Microfinance in India Unit 3 | Micro Finance Notes | B.Com 4th Sem | CBCS Pettern

Gauhati University Microfinance Unit 2 Notes, Macro finance Notes for Bcom 4th Semester

In this page we have uploaded the Guahati University Micro-finance B.COM 4th Semester, Unit 3 "Microfinance in India" Notes, Which can Be Useful for B.com Final Exams.

Also useful for Dibrugarh UniversityRabindranath Tagore University,Hojai B.Com 4th Sem Students.


Micro Finance  QUESTION ANSWER 2,5,10 MARKS


1. Define Micro Finance?


Ans: Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services. It is not just about giving micro credit to the poor rather it is an economic development tool whose objective is to assist poor to work their way out of poverty. It covers a wide range of services like credit, savings, insurance, remittance and also non financial services like training, counseling etc.


2.Give two Salient Features of Microfinance.


Ans : Borrowers are from the low income group Loans are of small amount-micro loans.


3. Mention the two Channels of Micro finance?


Ans: In India microfinance operates through two channels: (i) SHG Bank Linkage Programme (SBLP), (ii) Micro Finance Institutions (MFIs). 


4. Define SHG Bank Linkage Programme?


Ans: This is the bank-led microfinance channel which was initiated by NABARD in 1992. Under the SHG model the members, usually women in villages are encouraged to form groups of around 10-15. The members contribute their savings in the group periodically and from these savings small loans are provided to the members. In the later period these SHGs are provided with bank loans generally for income generation purpose. The group's members meet periodically when the new savings come in, recovery of past loans are made from the members and also new loans are disbursed. This model has been very much successful in the past and with time it is becoming more popular. The SHGs are self sustaining and once the group becomes stable it starts working on its own with some support from NGOs and institutions like NABARD and SIDBI. 5.


5.Define Micro Finance Institutions?


Ans: Those institutions which have microfinance as their main operation are known as micro finance institutions. A number of organizations with varied size and legal forms offer microfinance service. These institutions lend through the concept of Joint Liability Group (JLG). A JLG is an informal group comprising of 5 to 10 individual members who come together for the purpose of availing bank loans either individually or through the group mechanism against a mutual guarantee. 6. Mention some of the top 10 Microfinance Companies in India?


Ans: Annapurna Microfinance Pvt Ltd, Arohan Financial Services Pvt Ltd, Bandhan Financial Services Pvt Ltd, BSS Microfinance Pvt Ltd, Cashpor Micro Credit, Disha Microfin Pvt Ltd, Equitas Microfinance Pvt Ltd

Gauhati University Microfinance Notes 

7. Give an Overview of Financial Inclusion?


Ans: The Government initiated the National Mission for Financial Inclusion (NMFI), namely, Pradhan Mantri Jan Dhan Yojana (PMJDY) in August, 2014 to provide universal banking services for every unbaked household, based on the guiding principles of banking the unbanked, securing the unsecured, funding the unfunded and serving unserved and underserved areas. A digital pipeline has been laid for the implementation of PMJDY through linking of Jan-Dhan account with mobile and Aadhaar [Jan Dhan-Aadhaar-Mobile (JAM)]. In order to move towards creating a universal social security system for all Indians, especially the poor and the under-privileged, three ambitious Jan Suraksha Schemes or Social Security Schemes pertaining to Insurance and Pension Sector were announced by the Government in the Budget for 2015-16. The schemes were launched on 9th May, 2015, for providing life & accident risk insurance and social security at a very affordable cost namely (a) Pradhan Mantri Suraksha Bima Yojana and (b) Pradhan Mantri Jeevan Jyoti Yojana and (c) Atal Pension Yojana. Pradhan Mantri Vaya Vandana Yojana to protect elderly aged 60 years and above was initially opened for subscription for a period of one year i.e. from 4th May 2017 to 3rd May 2018.


8. Give some of the Financial Inclusion Schemes in India? 


Ans: The Government of India has been introducing several exclusive schemes for the purpose of financial inclusion. These schemes intend to provide social security to the less fortunate sections of the society. After a lot of planning and research by several financial experts and policymakers, the government launched schemes keeping financial inclusion in mind. These schemes have been launched over different years. Let us take a list of the financial inclusion schemes in the country: (i) Pradhan Mantri Jan Dhan Yojana (PMJDY), (ii) Atal Pension Yojana (APY), (iii) Pradhan Mantri Vaya Vandana Yojana (PMVVY), (iv) Stand Up India Scheme


9. Give two Objectives of Financial Inclusion? 


Ans: (i) Financial inclusion intends to help people secure financial services and products at economical prices such as deposits, fund transfer services, loans, insurance, payment services, etc., (ii) It aims to establish proper financial institutions to cater to the needs of the poor people. These institutions should have clear-cut regulations and should maintain high standards that are existent in the financial industry.


10. Define Financial Inclusion through Digital Payment Systems?


Ans: They can also make payments for products and services in their residential regions with the help of electronic payment wallet systems. The Government of India has launched several electronic wallet systems through smartphone apps such as Bharat Interface for Money (BHIM), Aadhaar Pay, and lots more! Electronic wallets or e-wallets refer to wallets that can be used with the help of electronic means such as mobile phones. These wallets replace physical wallets. A user can make cashless payments through online as well as offline means. He or she will need to download the e-wallet app on their mobile phone and utilise it to make transactions. These e-wallets can be utilised for mobile recharges, utility bill payments, grocery stores, e-commerce portals, etc. Many digital financial tools offer attractive offers and discounts when people make use of these tools. These are very helpful and new to the economically underprivileged sections of the society. They can enjoy offers, receive cashback options, and rewards. These incentives will help a user save a lot of money.

Dibrugarh University Microfinance Notes

11. What is the Need for Financial Inclusion?


Ans: Financial inclusion enhances the financial system of the country comprehensively. It strengthens the availability of economic resources. Most importantly, it toughens the concept of savings among poor people living in both urban and rural areas. This way, it contributes towards the progress of the economy in a consistent manner. Many poor people tend to get cheated and sometimes even exploited by rich landlords as well as unlicensed moneylenders due to the vulnerable condition of the poor people. With the help of financial inclusion, this serious and hazardous situation can be changed. Financial inclusion engages in including poor people in the formal banking industry with the intention of securing their minimal finances for future purposes. There are many households with people who are farmers or artisans who do not have proper facilities to save the money that they earn after putting in so much effort.


12. Give some of the programmes introduced by the RBI in order to achieve its goals?


Ans: (i) The RBI instructed every bank to have Basic Saving Bank Deposits (BDSD) accounts for the economically weaker sections of the society. These are no-frill accounts where account holders do not have to maintain any minimum balance or minimum deposit. These account holders can withdraw cash at any ATM or at the bank branch They should also be given the opportunity to make use of electronic payment channels for receiving and transferring money to others, (ii) The RBI also asked banks to have simple Know Your Client (KYC) regulations for the less fortunate people of the society. There are many people in rural areas who are unable to open bank accounts due to strict KYC norms. Hence, the RBI wants banks to have simplified KYC requirements particularly if a low-income individual is interested in opening a bank account with an amount not above Rs.50,000. It also wants minimal KYC norms if the overall credit in the accounts does not go above Rs.1 lakh for 1 year. Recently, banks have been asked to accept Aadhaar Card as identity proof as well as address proof since most people belonging to low-income groups have made Aadhaar card in their names, (iii) Keeping in mind about the lack of bank branches in rural areas, the RBI has asked all banking institutions to open more and more branches in villages across the nation in order to provide good banking services to the villagers. There are many remote villages where there are no banks and also no good transportation services. It is very difficult for residents of these areas to commute to a far-off bank branch for availing banking services. Hence, with the compulsory rule of the RBI, banks are distributing the ratio of banks in villages and cities to have a balance.


13. Give the Operations of Financial Inclusion?


 Ans: Under financial inclusion, the main aspect is access to financial sources. This can be broadly divided into credit, wealth creation, and contingency planning.

(i) According to the concept of financial inclusion, under the credit aspect, a low-income individual needs proper access to emergency loans, consumer loans, housing loans, and business livelihood loans at affordable rates. 

(ii) Under the wealth creation aspect, a poor individual should be able to make excellent savings and have access to reliable investment options that generate good returns. Every low-income household should also have basic financial literacy and understand the concept of risk in finance clearly. (iii) Under the contingency planning segment of the financial inclusion system, a poor person should have access to funds that can be utilised exclusively in the future. It is not enough if these people have only means to improve their income and enhance their lifestyle. They should also have the right resources to be prepared for the future, especially when they get old. Many of the poor people may not be aware of retirement plans. They should be provided with affordable retirement plans that will give them good returns in the later stages of their lives.


14. Mention some Special Financial Products Offered for Attaining Financial Inclusion?


Ans: (i) General Credit Cards (GCC): Banks were asked by the RBI to launch and offer General Credit Card facilities with an amount of up to Rs.25,000 at their branches located in semi-urban and rural areas.


(ii) Kissan Credit Cards (KCC): The Reserve Bank of India also instructed banks to provide Kissan Credit Cards exclusively to small farmers who earn very low incomes and who have very limited funds due to which they cannot invest in proper farming tools, fertilisers, pesticides, crop seeds, tractors, land for farming, storage warehouses, etc. They are forced to rely on other wealthy landlords for getting land to sow crops. These Kissan Credit Cards are intended to help farmers make instant purchases whenever required. Many a time, farmers give up on purchasing things required for their occupation due to lack of funds.


(iii) ICT-Based Accounts via BCS: The Reserve Bank also devised a plan to help banks to reach out to the unbanked individuals of the society by offering information and communications technology (ICT)-based bank accounts with the help of business correspondents (BCs). These accounts allow users to make withdrawals of cash, create deposits, and apply for loans and other forms of credit through electronic forms. This type of account makes banking inexpensive and simple.


15. Define Financial Inclusion through Microfinance? 


Ans: Microfinance is a very effective way of offering funds to the economically underprivileged sections of the society. Microfinance refers to giving micro loans or micro credit to the less fortunate entrepreneurs and small-scale business enterprises. This mode of financing has helped India extensively in achieving financial inclusion in a cost-effective manner. It has impacted the lives of the poorest people in the nation. It includes the provision of loans, savings instruments, and other financial instruments for the purpose of making more money and saving it proficiently for multiple purposes. There are several impoverished people in the nation who do not have access to financial sources and who have no idea how to get out of their hopeless financial condition. With basic microfinance, they will be given opportunities to start some form of business or get a better job and improve their lifestyles. They do not have access to traditional banking options and hence, microfinance is a great boon to them as it gives them a chance to borrow money, utilise it for lucrative purposes, and repay it conveniently over a fixed period of time. They will also learn to manage their hard-earned money meticulously.


16. Define Financial Inclusion with the Help of Private Companies.


Ans : Private companies have also initiated programmes in order to contribute towards achieving financial inclusion in the nation. These private companies planned and implemented projects in order to make the low-income groups of people be engaged in developmental projects. Some of these programmes include Haryali Kisan Bazaar by DCM, EChoupal or E-Sagar by ITC, Project Shakti by Hindustan Unilever, and many more. Over the past few years, financial inclusion has become a very prominent public policy aspect in order to develop the economy in a sustainable manner. It plays a significant role in keeping institutions that provide finance in a very steady and firm condition. Banks can enjoy excellent stability when financial inclusion is attained. It also helps in minimising the distance between financial institutions and customers, and this, in turn, assists in maintaining a healthy relationship. With financial inclusion, every economic agent in the nation will have the ability to make use of formal financial services and move towards the overall development of the economy.



18.Explain the Emerging Risks and Challenges in Microfinance? 


Ans: Emerging Risks and Challenges in Microfinance


(i) Credit Risk: Credit risk, the most frequently addressed risk for MFIS, is the risk to earnings or capital due to borrowers' late and non-payment of loan obligations. Credit risk encompasses both the loss of income resulting from the MFIs inability to collect anticipated interest earnings as well as the loss of principle resulting from loan defaults. Credit risk includes both transaction risk and portfolio risk.


(ii) Transaction Risk: Transaction risk refers to the risk within individual loans. MFIs mitigate transaction risk through borrower screening techniques, underwriting criteria, and quality procedure for loan disbursement, monitoring, and collection.


(iii) Portfolio Risk: Portfolio risk refers to the risk inherent in the composition of the overall loan portfolio. Policies on diversification, maximum loan size, types of loans, and loan structures lessen the portfolio risk.


(iv) Liquidity Risk: Liquidity risk is the risk that an MFI cannot meet its obligations on a timely basis Liquidity risk usually arises from management,,s inability to adequately anticipate and plan for changes in funding sources and cash needs. Efficient Liquidity Management requires maintaining sufficient cash reserves on hand while also investing as many funds as possible to maximize earnings.


(v) Financial Risks: Most MFIs focus on financial risks, including credit, liquidity, Interest rate, and investment risks. Mentioned under are the risks which are very critical for the MFIS.


(v) Interest Rate Risk: Interest rate risk is the risk of financial loss from changes in market interest rates. The greatest interest rate risk occurs when the cost of funds goes up faster than the financial institution can or is willing to adjust its lending rates..



19. Explain the Financial Inclusion in India through Digitisation of Monetary Transactions?


 Ans: The government of India intends to carry out crores of digital financial transactions for the present and upcoming years with the help of Unified Payment Interface (UPI), Unstructured Supplementary Service Data (USSD) banking methods, Immediate Payment Service (IMPS), National Electronic Funds Transfer (NEFT), Aadhaar Pay, debit cards, BHIM, and credit cards. Moreover, the government wants to make it compulsory for fertiliser depots, block offices, petrol pumps, road transport offices, hospitals, colleges, universities, etc. to make arrangements for accepting payments for services and products through digital payment systems. It makes a lot of sense especially when customers are required to make high-value payments at these institutions or offices. The government intends to achieve this by issuing a mandate to the above-mentioned institutions. Apart from this, the government also wants to make it mandatory that every government receipt is offered exclusively through any digital mode. Presently, many government operations are carried out digitally and customers receive receipts for payments in the digital form. However, this has not been completely effective in every part of the nation. To attract more and more users for digital modes of payment, the government is trying its best to remove or reduce service charges that are levied by companies on the electronic transactions. These digital financial apps will help in eliminating corruption apart from achieving financial inclusion. These apps aim to attain financial inclusion by offering interesting and attractive bonuses for both users and merchants. Customers who make use of these cashless payment tools will be able to enjoy referral bonus schemes and meanwhile, merchants will get cashback rewards and points when they allow customers to transact through these cashless systems. Apart from introducing digital financial systems to the poor people, a few banks have released mobile banking vans or trucks to reach the interior parts or untouched parts of the country. In these parts, people do not have access to transport, communication, or financial services. Along with the government owned payment apps, there are many private mobile electronic wallet (e-wallet) systems created by private companies and banks. Most of these apps allow bank fund transfers. All these e-wallets enable users to make payments digitally in a convenient manner. Individuals will not get stranded anywhere even if they are out of cash in hand. If they have money in their electronic wallet, they are safe and can carry out financial transactions successfully without having to rely on others for money. Most of these apps are available on Android and iOS smartphones. There are also some apps that are available on phones that operate through Windows. One of the leading e-wallets in India is Paytm. It is available on Android, Blackberry, iOS, Ovi, Windows, etc. Some of the other prominent e-wallet apps include Freecharge, MobiKwik, Citrus Wallet, Oxigen Wallet, ItzCash, Axis Bank Lime, Jio Money, ICICI Pockets, HDFC PayZapp, SBI Buddy, mRupee, Vodafone M-Pesa, PayMate, PayUmoney, Juspay, Ezetap, Citi MasterPass, MomoeXpress, Ola Money, Mswipe, etc.



20.What is NABARD? Explain the Objectives of NABARD?


Ans: In the light of recommendations of the committee of review arrangements for institutional credit for agricultural and rural development the govt. of India set up the National Bank for Agricultural and Rural Development. National bank for agricultural and rural development was established on July 12, 1982, by merging the agricultural credit development of RBI and three other development banks. It was actually as an agency for promoting integrated rural development and to provide all sorts of production and investment credit for agricultural and rural development. NABARD has a dual role to play- As an apex institution and as a refinance institution. It has inherited its apex role from RBI i.e. it is performing all the functions performed by RBI with regard to agricultural credit. At the same time, NABARD has taken over the functions of ARDC and thus provides refinance facilities to all banks and financial institutions lending to agriculture and rural development.


Objectives of NABARD


Following are the objectives of NABARD (A) To give undivided attention and purposeful direction in integrated rural development.


(B) To act as a centerpiece for the entire rural credit system at the national level.


(C) To act as a provider of supplemental funding to rural credit.


(D) To arrange for investment credit to small industries, villageand cottage industries, handicrafts and other rural craft.


(E) To improve the credit distribution system by institution building, rehabilitation of credit institutions and training of bank personnel.


(F) To provide refinance facilities of SLDBS, SCBS, RRBs and commercial for development purposes in rural areas.


(G) To inspect, monitor and evaluate project getting refinance from the NABARD.


(H) To coordinate the working of different agencies engaged in development work in rural areas at the regional level, and to have liaison with the government of India, RBI, state govt. and other policy-making institutions at the national level.


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Microfinance Unit wise Notes

UNIT.

CONTENTS

Links

1

Microfinance Meaning & Concepts

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2

Microfinance Institutions

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3

Microfinance In India

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4

Management of MFIs

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5

Legal and Regulatory Framework for Microfinance

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