LEGAL AND REGULATORY ASPECTS OF MICRO

FINANCE TO ACHIEVE INCLUSIVE GROWTH

PGDM B (2014 - 2016)

Presented by:-

Simran Jain

Rohit Jethani

Pratik Patil

Karishma shaikh

Deepak Nadar

Frahvak Dumasia

Ankush Gala

Priyanka More

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S.no Contents Page No

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Introduction to Microfinance

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It has long been a challenge for interested parties, such as government officials, non-governmental organizations (NGOs) and philanthropists, to improve access by the poor to financial resources that can help them increase their incomes.

Most of those trapped in poverty do not have enough income to open accounts with traditional banks. As a result, many look for loans from family, friends and even loan sharks exploiting the black market. One way to help the world's poorest comes in the form of microfinance, which brings basic banking entrepreneurs began lending money on a large scale to the working poor. One individual who gained worldwide recognition for his work in microfinance is professor Muhammad Yunus who, tools to the world's most needy. 

The term "microfinance" describes the range of financial products (such as microloans, microsavings and micro-insurance products) that microfinance institutions (MFIs) offer to their clients. Microfinance began in the 1970s when social with Grameen Bank, won the 2006 Nobel Peace Prize. Yunas and Grameen Bank demonstrated that the poor have the ability to pull themselves out of poverty. Yunus also demonstrated that loans made to the working poor, if properly structured, had very high repayment rates. His work caught the attention of both social engineers and profit-seeking investors.

Historically, the goal of microfinance was the alleviation of poverty. For many years, microfinance had this primary social objective and so traditional MFIs consisted only of non-governmental organizations (NGO), specialized microfinance banks and public sector banks. More recently, the marketplace has been evolving. For example, some non-profit MFIs are transforming themselves into profit-seeking institutions to achieve greater strength, sustainability and market reach. They are being joined in the microfinance marketplace by consumer finance companies, like GE Finance and Citi Finance. "Big-box" consumer retailers, like Wal-Mart, Elektra and Tesco are beginning to emerge as consumer lenders and a few are venturing into microfinance. Although most MFIs still consider poverty alleviation the primary goal, selling more products to more consumers is the primary motivation of many new entrants.

Microfinance Products and Services4

The following products and services are currently being offered by MFIs:

Microloans: Microloans (also known as microcredit) are loans that have a small value; most loans are less than $100 in size. These loans are generally issued to finance entrepreneurs who run micro-enterprises in developing countries. Examples of micro-enterprises include basket-making, sewing, street vending and raising poultry. The average global interest rate charged on micro-loans is about 35%. Although this may sound high, it is much lower than other available alternatives (such as informal local money lenders). Moreover, MFIs must charge interest rates that cover the higher costs associated with processing the labor-intensive micro-loan transactions.

Microsavings: Microsavings accounts allow individuals to store small amounts of money for future use without minimum balance requirements. Like traditional savings accounts in developed nations, micro-savings accounts are tapped by the saver for life needs such as weddings, funerals and old-age supplementary income.

Micro-Insurance: Individuals living in developing nations have more risks and uncertainties in their lives. For example, there is more direct exposure to natural disasters, such as mudslides, and more health-related risks, such as communicable diseases. Micro-insurance, like its non-micro counterpart, pools risks and helps provide risk management. But unlike its traditional counterpart, micro-insurance allows for insurance policies that have very small premiums and policy amounts. Examples of micro-insurance policies include crop insurance and policies that cover outstanding balances of micro-loans in the event a borrower dies. Due to the high administrative expense ratios, micro-insurance is most efficient for MFIs when premiums are collected together with microloan repayments.

Evolution of Micro finance

Microfinance as an industry evolved in all the third world countries almost at the same time span. The world over, it was getting widely recognized that improving income levels of low-income community is essential to improve their well-being – besides the state sponsored welfare programmers. During the 1970s and 1980s, the microenterprise movement led to the emergence of Non- Governmental Organizations (NGOs) that provided small loans for the poor. In 1990s, across the world, a number of these institutions transformed themselves into formal financial institutions in order to access and on-lend funds, thus enhancing their

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outreach. One of the significant events that helped it gain prominence in the 1970s was through the efforts of Mohammad Yunus, a microfinance pioneer and founder of the Grameena Bank of Bangladesh. In 2006, Prof. Yunus was awarded Nobel Peace prize “for his efforts to create economic and social development from below.” In India, many formal financial institutional structures were experimented with – Regional Rural Banks (RRBs), District Central Credit Cooperative Banks (DCCBs), Local Area Banks (LABs), Self-Help Group (SHG) Bank linkage program. All these received mixed success and paralelly, the civil society organizations started feeling the need to offer financial services to the poor. Credit was getting increasingly recognized as an essential tool to break the vicious cycle of poverty. Gradually, Microfinance Institutions emerged in 1990s and 2000s. MFIs today differ in size and reach; some serve a few thousand clients in their immediate geographical area, while others serve hundreds of thousands, even millions, in a large geographical region, through numerous branches.

The Grameen Model:The Grameen Bank started in 1976 by the Nobel Laureate, Professor Muhammad Yunus in Bangladesh. Grameen today has some 2468 branches in Bangladesh, with a staff of 24,703 people serving 7.34 million borrowers from 80’257 villages. Grameen’s methods are applied in 58 countries including the United States. Grameen Bank borrowers own 94% of the bank. The remaining 6% are owned by the government.

Working Model of Grameen Bank:Bank Holding regular and usually weekly meetings which are supervised by a MFI worker who maintains the records, where savings and repayments are collected and handed over to the MFI worker, Organizing contributions to one or a number of group savings funds, which can be used by the group for a number of purposes, usually only with the agreement of the MFI which maintains the group fund accounts, Guaranteeing loans to their individual members, by accepting joint and several liability, by raising group emergency funds and by accepting that no members of a Group will be able to take a new loan if any members are in arrears, Arising from the above, appraising fellow-members’ loan applications, and ensuring that their fellow-members maintain their regular savings contributions and loan repayments.

Micro finance in India

Microfinance sector has grown rapidly over the past few decades. Nobel Laureate Muhammad Yunus is credited with laying the foundation of the modern MFIs with establishment of Grameen Bank, Bangladesh in 1976. Today it has evolved into a vibrant industry exhibiting a variety of business models. Microfinance Institutions (MFIs) in India exist as NGOs (registered as societies or trusts), Section 25 companies and Non-Banking Financial Companies (NBFCs). Commercial Banks, Regional Rural Banks (RRBs), cooperative societies and other large lenders have played an important role in providing

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refinance facility to MFIs. Banks have also leveraged the Self-Help Group (SHGs) channel to provide direct credit to group borrowers.With financial inclusion emerging as a major policy objective in the country, Microfinance has occupied centre stage as a promising conduit for extending financial services to unbanked sections of population. At the same time, practices followed by certain lenders have subjected the sector to greater scrutiny and need for stricter regulation.

Although the microfinance sector is having a healthy growth rate, there have been a number of concerns related to the sector, like grey areas in regulation, transparent pricing, low financial literacy etc. In addition to these concerns there are a few emerging concerns like cluster formation, insufficient funds, multiple lending and over-indebtedness which are arising because of the increasing competition among the MFIs. On a national level there has been a spate of actions taken to strengthen the regulation of MF sector including, enactment of microfinance regulation bill by the Government of Andhra Pradesh, implementation of sector-specific regulation by Reserve Bank of India and most recently, release of Draft Microfinance Institutions 

Though many central government and state government poverty alleviation programs are currently active in India, microfinance plays a major contributor to financial inclusion. In the past few decades it has helped out remarkably in eradicating poverty. Reports show that people who have taken microfinance have been able to increase their income and hence the standard of living.

In India microfinance operates through two channels:1. SHG – Bank Linkage Programme (SBLP)2. Micro Finance Institutions (MFIs)

Highlights of the Microfinance sector

- The gross loan portfolio of India's microfinance sector accounts for more than 7 percent of the sector's worldwide loan portfolio size. As much as 30 percent of the world's microfinance borrowers are in India.

- While the average size of a microfinance loan is $522.8 globally, according to MIX Market data, the average loan size in India is only about a fourth of that at $144.

- India is the largest microfinance market in the world, with some 120 million homes with no access to financial services, estimates CRISIL Research. MFIs are mostly concentrated in India's southern states, serving about 70 million people.

- The microfinance market has grown at an average annual rate of nearly 80 percent over the last three years, Sa-Dhan said. Drawn to the growth, private equity firms have moved in, with

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MFIs accounting for about 40 percent of all Indian private equity deals in the last two years, according to Venture Intelligence.

- There are more than 3,000 MFIs and NGO-MFIs, of which about 400 have active lending programmes, according to CRISIL Research. The top 10 MFIs account for nearly three-fourths of loans outstanding.

List of MFIs:

SKS Microfinance LimitedSKS Microfinance was started in 2003 and has become a leading brand in microfinance industry. Company has head office in Andhra Pradesh and listed in both BSE and NSE. SKS Microfinance Limited is and banking institute and has over 20000 employees. It is India's largest Micrio finance Company and has operations in 19 states.Headquarters: Hyderabad, India | Founded: 1998 | Staff size: 22,733 | Number of borrowers (2011): more than 7.3 million | Gross loan portfolio: $925 million

Spandana Sphoorty Financial LtdSpandana Sphoorty Financial Ltd is a well know microfinance company that has provide micro credit to people has less income .Presently company has reached to 4.7 millions households and has spread operations in 180 districts across 12 states.Headquarters: Hyderabad, India | Founded: 1998 Staff size: 8,328| Number of borrowers (2011): nearly 4.2 million | Gross loan portfolio: $778 million

Share Microfin LimitedShare Microfin Limited is a leading Micro finance company, recently received Price Transparacy award from mftransparency.org . Company is a Non Banking Finnacil company, provides financial support to poor people. Currently company has 4352 employees that work across 914 districts in 19 status and helping needed households.Headquarter: Hyderabad, Andhra Pradesh | Legal Status: Public Ltd. Company (NBFC) | Branches : 666

Asmitha Microfin LtdAsmitha Microfin Ltd was established in 2002 is a Micro Finance company that provide small loans to poor women, so they can start their business and earn income.Headquarter: Hyderabad, Andhra Pradesh | Legal Status : Public Ltd. Company (NBFC) | Number of Branches : 3638

Shri Kshetra Dharmasthala Rural Development ProjectShri Kshetra Dharmasthala Rural Development Project well known as SKDRDP is a charitable trust that promotes empowerment of women’s in rural area. Company offers loans (individual & group) to poor women, so they can start their business. Presently company is providing services in over 25,000 villages.Established : 1991 | Services in: 25000 villages

Bhartiya Samruddhi Finance Limited (BSFL)Bhartiya Samruddhi Finance Limited is a well known Micro Finance company that was started in 1996 and has head office in Hyderabad, Presently company has customer base of 3.5 millions, in which 90% customers are poor and belong to rural area. BASIX provide services in 17 states, 223 districts and over 39,251 villages.Headquarter Hyderabad, Andhra Pradesh | Legal Status : Public Ltd. Company| Number of Branches : 87

BandhanBandhan is a famous micro finance company started in 2001 by Mr. Chandra Shekhar Ghosh. In 13 years company is providing services in 22 States and Union Territories. It is a Non Banking Financial Company that provides small loans to the needed customers. Headquarter: Kolkata, West Bengal| Number of Branches : 385 Cashpor Micro Credit (CMC)Cashpor Micro Credit is a Micro Finance company and public charitable trust known as Cashpor Trust. Company is a nonprofit organization that provide small loans to poor women living in villages of UP and Bihar.Headquarter: Varanasi, Uttar Pradesh | Number of Branches : 247 Grama Vidiyal Micro Finance Pvt Ltd (GVMFL)Grama Vidiyal Micro Finance Pvt Ltd was started in 1993 and has been providing excellent micro finance services to needed people in rural areas. Company has head office in Tamil Nadu and has more than 2262 employees that work for the success of the company. Because of excellent work, Grama Vidiyal Micro Finance honored with several awards.Headquarter : Tiruchirappalli, Tamil Nadu | Number of Branches : 126

Grameen Financial Services Pvt Ltd (GFSPL)9

Grameen Financial Services Pvt Ltd is a non banking financial institute approved by Government of India. Company started with aim to fostering rural women, so they start small scale business and earn money. It was started in 1999 as an NGO but in 2007 organization transformed into Non-Banking Financial Company that provides Micro finance services.Headquarter:Bangalore, Karnataka | Number of Branches : 62

Legal Structure of MFIs:

A microfinance institution under the Microfinance Institutions (Development and Regulation) Bill, 2012 includes the following entities: (a) a society registered under the Societies Registration Act, 1860; (b) a company registered under section 3 of the Companies Act, 1956; (c) a trust established under any law for the time being in force; (d) a body corporate; or (e) any other organisation, which may be specified by the RBI if the object of the institution is the provision of microfinance services. It does not include a banking company, co-operative societies engaged primarily in agricultural operations or industrial activities or any individual who carries on the activity of money-lending and is registered as a moneylender under the provision of any State law.

A MFI in India acquires permission to lend through registration (Table 1 provides details of the registration requirements). MFIs are registered as one of the following five types of entities1:

1. Non-Government Organisations engaged in microfinance (NGO MFIs), comprising of Societies and Trusts;

2. Cooperatives registered under the conventional state-level cooperative acts, the national level Multi-State Cooperative Societies Act (MSCA 2002), or under the new State-level Mutually Aided Cooperative Societies Act (MACS Act);

3. Section 25 Companies (not-for profit);

4. For-profit NBFCs; and

5. NBFC-MFIs.

Table 1 tabulates the major regulations applicable to NBFCs as stipulated by the RBI.

Table 1: MFIs by Type of Registration

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Category Type of MFI Registration

Not for

Profit

NGO MFIs: Societies

& Trusts (500)

Registered under Societies

Registration Act, 1860

Section 25

Companies (10)

Section 25 of Companies

Act, 1956

Mutual

Benefit

Cooperatives (100) Registered under State Cooperative Societies Act or Mutually Aided Cooperative Societies Act (MACS) or Multi-State Cooperative Societies Act, 2002

For-Profit NBFC (50) Companies Act, 1956 & registered with RBI

NBFC-MFI RBI Circular, May 2011

SHGs – BANK LINKAGE PROGRAM

Self Help Groups (SHGs)

Self Help Group Model: In SHG Model the members form a group of around twenty members. The group formation process may be facilitated by an NGO or by the MFI or bank itself, or it may evolve from a traditional rotating savings and credit group (ROSCA) or other locally initiated grouping.

To alleviate the poverty and to empower the women, the micro-finance has emerged as a powerful instrument in the new economy. With availability of micro-finance, self-help groups (SHGs) and credit management groups have started in India.  The Self Help Groups (SHGs) are created small and homogeneous groups to reap economic benefits for members out of mutual savings, solidarity and joint responsibility through peer monitoring. The main advantage to banks of their links with the SHGs is the externalization of a part of work items of credit cycle such as assessment of credit needs, appraisals, disbursal supervision and repayment, reduction in the formal paper work and transaction costs.

Self-Help Groups (SHGs) are the thrift and credit groups formed informal way whose members pool savings and relend within the group on rotational or needs basis. These groups have operated on co-operative principles and do collective actions. They succeeded in

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performing/providing banking services to their members door steps without any defaults. They are formed for addressing their common problems. They make regular savings habit and use the pooled savings for the benefit of their members through a structured process of essential financial intermediation like prioritization of needs, setting self-determined terms for repayment and keeping records. It builds financial discipline and credit history that then encourages banks to lend to them in certain multiples of their own savings and without any demand for collateral security.

Stages of Group Dynamics:

There are four stages to form an SHG:

Forming: In this stage, people come together informally and meet. They are encouraged to talk about their problems and solutions. During this stage, based on the felt need, homogeneous groups emerge naturally.

Storming: During this stage conflicts between individual interest and groups interest surface and are dealt with. The leadership emerges. The procedures, rules and roles are established.

Norming: Trust develops among group members leading to cohesiveness in the group.

Performing: This is the final stage when the group becomes operational and starts functioning for the benefit of its members.

WHO FORMS SHG

FACILITATOR RETIRED SCHOOL TEACHER GOVT. SERVANT, HEALTH WORKER FIELD STAFF/ STAFF OF ANY DEVELOPMENT AGENCY BANKER UNEMPLOYED EDUCATED PERSON HAVING INCLINATION TO HELP A

MEMBER OF FARMERS’ CLUB

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GOALS OF SHGS

Self-help groups are started by non-profit organizations (NGOs) that generally have broad anti-poverty agendas. Self-help groups are seen as instruments for a variety of goals including empowering women, developing leadership abilities among poor people, increasing school enrolments, and improving nutrition and the use of birth control. Financial intermediation is generally seen more as an entry point to these other goals, rather than as a primary objective. This can hinder their development as sources of village capital, as well as their efforts to aggregate locally controlled pools of capital through federation, as was historically accomplished by credit unions.

Characteristics of SHG

The following are the charecteristics of SHG:

The ideal size of an SHG is 10 to 20 members; The group need not be registered; From one family, only one member; The group consists of either only men or of only women; Women’s groups are generally found to perform better. Members have the same social and financial background. The group should meet regularly

BENEFITS OF FINANCING TRROUGH SHGS

An economically poor individual gains strength as part of a group. Besides, financing through SHGs reduces transaction costs for both lenders and borrowers. While lenders have to handle only a single SHG account instead of a large number of small-sized individual accounts, borrowers as part of an SHG cut down expenses on travel (to & from the branch and other places) for completing paper work and on the loss of workdays in canvassing for loans.

SHG – Bank Linkage program

A sizeable share of population in India continues to remain outside the formal banking system despite considerable expansion in branch network. Alternative models are being

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experimented with to meet the objective of financial inclusion. The SHG-Bank linkage model is the indigenous model of micro-credit evolved in India and has been widely acclaimed as a successful model. SHG-Bank linkage programme is considered a promising approach to reach the poor and has since its inception made rapid strides exhibiting considerable democratic functioning and group dynamism. The SHG-Bank linkage model was introduced in 1991-92 with a pilot project of linking 500 SHGs with banks.   Banking network have a significant influence on the spread of SHG-Bank linkage programme in the States and regions.   The SHG-Bank linkage programme augurs well for the tasks of financial inclusion, financial equity as well as efficiency.

This program, developed and managed by NABARD, allows SHGs to obtain loans from banks – commercial, rural, and cooperative banks. The banks lend to the SHGs and are eligible for NABARD refinance for these loans at a subsidized interest rate.   The program, started in 1992 as a pilot project and upgraded to a regular banking program in 1996, has expanded rapidly since then. NABARD’s refinance has however been falling in proportion – possibly because of the prevailing low interest rates, high level of liquidity in banks, and not the least, because of the banks starting to see the program as a profitable proposition   A Microfinance Development Fund, created at NABARD with a start up fund of 1 billion₹ (US$21 million) using contributions from the Reserve Bank of India, NABARD and other commercial banks, is to be used to consolidate and further expand the program. The growth of the program was slow during the initial years for several reasons.  Unlike other subsidized lending programs supported by the government, the program is not mandatory for the banks.

SHG-Bank linkage Programme has brought out the traditional skills, organizational skills and collective power of women, especially, from economically disadvantaged background to the forefront. The women SHG members have ventured into hitherto unexplored areas and proved that they can deliver when trusted and entrusted.

Objectives

The following are the objectives of SHG Bank linkage program:

To develop mutual faith and confidence between the rural poor and bankers. To combine sensitivity, flexibility and responses of the informal credit system with

the strength of administration capabilities, technical strength and the financial resources of the formal financial institutions.

To expand credit flow/ financial services to the rural poor with less transaction costs. To alleviate poverty and empower the women.

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Models of SHG Bank Linkage Program

The following are the models of SHG Bank Linkage program:

1. SHGs formed and financed by banks2. SHGs formed by NGOs and formal organizations but directly financed by the banks I3. SHGs financed by banks using NGOs and other agencies as financial intermediaries

Training program

Several factors explain the rapid increase in program outreach in recent years. Apart from natural learning process of all actors involved, NABARD’s extensive training programs to all the actors involved played a significant role.  The program faces several challenges. Most critical is the issue of sustainability of the SHGs; many are dependent on the promoter organizations for even routine tasks such as maintenance of account books and conducting of meetings where transactions take place. Others operate at a low equilibrium of low savings and low credit that is unlikely to contribute significantly to improving the lives of SHG members

Keeping in view the expansion of SHG Bank Linkage Programme, changing needs, policies, priorities, etc., NABARD undertook a comprehensive Training Need Assessment (TNA) with the assistance of GIZ. A National Level Training Consultation Meet on SHG-bank Linkage training was also organized and findings of the study were deliberated upon with all stakeholders. Based on the recommendations made at the consultation meet, the existing training modules were revised and a revised handbook on Training Programmes under SHG-Bank Linkage was forwarded to all scheduled commercial banks and RRBs.

Grant of Assistance

The Government grants assistance to the formation and development of SHGs.   The following table shows the cumulative sanction made by the Government as on 31.03.2014 to various agencies and also the disbursement of grant up to 31.03.2014 to such agencies.

Grant of assistance granted to partners of SHG – BLP

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(as on 31.03.2014)

Rs. In lakh

Agency Cumulative sanction up to 31.03.2014

Disbursement  upto 31.03.2014

Amount SHG (No.) Amount SHG (No.)

NGOs 23,375.14 574866 7229.16 378890

RRBs 764.24 49800 195.81 46164

Co-op banks 1416.98 83069 369.97 52501

IRVs 460.12 26883 82.27 11228

Farmer’s club 40.63 2544 20.40 9832

SHG Federation 28.61 250 1.85 46

PACs 394.45 8533 4.28 85

Total 26283.37 745945 7903.74 498746

SHG – Bank Linkage progress

The following table shows the savings of the SHGs, loans disbursed to such groups and the outstanding of loan by these groups:

SHG-Bank Linkage - Highlights

In Rs. crore

Year Savings Balance Loans disbursed Loans outstanding

2010 – 11 6551.41 16534.77 36340

2011 – 12 8214.15 20585.36 39375.30

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2012 - 13 9897.42 24017.36 42972.52

The above table witnesses that the savings in respect of SHG is on the increase.   The loan got by them is also in the increase.   But the loan outstanding is on the increase which is not good for the development of SHGs.

Non Performing Assets

The following tables the details of nonperforming assets in respect of SHGs as on 31.03.2012, 31.03.2013 and 31.03.2014, the first table agency wise and the second table region wise

Agency-wise NPAs of Bank Loans to SHGs

Rs. In crore

Agency Loan outstanding against SHGs – Position as on

Amount of NPAs as on Percentage of NPAs to loan outstanding as on

31.03.12 31.03.13 31.03.14 31.03.12 31.03.13 31.03.14 31.03.12 31.03.13 31.03.14

CB (Public sector)

24406.57 25371.18 28000.99 1581.05 2129.23 1966 6.48 8.39 7.02

CB (Pvt. sector)

1403.72 1268 26 1387.42 74.37 46.75 58.56 5.30 3.69 4.22

RRBs 8613.58 10521.13 11048.95 426.34 430.88 691.89 4.95 4.10 6.26

Co-op banks

1916 14 2214.63 2490.16 130.97 180.06 215.85 6.84 8.13 8.67

Total 36340 39375.30 42927.52 2212.73 2786.92 2932.67 6.09 7.08 6.83

Region wise NPAs of Bank Loans to SHGs17

Rs.in crore

Region Loan outstanding against SHGs – Position as on

Amount of NPAs as on Percentage of NPAs to loan outstanding as on

31.03.12 31.03.13 31.03.14 31.03.12 31.03.13 31.03.14 31.03.12 31.03.13 31.03.14

North 1178.28 1160.68 1100.64 81.55 129.87 150.46 6.92 11.19 13.67

NE Region

993.27 796.76 753.80 51.33 68.23 66.96 5.17 8.56 8.88

Eastern 4629.80 5538.13 4944.63 337.08 570.56 547.42 7.28 10.30 11.07

Central 2780.29 2776.85 2696.66 367.03 479.76 508.98 13.20 17.28 18.87

Western 1363.78 1467.52 1640.46 112.14 126.57 182.26 8.22 8.63 11.11

Southern 25394.59 27635.36 31791.33 1263.59 1411.93 1476.57 4.98 5.11 4.64

Total 36340 39375.30 42927.52 2212.73 2786.92 2932.67 6.09 7.08 6.83

The overall NPA percentage of loans to SHGs has come down marginally from 7.08% as on 31.3.2013 to 6.83% as on 31.03.2014 thereby reversing upward swing in NPA observed during the last few years. However, the level of NPA is still alarmingly high compared to position 5 years back (2.9% as on 31.3.2010). Moreover, the decline in the NPA percentage has been reported only in the Southern Region with high progress, while all other regions have continued with the upward swing in NPAs during the year.    As efforts are being made to spread the reach of SHG-BLP to the resource poor regions, the continued upsurge in NPAs in these regions needs to be viewed quite seriously.                      

Recent Developments

Annual Report 2013-14 of NABARD says that financing of SHGs by banks has undergone a paradigm shift with the spread of the SHG Bank linkage programme, substantial increase in quantum of credit disbursed and adoption of cash credit system of lending which has also led to increasing delinquencies in SHG financing. Developing appropriate norms for selection of SHGs is critical for mitigating credit risks and ensuring the quality of financing done by banks. Accordingly, norms were developed for assessing SHGs for credit linkage and the same was circulated to all the banks. These norms can be followed by the financing banks at the time of first credit linkage of SHGs and also for repeat linkage of mature SHGs including 18

cases where higher quantum of credit is requested (i.e. credit in excess of four times of the group corpus). Similar norms were also suggested to enable banks to take up appraisal of JLGs for financing.

Mobile based accounting system for SHGs

 A mobile based book keeping system which helps SHGs to maintain their financial transaction electronically in their local language and allows monitoring of the same by all stakeholders was implemented for 100 SHGs in Dharampuri district of Tamil Nadu. Under this system, SHGs update their transactions, meeting details by sending SMS from their mobile phones which is loaded with the software developed by NABARD. After the success of the pilot to the satisfaction of all stakeholders, the project has been upscaled for 10,000 SHGs. The SHGs will be charged 35.00 per month for the services. NABARD has₹ sanctioned 12.00 lakh as grant for bearing a part of SHGs monthly charges for first two₹ years.

Tablet PC based accounting system for SHGs

 Another pilot project was designed to monitor the day to day transactions of SHGs and updation of MIS on a real time basis by entering data in tablet PC. The field staff of NGO records the transactions and the SHGs get a copy of the records by paying fees. The pilot was successfully completed in January 2013 in 100 SHGs of Nandurbar district of Maharashtra. The project has now been upscaled for 50,000 SHGs where NABARD will give grant assistance up to 60 lakh to bear part of the monthly charges of SHGs during the first two₹ years. The SHGs will pay a flat rate of 40 per month for the services for next three years.₹

Suggestions

The following are the suggestions for the improvement of SHG – Bank linkage program:

To encourage banks to take keen interest in furthering the SHG movement, perhaps a scheme of performance-linked incentive could be considered

The performance indicator for the banks may be with reference to the credit disbursed under the SHG-Bank linkage programme in the lagging regions.

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Specific funds may be created to address the regional imbalances in the programme.

As observed by the Committee on Financial Inclusion (Chairman: Dr. C. Rangarajan), in several cases, bankers show unenthusiastic attitude in promoting SHGs. Occasionally, they point out reasons like shortage of staff, time, etc. Special training and awareness programme about the model is needed for the branch officials.

The spread of SHGs in North, Eastern and North-Eastern Region is poor. One of the reasons for this is the weak banking network and social backwardness and less NGO activity. There is a need to evolve SHG models suited to the local context.

Banks, with the help of NABARD, should evolve a common checklist for all SHGs with very simple record keeping.

In the ever changing technology there is good scope for ICT tools to reduce cost of financial inclusion. This needs to be sufficiently explored for the benefit of both banks and rural SHG members.

Joint Liability Group (JLG):A joint Liability Group (JLG) is an informal group comprising preferably of 4 to10 individuals coming together for the purposes of availing bank loan either singly or through the group mechanism against mutual guarantee. The JLG members would offer a joint undertaking to the bank that enables them to avail loans. The JLG members are expected to engage in similar type of economic activities like crop production.

Working Of Joint Liability Group:Members should be of similar socio economic status and background carrying out farming activities and who agree to function as a joint liability group. The groups must be organized by the likeminded farmers and not imposed by the bank or others. The members should be residing in the same village/ area and should know and trust each other well enough to take up joint liability for group/ individual loans.

Difference between JLGs and SHGs:

JLGs (Joint Liability Groups) SHG (Self Help Group) Minimum 15 members and

maximum 20 Minimum 3 members and maximum

5 Meeting is compulsory No necessary of compulsory

meeting

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Bank loan is available They get loans only from MFIs Gets the benefit of government

scheme. Individual responsibility There is no benefit. They share

responsibility and stand as guarantee for each other.

Cooperative Society:A Co-operative Society is formed as per the provisions of the Co-operative Societies Act, 1912. At least ten persons having the capacity to enter into a contract with common economic objectives, like farming, weaving, consuming, etc. can form a Co-operative Society.

Characteristics of Co-operative Society:Open membership Voluntary Association State control Sources of Finance Democratic Management Service motive Separate Legal Entity Distribution of Surplus Self-help through mutual cooperation

NBFC – Microfinance firms to play a key role in financial inclusion

By increasing the income cap for the eligibility of a micro-loan borrower as well as the permissible total borrower indebtedness, the Reserve Bank of India (RBI) has indicated its strong support to non-banking financial companies – microfinance institutions ‘(NBFC-MFIs)’ role in financial inclusion.

The new move is likely to significantly increase the potential market size without affecting borrowers’ servicing ability and improve operating efficiency of NBFC-MFIs, said a report by the rating agency, India Ratings & Research (Ind-Ra).

This move could also be a precursor to expanding NBFC-MFIs’ role in financial inclusion if they maintain and strengthen their underwriting standards. Also, existing MFIs may be tempted to slow down their branch expansion in non-south states, providing opportunities for new players.

RBI proposes to widen the consumer base of MFIs by nearly doubling the income limits of an eligible borrower to Rs 100,000 from Rs 60,000 in rural areas and Rs 1,60,000 from Rs 1,20,000 in urban areas. It also proposes to increase the total borrower indebtedness to Rs 1,00,000 from Rs 50,000. These changes could nearly double the long – term potential of the sector and bring a wider section of poor within the ambit of microfinance. At the same time, MFIs would also have the incentive to increase penetration for existing borrowers as they would qualify for loans with higher amounts in – line with the growth in rural incomes.

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NBFC – MFIs’ current underwriting standards seem adequate. This is because in spite of RBI allowing them to lend up to Rs 50,000, only few districts especially in south India and some other states have been saturated in terms of borrower indebtedness or having micro-loans from two or more MFIs, the report said.

They have now been provided sufficient headroom to grow for the next five years. If MFIs ensure a correlation between income, needs and loans, they will not be under pressure to dilute underwriting standards to showcase portfolio growth.

Recently, the Prime Minister, Narendra Modi has asked the bankers to study the successful micro finance models being followed in other parts of the world and try to adapt them according to the local requirements.

Speaking after the launch of the Pradhan Mantri Mudra Yojana aimed at funding the small entrepreneurs of India, Modi said that while there are a number of facilities provided for the large industries in India, there is a need to focus on 5 crore 75 lakh self-employed people who use funds of Rs 11 lakh crore, with an average per unit debt of merely Rs 17,000 to employ 12 crore Indians, reported a PIB release.

The Prime Minister said that MUDRA scheme is aimed at “funding the unfunded”. MUDRA will build on experiences of some of the existing players, who have demonstrated ability to cater to the Non Corporate Small Business segment to build a financing architecture and right eco-system for both the entrepreneurs as well as the last mile financiers to the segment. Access to finance in conjunction with rational price is going to be the unique customer value proposition of MUDRA.

The establishment of MUDRA would not only help in increasing access of finance to the unbanked but also bring down the cost of finance from the Last Mile Financiers to the informal micro/small enterprises sector. The approach goes beyond credit only approach and offers a credit – plus solution for these myriad micro enterprises, creating a complete ecosystem spread across the country, said the Prime Minister.

Microfinance Institutions Network IndiaMicrofinance Institutions Network (MFIN) is a self-regulatory organization of NBFC MFIs

that aims to work with regulators to promote microfinance to achieve larger financial

inclusion goals.

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Logo of MFIN

MFIN is supported by Omidyar Network, a philanthropic investment firm, and the

International Finance Corporation (IFC), a member of the World Bank Group.

Omidyar Network is funding the project to support MFIN in its above efforts. IFC is

providing advisory services and technical consultancy to Alpha in its effort to get the

credit bureau services being made available to the MFI sector.

Latest List of MFIN Members

1. Anjali Micro Finance

2. Arohan Financial Services Ltd

3. Asirvad Microfinance Ltd.

4. Asmitha Microfin Ltd.

5. Bandhan Financial Services Pvt Ltd

6. Bhartiya Samruddhi Finance Ltd

7. BWDA Finance Ltd

8. CDC Microfinance Pvt. Ltd

9. Credible Micro Finance P Ltd

10. Equitas Micro Finance India Private Ltd

11. ESAF Microfinance and Investments P Ltd

12. Fullerton India

13. Grama Vidiyal

14. Grameen Financial Services P Ltd

15. Growing Opportunity

16. Hand in Hand

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17. Janalakshmi Financial Services Pvt Ltd

18. L&T Finance

19. Madura Micro Finance Ltd.,

20. Mimoza Enterprise Finance Pvt Ltd

21. S.M.I.L.E. Microfinance Ltd / Mahasemam

22. Sahayata Microfinance P Ltd

23. Samasta

24. Satin Creditcare Network Ltd

25. Share Microfin Ltd

26. SKS Microfinance Ltd

27. Sonata Finance Pvt Ltd

28. Spandana Sphoorty Financial Ltd

29. Suryoday

30. SWAWS Credit Coporation India (P) Ltd

31. Trident MicroFin P Ltd

32. Ujjivan Financial Services Pvt Ltd

33. Utkarsh Microfin

34. Village Financial Services Pvt Ltd

C ode of Conduct of Microfinance Institutions Network (MFIN)

The list of the code of conduct as relevant to the branches is mentioned here below:

A. Fair Practices with Borrowers:

MFIs should clearly convey to the borrowers by way of loan card, passbook or through Kendra meeting the following terms of the loan: a) All the important terms and conditions of the loan agreement

b) Rate of interest on declining balance method

c) Processing fee

d) Any other charges

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e) Security or any other deposit.

f) Systematic advance collections

g) Total charges recovered for insurance coverage and risks covered

h) Any other services rendered and charges for the same

Recovery mechanism: a. Though each MFI should ensure timely recovery of dues, it is imperative that the MFIs shall not use any abusive, violent, or unethical methods of collection and the recovery efforts should be in line with RBI guidelines issued from time to time.

b. A valid receipt should be provided by MFI for each collection from the borrower.

B. Multiple Lending & Lending Limits:

a) The maximum number of MFIs who can lend to one client is three, and the maximum loan outstanding from all the three MFIs together to a single client is restricted to Rs. 50,000/- at any point of time.

b) This cap will cover only unsecured loans given within the joint liability group mechanism

c) Any secured loans or individual business loans will not be covered under this cap.

d) The code will not cover the credit norms to be fixed by individual member MFIs.

C. Data Sharing /Incident Sharing:

In addition to the formatted data supplied to the Credit Bureaus like CIBIL and High Mark, the MFIs should agree to participate in a forum to share qualitative credit information. a) Whenever any member comes across Incidents of High Default (IHD), the member should inform the Association of the same so that the other members are made aware of it. However whether any other member would further lend to clients in such an area would be the choice of each individual MFI based on their credit policies

b) In case of any Incidents of High Default is faced by one MFI, all members shall cooperate in a recovery drive and restrain lending in that area till things are streamlined.

D. Recruitment:

a. The code covers all MFI staff, in particular field staff up to the branch manager cadre.

b. Any member MFI should have at least 50 percent of its net new recruitment in any particular year as people whose immediate previous job has not been with another member MFI.

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c. As a matter of free and fair recruitment practice, there will be no restriction on hiring of staff from other MFIs by legitimate means in the public domain like general recruitment advertisements in local newspapers, web advertisements on site, walk-in interviews, etc.

d. Whenever a member MFI recruits from any other member MFI, it will be mandatory to seek a reference check from the previous employer.

e. All member MFIs also agree not to recruit anybody from the other members without the relieving letter / no due certificate from the previous MFI employer.

f. All member MFIs agree to provide such relieving letter / no due certificate to the outgoing employee in case he has given proper notice, handed over the charge and settled all the dues towards the MFI.

g. Any staff member who is discovered to have lied about his background of working with any other MFI, will be asked to leave immediately by the recruiting MFI.

E. Whistle Blowing:

a. Any person or MFIN member is entitled to report an incident of improper conduct by another MFIN member, to the Code of Conduct Enforcement Committee (CCEC) of MFIN. b. The CCEC shall investigate such instances within 30 calendar days of receiving such report. For this purpose the CCEC may depute its own staff or use the services of outsourced agencies as the CCEC thinks fit.

F. Enforcement Mechanism:

a) The CCEC has developed a mechanism to conduct the inquiry in a fair manner on receipt of any incident reported by any person or MFIN member. It takes appropriate action against the erring MFI.

b) This mechanism is developed to ensure that all member MFIs should strictly follow the COC.

G. Ombudsperson Mechanism:

a) MFIN Board will appoint one or two individuals of high professional reputation and integrity, as Ombudsperson in each of the six RBI regions – East, West, Central, South, North and Northeast, to provide an independent mechanism to individual consumers or staff members to complain against an MFI and seek redressal.

b) Any person desiring to complain against an MFIN Member shall write a letter to the Ombudsperson

c) The Ombudsperson, on receipt of the complaint will send copies to the Chairman of the CCEC and the Chairman of MFIN Board. The Ombudsperson can cause an initial inquiry to be conducted to determine prima facie if there exists a case for investigation

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d) The Ombudsmen will have the power to ask the errant MFI to make good any damages incurred by the consumer, and in addition impose a fine on the MFI, commensurate with the seriousness of the complaint.

The Micro Finance Institutions (Development and Regulation) Bill, 2012

Highlights of the Bill 

The Bill seeks to provide a statutory framework to regulate and develop the micro

finance industry.

The Reserve Bank of India (RBI) shall regulate the micro finance sector; it may set an

upper limit on the lending rate and margins of Micro Finance Institutions (MFIs).

MFIs are defined as organisations providing micro credit facilities up to Rs 5 lakh,

thrift collection services, pension or insurance services, or remittance services.

The Bill provides for the creation of councils and committees at central, state and

district level to monitor the sector.

The Bill provides for a Micro Finance DevelopmentFUND  managed by RBI;

proceeds from this fund can be used for loans, refinance orINVESTMENT  to MFIs.

The Bill requires the RBI to create a grievance redressal mechanism.

Key Issues and Analysis

The Bill provides safeguards against misuse ofMARKET  dominance by MFIs to

charge excessive rates.  It allows RBI to set upper limits on lending rates and

margins.  However, there is no provision for consultation with the Competition

Commission of India.

The Bill allows MFIs to accept deposits.  Unlike banks, there is no facility for

insuring customer deposits against default by MFIs.  The minimum capital

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requirement is also lower, though RBI may prescribe higher requirements. 

The Development Fund for MFIs is to be managed by the RBI.  The Bill also enables

regulatory powers to be delegated to NABARD.  Both these provisions could lead to

conflict of interest.

The Bill provides for the creation of micro finance committees at central, state and

district levels to oversee the sector.  However, the formations of these committees are

not mandatory.

The Bill allows MFIs to provide pension and insurance services.  However, it does not

provide for regulation by or coordination of RBI with the respective sector regulators

Recovery mechanisms

The Reserve Bank of India appointed sub-committee will examine the recovery mechanism of microfinance institutions and their interest rate practices, amid criticism of these lenders charging exorbitant loans rates and using strong arm tactics for recovery.

“To examine the prevalent practices of MFIs regarding interest rates, lending and recovery practices, to identify trends that impinge on borrowers' interest,” the RBI said in a notification.

The Reserve Bank had appointed a sub-panel, under the Chairmanship of Y. H. Malegam, to look into the functioning of MFIs. The RBI will examine the conditions under which loans to MFIs could be classified as priority sector lending and give appropriate recommendations.

At present, MFIs charge up to 34 per cent interest rate a year on loans.

Although the companies registered with the RBI cover over 80 per cent of the microfinance business, in terms of numbers of MFI, they constitute only a small percentage.

The Finance Ministry is preparing a Bill on regulating MFIs and has finished consultations with stakeholders to table the Bill.

But this has been delayed now, since the whole issue came under a lot of controversy after a number of suicide cases were reported in Andhra Pradesh, allegedly due to coercive methods adopted by these lenders to recover their money from poor borrowers.

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This prompted the State to promulgate an Ordinance to rein in MFIs and the RBI to constitute a sub-committee to look into the functioning of these lenders.

The RBI said that the sub-committee would “examine and make appropriate recommendations regarding the applicability of money lending legislation of the States and other laws to NBFCs/ MFIs.”

The sub-committ ee would also detail out “the objectives and scope of regulations of NBFCs undertaking microfinance by the RBI and the regulatory framework needed to achieve those objectives,” the RBI said

It is interesting in this context to consider the experience of banks which in respectof their retail portfolio had in the past faced similar problems of coercive recovery. They believe this problem was significantly reduced by the following measures:-

a) The size of their portfolio was reduced to the levels which they could adequatelycontrol.

b) The use of out-sourced recovery agents was reduced and more of their ownemployees were used for recovery particularly in sensitive areas.

c) The types of products were examined and recovery methods were fine tunedto recognize the variances in these products.

d) Training and supervision were greatly enhanced.

e) Compensation methods for staff were reviewed and greater emphasis was given to areas of service and client satisfaction than merely the rate of recovery.

Comparison of Micro finance in India and Bangladesh

Microfinance sector has grown rapidly over the past few decades. Nobel Laureate Muhammad Yunus is credited with laying the foundation of the modern MFIs with establishment of Grameen Bank,

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Bangladesh in 1976. Today it has evolved into a vibrant industry exhibiting a variety of business models. Microfinance Institutions (MFIs) in India exist as NGOs (registered as societies or trusts), Section 25 companies and Non-Banking Financial Companies (NBFCs). Commercial Banks, Regional Rural Banks (RRBs), cooperative societies and other large lenders have played an important role in providing refinance facility to MFIs. Banks have also leveraged the Self-Help Group (SHGs) channel to provide direct credit to group borrowers.

With financial inclusion emerging as a major policy objective in the country, Microfinance has occupied centre stage as a promising conduit for extending financial services to unbanked sections of population. At the same time, practices followed by certain lenders have subjected the sector to greater scrutiny and need for stricter regulation.

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Microfinance In Bangladesh

Bangladesh has been known as the birthplace of microfinance, and competition has markedly increased during the last decade. Since its inception, microfinance has evolved as an economic development approach to benefit low-income people in rural and urban areas. Bangladesh has one of the longest histories with microfinance. Since various pilot programs and experiments were conducted by Grameen Bank and BRAC, microfinance has undergone continuous improvement in the country.

Now, Bangladesh boasts a large number of well-known microfinance institutions (MFIs) includingGrameen Bank, BRAC, and the Association of Social Advancement (ASA). Simultaneously, many smaller MFIs have started operations throughout Bangladesh. As of December 2008, 402 MFIs possess a license from the Microcredit Regulatory Authority (MRA) and 4,236 MFIs have applied for a license. I

As the microfinance market has matured in recent years, competition has increased among major MFIs. Against this backdrop of intense competition, overlapping loan problems among major MFIs and borrowers has emerged as a problem in Bangladesh. While poor people have more choices from which MFIs to borrow money, the number of people who use multiple loans from various MFIs has been increasing. As a result, there are ever more heavily indebted people in Bangladesh, and this is beginning to pose a threat to MFIs and the microfinance industry. Considering how many MFIs operate in Bangladesh, the microfinance market seems to have become saturated.

The object of this study is to analyse the overlapping loan problems based on previous research and interviews the author conducted with ASA borrowers and ASA field staff in Rajshahi and Comilla, Bangladesh in 2009. It will then describe issues caused by those overlapping loan problems. In conclusion, it will recommend measures that the whole microfinance industry in Bangladesh should take to prevent this problem from worsening.

Microfinance is entering into a new and more dynamic phase. The launching of initial public offerings(IPOs), innovations in mobile microfinance services, remittance through microfinance institutions using latest communications technology are the new dimension of microfinance that bring finance - and hope - to the world's least developed countries. Microfinance is rapidly shifting from a niche product to a globally recognized form of finance and becoming more sophisticated and diverse. Bangladesh microfinance sector is mature now and its assets constitute around 3 percent of GDP in 2010. There are four main types of institutions involved in microfinance activities inBangladesh:

Grameen Bank NGO-MFIs that have received licenses from MRA Commercial and specialized banks Government sponsored microfinance programs (e.g. Through BRDB, cooperative societies

and programs under different ministries).

Total outstanding loan of this sector was around Tk. 210 billion (USD 3.2 billion) in December 2010 disbursed among 30 million poor people and savings worth Tk. 160 billion (USD 2.3 billion) which helped them to be self-employed and accelerated overall economic development process of the country.

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Microcredit Regulatory Authority (MRA) has been established by the Government of the Peoples' Republic of Bangladesh under the "Microcredit Regulatory Authority Act -2006" to promote and foster sustainable development of microfinance sector through creating an enabling environment for NGO-MFIs in Bangladesh. As the statutory body MRA monitors and supervises microfinance operations of NGO-MFIs. License from the Authority is mandatory to carry out microfinance operations in Bangladesh. MRA publishes statistical information of microfinance sector on a regular basis. The NGO-MFIs provide operational information on a prescribed format twice a year and financial information annually. This publication is based on information provided for the fiscal Year 2010 by 482 NGO-MFIs.

Other Banks; 18%

NGO - MFI; 38%

Grameen Bank; 35%

Commercial Banks; 9%

Sales

A) Gross Loan Portfolio Gross loan portfolio means the total amount of money lent by institutes to the customers

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Above graphs clearly depicts that the loan portfolio of Indian MFIs is increasing tremendously year on year as compared to Bangladeshi MFIs. Leaders of MFIs in India has shown a high growth in respect of gross loan portfolio as SKS loan portfolio has grown by more than 900 times in just four year, Spandana loan portfolio rose to around Rs.800 million from Rs.100 million from 2006-10, similarly Share’s loan portfolio has quadrupled from 100 to around 400 million in these year.

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On the other hand, Bangladesh MFIs leader's loan portfolio is also increasing but the rate of growth is not as such of Indian MFIs. Coming on to the comparison of overall MFIs industry in both the countries, result were similar to that of top institutes in both the countries.

From the above graph it is evident that the loan portfolio is growing tremendously in India, which has risen to 9.18 times (around 918%) in 2010 from 2006. Whereas in Bangladesh it has just decline from 73.66%(2006) to 63.35% in 2010 around 10.31% has decline .This might be because of the fact that Serious charges emerged about microfinance borrowers taking on multiple loans and too much debt, coercive collection practices by microfinance staff, and even suicides among borrowers who were unable to meet their payments Moreover the population of India is around 8 times larger than that of Bangladesh, therefore the absolute value of loan portfolio has to be higher in India. And the data of last five years is showing that the microfinance activities are penetrating at a good speed in India. (As per CIA, World Fact book India’s population (July 2011) : 1,189 million; Bangladesh : 158 million).

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These graph reflect that the number of active clients of Bangladesh MFIs is much higher than that of Indian MFIs. Bangladeshi MFIs are showing minuscule addition of clients, this might be because of the fact that the concept of microfinance is older in Bangladesh, therefore these institutes may have already reached a mature stage. Whereas clientele of Indian MFIs are increasing at a very high speed. Because of such a high rate of growth of Indian MFIs clientele, the gross loan portfolio is growing tremendously.

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Average Industry figures are also showing same result that the Bangladesh MFIs are not showing any significant growth in client’s number whereas the clientele of Indian MFIs are increasing robustly. Apart from this, average loan per borrower/ client 1 has also increased in India from Rs.106 in 2006 to Rs.165 in 2010. Similarly in Bangladesh it has increased from Rs.72 to Rs.126 in 2010. Therefore if the Indian MFIs are penetrating more and more (increasing clientele) obviously the loan portfolio will grow tremendously.

B) Cost of BorrowerCost per borrower ratio is very important as it helps to analyse the efficiency of MFIs by determining the average cost of maintaining an active client. Graph below (figure-5) shows the Cost per borrower ratio of MFIs in India and Bangladesh. It is clear that the cost per borrower of institutes in India is increasing, while it has shown downturn in 2010 in SKS, SHARE and BANDHAN.

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On the hand, although the cost per borrower of MFIs in Bangladesh is showing similar trend but still it is less than Indian MFIs as (Figure .6) below. Whereas on comparing the performance of the overall MFIs industry, it is observed that the cost of borrowers of MFIs in India is much higher than that of MFIs in Bangladesh.

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C) Financial StabilityUpon analysis of the financial ratios of the performance of Indian MFIs with their Bangladeshi counterparts, the comparative scenario upon their working and performance can be woven into following facts and figures.

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Comparative analysis of Return on Asset (ROA) of top MFIs in India and those in Bangladesh reflects that Indian MFIs are outperforming on the basis of return earned on assets, implying that Indian MFIs are using their assets much efficiently and thus generating higher returns as compared to Bangladesh.

Industry Average for ROA India And Bangladesh

Industry comparison shows that Indian MFIs are showing steady growth in ROA, thus they are making every possible effort to effectively use their assets. While Bangladesh MFIs are undergoing declining ROA although it has increased in 2010 but still it is much lower when compared to Indian MFIs as depicted in above figure.

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D) Yield on Gross PortfolioThe yield on Portfolio ratio helps to determine the cost/income on the fund raised/distributed. In the context of MFI it is calculated by dividing cash received from interest, fee and commission on the loan by gross loan portfolio. Thus it gives the interest rate at which MFIs is lending loans to people. When comparing this ratio between Indian and Bangladeshi top MFIs, it is observed that although this ratio is increasing of Indian MFIs year on year whereas Bangladesh MFIs are maintaining yield on portfolio somewhat similar since the four years with a slight decrease.

Similarly, upon the comparison of the average yield on a gross portfolio for all the MFIs in India andBangladesh, it is found that yield is much higher in India, reflecting that the Indian MFIs are charging a much higher rate for loans. In 2006, Yield on a gross portfolio of Indian MFIs was lower than that of Bangladesh MFIs but from then yield on loans provided by Indian MFIs has accelerated and has

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gone from 16.90% in 2006 to around 25.25% in 2009. Thus the interest charged by Indian MFIs has been increased by 8.35% in just five years. Whereas, Bangladesh MFIs is maintained somewhat similar rates on their loan granted. Apart from these as discussed above ROA of Indian MFIs are increasing y-o-y thus it is clear that Indian MFIs are inclined toward profit motive therefore they are increasing their return by making their operations more efficient and charging higher interest rate on the loans given to the poor people as in the below figure.

E) Return on EquityReturn on equity is another very significant ratio which helps to calculate the rate of return on average equity for a particular time period. In context of microfinance institutes ROE ratio is generally used as a proxy for commercial viability.

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While comparing the ROE of overall microfinance industry of India and Bangladesh, it is observed that the ROE of Indian MFIs is steadily increasing year on year, whereas the ROE of Bangladesh MFIs is decreasing gradually. This substantiates that the MFIs in India are earning higher return on equity and therefore reflecting that they are more inclined towards the commercial motive. On the other hand, Bangladesh MFIs seems to be working for social motive.

Challenges faced in Micro finance:

Microfinance has emerged as a key instrument of financial inclusion, not only in India but in the entire developing world. The growth of microfinance institutions in India is quite good in recent years. The microfinance institutions in India have evolved into a vibrant industry exhibiting a variety of business models.

However, few challenges in the spread of microfinance in India include:

Rural Vs Urban Poor: Most of the microfinance institutions pay more attention to the rural areas and they neglect the poor people living in the urban areas. Out of the total 800 microfinance organizations operating their business in India, only six of them have been able to concentrate on the urban poor. The population of urban poor is quite huge in India and it is like 100 million and this number is expected to rise rapidly in the coming years. The microfinance institutions need to focus on the urban poor people too. There are many established finance institutions ranging from banks, private lenders in urban areas in India who lend money to the individuals and most of the people trust them a lot. So, it is quite difficult for the microfinance institutions to start their business in the urban areas.

Scale of operations: In order to achieve sustainability it is important to increase the scale of microfinance operations and outreach. In India, the microfinance outreach is very low which is only

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5% compared to 65% in Bangladesh. The increase in the size and scale of operations of MFI’s will help in sustaining the default risk and reduce the operational costs per borrower.

Uncertainty and default risk: Uncertainty and default risk are the major challenges faced by the Microfinance institutions in India. Most of the rural people in India have volatile and irregular income and their expenditure patterns are very bad. The rural people in India are highly exposed to the systematic risks like the crop failures or the fall in the commodity prices and as a result, they face difficulties while servicing the loans. So, the microfinance institutions have legitimate concerns when they are dealing with the poor people living in the rural areas and they tend to perceive the loans very risky.

Lack of security / collateral for Micro- loans: Government of India has not been able to design and implement an effective and strong and regulatory framework which is conducive to the growth of Microfinance Institutions in India. As a result, the contract design, contract enforcement and contract re-negotiation of MFI’s is quite weak. It makes the microfinance institutions quite difficult to provide any right incentive for the repayment of the loan. The securitization and asset reconstruction law helped to improve the legal framework to recover the bad loans and the out of court settlements have also been introduced. The ownership, the title and the process of registration of lands is quite weak in rural areas. So, the MFIs often face challenges when they require the collateral from the borrowers.

Lack of policy planning: The regulatory and financial policies of the Government in India are also not so strong and there are various gaps in the policies announced by it and the policies often end up with higher financial risk for the MFIs. The risks can be like high fiscal deficits, interest rate policies and improper credit planning policy of RBI etc.

Profit Motive: A paradigm shift in the focus of the MFI’s from “social motive” to “profit motive” has led to emergence of “For Profit MFI’s” in the recent years. This change in focus is putting a lot of stress on the managements of the MFI’s to show increased growth and astounding loan portfolios. Since these MFI’s have equity participation from fund managers and private individuals, they are faced with increased competition to show financial growth and improved rate of return. The new MFIs have created the appearance of being far more concerned about doing well financially than in doing good for clients, community and nation.

The way to address the challenge:

Women have a better sense of responsibility as compared to men, and hence, 95% of micro-loans in India are given to women groups. But, the present system of micro loans needs to change and be more appealing to individuals and not just group centric.

Following are few ways that may be followed by the MFIs to address the above challenges:

Setting up of achievable targets for profit and growth: The MFI’s should identify and set reasonable and achievable growth targets for profit and return on investments. The over

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enthusiasm of the few managements to project and achieve more than normal targets in growth and profit leads to collapse of the basic premise of social motive on which the edifice of MFI industry is based.

Effective utilisation of microloans: The MFI’s need to ensure that micro loans are utilized for productive purposes or employment generation activities and not utilized for repayment of existing loans. The cycle of servicing multiple loans by the poor without any addition to their income engulfs them into the vicious circle of continuous debt leading to risk of default. The MFI’s need to communicate and bring awareness about the risks of inappropriate utilization and deployment of the loans for consumption purpose by the borrowers. Generally, the income rich households take more credit for investment purpose and less for consumption purpose as compared to the income poor households.

Flexible repayment options: The microfinance organizations should provide repayment options with enhanced flexibility. It should try to understand the perspective of the customer. For example, the farmers who take micro loans should be allowed to repay the money after they have harvested their crops in the cropping season, instead of the standard system of weekly repayments.

Framing policies and regulations: It is very important to formulate and implement clear and unambiguous policies to enable easier operation and regulation of Microfinance institutions in India. This has to be done on urgent basis and the Government of India should play a vital role in establishing the enabling policy, legal and regulatory framework for the MFIs.

Liberal norms for granting loans: Loans should be such that they can be availed by men as well. The loans need to be made more accessible without compromising on the surety of recovery. This can be achieved by involving women as well as men in a loan process. For example, giving a micro loan to a household instead of a group of men or women, or any individuals, can be a good option.

Clear targeting of clients: The MFIs should ensure that the borrowers are authentic and they repay the loans without any fail. Appropriate services and products and good staffing is quite essential to ensure the effectiveness. MFIs should focus on the quality of the groups participating in the credit programmes and the importance of financial sustainability of the groups.

S TATUTORY REQUIREMENTS

CAPITALISATION, CAPITAL ADEQUACY AND EQUITY CAPITAL

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MFIs registered as societies and trusts by their design lack a clear ownership structure, hence societies and trusts can only acquire funds of their own by way of donor grants and surpluses from operations. On the other hand, entities like cooperative societies, cooperative banks, and companies registered under Section 8 of the Companies Act and NBFCs do have owners and hence also equity capital that becomes the financial under-pinning of their operations. Owned funds of the latter types of organisations, therefore, consist of the sum of shareholders’ equity and surpluses from operations. Such organisations rarely have donor grants but, to the extent that they receive such grants, these would also be included in the definition of owned funds. Investments in subsidiaries, companies in the same group and other NBFCs must be deducted from the above to the extent that such investments exceed 10 per cent of the NOF after reducing owned funds by any deferred revenue expenditure and other intangible assets. This constitutes the NOF of an NBFC. The value of minimum NOF required for different types of organisations to undertake financial operations is set out in Table:-

Net-Owned Funds required for Different Forms of MFIs

Legal Forms Minimum Value of Net Owned Assets

Cooperative Societies A fixed per member contribution set bythe bye-laws of the societies – for produceror financial cooperatives this is usually setat Rs100

Cooperative Banks RS 1 lakh

Section 25 Companies(undertaking microfinance activities)

No minimum requirement

Non Banking Finance Companies Rs 2 crore

While the regulations on cooperative societies and Section 8 companies do not have any such stipulation, RBI as the regulator for NBFCs and cooperative banks has fixed strict capital adequacy norms for such institutions under Section 45 JA of the RBI Act. Thus, NBFCs are required to maintain a minimum capital adequacy ratio of 12 per cent, consisting of Tier I and Tier II capital where Tier II capital should not be more than 100

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per cent of Tier I. This minimum capital adequacy norm holds for cooperative banks as well. The enforcement of these capital adequacy norms is particularly much stronger in the case of NBFCs than it is for other entities like banks.

The Companies Act provides the regulatory platform for the equity capital holding of NBFCs and Section 8 companies. At the time of their registration as companies such entities need to declare their authorised and paid-up share capital. If these entities want to alter their authorised share capital, they need to seek the approval of the Registrar of Companies. The Companies Act, also specifies that companies must state their share- holding position in annual reports. Similarly, cooperatives must also declare their authorised share capital to the Registrar of Cooperative Societies and get approval for any alteration in the size of authorised share capital.

Y. H. MALEGAM COMMITTEE REPORT 2011

The RBI appointed Mr. Y. H. Malegam Committee (the Sub-Committee of the Central Board of Directors of Reserve Bank of India to Study Issues and Concerns in the MFI Sector related to the entities regulated by the Bank) has submitted its report to the RBI in January 2011.

The Sub-Committee composed of Shri Y.H. Malegam as Chairman, Shri Kumar Mangalam Birla, Dr. K. C. Chakrabarty, Smt. Shashi Rajagopalan and Prof. U.R. Rao as Members and Shri V. K. Sharma (Executive Director) – Member Secretary

The terms of reference of the Sub-Committee were

1. To review the definition of ‘microfinance’ and ‘Micro Finance Institutions (MFIs)’ for the purpose of regulation of non-banking finance companies (NBFCs) undertaking microfinance by the Reserve Bank of India and make appropriate recommendations.

2. To examine the prevalent practices of MFIs in regard to interest rates, lending and recovery practices to identify trends that impinge on borrowers’ interests.

3. To delineate the objectives and scope of regulation of NBFCs undertaking microfinance by the Reserve Bank and the regulatory framework needed to achieve those objectives.

4. To examine and make appropriate recommendations in regard to applicability of money lending legislation of the States and other relevant laws to NBFCs/MFIs.

5. To examine the role that associations and bodies of MFIs could play in enhancing transparency disclosure and best practices

6. To recommend a grievance redressal machinery that could be put in place for ensuring adherence to the regulations recommended at 3 above.

7. To examine the conditions under which loans to MFIs can be classified as priority sector lending and make appropriate recommendations.

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8. To consider any other item that is relevant to the terms of reference.

Key recommendations:

1. A separate category be created for NBFCs operating in the Microfinance sector, such NBFCs being designated as NBFC-MFI.

2. A NBFC-MFI is defined as “A company (other than a company licensed under Section 25 of the Companies Act, 1956) which provides financial services pre-dominantly to low-income borrowers with loans of small amounts, for short-terms, on unsecured basis, mainly for income-generating activities, with repayment schedules which are more frequent than those normally stipulated by commercial banks and which further conforms to the regulations specified in that behalf”. It is suggested to define each component of this definition in the regulation.

3. The suggested conditions to be followed to classify a NBFC as a NBFC-MFI a). Not less than 90% of MFI’s total assets (other than cash and bank balances and money market instruments) are in the nature of “qualifying assets.” b)The criteria suggested to be satisfy the “qualifying asset” of NBFC-MFI are i) the loan is given to a borrower who is a member of a household whose annual income does not exceed Rs. 50,000; ii)the amount of the loan does not exceed Rs. 25,000 and the total outstanding indebtedness of the borrower including this loan also does not exceed Rs. 25,000; iii) the tenure of the loan is not less than 12 months where the loan amount does not exceed Rs. 15,000 and 24 months in other cases with a right to the borrower of prepayment without penalty in all cases; iv) the loan is without collateral; v) the aggregate amount of loans given for income generation purposes is not less than 75% of the total loans given by the MFIs; vi) the loan is repayable by weekly, fortnightly or monthly installments at the choice of the borrower. c) The income it derives from other services is in accordance with the regulation specified in that behalf.

4. A NBFC which does not qualify as a NBFC-MFI should not be permitted to give loans to the microfinance sector, which in the aggregate exceed 10% of its total assets.

5. The Committee recommended a “margin cap” of 10% in respect of MFIs which have an outstanding loan portfolio at the beginning of the year of Rs. 100 crores and a “margin cap” of 12% in respect of MFIs which have an outstanding loan portfolio at the beginning of the year of an amount not exceeding Rs. 100 crores. It also recommended an interest cap of 24% on individual loans.

6. In respect of transparency in Interest Charges, the committee has suggested the following Recommendations:

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a) There should be only three components in the pricing of the loan, namely (i) a processing fee, not exceeding 1% of the gross loan amount (ii) the interest charge and (iii) the insurance premium.

b) Only the actual cost of insurance should be recovered and no administrative charges should be levied.

c) Every MFI should provide to the borrower a loan card which (i) shows the effective rate of interest (ii) the other terms and conditions attached to the loan (iii) information which adequately identifies the borrower and (iv) acknowledgements by the MFI of payments of installments received and the final discharge. The Card should show this information in the local language understood by the borrower.

d) The effective rate of interest charged by the MFI should be prominently displayed in all its offices and in the literature issued by it and on its website.

e) There should be adequate regulations regarding the manner in which insurance premium is computed and collected and policy proceeds disposed off.

f) There should not be any recovery of security deposit. Security deposits already collected if any should be returned.

g) There should be a standard form of loan agreement.

7. In order to minimize the adverse features of Multiple-lending, Over-borrowing and Ghost-borrowers, the committee has made the following recommendations.

a) MFIs should lend to an individual borrower only as a member of a JLG and should have the responsibility of ensuring that the borrower is not a member of another JLG.

b) a borrower cannot be a member of more than one SHG/JLG. c) not more than two MFIs should lend to the same borrower. d) there must be a minimum period of moratorium between the grant of the loan and the

commencement of its repayment. e) recovery of loan given in violation of the regulations should be deferred till all prior

existing loans are fully repaid.

8. All sanctioning and disbursement of loans should be done only at a central location and more than one individual should be involved in this function. In addition, there should be close supervision of the disbursement function.9. It is recommended to establish one or more Credit Information Bureaus (CIB) and all MFIs are required to become members of such bureau. Till the operation of CIB, the responsibility to obtain information from potential borrowers regarding existing borrowings should be on the MFI.10. In case of coercive methods used in recovery, the MFIs and their managements should be subject to severe penalties. b) The regulator should monitor whether MFIs have a proper Code of Conduct and proper systems for recruitment, training and supervision of field staff to ensure the prevention of coercive methods of recovery. Field staff should not be allowed to make recovery at the place of residence or work of the borrower and all individual loans. 11. The minimum net worth recommended for NBFC-MFI is Rs.15 crore.

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12. Every MFI should be required to have a system of Corporate Governance in accordance with rules to be specified by the Regulator.13. Provisioning for loans should not be maintained for individual loans but an MFI should be required to maintain at all times an aggregate provision for loan losses which shall be the higher of: (i) 1% of the outstanding loan portfolio or (ii) 50% of the aggregate loan installments which are overdue for more than 90 days and less than 180 days and 100% of the aggregate loan installments which are overdue for 180 days or more.14. NBFC-MFIs should be required to maintain Capital Adequacy Ratio of 15% and all of the Net Owned Funds should be in the form of Tier I Capital.15. Bank lending to the Microfinance sector both through the SHG-Bank Linkage programme and directly should be significantly increased and this should result in a reduction in the lending interest rates.16. Bank advances to MFIs shall continue to enjoy “priority sector lending” status. However, advances to MFIs which do not comply with the regulation should be denied priority sector lending” status. It may also be necessary for the Reserve Bank to revisit its existing guidelines for lending to the priority sector in the context of the Committee’s recommendations.17. In respect of assignment and securitization, MFI portfolio, the following are the recommendations:

a) Disclosure is made in the financial statements of MFIs of the outstanding loan portfolio which has been assigned or securitised and the MFI continues as an agent for collection. The amounts assigned and securitised must be shown separately.

b) Where the assignment or securitisation is with recourse, the full value of the outstanding loan portfolio assigned or securitised should be considered as risk-based assets for calculation of Capital Adequacy.

c) Where the assignment or securitisation is without recourse but credit enhancement has been given, the value of the credit enhancement should be deducted from the Net Owned Funds for the purpose of calculation of Capital Adequacy.

d) Before acquiring assigned or securitised loans, banks should ensure that the loans have been made in accordance with the terms of the specified regulations.

18. It is recommended to examine the creation of one or more "Domestic Social Capital Funds" in consultation with SEBI to fund MFIs. Further, MFIs should be encouraged to issue preference capital with a ceiling on the coupon rate and this can be treated as part of Tier II capital subject to capital adequacy norms.

19. In order to monitor the Compliance, the following recommendations are madea) The primary responsibility for ensuring compliance with the regulations should rest

with the MFI itself and it and its management must be penalized in the event of non-compliance

b) Industry associations must ensure compliance through the implementation of the Code of Conduct with penalties for non-compliance.

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c) Banks also must play a part in compliance by surveillance of MFIs through their branches.

d) The Reserve Bank should have the responsibility for off-site and on-site supervision of MFIs but the on-site supervision may be confined to the larger MFIs and be restricted to the functioning of the organizational arrangements and systems with some supervision of branches. It should also include supervision of the industry associations in so far as their compliance mechanism is concerned. Reserve Bank should also explore the use of outside agencies for inspection.

e) The Reserve Bank should have the power to remove from office the CEO and / or a director in the event of persistent violation of the regulations quite apart from the power to deregister an MFI and prevent it from operating in the microfinance sector. f) The Reserve Bank should considerably enhance its existing supervisory organisation dealing with NBFC-MFIs.

20. The exemption from the provisions of State Money Lending Acts was recommended on account of interest margin caps and increased regulation suggested by the Committee

21. In respect of The Micro Finance (Development and Regulation) Bill 2010, the committee subject to Smt.Rajagopalan's reservations above, recommend the following: a) The proposed Act should provide for all entities covered by the Act to be registered with the Regulator. However, entities where aggregate loan portfolio (including the portfolio of associated entities) does not exceed Rs. 10 crores may be exempted from registration. b) If NABARD is designated as the regulator under the proposed Act, there must be close co-ordination between NABARD and Reserve Bank in the formulation of the regulations applicable to the regulated entities. c) The micro finance entities governed by the proposed Act should not be allowed to do the business of providing thrift services. 22. The Committee also felt that the need for a separate Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act will not survive if the Committee’s recommendations are accepted, 23. The cut-off date suggested for implementation of the recommendations is April 1st, 2011. In particular, the recommendations as to the rate of interest, it is recommended that it should be made effective to all loans given by an MFI after March 31st 2011.

Budget 2015Funding the unfunded

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Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of `20,000 crores, and credit guarantee corpus of `3,000 crores to be created.

In lending, priority will be given to SC/ST enterprises. MUDRA Bank will be responsible for refinancing all Micro-finance Institutions

which are in the business of lending to such small entities of business through a Pradhan Mantri Mudra Yojana.

A Trade Receivables discounting System (TReDS) which will be an electronic platform for facilitating financing of trade receivables of MSMEs to be established.

Comprehensive Bankruptcy Code of global standards to be brought in fiscal 2015-16 towards ease of doing business.

Postal network with 1,54,000 points of presence spread across villages to be used for increasing access of the people to the formal financial system.

NBFCs registered with RBI and having asset size of `500 crore and above may be considered for notifications as ‘Financial Institution’ in terms of the SARFAESI Act, 2002.

Agriculture

Major steps take to address the two major factors critical to agricultural production, that of soil and water.

Paramparagat Krishi Vikas Yojana’ to be fully supported. Pradhanmantri Gram Sinchai Yojana’ to provide ‘Per Drop More Crop’. 5,300 crore to support micro-irrigation, watershed development and the ‘Pradhan

Mantri Krishi Sinchai Yojana’. States urged to chip in. 25,000 crore in 2015-16 to the corpus of Rural Infrastructure Development Fund

(RIDF) set up in NABARD; `15,000 crore for Long Term Rural Credit Fund; `45,000 crore for Short Term Co-operative Rural Credit Refinance Fund; and `15,000 crore for Short Term RRB Refinance Fund.

Target of `8.5 lakh crore of agricultural credit during the year 2015-16. Focus on improving the quality and effectiveness of activities under MGNREGA. Need to create a National Agriculture Market for the benefit farmers, which will also

have the incidental benefit of moderating price rises. Government to work with the States, in NITI, for the creation of a Unified National Agriculture Market.

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From Jan dhan to jan suraksha

Government to work towards creating a functional social security system for all Indians, specially the poor and the under-privileged.

Pradhan Mantri Suraksha Bima Yojna to cover accidental death risk of `2 Lakh for a premium of just `12 per year.

Atal Pension Yojana to provide a defined pension, depending on the contribution and the period of contribution. Government to contribute 50% of the beneficiaries’ premium limited to `1,000 each year, for five years, in the new accounts opened before 31st December 2015.

Pradhan Mantri Jeevan Jyoti Bima Yojana to cover both natural and accidental death risk of `2 lakh at premium of `330 per year for the age group of 18-50.

A new scheme for providing Physical Aids and Assisted Living Devices for senior citizens, living below the poeverty line.

Unclaimed deposits of about `3,000 crores in the PPF, and approximately `6,000 crores in the EPF corpus. The amounts to be appropriated to a corpus, which will be used to subsidize the premiums on these social security schemes through creation of a Senior Citizen Welfare Fund in the Finance Bill.

Government committed to the on-going schemes for welfare of SCs, STs and Women.

MUDRA (Micro Units Development & Refinance Agency):

What is MUDRA loan?

As per Department of Financial Services, Ministry of Finance, Govt. of India’s letter No.27/01/2015-CP/RRB dated May 14, 2015 loans given to non-farm income generating enterprises in manufacturing, trading and services whose credit needs are below Rs.10 lakh by all the Public Sector Banks, Regional Rural Banks, State Cooperative Banks and Urban Co-operative Banks will be known as MUDRA loans under the Pradhan Mantri MUDRA Yojana (PMMY). All such loans can be covered under refinance and/or credit enhancement products of MUDRA.

In addition to these Banks, NBFCs and MFIs operating across the country can also extend credit to this segment, for which they can avail financial assistance from MUDRA Ltd., subject to their conforming to the approved eligibility criteria. Eligibility criteria for availing refinance/financial assistance by institutions from MUDRA has been finalized and hosted at MUDRA’s website.

To begin with, based on eligibility criteria, MUDRA has enrolled 27 Public Sector Banks, 17 Private Sector Banks, 27 Regional Rural Banks and 25 Micro Finance Institutions (MFIs - list

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as per Annexure I) as partner institutions for channelizing assistance to the ultimate borrower.

Whom to approach for assistance under PMMY?

Borrowers, who wish to avail assistance under Pradhan Mantri MUDRA Yojana (PMMY), can approach the local branch of any of the above referred institutions in their region. Sanction of assistance shall be as per the eligibility norms of respective lending institution.

Whom to contact for assistance?

MUDRA has identified 97 Nodal Officers at various SIDBI Regional offices/Branch Offices to act as “first contact persons” for MUDRA.

For information on MUDRA products and for any kind of assistance, the borrower can either approach/contact MUDRA office at Mumbai or the identified MUDRA Nodal Officers, whose details (along with contact numbers and mail ids) are made available at MUDRA’s Website. The borrower may also visit MUDRA website, www.mudra.org.in and can send any query/suggestion to help@mudra.org.in.

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How and where to get loans under Pradhan Mantri MUDRA Yojana (PMMY):

Process flow:

MUDRA would primarily be responsible for:

Laying down policy guidelines for micro enterprise financing business55

Registration of MFI entities Supervision of MFI entities Accreditation /rating of MFI entities Laying down responsible financing practices to ward off over indebtedness and ensure

proper client protection principles and methods of recovery Development of standardised set of covenants governing last mile lending to micro

enterprises Promoting right technology solutions for the last mile Formulating and running a Credit Guarantee scheme for providing guarantees to the

loans/portfolios which are being extended to micro enterprises Supporting development & promotional activities in the sector Creating a good architecture of Last Mile Credit Delivery to micro businesses under the

scheme of Pradhan Mantri MUDRA Yojana

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Note:

These institutions have to submit their latest financial status/position and submit loan application for availing of financial assistance from MUDRA Ltd.

The MFIs although registered in a particular centre or a state can also operate in other centres and states, according to their bye laws. Accordingly, these institutions cover most of the States.

The biggest bottleneck to the growth of entrepreneurship in the NCSBS is lack of financial support to this sector. The support from the Banks to this sector is meagre, with less than 15% of bank credit going to Micro, Small and Medium Enterprises (MSMEs).

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A vast part of the non-corporate sector operates as unregistered enterprises. They do not maintain proper Books of Accounts and are not formally covered under taxation areas. Therefore, the banks find it difficult to lend to them. Majority of this sector does not access outside sources of finance.

It is in this backdrop that Government of India (GoI) is setting up a Micro Units Development & Refinance Agency (MUDRA) Bank through a statutory enactment. This Agency would be responsible for developing and refinancing all Micro-finance Institutions (MFIs) which are in the business of lending to micro / small business entities engaged in manufacturing, trading and service activities. The Bank would partner with state level / regional level co-ordinators to provide finance to Last Mile Financiers of small / micro business enterprises.

The roles imagined for MUDRA include laying down policy guidelines for micro enterprise financing business and registration of MFI entities as well as their accreditation and rating.

Here are 11 things you must know about Mudra Bank and how it will benefit you:

Setting up

Mudra Bank is being set up through a statutory enactment and will be responsible for developing and refinancing through a Pradhan Mantri MUDRA Yojana.

Last mile financiers

Since small entrepreneurs are businesses are often cut off from banking system because of limited branch presence, Mudra Bank will partner with local coordinators and provide finance to "Last Mile Financiers" of small/micro businesses.

Targets

The Finance Ministry said measures to be taken up by MUDRA are targeted towards mainstreaming young, educated or skilled workers and entrepreneurs including women entrepreneurs.

5.77 Crore

The bank will cater to 5.77 crore small business units that are spread all across India who currently find it difficult to access credit from the regular banking system.

Recovery method

Mudra Bank will ensure clients are properly protected and will lay down principles and methods of loan recovery in case of a default. The Bank will also rigidly follow "responsible financing practices" so deter borrowers from indebtedness.

Corpus

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The Bank will be set up with a corpus of Rs.20,000 crore and a credit guarantee fund of Rs.3,000 crore.

Shishu/Kishor/Tarun

The Bank will nurture small businesses through different stages of growth and development of businesses termed as Shishu, Kishor and Tarun.

Shishu

This is will be the first step when the business is just starting up. The loan cover in this stage will be up to Rs.50,000.

Kishor

In this stage, the entrepreneur will be eligible for a loan ranging from Rs.50,000 to Rs.5 lakh.

Tarun

This last and final category will provide loans for up to Rs.10 lakh.

Bandhan:

After more than a decade, a new private sector lender will start operations from August 23. The Kolkata-based microfinancier, Bandhan Financial Services, received the final approval from the Reserve Bank of India (RBI). The bank won’t lend to the corporate sector — at least for the time being — and focus on its strength, that is, serving the bottom-of-the-pyramid category. The lender will start with 600 branches, of which 200 will be in metro and urban areas and the remaining in semi-urban and rural areas. “While RBI   norms require us to open 25 per cent of the branches in the unbanked areas, we will open 40 per cent of the branches in those areas,” Chandra Shekhar Ghosh, founder and chairman of Bandhan, told Business Standard. The bank will have 250 automated teller machines to start with.

The bank will be profitable from day one as the present microfinance entity is in the black. It made an Rs 428-crore profit in 2014-15. Ghosh admitted the initial period would be challenging as the new bank would not have low-cost deposits — a key component of the liabilities of a bank, crucial for profits. The lender expects it will take two years to build up a current and savings account (Casa) deposit base that will, in turn, help it reduce lending rates. The micro financier’s cost of the deposit, which raises funds from banks, is 12 per cent and it charges 22.4 per cent for loans. However, bad loans are only

59

10 basis points of its advances. Bandhan Bank will start with an Rs 11,000-crore book and capital of Rs 3,200 crore — far above the regulatory requirement of Rs 500 crore.

Bandhan recently completed raising Rs 1,020 crore in equity from International Finance Corporation, Singapore's sovereign wealth fund GIC and state-run Small Industries Development Bank of India. It hopes to increase its customer base to 10 million when it starts operations from 6.6 million now. “We aim to double our customer base in two years,” Ghosh said. “Our target is to increase the number of customers and not the loan book.”

“Our plan is to open around 500-600 branches across the country with a special focus on the

east and north-eastern region. We will be a bank for all, but our primary objective will be to

serve the unbanked,” Ghosh said.

He added that the bank will cater especially to micro, small and medium enterprises.

Bandhan had recently raised Rs 1,020 crore equity from International Finance Corporation,

Singapore’s sovereign wealth fund GIC, and the state-run Small Industries Development

Bank of India (SIDBI).

Following the equity infusion, its net worth has gone up to Rs 2,700 crore, well above the

RBI’s stipulation of a minimum capital base of Rs 500 crore for new banks.

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Bandhan plans to open 20 branches

Bandhan Financial Services, which has received in-principle approval to start banking operation, plans to set up 20 branches in the state in 2015-16, said a Reserve Bank of India (RBI) official.

"Bandhan, as a microfinance institution (MFI) already has presence in the state. They target to have 20 branches of their proposed bank in Odisha during the current fiscal. They plan to convert their fixed location offices in the state to bank branches," said P K Jena, regional director, Reserve Bank of India, Bhubaneswar on the sidelines of 139th state level bankers' committee (SLBC) meeting here. Last year, Bandhan along with IDFC Limited were granted in principle approval by RBI to set up banks.

In addition, public sector banks Punjab National Bank and Andhra Bank propose to open 40 and 75 new branches in the state respectively in 2015-16.

The banks having operations in Odisha have lagged behind their targets in opening of new branches during the last fiscal. Against the target of 1,118 new branches in the unbanked gram panchayats set for 2014-15, only 119 branches could be opened in the year under review.

It may be noted that the SLBC has drawn up an ambitious plan to cover all 4,597 unbanked gram panchayats by 2019. To facilitate this effort, the state government has assured the banks that space would be provided in panchayat buildings and Rajiv Gandhi Seva Kendras free of cost for five years. The total number of bank branches in Odisha now stands at 4,672, out of which 54.43 per cent are in rural area.

The CD (credit deposit) ratio of the banks in Odisha has declined compared to the previous fiscal. While the CD ratio was 85.31 per cent in 2013-14, it has dipped to 73.19 per cent in the last fiscal. The CD ratio, excluding the advance sanctioned through branches in other states and utilised in the state, is just 52.32 per cent, failing to achieve the mandated rate of 60 per cent. Only five districts - Dhenkanal, Khurda, Sonepur, Kalahandi and Bhadrak have CD ratio of more than 60 per cent.

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Bandhan plans to tap MSME business in South India

Bandhan Bank, the microfinance   entity-turned-universal bank, plans to tap into micro, small and medium enterprises (MSMEs) for growing its business in south India, where it will open 100 branches in two years.

The bank will begin with 14 branches in the five southern states, when it is launched on August 23, by President Pranab Mukherjee.  Bandan, the largest microfinance institution with a market share of 25 per cent, currently doesn’t have a presence in south India.

“Micro and small enterprises are not getting access to credit by the existing banks,”said Chandra Shekhar Ghosh, managing director and chief executive officer of Bandan Bank. “We will implement our learning from microfinance to offer better service to these customers”.

Eg: Mahalaxmi Saras

Brief Description:

Every year, the Rural Development Department, Govt. of Maharashtra, Ministry of Rural

Development, Govt. of India, and National Agricultural Bank for Rural Development

(NABARD) jointly organize and host a grand exhibition-cum-sale of goods and articles

produced by rural artisans and Self Help Groups (SHGs) from all states of India. “Mahalaxmi

Saras” is being organized since year 2004, as a part of the India International Trade Fair

(IITF), Pragati Maidan, New Delhi.

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Objective:

The idea of the Mahalaxmi Saras Portal was conceived by the Principal Secretary, Rural

Development Department, with a view to provide a permanent online platform for the Self

Help Groups which will help them in being in constant touch with their customers and

prospective buyers, in addition to encouraging them to showcase their products and services.

Target Group: Rural Women Self Help Groups

Geographical Reach within India: Maharashtra State, as also other states of India

Geographical Reach outside India: Globally

Date From which the Project became Operational: 18-1-2013

Is the Project still operational?: Yes

List 5 achievements of the programme/project/initiative:

1. Online presence of Women Self Help Groups

2. Increased sales of Rural Artisans’ products

3. Increased IT literacy among rural women

4. Project can be replicated among other states

5. Increased number of potential buyers of the Women Self Help Groups’ products

List 5 Key challenges faced while implementing the project/programme/initiative and

how they were overcome:

1. Timeframe constraints

2. Manpower during development

3. IT literacy was required to be developed before launching the project.

4. The required infrastructure was not available at many places for data entry.

5. The Portal had to be in regional (Marathi) language. Some extra time was taken for

translation of the content.

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Microfinance sector may come under Nabard

Data as per FY 2006-07

The "sunrise" sector of microfinance, billed to have a potential of Rs 35,000 crore is likely to be regulated by the National Bank for Agriculture and Rural Development (Nabard).

And this would mean a regulator for more than 400m Indians who are out of the banking system and who are currently being serviced by microfinance institutions. The microfinance bill, currently under review, is likely to be introduced in Parliament in the winter session.

"Nabard may be appointed as the regulator for microinsurance. This may follow, once the bill is tabled in Parliament," said a source. Recent entrants into the sector, including international venture funds like Vinod Khosla's SKS micro finance, will be regulated by Nabard.

The costs of servicing the banking needs of 75m households in the country amount to Rs 80,000 core, according to industry figures. At present, only 5% of the annual credit demand is met for the population living below the poverty line. Nearly 80% of the demand is met by the informal sector.

Nabard first launched a pilot phase of the SHG (Self Help Group) Bank Linkage programme in February 1992. Nabard is entrusted with framing policy for rural credit, provision of technical assistance backed liquidity support to banks, supervision of rural credit institutions.

As of March '06, nearly Rs 5,000 crore were mobilised that translates into 32.98m households. The credit mobilised per SHG is Rs 51,000, according to Nabard. There are more than 22 lakh SHGs today and an additional 3.85 lakh will be added by the end of this fiscal.

The MFIs want the government to empower them to mobilise savings accounts through the legislation. But the RBI has expressed reservations about the efficacy of MFIs in handling public money since it could put the interests of the depositors in jeopardy.

Though, MFIs fear that regulation might stifle an emerging sector like one, analysts are of the view that it is important to put MFIs under the scanner, to check uncontrolled growth.

"Existing regulations for NBFCs are sufficient to regulate MFIs," chief executive of a leading micro lender said. MFIs registered under Section 25 of the Companies Act are exempted from the core provisions that apply to NBFCs.

Data as per 2010-11

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 A worried government has put on fast track the proposed bill to regulate micro-lenders, as it seeks to ensure that over-regulation by states does not kill the sector that is envisaged to play a big role in furthering financial inclusion.

The finance ministry could move a bill in the winter session of Parliament that will make Nabard responsible for regulation of all non-profit microfinance institutions structured as trusts, cooperatives, or mutual benefit societies.

At present, micro-lenders follow the relevant sector law, depending on the way they are structured. The new law will treat microfinance as a separate business and will also consider bringing non-banking finance companies in the microfinance sector under the ambit of the legislation. The decision to fast-track the bill follows the October 15 ordinance, or emergency law, issued by Andhra Pradesh that imposed severe restrictions and debt restructuring obligation on lenders following a spate of suicides that were blamed on coercion by micro-lenders to recover their dues.

Issues to be thought of before Allowing Nabard to act as regulator of MFIs, 2010-11 data

The Malegam panel has questioned the suitability of Nabard as the regulator

for the micro-finance segment (excluding banks, co-operative banks and

NBFCs). The central government has drafted a 'Micro Finance (Development

and Regulation) Act 2010' under which Nabard will be the regulator for the

entities covered by the Act. "Nabard currently is not only the agency

responsible for the development of the micro-finance sector but is also a

participant, in that it finances the sector. There may be a perceived conflict

of interest if Nabard is also a regulator. If therefore, Nabard is to act as a

regulator, it may be required not to participate in the financing of the

sector," the panel said.

If Nabard is to remain the regulator as provided in the proposed Act, then it

is necessary that there should be close co-ordination between the RBI and

Nabard in the formulation of the regulations issued by each regulator. This

is necessary to ensure against the risk of entities taking advantage of

regulatory arbitrage, the panel said. The panel said, "The problems get

multiplied several-fold when we consider that the example of the AP

government could be followed by other states. If there are separate

regulations governing NBFC-MFIs in individual states, the task of regulation

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by the RBI of MFIs operating in more than one state will become

impossible."

Case Study

SKS Microfinance Case Study - Lakshmi's Story

SKS Microfinance Limited (SKS) is a non-banking finance company regulated by the Reserve Bank of India and currently operating in 19 of India’s 28 states. SKS’ mission is to eradicate poverty by providing financial services to the poor.

A study conducted by the Navnirman Institute of Management on the microfinance industry in India provides case studies illustrating the human impact of SKS’s work.

One such story is Bandaru Lakshmi’s:

When Lakshmi came to Atukula Bazaar in Suryapet with her family, they were penniless. The family had no hope of surviving. Her husband was not doing too well at his business and no one was ready to lend them money. Lakshmi was worried about how they would bring up their two daughters and their son.

When Lakshmi found out about SKS operations in her village, she took an income generating loan of INR 10,000 (USD 212). She used this money to buy and sell readymade garments in the nearby villages. With a heavy load on her head, she went door to door and worked hard to save money. Confident about the sales and her hard work, she took a second income generating loan of INR 12,000 (USD 255). Later, she took a loan of INR 14,000 (USD 297) to purchase the readymade cloth for more sales. Her daily earnings grew steadily. Today, she clocks a monthly income of INR 30,000 (USD 638) per month.

Lakshmi is an inspiration to many today. A role model to others in Suryapet, Lakshmi recently felt most rewarded when her eldest daughter secured a job in Infosys.

“Thanks to the loans SKS extended to me time and again, I was able to give my children a decent education. Today people respect our family and I am grateful,” she says.

http://www.globalhand.org/en/search/success+story/document/28296?search=microfinance

Microinsurance66

Poor households have less access to formal insurance to protect themselves against risks such as the death of the family breadwinner, severe or chronic illness in the family, or the loss of an asset, including livestock and housing.

Microinsurance helps people manage unexpected events in return for payments proportional to the likelihood and level of a specific risk. Areas covered by microinsurance include health, assets, agriculture, and death. As with all insurance, risk pooling under microinsurance allows many individuals or groups to pool risks and redistribute the costs of the risky events within the pool.

As microfinance institutions expand beyond credit to a broader array of financial products, they are becoming more interested in offering clients microinsurance products in partnership with insurance companies. While commercial insurers provide the majority of the world’s products, mutual, cooperative, and other community-based or community-led insurance organizations are emerging as microinsurance providers. The greatest challenge for microinsurance schemes is finding the right balance between adequate protection and affordability to deliver real value to the insured.

PROVIDING HEALTH INSURANCE THROUGH MICROFINANCE

NETWORKS IN RURAL KARNATAKA, INDIA

Formal health insurance can potentially help low-income households cope with large medical expenses. Researchers partnered with SKS Microfinance to measure the impact of bundling a health insurance product with microloan renewals on health insurance take-up, and health care use and spending. They found that the requirement to purchase health insurance substantially reduced microcredit clients’ loan renewal rates, meaning that people were willing to give up credit to avoid buying insurance.

Policy Issue: 

For struggling families living in poverty, economic shocks can be devastating. An unexpected home repair, income loss, or ailing family member can drain money needed for food and housing. Health shocks are among the largest and least predictable forms of uncertainty that a poor family can face. In developing countries, high levels of poverty and poor health conditions have the potential to make health shocks more frequent and dangerous. Formal health insurance has the potential to mitigate the financial impact of health shocks, but researchers have found that demand for insurance products has generally been low among poor households. Additionally, insurers have been hesitant to offer any but the most basic products, due to worries that only the riskiest and/or most unhealthy clients will take up 67

insurance (referred to as “adverse selection”) and clients taking on more risk because they have insurance (called “moral hazard”). Bundling insurance with other financial products like microcredit has been seen by some as a simple method to reduce adverse selection and moral hazard issues, lower administrative costs for financial institutions, and provide poor households with a package of useful financial products.

Context of the Evaluation: 

In 2006, SKS Microfinance was the largest microfinance institution in India. In rural Karnataka, where this evaluation took place, client households experienced an average of 2.5 serious health events in the year prior to the evaluation. They spent almost INR 4,700 (US$116 at the time) on health-related issues, with INR 603 (US$15) spent on hospitalizations. Only 14 percent reported having formal health insurance available in their village, and just 0.4 percent of households surveyed reported having formal health insurance themselves.

Details of the Intervention: 

Researchers partnered with SKS Microfinance to evaluate the effect of bundling a health insurance policy with microcredit loan renewals. From a list of 201 villages where SKS operated microfinance programs, researchers randomly selected 101 to serve as the treatment group and 100 to serve as the comparison group. In 2007, SKS began requiring loan clients in these villages to purchase health insurance at the time of renewing their loan. In comparison villages, SKS continued to operate its microfinance business without any changes.

For treatment villages, the typical health insurance product cost INR 525 (US$13) at the time, equivalent to 6.5 percent of an average loan amount (INR 8,000). Households paid in weekly installments alongside loan payments. The insurance package covered only hospitalization and maternity expenses, and clients could either visit pre-approved health facilities for free or pay out of pocket at other facilities and submit reimbursement claims.

Researchers conducted baseline surveys with a randomly selected sample of SKS client households between late 2006 and early 2007 and collected follow-up data with the same households two years later from 2009 to 2010.

Results and Policy Lessons: 

Bundling insurance products with loan renewals caused clients to reduce renewal rates. A portion of clients gave up credit to avoid buying insurance. Microcredit clients who did renew were, on average, neither unhealthier nor more likely to incur health expenses.

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Loan renewal take up: The requirement to purchase health insurance substantially lowered microcredit clients’ loan renewal rates. Within a year of the program roll-out, loan renewal rates in treatment villages dropped to 55 percent, 16 percentage points lower than the 71 percent rate in comparison villages, suggesting that many were willing to give up microcredit to avoid buying insurance. Following widespread discontent with the health insurance requirement, SKS made the insurance add-on voluntary in late 2008 and removed the option altogether in early 2009. Even after this removal, clients in treatment villages were 16 percentage points less likely to have an outstanding loan than the average 54 percent in comparison villages. These households did not generally take out other loans, suggesting that this was a net loss in access to microfinance. 

Client riskiness: SKS Microfinance’s fear that only riskier or unhealthier clients would take up health insurance packages proved unfounded, primarily because very few people wanted the product at all. Researchers did not observe greater insurance take-up for households in worse health at baseline. Even for pregnancy, a relatively more predictable healthcare expense, there was no evidence of any difference in insurance take-up.

Overall these findings suggest the need for more comprehensive and reliable insurance products. In early stages of introducing formal health insurance to the poor, researchers recommend that institutions concern themselves less with client riskiness and more with how best to market and manage insurance products for low-income consumers in order to increase demand.

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