In this page we have uploaded the Guahati University Micro-finance B.COM 4th Semester Notes
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| Gauhati University Micro Finance Notes |
Unit 1 : Micro Finance: Meaning & Concept
1. Define Microfinance? (GU. B. COM 2021)
Answer: Microfinance - also known as microcredit - is a way to give small business owners and entrepreneurs the opportunity to earn money. These small and isolated businesses often do not have access to regular sources of funding from large corporations. This means that it is difficult to access loans, insurance, and investments that will help grow their business. In fact, microfinance provides loans, credit, access to savings accounts and even insurance policies and transfers to a small business owner and entrepreneur. There are many such businesses in developing lands.
2. Mention the various types of MicroFinance in India?
Answer: Type sof Micro Finance are: (i) Joint Liability Group (JLG), (ii) Self Help Group (SHG), (iii) The Grameen Bank Model, (iv) Rural Cooperatives.
3. Give the Main goal of financial inclusion.(GU. B. COM 2021)
Answer: Each type of microfinance institution is different in many ways but serves the same purpose - investment. Due to their frameworks, some models have not been as successful as others in achieving this goal. In addition to the above, small financial institutions can also be divided into large, medium and small. These institutions vary depending on location access, infrastructure, staffing capacity, funding and borrowing processes, income and operational efficiency.
4. Give the Importance Of Microfinance In India.
Answer: The concept of small business has been highlighted since the 1970s with the aim of developing the poorest part of society and promoting economic growth. Its value has increased during the global financial crisis when trust in an organized banking system shakes. Microfinance in India plays a major role in the development of India. It acts as a poverty alleviation drug for people living in rural areas. It aims to help marginalized communities achieve higher levels of manufacturing and income security at the local and community level. The great importance of small investments in India is that they provide access to the capital for small businesses. As mentioned above the microfinance in India provides loans, insurance, access to savings accounts.
5.Provide two key features of Micro Finance?
Answers: a) Small loans do not require any collateral: The main feature of a small loan under microfinance is that it does not require any collateral. Borrowers are not.
b) Borrowers are usually poor people: The purpose of small loans is to lend to needy people with useful hands. So usually the financiers are the less developed part of India as well as the small business owners or entrepreneurs.
6. What are the small financial channels?
Answer: There are two microfinance stations in India: SHG-Bank Linkage Program (SBLP) â "In 1992 NABARD founded the station. This model encourages women to unite together to form a group of 10 members. 15. When all the women in the backlog of classes donate their individual funds to the group from time to time. After that, loans are given to group members for their contributions. that once these self-help groups have reached a level of stability, they operate almost independently with minimal support from NABARD, SIDBI, and non-governmental organizations
7. Name some Small Income Companies in India.
Answer: Some of India's microfinance companies are as follows: a) Arohan Financial Banks, b) BSS microfinance pvt ltd., C) Cashpor microcredit, d) Equitas microfinance pvt ltd, e) Asirvad microfinance pvt ltd, 6. Bandhan financial services pvt ltd.
7. What is a Self-Help Group (SHG)?
Answer: The Self-Help Group (SHG) is a registered or unregistered group of small business people with the same social and economic background voluntarily, who come together to save small amounts regularly, to agree to collectively contribute to one fund and meet their urgent needs. by helping each other. Team members use collective ingenuity and peer pressure to ensure the proper use of credit termination and timely payment. In fact, peer pressure has also been recognized as a substitute for effective bail.
8. What are the benefits of earning money through spending SHGS ?
Answer: An economically poor person gains power as part of a group. In addition, SHGS funding reduces operating costs for both lenders and lenders. Although lenders have to carry only one SHG account instead of several smaller accounts, borrowers as part of SHG reduce travel costs (to and from the branch and other locations) to complete paperwork and lose working days on loan campaigns.
Gauhati University B.com 4th Sem Micro Finance Notes and Important Questions Answers
9. What are the latest indicators of Micro Credit payments?
Answer: With a view to helping banks move smoothly and more effectively with the poor, the Self-Help Groups (SHGs) small-scale debt research project with banks was launched by NABARD in 1991-92 with the aim of simplifying and more. purposeful banking with the poor. The RBI then advised commercial banks to actively participate in the merger. The plan has been handed over to RRBs and co-operative banks. The number of SHGS linked to banks was 4,61,478 as at 31 March 2002. This means that an estimated 7.87 million poorest households have been admitted to the official banking services since March 31,2002. More than 90 percent of banks linked to banks are women-only groups. Accumulated repayment of bank loans on these SHGs stands at Rs. 1026.34 crores as of March 31, 2002 with an average loan of Rs. 22,240-00 per SHG and Rs. 1,316-00 per family. About the smart communication of the model, while the Model I, that is. directly to the SHGs without the intervention / assistance of any NGO now accounts for 16%, ModelII, i.e.. directly to the SHGS with the assistance of NGOs and other legal entities up to 75% and Model III, viz. with an NGO as a facilitator and funding agency represents 09% of all communications. Although 488 provinces in all provinces / UTs are covered under this program, 444 banks including 44 commercial banks (including 17 private companies), 191 RRBs and 209 co-operative banks and 2,155 NGOs are now linked to SHG- bank affiliate program.
10. Is Foreign Investment Approved for Micro Credit Projects?
Answer: Government. India ' Indian Indigenous Investment (NRI) investment to encourage international participation in small debt projects. This puts debt services at a low level of financing for small producers and small businesses in rural and urban areas.
Updated Notes:
UNIT-1
MICROFINANCE
Short Question Answer:
1. Define Microfinance? [G.U. 2021]
Ans: Microfinance - also called microcredit - is a way to provide small business owners and entrepreneurs access to capital. Often these small and individual business don't have access to traditional financial resources from major institutions. This means it is harder to access loans, insurance, and investments that will help grow their business. Essentially, microfinance is providing loans, credit, access to savings accounts even insurance policies and money transfers to the small business owner and entrepreneur. There are many such enterprises in the developing world.
2. Mention the various types of MicroFinance in India?
Ans: Type of Micro Finance are: (i) Joint Liability Group (JLG), (ii) Self Help Group (SHG), (iii) The Grameen Bank Model, (iv) Rural Cooperatives.
3. Give the Main goal of financial inclusion. [2021]
Ans: Each type of microfinance institution is different from the other in many ways but they work towards the same goal- financial inclusion. Due to their operational frameworks, some models have been less successful than others in attaining this In addition to the above, microfinance institutions can also be categorised into large, medium and small scale. These institutions differ in terms of geographical reach, infrastructure, manpower skills availability, funding processes, revenues and success operations.
4. Give the Importance Of Microfinance In India.
Ans: The concept of microfinance has been highlighted since 1970s with an aim to uplift the poor section of the society and to enhance economic growth. Its importance has been amplified amidst global financial crisis when trust in the formal banking system is shaken. Microfinance in India plays a major role in the development of India. act as an anti-poverty vaccine for the people living in rural areas. It aims at assisting communities of the economically excluded to achieve greater level of asset creation and income security at the household and community level. The utmost significance of microfinance in India is that it dispenses the access to the capital to small entrepreneurs. As it has been discussed above, microfinance in India is providing loans, insurance, access to savings accounts.
5. Give two important features of Micro Finance?
Ans : The following are the two features of microfinance:
a) Microfinance do not require any collateral : The keystone feature of the microloans under microfinance is that it does not require any collateral. The borrowers is not.
b) The borrowers are generally poor people: The purpose of microfinance is to lend a helpful hands towards needy people. So generally the borrowers of microfinance are the people belonging to underdeveloped part of India and Small businessmen or entrepreneurs.
6. Mention the Channels Of Microfinance?
Ans: There are two channels through which microfinance is being operate in India: SHG-Bank Linkage programme (SBLP) "In the year 1992 NABARD initiated this channel. This model incites women to unite together to form a group of 10-15 members. Where all the women belonging to financial backward classes contributes by giving their individual savings to the group at regular intervals. Thereafter, loans are provided to the members of the group by their contributions. Self-help groups (SHG) also at later stage provide loans for income generating activities. Self-help groups has gained a lot of success in the past years and it got popular for contributing for the empowerment of women. It has been observed that once these self-help groups reach the level of stability, they function almost independently with minimal support from NABARD, SIDBI, and Non-governmental organizations.
7. Mention some Microfinance Companies In India.
Ans: Some of the microfinance companies that offer loans to the unbanked and under banked population in India as are follows:
a) Arohan financial banks, b) BSS microfinance pvt ltd., c) Cashpor microcredit, d) Equitas microfinance pvt ltd, e) Asirvad microfinance pvt ltd, f) Bandhan financial services pvt ltd.
8. Mention two Lenders Offering Microfinance Loans To Mfis Institutions.
Ans: Following are the lenders offering microfinance loans to the microfinance institution:
a) Reliance Money: Reliance company at the great rate of interest offers money to microfinance institutions. The required documentation is very limited. b) ICICI Bank: Since last 10 years ICICI Bank has been a partner with the micro finance institutions and is successfully provide the lown to them. Currently the ICICI BANK is clearly focusing on setting up a profitable and cordial relation with microfinance institutions and also in the investing which can enable the growth of microfinance institutions in India.
9. Give two Advantages of Microfinance Company.
Ans: Advantages of Microfinance Company:
a) Collateral-free loans: Most of the microfinance companies seok no collateral for providing financial credit. The minimum paperwork and hassle-free processing make them a suitable option for quick fundraising.
b) Disburse quick loan under urgency: The financial crisis is inherently unpredictable as it could creep up at any point in time without intimating anybody. Thanks to microfinance companies that can provide secure and collateral-free funds to an individual in the demanding situation to meet their financial need.
10. Mention two Disadvantages of a Microfinance Company?
Ans: Disadvantages of Microfinance Company:
a) Harsh repayment criteria: In the absence of the legit working protocol and compliances, Microfinance Companies could adopt a harsh repayment approach that someone would not prefer in the state of the financial crisis. Easy debt never comes with relaxed conditions, and that is something true with microfinance companies as well. Since these companies work under strict conditions they could manipulate their customer for repayment unethically.
b) Small Loan amount: Unlike mainstream financial banks,Microfinance Companies offers a smaller amount. Since these banks don't ask for collateral against the credit, the of the large loan amount is practically impossible in their case.
11. Give two objectives of Micro Finance?
Ans: (i) Provide Access to fund: Typically, the poor acquire financial services like loans through informal relationships. These loans, however, come at a high cost per dollar loaned and can be unreliable. Furthermore, banks have not traditionally viewed poor people as viable clients and often will reject them due to unstable credit or employment history and lack of collateral. MFIs dismiss such requirements and provide small loans at high interest rates, thus providing MFIs the funds they need to continue operation.
(ii) Encourage Entrepreneurship and Self-Sufficiency: Underprivileged people may have potentially profitable business ideas, but they cannot put them into action because they lack sufficient capital for start-up costs. Microcredit loans give clients just enough money to get their idea off the ground so they can begin turning a profit. They then pay off their micro-loan and continue to gain income from their venture indefinitely.
12. Give two impact of microcredit?
Ans: Economic Impacts: increased and more stable income,reduced vulnerability to external shocks, progression from the informal economy to the formal economy.
Social Impacts: improved living conditions, improved education and healthcare, emancipation of women.
13. What are the interest rates applicable?
Ans: The reform of the interest rate regime has constituted an integral part of the financial sector reforms initiated in our country in 1991. In consonance with this reform process, interest rates applicable to loans given by banks to micro credit organizations or by the micro credit organizations to Self-Help Groups/member-beneficiaries has been left to their discretion. The interest rate ceiling applicable to direct small loans given by banks to individual borrowers, however, to remain in force.
14. What are the terms & conditions for accessing micro credit?
Ans: Banks have been given freedom to formulate their own lending nonms keeping in view ground realities. They have asked to devise appropriate loan and savings products and the related terms and conditions including size of the loan, unit cost, unit size, maturity period, grace period, margins, etc. Such credit covers not only consumption and production loans for various farm and non-farm activities of the poor but also include their other credit needs such as housing and shelter improvements.
15. What is a Self-Help Group (SHG)?
Ans: A Self-Help (SHG) is a registered or unregistered group of micro entrepreneurs having homogenous social and economic background voluntarily, coming together to save small amounts regularly, to mutually agree to contribute to a common fund and to meet emergency needs on mutual help basis. The group members use collective wisdom and peer pressure to ensure proper end- use of credit and timely repayment thereof. In fact, peer pressure has been recognized as an effective substitute for collaterals. 16. What are the advantages of financing through SHGs?
Ans: An economically poor individual gain 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 a 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.
17. What are the latest indicators? Micro Credit disbursement indicators ?
Ans: With a view to facilitating smoother and more meaningful banking with the poor, A pilot project for purveying micro credit by linking Self-Help Groups (SHGS) with banks was launched by NABARD in 1991-92 with a view to facilitating smoother and more meaningful banking with the poor. RBI had then advised commercial banks to actively participate in this linkage programme. The scheme has since been extended to RRBs and co-operative banks. The number of SHGs linked to banks aggregated 4,61,478 as on March 31, 2002. This translates into an estimated 7.87 million very poor families brought within the fold of formal banking services as on March 31,2002. More than 90 per cent of the groups linked with banks are exclusive women groups. Cumulative disbursement of bank loans to these SHGS stood at Rs. 1026.34 crores as on March 31,2002 with an average loan of Rs. 22,240-00 per SHG and Rs. 1,316-00 per family. As regards model-wise linkage, while Model 1, viz. directly to SHGs without of any NGO now accounts for 16%, Model II, viz. directly to SHGs with facilitation by NGOs and other formal agencies amounts to 75% and Model III, viz. through NGO as facilitator and financing agency represents 09% of the total linkage. While 488 districts in all the states/UTs have been covered under this programme, 444 banks including 44 commercial banks (including 17 in the private sector), 191 RRBs and 209 co-operative banks along with 2,155 NGOS are now associated with the SHG-bank linkage programme.
18. Is Foreign Investment allowed in Micro Credit projects?
Ans: Govt. of India vide their notification dated August 29,2000 have included 'Micro Credit/Rural Credit' in the list of permitted non- banking financial company (NBFC) activities for being considered for Direct Investment (FDI)/Overseas Corporate Bodies (OCB)/Non-Resident Indians (NRI) investment to encourage foreign participation in micro credit projects. This covers credit facility at micro level for providing finance to small producers and small micro enterprises in rural and urban areas.
19. What is the Micro Finance Development Fund?
Ans: There is an need for micro credit providers to shift from a minimalist approach that is offering only financial - intermediation-to an integrated approach to poverty alleviation taking a more holistic view of the client including provision of enterprise development services like marketing infrastructure, introduction of technology and design development. In this context, the setting up of the Micro Finance Development Fund marks an important step. Pursuant to the announcement of Union Finance Minister in his budget speech for the year 2000-01, this Rs. 100 crore Fund has been created in NABARD to support broadly the following activities:
(a) giving training and exposure to self-help group (SHG) members, partner NGOs, banks govt. agencies;
(b) providing start-up funds to micro finance institutions and meeting their initial operational deficits;
(c) meeting the cost of formation and nurturing of SHGs,
(d) designing new delivery mechanisms; and
(e) promoting research, action research, management information systems and dissemination of best practices in micro finance. This Fund is thus expected to address institutional and delivery issues like institutional growth and transformation, governance, accessing new sources of funding, building institutional capacity and increasing volumes. RBI and NABARD have contributed Rs. 40 crore each to this Fund. The balance Rs. 20 crore were contributed by 11 public sector banks.
20. Are all MFIs non-profit?
Ans: Many MFIs began as a non-profits, however, a for-profit sector has developed more recently. For-profit MFIs have drawn on large investments which allow them to distribute more funds by (at times) more efficient means. The challenge for many for-profit MFIS is achieving a balance between financial sustainability and the poverty- alleviation mission of the microfinance sector. At OneSeed, all of our partners have been carefully selected because they meet our criteria and they all also happen to be non-profit MFIS. 21. What are some of the risks or controversies?
Ans: The provision of financial services is neither without risk nor controversy. As the field of microfinance has grown and evolved, predatory lending practices and a lack of risk management by a small number of MFIs have raised important and fundamental critiques of lending practices. Although similar movements have occurred in other Latin American countries, the "No Payment Movement" in Nicaragua is a prime example of one of the risks with microfinance. In 2008, several thousand people occupied an MFI in the city of Jalapa. The protesting turned violent and the leaders of the movement demanded that Congress accept a 10 year amortization period with 8% APR or less for all loans. This movement has put many MFIS at risk and therefore reduced the available microcredit in Nicaragua. In India, there have been cases of suicide due to unpaid microcredit loans. When interest rates skyrocket and borrowers are unable to repay their loans, a cycle of debt can result in personal financial ruin.
22. Give a History of Microfinance?
Ans: Microfinance is not a new concept. Small operations have existed since the 18th century. The first occurrence of microlending is attributed to the Irish Loan Fund system, introduced by Jonathan Swift, which sought to improve conditions for impoverished Irish citizens. In its modern form, microfinancing became popular on a large scale in the 1970s. The first organization to receive attention was the Grameen Bank, which was started in by Muhammad Yunus in Bangladesh. In addition to providing loans to its clients, the Grameen Bank also suggests that its customers subscribe to its "16 Decisions," a basic list of ways that the poor can improve their lives.
Long Question Answer : 5 marks
1. Explain five benefits of Micro Finance?
Ans : (i) Access: Banks simply won't extend loans to those with little or no assets, and generally don't engage in the small size of loans typically associated with microfinancing. Microfinancing is based on the philosophy that even small amounts of credit can help end the cycle of poverty. Many women and girls have trouble accessing formal financial institutions as they don't have appropriate identification or certification of land and house ownership.
(ii) Better Loans Repayment Loans: Microfinance tends to target women borrowers, who are statistically less likely to default on their loans than men. These loans help empower women, and they are often safer investments for those loaning the funds.
(iii) Extending Education and Health: Families receiving microfinancing are less likely to pull their children out of school for economic reasons and more likely to have resources to pay for school fees or health services.
(iv) Sustainability: Even a small working capital loan of $100 can be enough to launch a small business in a developing country that could help the individuals pull themselves and their family out of poverty. These small businesses can help create new employment opportunities, which has a beneficial impact on the local economy.
(v) Improved Income and Nutrition: Through small loans women are able to get needed agriculture inputs such as improved seeds and fertilizers to increase productivity and nutritional content of crops and generate more income from the market.
2.Explain the Definition of microfinance institutions in India?
Ans: Microfinance Services Regulation Bill of India, defines microfinance services as financial assistance to be provided to an eligible individual directly or by a group mechanism
An amount of maximum fifty thousand in aggregate per person for small and cottage enterprises, agricultural and allied activities (consumption purposes of the person is also included) or
A maximum amount of one lakh fifty thousand in aggregate per person for the purpose of housing or
Such like the above amounts may be prescribed to a person for other purposes also. The bill, in addition, explains microfinance institutions as the organization of individuals which includes the following if the establishment of the organization concentrates on the purpose of increasing microfinance services:
Registration of society under Societies Registration Act (1860).
A creation of trust under Indian Trust Act (1880) or registered public trust under state enforced governing trust.
A society registered under the Multi State Cooperative Societies Act (2002) which can be a cooperative society or a mutual benefit corporative etc (Singh, 2016).
3. Explain the types of microfinance institutions?
Ans : (i) Joint Liability Group (JLG): Joint Liability Group can be explained as the informal group consists of 4-10 individuals who try to avail loans against mutual guarantee from banks for the purpose of agricultural and allied activities. This category generally consists of tenants, farmers and other rural workers. They work primarily for lending purposes, although they also offer the savings facility. In this type of institution every individual of a borrowing group is equally liable for the credit (Singh, 2010). This kind of institution is simple in nature and requires little or no financial administration (UBI, no date). However, one of the serious problems of this structure is personal preferences in lending credit which resulted in a partial failure of the system. Of late due to various promotional initiatives taken by banks such as Indian bank, Karur Vysya Bank and Indian Bank, the credibility of Joint Liability Group model has received a boost (The Hindu, 2016). It still remains a landmark movement in the area of protection of farmer's land ownership rights.
(ii) Self Help Group (SHG): Self Help Group is a type of formal or informal group consisting of small entrepreneurs with similar kind of socio-economic backgrounds. Such individuals temporarily come together and generate a common fund to meet the emergency needs of their business. These groups are generally non-profit organizations. The group assumes the responsibility of debt recovery. The advantage of this micro-lending system is that there is no need for collateral. Interest rates are also generally low and fixed especially for women (Chowdhury, 2013; Business Standard, 2017). In addition various tie-ups of banks with SHGs have been implemented for the hope of better financial inclusion in rural areas (Jayadev and Rao, 2012). One of the most important ones is NABARD SHG linkage program where many self- help groups can borrow credit from bank once they successfully present a track record of regular repayments of their borrowers. It has been very successful especially in Andhra Pradesh, Tamil Nadu, Kerala and Karnataka and during the year of 2005-06. These states received approximately 60% of SGH linkage credit (Taruna and Yadav, 2016).
(iii) The Grameen Bank Model: Grameen Model was introduced by the Nobel laureate Prof. Muhammad Yunus in Bangladesh during 1970s. It has been widely adopted in India in the form of Regional Rural Banks (RRB). The goal of this system has been the overall development of the rural economy which generally consists of financially backward classes. But this model has not been fully successful in India as rural credit and system of recovery are a real problem. Huge amount of non-performing assets also led to failure of these regional banks (Shastri, 2009). Compared to this model Self Help Groups have been more successful as they are more suited to the population density of India and far more sustainable (Dash, 2013).
(iv) Rural Cooperatives: Rural Cooperatives in India were set up during the time of independence by the government. They used the mechanism to pool the resources of people with relatively small means and provide financial services. Due to their complex monitoring structure, their success has been limited. In addition, this system only catered to the credit-worthy individuals of rural areas, not covering a large part of the country's financially backward section (Rajendran, 2012).
4. Explain the Goal Of Micro Finance Institutions?
Ans: The goal for MFIS should be:
To improve the quality of life of the poor by providing access to financial and support services;
To be a viable financial institution developing sustainable communities;
To mobilize resources in order to provide financial and support services to the poor, particularly women, for viable productive income generation enterprises enabling them to reduce their poverty;
Learn and evaluate what helps people to move out of poverty faster;
To create opportunities for selfemployment for the underprivileged;
To train rural poor in simple skills and enable them to utilize the available resources and contribute to employment and income generation in rural areas.
5. Explain the features of Micro Finance Institutions?
Ans: Micro finance institutions, or MFIs, are financial institutions working towards the upliftment of the needy and underprivileged section of the society by providing short-term loans to help them set up their own venture. These institutions take very calculated risks and fund the interested borrowers to help them get trained, setup and run a small- scale business. There are a number of features that make microfinance institutions different from banking organizations.
Here are some of the key features of the MFIs in India :
MFIs offer loans to individuals who belong to the low-income group.
The loans that are offered by these institutions are of small amount; this is why these loans are known as miero loans.
MFIS provide loans to borrowers for a short period. After they repay the loan they can again opt for another one.
.MFIs give loans to people who want to start up a business of their own without any security or collateral.
The repayment frequency of the micro loans offered by MFIS is high and the borrower needs to repay the amount at quick intervals.
In most cases, the loans are provided by these organisations are for income-generation purposes.
6. Explain the Current Status and Growing of Micro Finance in India?
Ans: 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 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. This report, which contains only a part of the actual report is based on the research work done as a part of the summer internship project at Reserve Bank of India, Kanpur. The research involved study of the past literatures about the microfinance sector, related online research papers and journals. The study also involved survey of all MFIs in the state of Uttar Pradesh through field visits and online survey. The annual reports and the sector reports published by regulatory bodies, MFI associations and major microfinance players facilitated the study, especially in understanding the size, growth and past trends. Interactions with some of the industry experts helped in understanding and analysing the emerging concerns in the microfinance sector and also to look for some possible solutions. 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 (development and regulation) Bill, 2011 for comments. Based on the research work, a few major recommendations made in the report include field supervision of MFIs to check ground realities and the operational efficiency of such institutions. Offer incentives to MFIS for opening branches in unbanked villages, so as to increase rural penetration. Also MFIs be encouraged to offer complete range of products to their clients. Transparent pricing and technology implementation to maintain uniformity and efficiency are among the others which these institutions should adopt. Inability of MFIs in getting sufficient funds is a major hindrance in the microfinance growth and so these institutions should look for alternative sources of funds. Some of the alternative fund sources include outside equity investment, portfolio buyouts and securitization of loans which only a few large MFIS are currently availing.
7. Explain the Gaps in Financial system and Need for Microfinance?
Ans: According to the latest research done by the World Bank, India is home to almost one third of the world's poor (surviving on an equivalent of one dollar a day). 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. About half of the Indian population still doesn't have a savings bank account and they are deprived of all banking services. Poor also need financial services to fulfill their needs like consumption, building of assets and protection against risk. Microfinance institutions serve as a supplement to banks and in some sense a better one too. These institutions only offer micro credit but they also provide other financial services like savings, insurance, remittance and non-financial services like individual counselling, training and support to start own business and the most importantly in a convenient way. The borrower receives all these services at her/his door step and in most cases with a repayment schedule of borrower's convenience. But all this comes at a cost and the interest rates charged by these institutions are higher than commercial banks and vary widely from 10 to 30 percent. Some claim that the interest rates charged by some of these institutions are very high while others feel that considering the cost of capital and the cost incurred in giving the service, the high interest rates are justified.
8. Explain the Channels of Micro finance?
Ans: In India microfinance operates through two channels:
(i) SHG Bank Linkage Programme (SBLP)
(ii) Micro Finance Institutions (MFIs)
(i) SHG-Bank Linkage Programme: 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.
(ii) Micro Finance Institutions: 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. The reason for existence of separate institutions i.e. MFIs for offering microfinance are as follows:
High transaction cost-generally micro credits fall below the break-even point of providing loans by banks
Absence of collaterals - the poor usually are not in a state to offer collaterals to secure the credit
Loans are generally taken for very short duration periods
Higher frequency of repayment of installments and higher rate of Default. Non-Banking Financial Companies (NBFCs), Co-operative societies, Section-25 companies, Societies and Trusts, all such institutions operating in microfinance sector constitute MFIS and together they account for about 42 percent of the microfinance sector in terms of loan portfolio. The MFI channel is dominated by NBFCs which cover more than 80 percent of the total loan portfolio through the MFI channel.
(iii) Service Providers: The microfinance service providers include apex institutions like National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and, Rashtriya Mahila Kosh (RMK). At the retail level, Commercial Banks, Regional Rural Banks, and, Cooperative banks provide microfinance services. Today, there are about 1,61,480 retail credit outlets of the formal banking sector in the rural areas comprising 13,000 branches of District level cooperative banks, over 15,480 branches of the Regional Rural Banks (RRBs) and over 38,400 rural and semi-urban branches of commercial banks besides almost 94,600 cooperatives credit societies at the village level. On an average, there is at least one retail credit outlet for about 4600 rural people. This physical reaching out to the far-flung areas of the country to provide savings, credit and other banking services to the rural society is an unparalleled achievement of the Indian bankingsystem. An attempt is made here to deal with various aspects relating to emergence of private microfinance industry in the context of prevailing legal and regulatory environment for private sector rural and microfinance operators.
9. Are fintechs going to take over the microfinance market? Explain.
Ans: In the 1990s, if you wanted to be a social entrepreneur, you founded an MFI. Today, you start a fintech. Accion has become one of the world's leading investors in "fintech for financial inclusion", with investments in nearly 50 companies offering such products as payment networks, remittances, small and medium enterprise (SME) credit, consumer credit, PayGo applications, customer advice, insurance, and data analytics. At first, many fintechs were out to disrupt traditional financial institutions, like MFIs, but they continue to confront two fundamental problems: customer acquisition and raising capital. This requires many fintechs to pivot towards partnering with traditional institutions, and that offers a path to the future for many MFIS: fintech partnerships can help MFIS make the leap from traditional to digital. However, MFIs need to prepare to work with fintechs. They need IT departments that can connect seamlessly to the technology fintechs bring. They need to develop a culture of experimentation, in contrast to an organizational identity wedded to traditional methods. And they need to recognize that fintechs, with limited financial resources, need to get to market quickly, or they need financial support from prospective partners. To take advantage of what fintechs have to offer, MFIs must not only ask what they need from fintechs, but also be prepared to offer what fintechs need from them.
10. Will MFIs join the shift to digital lending? Explain?
Ans: MFIs swear by their traditional underwriting methodologies, whether they involve group guarantees or individual repayment capacity assessment. These high-touch methods often yield repayment rates that other lenders only dream of. A key to success is that the methodology not only predicts the ability of a customer to repay, it actually increases motivation to repay, through peer pressure personal contact and the promise of continued access to credit. In contrast, the algorithms generated through big data and machine learning lack most of the motivational aspects and are designed primarily to predict repayment. As a result, much of the algorithm-based lending we see today features high default rates, which in turn requires high interest rates. That said, once the initial set-up is in place, algorithm-based credit is so cheap to operate that its rise is inexorable. Just look at Kenya, where digital lending got an early start. There are over 6 million digital borrowers, and according to a draft study by MSC, nearly 9 out of every 10 loans in the entire system are digital. Algorithm-based lending is made possible by access to customer behavioral data, data analytic capacity and ability to reach customers digitally, all of which may be difficult for MFIs (another reason for partnering with fintechs). As they develop the capabilities that enable algorithm-based lending, MFIs may wish to explore hybrid models that combine tech and touch. They may find it possible to focus on market segments that are hard for digital lenders to reach. In all cases, they need to advocate for high standards of consumer protection to be enforced in their markets, to avoid being crowded out by predatory lending.
11. Write a note on marketing strategies adopted by SHGS in India?
Ans: Initially, the marketing activities of the SHGS are far below the new standards set by globalisation. Most of the SHGS were engaged in direct marketing and most of the products were sold in local markets. Packing & Advertising of products was far below standards. Government of Andhra Pradesh under the dynamic leadership of the Chief Minister Sri Nara Chandra Babu Naidu introduced a unique concept of marketing SHG products with a concept "Producer to Consumer Sales" popularly known as DWCRA Bazars in late 1990s. SHG members were encouraged to put stalls in local shandys, mandal and district level DWCRA Bazars besides state level DWCRA Bazars conducted in the 2nd & 3rd week of December every year. These exhibitions attracted public attention and even popularised the SHG concept amongst general public. To encourage rural women producers, DWCRA Bazars were inaugurated and visited by Leaders / VIPs with a message that these exhibitions sell quality products at competitive prices. Inspired by the success of DWCRA Bazars, State Government introduced the following marketing strategies for sale of SHG products.
(i) Products Categorisation: SHGs produce more than 500 verities of products which can be broadly categorised into Agriculture and allied activity products, value added/Semi-processed and Processed food products, Vegetables, Flowers, Dairy & Meat products, Eggs & Chicken, Fish & Prawn, Snacks & Sweets, Pickles & Powders, Masalas &
(ii) Participation in International Trade Fairs: With the support and encouragement of the Chief Minister Sri Chandra Babu Naidu, some members of Self Help Groups were issued Passports and sponsored to participate in the International Trade Fairs at Colombo in Srilanka, Koulalampur in Malaysia, Dubai and USA.
(iii) Role of Banks: NABARD and Banks extend financial support to SHG members participating in Trade Fairs outside the State and Country by meeting the travel costs. These institutions also join hands with the state government in organising DWCRA Bazars and Exhibitions besides giving an opportunity for the SHGS to participate in the exhibitions sponsored by NABARD.
(iv) Role of Gol Organisations: SHG Members are registered with CAPART (Apex organisation for NGOS at the national level), LEPAKSHI, APCO, Industrial Exhibitions, NHDC and other organisations.
(v) SARAS: Taking a clue from the concept of DWCRA Bazars, Ministry of Rural Development, Gol introduced a similar marketing strategy and introduced SARAS exhibitions held in all state capitals every year-A platform in which SHG products from all the state are exhibited and sold. Annual calendar of SARAS exhibitions is communicated to SHGS in the beginning of the year to enable participants to plan travel, credit arrangements for manufacturing products and sale of products. These exhibitions provide opportunity to SHG members to understand urban markets and interact with similar players besides exposure to wholesale markets in cities and gain knowledge on customer's preferences/choices for their products. Some members learn skills from other members of other groups. Some members secure bulk orders for their products besides securing continuous contacts with bulk buyers.
(vi) Godavari and Krishna Pushkarams: Chief provided an opportunity to SHGs for sale of Pooja/Ritual Kits to the pilgrims in Pushkarams. SHGS were also offered free stalls in the DWCRA Bazar at Rajahmundry conducted on the eve of Godavari Pushkarams. SHG members sold kits & products valued more than ?3.0 crores.
(vii) Shilparamams/Urban haats: Stalls are allotted to SHG members in urban haats to showcase and sell products.
(viii) Tie-up with Departmental supplies: SHG members were given an opportunity to provide food to the students under Mid- day meal Scheme and supply food to 50,000 schools in the state. SHGS supply vegetables, spices, milk and other foods to the welfare hostels run by government. SHGS supply stitched uniforms to the students in primary and secondary schools under various government schemes. SHGS supply milk and other items to the Anganwadi centers in Chittoor District. Endowment Department procure certain items like Coconuts, Turmeric, Flowers etc., from the SHGs besides having sale counters near the temples for photo frames and other items.
12. Explain the Lead Bank Scheme in India? Mention the objectives of Lead Bank Scheme?
Ans: The Lead Bank Scheme is a scheme which aims at providing adequate banking and credit in rural areas through an 'service area approach', with one bank assigned for one area. It was introduced in 1969 in view of this aim. On the recommendation of the Gadgil Study Group and Banker's Committee, the Scheme was introduced by RBI. As per the studies by the committees it was found that the rural areas were not able to enjoy the benefits of banking. Also, that the commercial banks did not have adequate presence in rural areas and also lacked the required rural orientation which was hindering the growth of rural areas.
Objectives of The Lead Bank Scheme :
(a) One of the objective was to identify those regions which unbanked and underbanked in districts and also to evaluate their physiographic, agro climatic end Socio-economic conditions through economic survey.
(b) Another objective was to help in removing regional imbalances through appropriate credit deployment.
(c) The main objective was to extend banking facilities to unbanked areas (d) It was observed in the studies by the committee that there are certain credit gaps in various sector which need to be address and a credit plan is needed.
(e) It was important to identify economically viable and technically feasible schemes.
(f) The structural and procedural changes in banking sector were needed.
(g) Development of co-operation amongst financial and non-financial institutions, in overall development of the districts were also need.
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