Microfinance: Developing India since Inception

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It’s been almost 12 years since Mohammed Younus was awarded the Nobel Peace prize for his efforts to create economic and social development from below through Microfinance. As an experiment, Mr. Mohammud Yunus decide to lend to poor households in the village near of Jobra in Bangladesh. Due to the successful response
received from the house hold of Jobra village, the central bank of Bangladesh- the Bangladesh Bank decided to set up a special branch to cater to poor households by providing them with micro-finances to help them in earning their livelihoods. The trial project implemented by the bank was successful which led to microfianance expansion to nation wide by founding of Grameen bank by Mr. Mohammud Yunus in Bangladesh .Since its inception, the Grameen bank has been both lauded for being a revolutionary idea and criticized for not alleviating poverty. This idea was later adopted by NABARD in early 1970s and started in India.

MAIN PURPOSE BEHIND

The main concept behind Microfinance was to provide micro credit and other financial services to poor people especially women. This approach generated considerable enthusiasm in both development community and also at political levels. In the past years, India’s Microfinance institutions have struggled to gain legitimacy as credible institution in spite of their ability to deliver sustainable financial services to low income families. Serious doubts about their operations, interest rates, governance, client treatment and transparency continued to torment the
sector. Though the original intention behind the idea was to help low income people improve their economic and social prospects, over time, the organisational goals led them to abandon their original mission.

MICROFINANCE APPROACH

• Poor people are bankable.
• Trade-off between reaching the poor and profitability.
• Poor people need not depend on charity.
• Responsible borrowers on business terms for mutual profit.
• Saving of Poor households.
• Poor can also save save small amounts regularly.
• Easy access to credit is more important
• Peer pressure in groups helps in improving recoveries.

The Important Features of Microfinance are
1. Tool for the poor women empowerment of poor women
2. Loans amounts are very small
3. Targets the poor rural and urban households
4. Credit follows thrift i.e. mobilize savings and lend the same
5. Low transaction cost due to group lendings
6. Transparencies in operation
7. Short repayment period
8. Simple procedure for reviewing, processing and approving loan applications and delivery credit

9. Chances of misutilization are rare and there is assured repayment
10. Peer pressure act as the collateral security required for loans
11. Need based loan disbursement
12. Prompt repayment
13. There is no ceiling from the RBI in respect of minimum and maximum amounts

MICROFINANCE SERVICES REGULATION BILL

Microfinance Services Regulation Bill have been proposed by Government of India which formed the fundamental definition of microfinance as providing financial support to individual or client through a group mechanism directly or indirectly for

i. an amount, not exceeding rupees fifty thousand in aggregate per individual, for small and tiny enterprise, agriculture, allied activities (including for consumption purposes of such individual) or

ii. an amount not exceeding rupees one lakh fifty thousand in aggregate per individual for housing purposes, or

iii. Such other amounts, for any of the purposes mentioned at items (i) and (ii) above or other purposes, as may be prescribed.”

The bill further defines Micro Finance Institution as a organisation or association which works as business for extension of the microfinance services

i. a society registered under the Societies Registration Act, 1860, 100

ii. a trust created under the Indian Trust Act,1880 or public trust registered under any State enactment governing trust or public, religious or charitable purposes

iii. a cooperative society / mutual benefit society / mutually aided society registered under any State enactment relating to such societies or any multistate cooperative society registered under the Multi State Cooperative Societies Act, 2002 but not including.

CRUMBLING OF THE SECTOR

The sector was hit by a huge blow seven years ago when the Andhra Pradesh crisis happened. The AP crisis has been something of a turning point in public assessment of microfinance.
Around $1.2bn in debts was eventually written off, leaving the foundation of the sector shaken. The aftermath of demonetisation not only put a brake on growth but it put the sector through a rocky patch and the industry has been
experiencing a chill since then.

BENEFITS

Lack of financial support from formal banking system has made them to rely more on MFIs, even if is less flexible than the other tools to manage their cash flows. We must laud the positive side of microfinance, even while some of its practitioners have strayed away from the core mission.The benefits of MFIs include
 Better access to financial services to people with little or no assets
 Better loan repayment rates
 Provides support to micro enterprises thereby inculcating entrepreneurship spirit among jobless people
 Plays an important role in women empowerment
 Improved health and welfare

EXPANDING THE SECTOR TECHNOLOGY INTEGRATION

Indeed, it is no wonder that already MFIs has served some 200 million people around the world who were not eligible for any formal credit. In order to provide a better perspective of Microfinance compared to other financial institutions MFIs need to do more to measure and explain their social and economic value. Microfinance sector is
undergoing a change and several microfinance organisations have transformed into small banks. Today MFIs extend services beyond microcredit, to include savings, money transfers and insurance and several other services. This
improvement coupled with the advancement in technology has enabled the growth of digital services, mobile money account etc.

MODELS OF MICRO FINANCE PRACTICES
There are number of models of microfinance in India.
 The SHG-Bank Linkage Model
• Model – I : SHG formed and financed by banks
• Model – II : SHGs formed by financial agencies other than
banks but directly financed by banks :-
• Model – III : SHGs financed by banks using Non-Governmental
Organisations and other agencies
 Cooperative Model
 Partnership Model
 MFI
 NBFC MFI

NABARD AS MICROFINACE FACILITATOR

NABARD has always played its role as the main facilitator and mentor of microfinance initiatives in the country. It has successfully launched the SHG Bank Linkage initiative.
Started as pilot project in 1992, the Linkage Programme has now become the largest community based microfinance initiative. It has got hold of more than 85.77 lakh SHGs as on 31 March 2017. It covers more than a hundred million rural households It provides support in the form of grant assistance for formation, nurturing and credit linking of SHGs with the banks, capacity building of various stakeholders through training, exposure visits, seminars, workshops etc. NABARD efforts have intensifies over period of time to promote sustainable livelihoods among SHG
members by mainstreaming various projects such as Livelihood and Enterprise Development Programme (LEDP), pilots in micro insurance and pension, digitization of SHGs, etc.

Refinance to Banks: NABARD has always supported and extended hundred percent refinance to Banks for their lending to SHGs and MFIs so as to supplement their resources. During 2016-17, NABARD had done refinancing up to o Rs. 5659.51 crore while their SHG lending stands at only 10.58% of the total refinance provided to Banks for investment credit. The total amount disbursed was Rs. 6906.03 crore disbursed during the previous year.

NEED TO REVIVE THE SECTOR

Aftermath Demonetisation, there has been a lot of cheerful developments in the Microfinance sector. Equity investments have increased with many MFIs raising significant money from domestic and foreign investors. The sad truth is that microfinance has been saddled with misplaced expectations, and we have lost a sense of its more modest, even though critical, potential. Microfinance is a broader development approach, which in certain conditions may be a powerful tool. The end outcomes depend on how we are using and defining it.

Dr. Monika Mathur

Ph.D Yale University

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