intermediaries for microfinance INTRODUCTION Microfinance institutions are the oldest financial institutions in the world, but with time they have adapted to the changes, and have started using various credit lending models. Microfinance services are provided with different methods in India. A total of 14 models are existing in India. They include associations, bank guarantees, community banking, cooperatives, credit unions, Grameen, group, individual, intermediaries, NGOs, peer pressure, ROSCAs, small business, and village banking models. In reality, the models are loosely related with each other, and most good and sustainable 61 CU IDOL SELF LEARNING MATERIAL (SLM)
microfinance institutions have features of two or more models in their activities. The Microfinance lending models vary in their legal forms, in the channels and methods of delivery, in their governance structure, in their approach to sustainability and also in their approach to microfinance where their funds are sourced from, and how the money is governed. 62 CU IDOL SELF LEARNING MATERIAL (SLM)
Different institutions in formal and informal sector have successfully tried out these models. Though these models have their own model specific strengths and weaknesses, they have demonstrated to provide financial services to the unorganized sector with effective outreach. Majority of the microfinance institutions offer and provide credit on a solidarity-group lending basis without collateral. There is also a range of other methodologies that MFIs follow. Some MFIs start with one methodology and later on move or diversify to another methodology so that they do not exclude certain socio-economic categories of clients. So it becomes important to have a basic understanding of methodologies and activity of Credit Lending Models MICROFINANCE DELIVERY MODELS AND BANKS LINKAGES PROGRAMME The following are the variety of delivery models of microfinance in India. a) T he SHG-Bank Linkage Model :- The predominant model in the India microfinance context continues to be the SHG linkage model that accounts for nearly 20 million clients. It started as an Action Research Project in 1989. Under this model, self-help promotion institution usually an NGO, helps groups of 15-20 individuals through an incubation period after which time they are linked to banks. The SHG had proved their efficacy overtime but they suffer from a meager resource base which handicapped their capacity to expand the economic activities of their members. The factors received by the SHG members were the lack of information, time-consuming and expensive procedures for obtaining bank loans, rigid lending policies of the banks in respect of unit costs, unit sizes and group guarantee for loans. There are three linking model in the country. •M odel - I: SHG formed and financed by banks: - In this model, the banks play dual role of promotion of SHGs and also provider of credit to SHGs. Up to March 2005, 21% of SHGs financed were from this category. •M odel - II: SHGs formed by formal agencies other than banks (NGOs and other) but directly financed by banks: - In this model, the NGOs and other agencies have played the role of facilitator. Up to March 2005, 72% of SHGs financed were from this category. •M odel - III: SHGs financed by banks using NGOs and other agencies as financial intermediaries: - In this model, the NGOs and other agencies play the role of financial intermediation. Up to March 2005, only 7% SHGs financed were from this category. This in 63 CU IDOL SELF LEARNING MATERIAL (SLM)
2006-07, the country witnesses a marked proliferation of SHGs to the extent of 24,76,492. b) G rameen Model :- Potential clients are asked by the MFO to organize themselves into 'groups' of five members which are in turn organized into centers of around five to seven such groups. The loans for productive purposes are provided by the MFO directly to the members of small groups on the strength of group insurance. Grameen model is being followed by India by Association for Sarva Seva Farms (ASSEFA), Activities for Social Alternatives (ASA) and other financial and technical services limited. c) C ooperative Model :- This has been initiated by Cooperative Development Forum, Hyderabad which has relied upon a 'credit union' involving the saving first strategy. It has built up a network of Women Thrift Groups (WTGs) and Men Thrift Groups (MTGs). They are registered under Mutually Aided Cooperated Society Act (MACs) and mobilize savings resources from the members and access outside/supplementary resources from the individual system. d) P artnership Model :- The partnership model pioneered by ICICI Bank attempted to address the following key gaps: - • T o separate the risk of the MFI from the risk inherent in the microfinance portfolio. •T o provide a mechanism for banks to incentivize partner. MFIs continually, especially in a scenario when the borrower entered into a contact directly with the bank and role of the MFI was closer to that of an agent. •T o deal with the inability of MFIs to provide risk capital in large amounts, this limits the advances from banks, despite a greater ability of the later to provide implicit capital. In this model, the MFI collect a service charge from the borrowers to cover its transaction costs and margins. The lower the defaults, the better the earnings of the MFI as it will not incur any penalty charges vis-a-vis the guarantee it. 64 CU IDOL SELF LEARNING MATERIAL (SLM)
INTERMEDIARIES FOR MICROFINANCE What is a microfinance intermediary? I am using the term microfinance intermediary to refer to both loan funds and structured funds (which together I’ll just refer to as “microfinance funds” or “funds”) through which investors can channel their capital to MFIs in a risk-mitigated way without investing directly in the MFIs themselves. These funds are diversified and professionally managed. They can be time-bound, so they only exist for as long as the capital is raised, deployed, and repaid to investors, or they can be perpetual life, which operate continuously and raise, deploy, and repay investor capital on an ongoing basis. The capital they provide can be equity and/or debt and many funds invest in others sectors besides microfinance. In this blog, I’ll be focusing primarily on debt lenders with a majority of their portfolio targeted to microfinance. a. L oan funds versus structured funds A mutual fund in your 401K would be an example of what I’m calling a structured fund except for two big differences. First, mutual funds typically invest in public securities, such as public shares of stock traded on a stock exchange, which makes them very liquid. The microfinance funds we are discussing typically invest in private securities only which means you have to leave your money in for months if not years. Second, mutual funds managed by a Fidelity or a Vanguard would be widely available to retail investors whereas most microfinance funds are only available to institutional investors. b. F or-profit versus non-profit MCE Social Capital is a non-profit which means they don’t have private shareholders. As they are considered to be owned by the public they have a strong obligation to be transparent. This is reflected by their posting of their audited financials on their websites. On the other hand, Micro Vest is for- profit and more heavily regulated. They are not allowed to market to retail investors which is one reason they don’t make their financial results widely available. Similar to MFIs, microfinance funds fall along a social/commercial spectrum in terms of expected returns. As a for-profit company that targets institutional investors, Micro Vest has a focus on delivering risk-adjusted returns. Their investment thesis is that microfinance makes sense even for investors who are impact agnostic. Microcredit is a cooperative, similar to a non-profit, that was established by churches. Their strategic approach is to pay investors a modest return and to maximize its “lending for development” model (see the International Share Foundation and World Partnership Investments program). 65 CU IDOL SELF LEARNING MATERIAL (SLM)
U.S. versus Europe Europe has the largest number of microfinance funds, including responsibility based in Zurich, Switzerland with $3 billion assets under management. For context, it’s estimated that microfinance funds globally collectively manage around $10 billion in assets. Other European funds include Blue Orchard (also in Zurich), Triodos, and Oikocredit (both in the Netherlands). The largest funds in the U.S. are MicroVest and Developing World Markets. Where the funds are based, or more specifically where they are registered, can be important for how they raise capital. Oikocredit, in the Netherlands, can market to retail investors but only in Europe. Calvert Foundation can also market to retail investors but only in the U.S. Calvert Foundation’s approach The largest percentage of Calvert Foundation’s international portfolio remains microfinance. We have loans to a combination of loan funds, structured funds, networks, and MFIs, all of which I have discussed in this series. The different types of our microfinance borrowers reflect the range of the demand we see in the market and allows us to balance relatively riskier lending directly to MFIs with lower risk lending to networks and funds. You can read more about our approach to microfinance on our sector page. Microfinance has grown over the decades from small grant funded programs to a global financial system. Networks, funds, and institutions are all important actors in this system channeling capital to the microfinance market. Ultimately, this capital is channeled to people who lack access to basic financial services needed to grow their business or invest in their future. The better we understand the different microfinance actors, the better we can leverage theirs and our impact. Intermediaries for achieving financial inclusion can be broadly subdivided into two categories: • R egulatory approved category of intermediaries • O ther intermediaries. Till date, the following have been allowed to act as intermediaries by the regulatory authorities; Financial inclusion intermediaries in India B • S usiness correspondents • N 66 ection 25 companies registered under the companies act,1956 • CU IDOL SELF LEARNING MATERIAL (SLM)
on-governmental organization S M • C elf –help groups R R • E icrofinance Institutions A • A ivil society organizations A • O etired bank employees ‘ M • 67 etired bank employees • x-servicemen •I ndividual owners of Kirana/ medical/ fair price shops •I ndividual PCO owners • gents of small savings schemes of GOI • gents of insurance companies •I ndividuals petrol pump owners • uthorized functionaries of self-help groups • ther individuals including those operating common service center as BCS • for profit ‘ companies • icrofinance Companies registered as NBFC’s CU IDOL SELF LEARNING MATERIAL (SLM)
SUMMARY •I t is now time to weld these two concepts together in a large scale way to increase the presence of microfinance institutions in the financial markets around the world. The key lies in the innovation of microfinance backed instruments through the use of new microfinance impact bonds. Policymakers should focus on making the transition to the markets easier for microfinance institutions and financial organizations such as large multinational banks and investment banks should expand their portfolios to include assets based on microfinance loans. In this way, the impact that these institutions have on poverty alleviation and economic welfare can be amplified. •A new paradigm that emerges is that it is very critical to link poor to formal financial system, whatever the mechanism may be, if the goal of poverty allieviation has to be achieved. NGOs and CBOs have been involved in community development for long and the experience shows that they have been able to improve the quality of life of poor, if this is an indicator of development. The strengths and weaknesses of existing NGOs/CBOs and microfinance institutions in India indicate that despite their best of efforts they have not been able to link themselves with formal systems. It is desired that an intermediary institution is required between formal financial markets and grassroot. The intermediary should encompass the strengths of both formal financial systems and NGOs and CBOs and should be flexible to the needs of end users. There are, however, certain unresolved dilemmas regarding the nature of the intermediary institutions. There are arguments both for and against each structure. These dilemmas are very contextual and only strengthen the argument that no unique model is applicable for all situations. •S ome valuable lessons can be drawn from the experience of successful Microfinance operation. First of all, the poor repay their loans and are willing to pay for higher interest rates than commercial banks provided that access to credit is provided. The solidarity group pressure and sequential lending provide strong repayment motivation and produce extremely low default rates. Secondly, the poor save and hence microfinance should provide both savings and loan facilities. These two findings imply that banking on the poor can be a profitable business. However, attaining financial viability and sustainability is the major institutional challenge. Deposit mobilization is the major means for microfinance institutions to expand outreach by leveraging equity (Sacay et al 1996). In order to be sustainable, microfinance lending should be grounded on market principles because large scale lending cannot be accomplished through subsidies. 68 CU IDOL SELF LEARNING MATERIAL (SLM)
•A main conclusion of this paper is that microfinance can contribute to solving the problem of inadequate housing and urban services as an integral part of poverty alleviation programmes. The challenge lies in finding the level of flexibility in the credit instrument that could make it match the multiple credit requirements of the low income borrowers without imposing unbearably high cost of monitoring its end-use upon the lenders. A promising solution is to provide multi-purpose loans or composite credit for income generation, housing improvement and consumption support. Consumption loan is found to be especially important during the gestation period between commencing a new economic activity and deriving positive income. Careful research on demand for financing and savings behaviour of the potential borrowers and their participation in determining the mix of multi-purpose loans are essential in making the concept work (tall 1996). •E ventually it would be ideal to enhance the creditworthiness of the poor and to make them more \"bankable\" to financial institutions and enable them to qualify for long-term credit from the formal sector. Microfinance institutions have a lot to contribute to this by building financial discipline and educating borrowers about repayment requirements. KEYWORDS • Active Clients: - The number of clients with loans outstanding on any given date. An institution's official statistics on active clients are usually recorded as the number of clients with loans outstanding on the date its financial statements are filed. • Active Loan Portfolio: - The total amount loaned out less the total amount of repaid loans; i.e., all money that is \"on the street\" or owed to the institution in the form of loans on the date the report is filed. • Apex Scheme: - Wholesale financing, second-tier lending, on-lending. • Assessment: - Also called evaluation. Assessments include instrumental appraisals, rating exercises, and other activities that may determine how well an institution performs financially, operationally, and managerially. LEARNING ACTIVITY 1. Explain the term microfinance delivery 2. Write short note on microfinance models 69 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT END QUESTIONS Discuss Explain A. Descriptive Questions Describe 1. Analyse The SHG-Bank Linkage Model State 2. the Grameen & Co-operative Model 3. Partnership Model 4. the intermediaries for microfinance 5. Microfinance Delivery Models & Bank Linkages Programme B. Multiple Choice Questions (MCQs) SHG 1. Model I formed and financed by banks is a part of Model II a. Model III b. c. 2. the NGOs and other agencies have played the role of facilitator In a. Model I b. Model II c. Model III 3. Grameen model is being followed by India by a. ASA b. AFA c. NABAR D d. SHGs 70 CU IDOL SELF LEARNING MATERIAL (SLM)
4. Partnershi p Model was pioneered by a. SBI Bank b. HDFC Bank c. ICICI Bank 5. Under model, the MFI collect a service charge from the borrowers to cover its transaction costs and margins a. SHGs b. Grameen c. Co- operative d. Partnershi p Answers: 3. a 4. c 5. d 1. a 2. b SUGGESTED READINGS • Branch, Brian & Janette Klaehn. (2002). Striking the Balance in Microfinance: A Practical Guide to Mobilizing Savings. Washington: PACT Publications. • Dowla, Asif & Dipal Barua. (2006). The Poor Always Pay Back: The Grameen II Story. Bloomfield, Connecticut: Kumarian Press Inc. • Hirschland, Madeline. (2005). Savings Services for the Poor: An Operational Guide. Bloomfield CT: Kumarian Press Inc. • Sapovadia, Vrajlal K., (2006). Micro Finance: The Pillars of a Tool to Socio-Economic Development. New Delhi: Prentice Hall of India. • Ledgerwood, Joanna and Victoria (2006). Transforming Microfinance Institutions: Providing Full Financial Services to the Poor. World Bank, 2006. • Rutherford, Stuart. (2000). The Poor and Their Money. New Delhi: Oxford University Press. 71 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT -6 ISSUES, TRENDS AND FRONTIERS OF Le MICROFINANCE BEHAVIOUR arn ing Structure Ob jec CU IDOL SELF LEARNING MATERIAL (SLM) tiv es Int rod uct ion Em erg ing Iss ues in Mi cro fin anc e Ge nd er Iss ues in Mi cro fin anc e Mi cro fin anc e 72
Evidence from around the world & Policy implications ge nd CU IDOL SELF LEARNING MATERIAL (SLM) er ine qu alit y Ro le of Te ch nol og y in Mi cro fin anc e Mi cro Cr edi t as Pri orit y Se cto r Ad va nce Im pac t of Mi cro fin anc e on 73
Unit End Questions Em Suggested Readings po we LEARNING OBJECTIVES rm ent After studying this unit, you will be able to: of • Explain the issues in microfinance W • State the role of technology in microfinance om en CU IDOL SELF LEARNING MATERIAL (SLM) Mi cro fin anc e & wo me n em po we rm ent Su m ma ry Ke yw ord s Le arn ing Ac tivi ty 74
• Describe details of the gender issues in microfinance • Explain the impact of microfinance on empowerment of Women INTRODUCTION The microfinance sector in India, largely unfettered by tedious regulation and interference is young and dynamic. The biggest obstacle until recently was little access to commercial markets and the forbidding cost of capital funds. As private banks, spearheaded by ICICI in 2003, entered the 75 CU IDOL SELF LEARNING MATERIAL (SLM)
microfinance market, this barrier has partly disappeared and microfinance is growing at a break-neck pace on all fronts viz. loan outstanding, client outreach, product and service diversification or geographic spread. Concerns have now shifted to growth management issues such as skilled human resources, flexible product design, reducing transaction costs, ensuring adequate management information systems, standard credit information, better use of advances in technology, accessing alternative financing, expanding into underserved areas, and dealing with regulatory hurdles and political risks. There is an urgent need for structured long term financing to the sector to fully address these important issues and smoothly transition into a well-functioning mature industry. EMERGING ISSUES IN MICROFINANCE •C ost of outreach - reaching the unbanked populations of the world means servicing small loan amounts and servicing remote and sparsely populated areas of the planet, which can be dangerously unprofitable without high rates of process automation and mobile delivery. •L ack of scalability - smaller microfinance systems often struggle to preserve the profitability and performance in these markets, as FI's experience high growth rates that result from getting the service delivery right. This results in thwarting the growth of theseorganizations. •Q uality of SHGs (Self Help Groups) - Due to the fast growth of the SHG-Bank Linkage Programme, the quality of MFIs has come under stress. This is due to various reasons such as: a. T he intrusive involvement of government departments in promoting groups b. D iminishing skill sets on part of the MFIs members in managing their groups. c. C hanging group dynamics. •G eographic Factors - Around 60% of MFIs agree that the Geographic factors make it difficult to communicate with clients of far-flung areas which create a problem in growth and expansion of the organization. •D iverse business models - Supporting the very wide range of features and lending activities is 76 CU IDOL SELF LEARNING MATERIAL (SLM)
difficult and requires a considerable amount of cost and efforts. •H igh Transaction Cost - High transaction cost is a big challenge for microfinance institution. The volume of transactions is very small, whereas the fixed cost of those transactions is very high. •K YC and security challenges – The customers serviced by Microfinance instructions are usually the ones having none or very limited official identification or able to provide tangible security, this makes it extremely difficult for institutions to offer any banking services. •L imited budgets – Making provisions for large upfront investments is not possible for most of the MFIs which limits their capability to purchase world-class banking solutions that can help them fulfil their requirements and support their growth targets. No doubt, microfinance institutions have shown impressive growth and have been instrumental in the cause of financial inclusion, but a lot remains to be achieved. GENDER ISSUES IN MICROFINANCE An increase in the proportion of women accessing microfinance services by just 15% could potentially reduce gender inequality, as measured by the Gender Inequality Index, by half in the average developing nation. The finding comes from a recent study published in Applied Economics Letters that also found that cultural characteristics can influence this relationship. Gender equality refers to the rights, responsibilities and opportunities of women and men, girls and boys. It does not imply that women and men are the same, but that the interests, needs and priorities of both women and men should be taken into consideration while recognizing diversity across different populations. While the world has achieved progress towards gender equality under the UN’s Millennium Development Goals, women and girls continue to suffer discrimination and violence in many parts of the world. Take girl’s education for example, only 74 girls were enrolled in primary school for every 100 boys in 1990 in southern Asia. By 2012, enrolment had ratios remained the same. Girls also face barriers to entering both primary and secondary school in sub-Saharan Africa, Oceania and western Asia. Disadvantages in education translate into a lack of skills and limited opportunities in the labour market. In northern Africa, for instance, women hold less than one in five paid jobs in the non-agricultural sector. 77 CU IDOL SELF LEARNING MATERIAL (SLM)
Microfinance and gender inequality Microfinance gets its popularity and fame from Mohammad Yunus, who began experimenting with lending to poor women in the village of Jobra, Bangladesh, during his tenure as a professor of economics at Chittagong University, in the 1970s. In 2006, he won the Nobel Peace prize for pioneering the concepts of microfinance and establishing the Grameen Bank in 1983. Since then, various forms of microfinance programs have been introduced in many countries. Mohammad Yunus created microfinance by experimenting with lending to poor women in Bangladesh. Generally speaking, microfinance is the extension of small loans to the very poor, in combination with other financial services such as saving facilities, training, health services, networking, and peer support. This enables people to pursue entrepreneurial projects that generate extra income, thus helping them to better provide for themselves and their families. The last 30 years have shown that microfinance is a proven development tool capable of providing a vast number of the poor, particularly women, with sustainable tailored financial services that enhance their welfare. According to Microcredit Summit Campaign Report 2015, 3,098 microfinance institutions had reached over 211 million clients by 2013, 114 million of whom were living in extreme poverty. Of these poorest clients, 82.6%, or over 94 million, were women. Conceptually, microfinance enables poor women to engage in income-generating activities that help them become financially independent, strengthening their decision-making power within the household and society. It is through this channel that economists argue that microfinance has the potential to reduce gender inequality. But country-level community-based microeconomic research from across the developing world both supports and contradicts this premise. Given this inconclusive evidence, we thought a macroeconomic approach that pulls information from many countries together might provide a clearer picture. Evidence from around the world Our study uses data from 64 developing countries from between 2003 and 2014 to examine general international trends and patterns on gender inequality and microfinance. Gender inequality is measured with two popular indicators from the UN: Gender Development- related Index and Gender Inequality Index. These are composite indices based on measures of differences in health, education, living standards, empowerment, and economic status. The key variable of significance in our analysis is a gendered indicator of microfinance usage, 78 CU IDOL SELF LEARNING MATERIAL (SLM)
defined as the proportion of female clients as a share of the total national population. We constructed this measure using microfinance data from MIX Market, a microfinance auditing firm. Girls face barriers to entering both primary and secondary school in sub-Saharan Africa, Oceania and western Asia. Siegfried Modola/Reuters We found evidence of a negative relationship between women’s participation in microfinance and gender inequality. In other words, we found that gender inequality will potentially decrease when women’s participation increases. As noted above, in the average developing nation, an increase in microfinance by around 15% is associated with a decline in gender inequality by about half. But we also found that cultural characteristics that govern the relationships between men and women can potentially influence this relationship. For example, pressure on women to take on cooking and rearing responsibilities within the home could potentially limit their ability to fully adopt employment opportunities through microfinance-generated investments. That religion does not necessarily play a role in explaining the interaction between microfinance and gender inequality is another one of our findings. Instead, national conservatism and microfinance firms’ adoption of culturally-appropriate local practices potentially does. Many firms acknowledge the difficulties associated with women working outside the house in certain communities, for instance, so they help women establish small businesses at home, sometimes pulling resources together across households. Policy implications More microcredit in developing nations then is clearly good news for women. Since gender inequality is measured as composite indices of health, education and income indicators, it’s natural to conclude that greater access to credit in women’s hands will mean greater access to education and health as well as income-generating opportunities. Given these positive outcomes, governments and international organizations in developing nations should continue to promote microcredit institutions to indirectly empower women. But they must keep in mind that microfinance does not automatically empower women. Country-specific and cultural factors play a key role in determining how microfinance interacts with gender inequality. And these should be considered when assessing the impact of microcredit in the developing world. ROLE OF TECHNOLOGY IN MICROFINANCE Technological innovation – especially involving new Information Technology (IT) can be, and has been, exploited to improve the efficiency, scale and quality of microfinance services. Six technologies are catalogued by the Microfinance Gateway (CGAP) as having been adopted by MFIs 79 CU IDOL SELF LEARNING MATERIAL (SLM)
– we add some notes about relevance in the European content in italics after each is described: 1. A utomated Teller Machines (ATMs) facilitate transactions that would otherwise require staff attention (e.g. retrieving account information, accepting deposits, drawing down on pre- approved loans, and transferring funds). They are familiar in banks and some other finance institutions around the world. As with commercial banks, ATMs are most effective for MFIs that accept savings and want to serve customers in multiple locations and/or during non- business hours. By using ATMs, MFIs can focus human resources on providing personalized services. ATMs are widely diffused across Europe, and it might be appropriate to focus strategy on linking to available ATM networks. However, there might be scope for new public ATM terminals to be supported, for example in post offices or other community facilities. 2.I nteractive Voice Response (IVR) Technology. This helps MFIs clients to quickly get information via telephone rather than by travelling to a MFI office and request the service in person Call centre systems have a very mixed response in the European context, and the scale of the microfinance venture would determine whether it is worth investing in such a solution rather than a more conventional and more local personal call service. 3. S mart Cards. The use of Smart Cards can help MFIs deliver services like managing savings accounts, disbursing loans, or making transfers. With the ability of the card to store all relevant client’s information (e.g. account balances, credit, etc. including personal identification) it functions as an electronic passbook on which transactions can be recorded once, speeding up the process and improving accuracy Smart card systems have taken a long time to become familiar in many European countries, but are now widely accepted tools whose production costs have plummeted 4. P ersonal Digital Assistants (PDAs). MFIs staff can benefit from the use of PDAs, which can be customized to run specific programs to manage MFIs and client’s data and perform financial calculations. PDAs can help officers who are away in the field provide electronic data concerning clients/borrowers which can be useful for loan applications and review and approval. Increasingly smart phones and PDAs are also available to the users of microfinance services, so there is scope for more sophisticated service development – for example for clients to 80 CU IDOL SELF LEARNING MATERIAL (SLM)
access basic information and complete standard questionnaires. 5. B iometrics Technology. Despite being new, biometric methods of measuring individuals’ unique physical characteristics, for purposes of identification, are being adopted by MFIs who have become alerted to the importance of data security. Some MFIs find low-cost biometric technology to be preferable to passwords and PINs to access the clients’ financial data. Biometrics has been somewhat controversial, but is increasingly accepted for passport and similar uses. Banks are exploring voice recognition systems, but it remains to be seen whether any low-cost biometrics will be really secure against determine fraudsters. Such fraudsters might be less inclined to attack MFIs as if they were clients, and the main dangers (as usual) are liable to involve “inside” criminality. 6. C redit Scoring. Credit scoring systems technology analyze the pattern of clients’ historical data to predict how they will act in the future, and can help MFIs make more reliable decisions on loan applications, collections strategies, marketing, and client retention. The scoring technology can also be used in more advanced ways, such as pricing loans in relation to individual client risks, and for provision against loan losses. There are already many credit-checking bodies in Europe – and much criticism of their sometimes erratic treatment of individuals who are seeking loans through normal channels. MFIs may well have different criteria for treating bankruptcy, etc., and may be less satisfied with these services than established institutions. We can anticipate that innovative uses of IT will proliferate around MFIs. For example, it is well- known that in several African countries, where PCs and Internet access are not readily available in many regions, mobile telephones have come into their own. Mobile phones have been deployed as “electronic purses” that can be used in transactions of various sorts, and it is plausible that microfinance can find uses for such systems (perhaps in combination with IVR or PDA technology). This may be a case of innovation emerging from developing countries and being transferred to the industrial world. Microfinance in general has already benefited from the advancement of Internet technologies, which has meant that people are able to now take part in the microfinance movement from across the world. One example of how this new technology is being implemented is in the creation of microfinance websites, such as www.kivaB4B.org, which acts as an online broker connecting donors and recipients (which can be individuals, SMEs or MFIs)3 0. Another example is www.microplace.com, a for-profit subsidiary of eBay, which facilitates online peer-to-peer micro lending, enabling people to invest in microbusiness. A recent case is www.myc4.com (My Care For), which, like micro place, enables investors (private, organizations and companies) to invest in African microbusiness and SMEs. 81 CU IDOL SELF LEARNING MATERIAL (SLM)
As increasing numbers of people have access to the Internet, the web or social networking technologies can be used to promote the microfinance movement and to provide funds for investment in micro-businesses. Websites can link individuals and small businesses, including allowing lenders to review the profiles of SMEs seeking financing. (Typically these profiles concern region, gender, social issues and the economic sectors involved – they could also include information directly related to innovation.) More specific applications (e.g. online payments as offered by providers like PayPal or online credit card services) can then be used to enable lenders to transfer the money to MFIs, which will then pass the money on to those launching a small business directly or through a network of partners (which can be quite literally worldwide). Models such as Kiva, Micro place, and MyC4 aim to attract social investors who want a personal connection as well as a return on investments (social and/or financial). Funds from relatively affluent people may thus become a major source of personal lending to the poor. The challenge here is in the formative years, in setting up a strong network of microfinance institutions that can effectively mobilize and deploy volumes of cash. Here, strategic use of the latest Internet technologies (like Web 2.0 and social networking) can be crucial. Online microfinance (Kiva, Micro place, MyC4) is likely to grow and thereby contribute to the popularizing of the MFI movement. While more donors may be engaged, with more information resources, there are some concerns that online models are liable to be more distant and inflexible than conventional peer-to-peer lending, and that the use of the Internet will not only popularize microfinance among lenders, but also move it into closer rapprochement with established, corporate financial institutions. Such institutions, acting on a profit-driven model, may be less concerned with social benefits of microfinance, which is liable to be reflected in the sorts of project financed. Speculatively, this might have implications for the types of innovation fostered through microfinance – for example, innovations with quick yields might be favoured as opposed to those that are ultimately more sustainable or more broadly socially beneficial. The application of new IT to business and social relationships is often a source of concerns about standardization and depersonalization of services, threats to privacy, and the like. Microfinance is no exception. There is a valid concern that with MFIs relying upon IT to facilitate their services – such as the offering of advice – might weaken the value, scale and/or depth of guidance. But it should be noted that the virtual networks can actually span many agents. The recipient of a loan, and the ultimate supplier of the money, may be intermediated by organizations of several sorts- as noted, a charitable virtual fund-raising network may choose to link to another organization that disburses, and local organizations (that assure creditworthiness, etc) can also be part of this network. There is a clear responsibility to ensure that the information flows in question are secure, are handled promptly, and that the human touch is not lost in the process. 82 CU IDOL SELF LEARNING MATERIAL (SLM)
Challenges of this sort are worth examining in more depth, though this is not the place to do so. The likelihood is that the innovation that is microfinance will expand and evolve through making use of other social and technological innovations. The implications of this convergence of innovations could be profound. MICRO CREDIT AS PRIORITY SECTOR ADVANCE Bank credit to MFIs (NBFC-MFIs, societies, trusts, etc.) extended for on-lending to individuals and also to members of SHGs/JLGs is eligible for categorization as priority sector advance under respective categories viz., Agriculture, Micro, Small and Medium Enterprises, Social Infrastructure and Others subject to the criteria laid down in para 19 of the Master Direction FIDD.CO.Plan.1/04.09.01/2016-17 dated July 7, 2016 (updated as on December 04, 2018) on Priority Sector Lending – Targets and Classification. At a meeting of the National Credit Council held in July 1968, it was emphasized that commercial banks should increase their involvement in the financing of priority sectors, viz., agriculture and small-scale industries. The description of the priority sectors was later formalized in 1972 on the basis of the report submitted by the Informal Study Group on Statistics relating to advances to the Priority Sectors constituted by the Reserve Bank in May 1971. On the basis of this report, the Reserve Bank prescribed a modified return for reporting priority sector advances and certain guidelines were issued in this connection indicating the scope of the items to be included under the various categories of priority sector. Although initially there was no specific target fixed in respect of priority sector lending, in November 1974 the banks were advised to raise the share of these sectors in their aggregate advances to the level of 33 1/3 per cent by March 1979. At a meeting of the Union Finance Minister with the Chief Executive Officers of public sector banks held in March 1980, it was agreed that banks should aim at raising the proportion of their advances to priority sector to 40 per cent by March 1985. Subsequently, on the basis of the recommendations of the Working Group on the Modalities of Implementation of Priority Sector Lending and the Twenty Point Economic Programme by Banks (Chairman: Dr. K. S. Krishnaswamy), all commercial banks were advised to achieve the target of priority sector lending at 40 per cent of aggregate bank advances by 1985. Sub-targets were also specified for lending to agriculture and the weaker sections within the priority sector. Since then, there have been several changes in the scope of priority sector lending and the targets and sub-targets applicable to various bank groups. On the basis of the recommendations made in September 2005 by the Internal Working Group (Chairman: Shri C. S. Murthy), set up in Reserve Bank to examine, review and recommend changes, if any, in the existing policy on priority sector lending including the segments constituting the priority sector, targets and sub-targets, etc. and the comments/suggestions received thereon from banks, financial institutions, public and the Indian Banks’ Association (IBA), it was decided to include only those sectors as part of the priority sector, that impact large sections of the population, 83 CU IDOL SELF LEARNING MATERIAL (SLM)
the weaker sections and the sectors which are employment-intensive such as agriculture, and tiny and small enterprises. Further, the Sub-Committee of the Central Board of the Reserve Bank (Chairman: Shri Y. H. Malegam) constituted to study issues and concerns in the MFI sector, inter alia, had recommended to continue with the categorization of bank loans to MFIs under the priority sector provided they comply with the certain stipulated criteria in this regard. Presently, the broad categories of priority sector for all scheduled commercial banks are as under: CATEGORIES OF PRIORITY SECTOR (i) A griculture (Direct and Indirect finance): Direct finance to agriculture shall include short, medium and long term loans given for agriculture and allied activities (dairy, fishery, piggery, poultry, bee-keeping, etc.) directly to individual farmers, Self-Help Groups (SHGs) or Joint Liability Groups (JLGs) of individual farmers without limit and to others (such as corporates, partnership firms and institutions) up to the limits indicated in Section I, for taking up agriculture/allied activities. Indirect finance to agriculture shall include loans given for agriculture and allied activities as specified in Section I. (ii) M icro and Small Enterprises (Direct and Indirect Finance): Direct finance to micro and small enterprises shall include all loans given to micro and small (manufacturing) enterprises engaged in manufacture/ production, processing or preservation of goods, and micro and small (service) enterprises engaged in providing or rendering of services, and whose investment in plant and machinery and equipment (original cost excluding land and building and such items as mentioned therein) respectively, does not exceed the amounts specified in Section I. The micro and small (service) enterprises shall include small road & water transport operators, small business, professional & self-employed persons, retail trade i.e. advances granted to retail traders dealing in essential commodities (fair price shops), consumer co- operative stores and advances granted to private retail traders with credit limits not exceeding Rs. 20 lakh and all other service enterprises, as per the definition given in Section I. Indirect finance to small enterprises shall include finance to any person providing inputs to or marketing the output of artisans, village and cottage industries, handlooms and to cooperatives of producers in this sector. (iii) E ducational loans: Educational loans include loans and advances granted to only individuals for educational purposes up to Rs. 10 lakh for studies in India and Rs. 20 lakh for studies abroad, 84 CU IDOL SELF LEARNING MATERIAL (SLM)
and do not include those granted to institutions. Loans granted to educational institutions will be eligible to be classified as priority sector advances under micro and small (service) enterprises, provided they satisfy the provisions of MSMED Act, 2006 (iv) H ousing loans: Loans up to Rs. 25 lakh to individuals for purchase/construction of dwelling unit per family (excluding loans granted by banks to their own employees)and loans given for repairs to the damaged dwelling units of families up to Rs. 1 lakh in rural and semi-urban areas and up to Rs. 2 lakh in urban and metropolitan areas. IMPACT OF MICROFINANCE ON EMPOWERMENT OF WOMEN 6.6.1 Micro Finance and Women Empowerment In India, gender inequalities have existed since years, women since ages were given a secondary status and they were expected to be at home, taking care of children, cooking and doing the household chorus. Women were also subjected to domestic violence and indifference in the family. Education provided to the girl child was also limited. Female mortality and female foeticide was also high. With the increase in the middle class society, women started working and gradually coming out of their expected routine. Now they work, earn money and also take care of their children. Even though domestic violence still exists, women are more confident about their future because they can feed themselves and their children on their own. This fact is about the middle classes but in case of lower middleclass and poor households, status of women need to be improved. These women not only lack education and confidence, they also require some formal training if they are willing to work and earn. Development can happen only if women, who constitute half of the population of the country, are treated equally and get equal employment and self-employment opportunities. Women can develop themselves as well as their families if provided with proper guidance about business opportunities. They can bring their families out of the vicious cycle of poverty (Gadkari, R & Ramkishen, Y, 2011). Women below the poverty line are becoming more and more independent as compared to the past. They know the importance of additional income apart from the earnings of other members in the family; Savings along with income generation can create wonders and help them provide better future to their children. They understand the importance of income, savings, education, health and empowerment. Microfinance programmes in India are becoming a powerful instrument in poverty alleviation and women empowerment. It has empowered women both socially and economically. These microfinance interventions helped the poor women in maintaining and improving their livelihood (Debadutta Kumar Panda, 2009). The Self Help Group (SHG) revolution was a commencement for empowerment, particularly women empowerment. The women SHG members usually achieve self- 85 CU IDOL SELF LEARNING MATERIAL (SLM)
confidence and admiration in the general public. The decision making power of women SHG member increases as women are also engaged in income generating activities so their importance is felt in society and their houses. The SHG system is one that has proven to be very relevant and effective and offers women the possibility to gradually break away from exploitation and isolation. A large number of poor women are becoming a part of SHG movement. SHG helps them undertake income generating activities and make them self-reliant, self-sufficient and financially independent. SHG movement helps to become conversant with and organize women and help them move out of their household and develop business relations with outside world. SHG helps women to come out of their daily household tasks. Microfinance and SHG are tools of empowering poor women. Women comprise half of human resources and they have been identified as key agents of sustainable development. Women‘s equality is essential to a more holistic approach towards stabilizing new patterns and process of development that are sustainable (Gupta, M.S., 2008). The contribution of women and their role in the family as well as in the economic development and social transformation are pivotal. Women constitute 90 per cent of total marginal workers of the country. Rural women who are engaged in agriculture form 78 per cent of all women in regular work (Kabeer N, 2005). The role of micro-credit is to improve the socio and economic development of women and improve the status of women in households and communities. The micro entrepreneurships are strengthening the women empowerment and remove the gender inequalities. Self Help Group‘s micro credit mechanism makes the members to involve in other community development activities. Micro credit is promoting the small scale business enterprises and its major aim is to alleviate poverty by income generating activities among women and poor. Therefore, they could achieve self-sufficiency. Now-a- days economic development is one of the factors that have changed the entire scenario of social and cultural environment within the country especially for the women. The rural women are engaged in small-scale entrepreneurship programmes with the help of Self Help Groups. Through these SHGs they are economically empowered and also attain a status in family and community (Tripathy, U, 2011). SUMMARY •D igital is transforming many traditional sectors in brilliant ways. In today’s world, where technology is affecting everything and making it efficient, microfinance has not remained untouched. • T hat’s not to say it will come easy. Naturally, there will be hiccups, but they will improve 86 CU IDOL SELF LEARNING MATERIAL (SLM)
eventually, as it happens in case of any emerging industry. The sector still needs more lenders, and in time, the movement may grow to support major global markets. Whether it takes months or years for them to jump in is another issue entirely. •T he majority of developing nations are struck with poverty as a leading roadblock to their progress. The main factor that influences the widespread poverty in regions like India is the massive disparity in income distribution. Being an agrarian economy primarily, more than half of the Indian population sustains on agriculture and allied activities. •B oth the manufacturing and tertiary sector have been making steady progress since the last two decades, but still, there is a long way before they outgrow the former. The large agrarian sector of the Indian population seems deprived of formal financial services due to the limited functioning of the tertiary industry. It is an important reason why the agricultural industry has suffered from staggering growth in the past. •T he concept of microfinance was introduced in the Indian economy with the primary objective of financial inclusion of more impoverished and backward sections, especially the women. The growth trajectory of the Indian microfinance industry has been phenomenal since the time it was introduced. •F actors like the support of the National Bank for Agriculture and Rural Development (NABARD), linkage of the banking system with the self-help groups have further steered the underserved sectors of the Indian economy towards success through microfinance. •H owever, when it comes down to comparing the plush success of commercial banks, it is only fair to conclude that microfinance institutions have a long way to go. Not only do microfinance institutions lag in structural and operational approach, but also in overall financial processes. •A lthough it has come a long way, the microfinance sector can use technological aid to its own advantage to advance loans to the rural populace of India. •M icrofinance has emerged as an innovative poverty eradicating and development programme. The inability of financial institutions and other subsidy based poverty alleviation programmes to meet the credit requirements of the poor led to the birth of this programme. Under this 87 CU IDOL SELF LEARNING MATERIAL (SLM)
programme, financial and non-financial services are provided to the poor, especially women. In India, this programme was formally started in 1992 by NABARD and now this programme is operational in almost all of the Indian states. In this programme, a small group of poor people known as self-help group (SHG) is formed and a bank loan is given to this group at specified rate of interest but without any collateral. The group may use this loan to start any income generating activity or to fulfill some other individual needs. The group gets next loan only after the repayment of previous loan. The peer pressure within the group helps in the repayment of the loan. In India, there are broadly two different models for the delivery of microfinance, i.e., SHG bank linkage model and microfinance institution (MFI) model. In Punjab, microfinance is provided only through SHG-bank linkage model and there is no role of MFIs. •T he main objective of the study is to find the impact of microfinance programme on poverty alleviation, employment generation and women empowerment of the programme participants. The study is based on the hypotheses that microfinance programme generates employment, reduces poverty and empower the women participants of the programme. Besides, it is also hypothesized that extremely poor people get more benefits of the programme than the moderate poor; and the members of old SHGs are better-off than the members of new SHGs KEYWORDS • Assets: - Anything of value. Any interest in real or personal property which can be appropriated for the payment of debt. • Audit/Control: - Examination of organizational input/output cash flow (i.e., internal audits, external audits, fraud investigation). • Average Loan Balance per Borrower: - Gross Loan Portfolio / Number of Active Borrowers. • Average Number of Active Borrowers: - (Beginning year Number of Active Borrowers + Year end Number of Active Borrowers). LEARNING ACTIVITY 1. Write a note on role of women in MFI 2. Explain the term micro credit 88 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT END QUESTIONS Discuss Explain A. Descriptive Questions Analyze Describe 1. State the Emerging Issues in Microfinance 2. the Gender Issues / Inequality in Microfinance 3. the role of technology in Microfinance 4. on Micro Credit as Priority Sector Advance 5. impact of Microfinance on Empowerment of Women B. Multiple Choice Questions (MCQs) Which of 1. Outreach the following is the issue in microfinance Quality a. Scalabilit b. c. All of y d. these 2. Which of the following is not an issue in microfinance Low a. Geograph transaction cost Security b. Budget ical features c. challenge d. 3. helps MFIs clients to quickly get information via telephone rather than by travelling to a MFI office and request the service in person 89 CU IDOL SELF LEARNING MATERIAL (SLM)
a. IVR b. Smart Cards PDA c. All of d. these 4. can customise a specific programs to manage MFIs and client’s data and perform financial calculations a. IVR b. Smart Cards c. PDA d. All of these 5. technology analyse the pattern of clients’ historical data a. Credit scoring b. PDA c. IVR d. Biometric Answers: 1. d 2. a 3. a 4. c 5. a SUGGESTED READINGS • Branch, Brian & Janette Klaehn. (2002). Striking the Balance in Microfinance: A Practical Guide to Mobilizing Savings. Washington: PACT Publications. • Dowla, Asif & Dipal Barua. (2006). The Poor Always Pay Back: The Grameen II Story. Bloomfield, Connecticut: Kumarian Press Inc. • Hirschlan d, Madeline. (2005). Savings Services for the Poor: An Operational Guide. Bloomfield CT: Kumarian Press Inc. 90 CU IDOL SELF LEARNING MATERIAL (SLM)
• Sapovadi a, Vrajlal K., (2006). Micro Finance: The Pillars of a Tool to Socio-Economic Development. New Delhi: Prentice Hall of India. • Ledgerwo od, Joanna and Victoria (2006). Transforming Microfinance Institutions: Providing Full Financial Services to the Poor. World Bank, 2006. • Rutherfor d, Stuart. (2000). The Poor and Their Money. New Delhi: Oxford University Press. 91 CU IDOL SELF LEARNING MATERIAL (SLM)
• Le arn UNIT -7 FUNDING AND FINANCING MFIS ing Ob Structure jec tiv CU IDOL SELF LEARNING MATERIAL (SLM) es Int rod uct ion Li mit ati ons an d Op por tun itie s ass oci ate d wit h the se fun din g Ch all en ges fac ed by Mi 92
cro fin anc e Ins titu tio ns Re qui re me nts an d pre ssu res of the se fun din g Ca pit al sou rce s for M FIs an d the ir bus ine ss mo del s an d op era tio ns 93 CU IDOL SELF LEARNING MATERIAL (SLM)
Su m ma ry Ke yw ord s Le arn ing Ac tivi ty Un it En d Qu esti ons Su gg est ed Re adi ngs LEARNING OBJECTIVES After studying this unit, you will be able to: • Explain the Limitations and Opportunities associated with MFI funding • State the Capital sources for MFIs and their business models and operations • Give details of the Requirements and pressures of MFIs funding INTRODUCTION As a microfinance institution (MFI) operating in a frontier market, your business plays an essential role in helping financially excluded people to access the funds they need to build a brighter future for their families as well as protect them from risk. Yet – like many MFIs – you may lack access to the capital that you need to grow to the next level. You might be able to access the funds you need to expand your reach into new territories or to grow your loan book through a relationship with a microfinance investment vehicle (MIV), such as a 94 CU IDOL SELF LEARNING MATERIAL (SLM)
development finance institution, or an international creditor. Many such vehicles are interested in making debt, or perhaps even equity investments in businesses such as yours. However, there is a great deal of competition for a limited pool of capital, and the process of applying for funding from an MIV can be complex. In this white paper, we aim to help you understand which legal, technical, financial and social aspects of your business a funder will evaluate when it considers whether to provide you with capital. 95 CU IDOL SELF LEARNING MATERIAL (SLM)
LIMITATIONS AND OPPORTUNITIES ASSOCIATED WITH THESE FUNDING Challenges faced by Microfinance Institutions O 1. ver-Indebtedness The microfinance sector deals with marginalized sections of Indian society intending to improve their standard of living, and thus over-indebtedness poses a severe challenge to its growth. The growing trend of multiple borrowing by clients and inefficient risk management are the most significant factors that stress the microfinance industry in India. The microfinance sector gives loans without collateral, which increases the risk of bad debts. Fast-paced growth needs proper infrastructural planning, in which the Indian microfinance sector evidently lacks. Further, the lack of any apex control over the MFIs in India is also a leading cause of over- indebtedness. These factors also contributed to the Microfinance crisis of 2008 in India. Over- indebtedness makes the MFIs vulnerable to credit risk and increases the cost of monitoring that they have to incur to stay profitable in the long run. 2. H igher Interest Rates in Comparison to Mainstream Banks The financial success of MFIs is limited when compared to commercial banks in India. The centuries- old banking system has a strong foothold in Indian grounds and is slowly evolving to meet the needs of the times. Most Microfinance Institutions charge a very high rate of interest (12-30%) when compared to commercial banks (8-12%). The regulatory authority RBI issued guidelines to remove the upper limit of 26% interest on MFI loans. While many MFI sector players benefited from the RBI guideline update, the borrowers were left for the worse. A massive trend of farmer suicide in states like Andhra Pradesh and Maharashtra is the outcome of borrower indebtedness that resulted from the higher interest rates. 3. W idespread Dependence on Indian Banking System Because most microfinance institutions function as registered Non-Governmental Organizations (NGOs), they are dependent on financial institutions such as commercial banks for stabilized funding to carry out their own lending activities. Most of these commercial banks are private institutions charging a higher rate of interest. They also sanction loans for shorter periods. The massive dependence of Indian MFIs on banks makes them incompetent as a lending partner. 4.I nadequate Investment Validation 96 CU IDOL SELF LEARNING MATERIAL (SLM)
Investment valuation is a crucial capability for the healthy functioning of an MFI. The developing nature of the markets in which MFIs operate, the market activity is often limited. That is why it becomes difficult for MFI to gain access to market data for valuation purposes. Lack of consistent and reliable valuation procedures, MFI management teams, are unable to achieve the level of quality information that they need to be able to make investment decisions 5. L ack of Enough Awareness of Financial Services in the Economy A developing country in the making, India has a low literacy rate, which is still more moderate in its rural areas. A large chunk of the Indian population fails to understand the basic financial concepts. There is a severe lack of awareness of financial services provided by the microfinance industry among the masses. This lack of adequate knowledge is a significant factor that keeps the rural population from accessing MFIs for easy credit to meet their financial needs. It also contributes to widespread financial exclusion in the country. The additional task of educating masses and establishing trust before they initiate loans also falls on the shoulders of MFIs. Thesevere lack of awareness about policies and products offered by MFIs make it difficult for these institutions to sustain in excessively competitive environments that developing nations are home to. 6. R egulatory Issues The Reserve Bank of India (RBI) is the premier regulatory body for the microfinance industry in India. However, RBI more or less caters to commercial and traditional banks more than it helps MFIs. Even the needs and the structure of microfinance institutions are entirely different from those of other conventional lending institutions. Some regulations seem to have benefitted the MFIs, but others left numerous issues unaddressed. In spite of sporadic and unprecedented regulatory changes, the Microfinance industry appears to have been struggling to sustain. While new regulations result in structural and operational changes, they also result in ambiguity in norms of conduct. The result is sub-optimal performance and failure in the development of new financial products and services. Conclusively, there is a need for a separate regulatory authority for the microfinance industry. 7. C hoice of Appropriate Model Most Indian MFIs follow the Self-Help Group model (SHG model) or the Joint Liability Group model (JLG model) of lending. They hardly select the model based on scientific reasoning. Most MFIs choose the models randomly, regardless of the situation. What’s more, is that the choice of the model increases the risk of borrowings for the weaker section 97 CU IDOL SELF LEARNING MATERIAL (SLM)
beyond they can bear and is irreversible. In the end, the decision of the model affects the sustainability of the MFI organization in the long-run. REQUIREMENTS AND PRESSURES OF THESE FUNDING MFIs secure funding from a variety of sources, which depend in part on their status. In this way, money granted through microloans may come from: • g rants and subsidies, particularly during the MFI’s creation, •m ember and customer deposits, for MFIs organized as cooperatives or mutual funds, as well as microfinance banks that also offer savings products, • t he MFI’s own capital, generally supplying a small portion of funding, • l oans granted by one or more partner banks, •f unding from public investors, typically comprising bilateral or multilateral organizations like the European Investment Bank (EIB), IFC, KFW, AFD, Proparco, etc. •p rivate investors, supplied directly or through investment funds specializing in microfinance (microfinance investment vehicles, or MIVs), which serve as the intermediary between the MFI and investors searching for a socially responsible investment. The latter two options provide a source of long-term funding. CAPITAL SOURCES FOR MFIS AND THEIR BUSINESS MODELS AND OPERATIONS 1. S hareholders’ Equity Many financial institutions are owned by wealthy individuals and corporate institutions. They put together the initial or seed capital of the business to kick-start the operation. This initial capital is used to get the license, to acquire offices, hire key personnel and help to start the operation of the business. On many occasions, just one individual could commence the funding until others would join later on. These individuals are called Founders of the organization. 98 CU IDOL SELF LEARNING MATERIAL (SLM)
2.V enture Capital A venture capital is defined as a capital invested in a project in which there is a substantial element of risk, typically a new or expanding business. In other words, a venture capital is financing that investors provide to start-up companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions that pool similar partnerships or investments. Do you remember our lesson on development banks and wholesale banks? 3. G rants and Donations The minority of the microfinance institutions get their funding from grants and donations. These donations come from foundations, NGOs, charities and some social enterprise organizations that will like to contribute to the development of micro financing in some specific areas. Some private organizations/companies also do it through what is called Corporate Social Responsibilities (CSR). These grants and donations are called Donated Equity in the books of the recipient MFIs. Others will also treat is as capital grants – grants towards the purchase of fixed assets or specific projects. In this wise, the grants are amortized over the period of the grant. 4. B ank Loan Borrowing to augment the capital of the business is the normal thing in banking and financial services industry. Banks lend among themselves and lend to other institutions in their brackets other than outsiders. With this, MFIs do borrow from the banks to expand their loan portfolios and also meet critical fixed assets and operational needs. But the majority of these MFIs only borrow to fund their loan portfolios. This is done after they have exhausted their shareholders’ capital or need a bridging finance. A bridging finance is used when expected fund is delayed and a quick fund is needed to cover the gap between the shortfall now and the time of receiving the expected fund. 5. C rowd Funding Crowd funding is the practice of funding a project or venture by raising monetary contributions from a large number of people. Normally this is internet based appeals or proposals for many people to contribute towards a particular cause, for example, raising money to help flood victims or to provide social funding to a poor community. Funding of this sort could come in the form of donations or 99 CU IDOL SELF LEARNING MATERIAL (SLM)
equity. Now, there are a number of websites promoting these kinds of funding for businesses and individuals alike. But these strategies of funding call for marketing and selling of the ideas to the wider public. 6. P rivate Equity Investment A private equity is a type of equity and one of the asset classes consisting of equity securities and debt in operating companies that are not publicly traded on a stock exchange. A private equity investment will generally be made by a private equity firm, a venture capital firm or an angel investor. Referring to the points above on Shareholders equity and venture capital, the private equity is from private investment firms that have made an equity towards the business. An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. While venture capital is a subset of private equity, there are differences between the two. The most notable difference is that venture capital funds raise capital from investors to specifically invest in start-ups and small- and medium-size private companies with strong growth potential. Private equity is generally interested in continuing businesses, not start-ups! 7. P eer to Peer (P2P) Lending Peer-to-peer lending, sometimes abbreviated P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. Since peer-to- peer lending companies offering these services generally operate online, they can run with lower overhead and provide the service more cheaply than traditional financial institutions (Wikipedia). This also looks like the crowd funding strategy. But there is a great difference. P2P is organized in such a way that, lenders and borrowers are put on a platform. Lenders give out their loans under specific conditions and the borrowers can choose to accept the terms or contact another lender. Alternatively, the platform has a set of agreed interest rates, repayment periods and other conditions. In the crowd funding, however, the platform is generally for numerous individuals who could even contribute as little as US$1 towards a cause, and it is not for loan purposes. There is, however, an equity element introduced recently by some of the crowdfunding platforms SUMMARY •W hile some people will tell you that money grows on trees, financial experts will say money 100 CU IDOL SELF LEARNING MATERIAL (SLM)
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