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Evolution of Microfinance in India

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State Interventions in Rural

Credit

The credit demands in the rural sector werelargely met by co-operative societies till mid

1960’s. 

 All India Rural Credit Survey report of 1954 found

that informal sources accounted for 70% of rural

credit usage, followed by cooperatives (6.4%)

and commercial banks (0.9%).

The “Lead Bank Scheme” was introduced in

1969.

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Contd...

Under the Scheme, each district had beenassigned to different banks (public and private) to

act as a consortium leader to coordinate the

efforts of banks in the district particularly in

matters like branch expansion and creditplanning.

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Government Sponsored

Programmes

IRDP (Integrated Rural DevelopmentProgramme)

TRYSEM (Training of Rural Youth for Self-

Employment

DWCRA (Development of Women and Children in

Rural Areas) -1982-83

NREP (National Rural Employment Programme)

RLEGP (Rural Landless Employment GuaranteeScheme)

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Integrated Rural Development

Programme

Launched in financial year 1978 and extendedthroughout India by 1980.

It is a self-employment program intended to raise the

income-generation capacity of target groups among

the poor. The target group consists largely of small and

marginal farmers, agricultural labourers and rural

artisans living below the poverty line.

Subsidy+ Bank Credit The objective of IRDP is to provide suitable income-

generating assets through a mix of subsidy and credit

to below-poverty-line families with a view to bring

them above the poverty line.

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TRYSEM

Training was imparted through formal institutions,including industrial and servicing units,

commercial and business establishments and

through master craftsmen.

The duration of a course did not exceed six

months.

The trainees were eligible for loans from the

banks under the integrated rural development

program

The trainees are supplied free tool-kits during

their training.

TRYSEM is merged with a new self-employment

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DWCRA

It was started in the year 1982-83, on a pilot basis, in 50 districts andhas now been extended to all the districts of the country.

The main strategy adopted under this programme is:

To facilitate access for poor women to employment, skillupgradation, training, credit and other support services.

It seeks to encourage collective action in the form of groupactivities It encourages the habit of thrift and credit among poorrural women to make them self-reliant.

The programme also envisages that this target group would bethe focus for convergence of other services like family welfare,health care, nutrition, education, childcare, safe drinking water,sanitation and shelter to improve the welfare and quality of life ofthe family and the community.

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RLEGP

RLEGP was introduced on August 15, 1983, withthe objective of

 (a) improving and expanding employment

opportunities for the rural landless with a view to

providing guarantee of employment to at least

one member of every landless household up to

100 days in a year

 (b) creating durable assets for strengthening the

infrastructure so as to meet the growing

requirements of the rural economy.

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SHG-Bank Linkage

In 1992, NABARD issued policy guidelines forbank linkages with SHGs.

Earlier the banks had demanded physical

securities.

Under the 1992 guideline, the SHG functions as a

 joint liability group, replacing other collateral for

loans.

The collateral free loans increase progressively toupto four times the level of group’s savings

deposits.

The linkage permitted the reduction of transaction

costs.

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Contd...

The programme encompasses three broadmodels of linkage:

Model I: Bank-SHG-Members (Bank promotes

and nurtures SHGs)

Model II: Bank-Facilitating Agency- SHG-

Members (Groups are formed and supported by

NGOs)

Model III: Bank-NGO-mFI-SHG-Members (NGOs act as both facilitators and micro-finance

intermediaries)

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Microfinance Institutions

Those institutions which have microfinance astheir main operation are known as micro finance

institutions.

These institutions lend through the concept of

Joint Liability Group (JLG).

Non-Banking Financial Companies (NBFCs), Co-

operative societies, Section-25 companies,

Societies and Trusts, all such institutions

operating in microfinance sector constitute MFIs

and together they account for about 42 percent of

the microfinance sector in terms of loan portfolio.

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Leading MFIs

SEWA bank in Gujarat

SHARE, BASIX, CARE and MACs in Andhra

Pradesh

MYRADA in Karnataka

 ADITHI in Bihar

The Rashtriya Gramin Vikas Nidhi in Assam and

Orissa

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Constraints in Mainstreaming of MFIs

To increase the outreach of micro-financeservices, the issues related to legal, regulatoryand organisational systems should be addressed.

Borrower-unfriendly Products and Procedures

Inflexibility and Delay High Transaction Cost

Social Obligation and not a Business Opportunity

Legal and Regulatory Framework

Financing to MFIs

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Constraints Faced by Microfinance

Institutions

 A vast majority of MFIs function as NGOs to getaccess to funds

Inappropriate Forms of Organisation (Legal

Constraints):

Lack of Commercial Orientation

Isolated and Scattered

Lack of Proper Governance and Accountability

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Microfinance Versus Informal

Sources of Lending

 A large number of people are served by informalfinancial sector.

The challenge is not to fill a supposed creditvacuum, but to improve on the terms of the

informal sector. Informal sector includes:

Interest free loans from friends/relatives

Wage advances

Groceries/goods on creditLoans from professional money lenders

It is important for MFIs to understand each ofthese resources.

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Choice of Lender

Volume of credit

Speed of disbursal

Flexibility of payment

Convenience factors- proximity Price: interest rate and other fees