National Conference on “Indian Banking System :

Challenges Ahead”January 07 & 08, 2011

• Organizers: SDM College of Business Management, Mangalore

• In association with Bankers’ Club, Mangalore• Sponsored by University Grants Commission,

New Delhi (South Western Regional Office, Bangalore)

1Issues and Concerns in Microfinance in India

Issues and Concerns in Micro Financing in India

Prof Chowdari PrasadDean (Planning & Development)

TAPMI, ManipalJanuary 07, 2011

Introduction

• Surveys on Rural Credit in early 1950’s• Formation of SBI, 2 Bank Nationalisations• Lead Bank Scheme in 1969 and Credit Plans• Priority Sector financing by banks• Regional Rural Banks – 1975• Creation of NABARD and SIDBI• Service Area Approach and PLPs• Financial Inclusion…

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Literature Review• Dr C Rangarajan Committee Report on Financial

Inclusion – January 2008• Eleventh Five Year Plan 2007-12• Banking in India since Independence : A brief

history : The Indian Banker : August 2010• Status of Microfinance in India – NABARD Reports

for 2008-09 and 2009-10• A Dipstick on Microfinance Institutions in India : The

Indian Banker – December 2010• Assessing Development Impact of Micro Finance

Programs…………………..SIDBI, AFC and DFID-UK…

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Micro Finance• Micro finance is the provision of thrift, credit and other

financial services and products of very small amounts to the poor for enabling them to raise their income levels and improve their living standards. It has been recognized that micro finance helps the poor people meet their needs for small credit and other financial services. The informal and flexible services offered to low-income borrowers for meeting their modest consumption and livelihood needs have not only made micro finance movement grow at a rapid pace across the world, but in turn has also impacted the lives of millions of poor positively.

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Micro Finance and Rural Lending in India

• The recent Task Force on Micro Finance has defined it as "provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi urban or urban areas, for enabling them to raise their income levels and improve living standards". At present, a large part of micro finance activity is confined to credit only. Women constitute a vast majority of users of micro-credit and savings services.

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Indian Banking and Financial System

1. Cooperative Banking System – Urban & Rural2. State Bank of India (1955) and subsidiaries3. Foreign Banks in India 4. Nationalised Banks (14 in 1969 & 6 in 1980)5. Old Private Sector Banks6. Regional Rural Banks (Grameen Banks-1975)7. New Private Banks (post reforms – 1993)8. Local Area Banks (1996…) 9. Development Financial Institutions – IFCI, etc…10. Non-Banking Financial Institutions and11. Micro Finance Institutions (MFIs)……………….

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Issues and Concerns1. Introduction of standardized guidelines for MFIs with regard to

application, appraisal, selection of borrowers, security, margin requirements, documentation, etc., as also avoiding multiple financing to a single borrower by different agencies;

2. Charging of high rates of interest on the loans (generally said to be around 30% p.a. plus),

3. Mercenary Recovery mechanisms adopted by engaging outsiders/ collection agents,

4. Need to imparting and introducing of technology in MFI operations for a sound MIS system,

5. Compulsory credit rating of MFIs who are for-profit type, by agencies like CRISIL, M-Cril, etc., particularly when they borrow funds from banking system and resort to public issues;

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Issues and Concerns….2

6. MFIs to extend all financial and non-financial supports in accomplishing the Millinneum Development Goals like the formal banking system and

7. MFIs to be registered with NABARD with a laid down reporting system while ensuring proper compliances to RBI as also NPA management, etc.

8. Internal Audit and Risk Management mechanisms to be introduced for MFIs

9. Immediate need for enactment of a law covering all types of MFIs in the country and fixing up the regulatory mechanism.

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Conclusion and Recommendations• Under Indian Banking System, MFIs are a small

player as an alternative for rural lending…• MFIs are service/development oriented but if they

are for-profit type, monitoring is necessary• A Comprehensive Central Law to be enacted instead

of State Acts like in AP…• Regulator to be identified for monitoring, etc…• Financial Literacy in rural and semi-urban areas• Ombudsman scheme to extended to MFIs• Intense training to be imparted to staff in MFIs…

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References

• 15 Books and Reports…• 12 Magazines and Journals….• 28 Research Papers at National and

International level and Study Reports…• 9 Recent News Paper articles appeared recently• 30 Website addresses…• Annexure-I : The Pilgrim’s Progress (BI 14/11/10)• Annexure-II: Extracts from IIBF Vision (monthly)

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Thank You

• My Contact:-• Prof Chowdari Prasad• Dean (Planning & Development) and

Chairman-Branding & Promotion• TAPMI, Manipal-576104• Website : www.tapmi.edu.in• Email: chowdarip@tapmi.edu.in• Tel: 0820-2701045 & Mob:9482549472

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