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Gauhati University BCom 4th Microfinance Notes 2024
Unit - 1 Micro Finance
Short Question Answer : 2 marks
1. Define Microfinance? (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 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. (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 the others in attaining this objective. 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 and lending processes, revenues and success in 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 into formal banking system is shaken. Microfinance in India plays a major role in the development of India. It 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 that microfinance in India is providing loans, insurance, access to savings accounts.
5. Give two important features of Micro Finance?
Ans : 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. Menion the Channels Of Microfinance?
Ans: There are two channels through which microfinance is being operate in India: SHG-Bank Linkage programme (SBLP) a." 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 to the level of stability, they function almost independently with minimal support from NABARD, SIDBI, and Non-governmental organisations.
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, 6. 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 loan 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 seek 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 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 compliances, they could manipulate their customer for repayment unethically.
a) Small Loan amount: Unlike mainstream financial banks, Microfinance Companies offers a smaller loan amount. Since these banks don't ask for collateral against the credit, the disbursement of the large loan amount is practically impossible in their case.
11. Give two objectives of Micro Finance?
Ans: (i) Provide Access to Funds: 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 can 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, continues 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 norms keeping in view ground realities. They have been 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 Group (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 their 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.
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 for :
• 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 Overseas 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 the microfinance institutions different from the formal banking organisations.
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 micro 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 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. 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 not 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) Microfinance 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. 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.
17. Explain the Functions of NABARD.
Ans: Credit Functions:
Framing policy and guidelines for rural financial institutions.
• Providing credit facilities to issuing organizations Monitoring the flow of ground level rural credit.
• Preparation of credit plans annually for all districts for identification of credit potential.
Development Functions:
• Help cooperative banks and Regional Rural Banks to prepare development actions plans for themselves.
Help Regional Rural Banks and the sponsor banks to enter into MoUs with state governments and cooperative banks to improve the affairs of the Regional Rural Banks.
• Monitor implementation of development action plans of banks.
Provide financial support for the training institutes of cooperative banks, commercial banks and Regional Rural Banks.
• Provide financial assistance to cooperative banks for building improved management information system, computerisation of operations and development of human resources.
Supervisory Functions:
• Undertakes inspection of Regional Rural Banks (RRBs) and Cooperative Banks (other than urban/primary cooperative banks) under the provisions of Banking Regulation Act, 1949.
• Undertakes inspection of State Cooperative Agriculture and Rural Development Banks (SCARDBs) and apex non- credit cooperative societies on a voluntary basis.
• Provides recommendations to Reserve Bank of India on issue of licenses to Cooperative ** Banks, opening of new branches by State Cooperative Banks and Regional Rural Banks (RRBs).
• Undertakes portfolio inspections besides off-site surveillance of Cooperative Banks and Regional Rural Banks (RRBs).
Very Long Question Answer :
1. Explain The concept of Micro Finance? Discuss the Scope and growth of Microfinance in India"?
Ans: Microfinance Microfinance is called upon to provide financial services to the poor with low income. It is referred to the grant of a small loan by a bank or any other financial institution as well as to the provision of other facilities including insurance, savings, and money transfer. These basic financial services help people save, invest, and generate their income. Potential loan debtors might have enough income or collateral but they still cannot appeal to banks because they require too small amount. Taking into account that informal financial relationships with village moneylenders lead to very high costs for borrowers, microfinance institutions are often very much to the point. Microcredit is a part of microfinance. As a rule, microcredit is targeted at unsalaried borrowers having no or little collateral. This term does not typically include consumer credit extended to salaried employees and built upon automated credit scoring system. In turn, microfinance presents financial services and products, such as money transfers, savings, insurance, and other services offered by different providers. Microfinance is a category of financial services targeting individuals and small businesses who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; savings and checking accounts; microinsurance; and payment systems, among other services. Microfinance in India started in the early 1980s with small efforts at forming informal self-help groups (SHG) to provide access to much-needed savings and credit services to the marginal population more importantly in rural areas. From this small beginning, the microfinance sector has grown significantly in the past decades. National bodies like the Small Industries Development Bank of India (SIDBI) and the National Bank for Agriculture and Rural Development (NABARD) are devoting significant time and financial resources to Microfinance sector. The World Bank has called South Asia the "cradle of microfinance." Statistics indicate that some 45% of all the people in the world who use microfinance services are living in South Asia. However, the overall percentage of the poor and vulnerable people with access to financial services remains small, amounting to less than 20% of poor households in India. 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 The microfinance sector has emerged as one of the most promising tool for ameliorating poverty in India. The microfinance in India involves forming self help groups, usually a group of 5 to 20 persons and providing them credit through bank linkage. Therefore in India, it is often called as SHG Bank linkage programme. NGOs in microfinance sector, also called as microfinance institution provide that linkage between banks and self help groups. With the help of credit and guidance from NGOs, the SHGs strive to come out of the quagmire of poverty. Another advantage found in Indian SHG movement is that most of the beneficiaries are women and thus it is becoming an important instrument of bridging the gulf of gender inequality. With the growth of microfinance industry many small and large Microfinance Institutions (MFI) had emerged in India and the largest MFI is SKS Microfinance Ltd which is also listed in the stock market, only such institution in India. The microfinance sector is having a healthy growth rate and it is currently a Rs.20,000 Cr. industry. The SHG-Bank Linkage Programme and the Microfinance Institutions put together achieved a growth in their customer base by about 10.8 percent. The combined borrowing customer base increased to 93.9 million from 86.3million in the previous year. Despite of healthy growth over the years, there number of concerns have emerged related to the sector, like 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. RBI credit policy capped household income at Rs. 120000/- and credit limit at Rs. 50000 for all MFI customers. This is to better target the beneficiary population to the bottom quartile population. Major challenges faced by microfinance in India are challenges related to access to finance, governance and management, demand for low interest 2 rates and managing competition. It further adds that:
The single biggest challenge for microfinance lies in the area 1 of training and capacity development;
On the supply side, there is a lack of service providers and comprehensive, integrated and relevant training modules
Limited reach in the northern and eastern parts of the country
Range of products tends to be limited to simple credit offerings
On the demand side, not enough attention is being paid to a training for senior management
Absence of social audit in many cases
2. Discuss 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 into formal banking system is shaken. Microfinance in India plays a major role in the development of India. It 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 that microfinance in India is providing loans, insurance, access to savings accounts. The concept of microfinance focuses on women also by granting them loans. It act as a tool for the empowerment of poor women as women are becoming independent, they are able to contribute directly to the well beings of their families and are able to confront all the gender inequalities. The major targets of microfinance are the poor rural and urban households and women too. The Reserve Bank Of India imparts no ceiling with respect to minimum and maximum amounts to be given as loan. Credit is important to the poor people for maintaining the common imbalance in between the income and their expenditure. It is also vital to the poor people for the income generating activities like investing in marginal farms and other small scale self employment ventures. Their access to formal banking channels are low due to the lack of resources an nature of formal credit institutions. Consequently in India, Microfinance institutions and self help groups are leading to other traditional banking channels as they are catering the need of credit to poor people. It has contribute a lot in enhancing the quality of life of the poor people. Therefore microfinance is not a financial system but a tool to allievate poverty from the country and bring social change and especially to uplift the status of women in our country so they can become self reliance. There is a public interest the interest of microfinance and this is what makes it acceptable as valid goal for public policy.
3. Discuss the Benefits of Microfinance?
Ans: There are literally dozens of benefits for microfinance, but the key pluses involve the role of microfinance in economic development. Vitanna.org and Plan International provide possibly the top benefits of microfinance:
(i) It allows people to provide for their families. Through microfinance, more households are able to expand their current opportunities so that more income accumulation may occur, says Vitanna.org, a financial services website.
(ii) It gives people access to credit. "By extending microfinance opportunities, people have access to small amounts of credit, which can then stop poverty at a rapid pace," says Vitanna.org. Plan International, a global organization dedicated to advancing children's rights and equality for women, agrees, stating: "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."
(iii) It serves those who are often overlooked in society. About 95 percent of some loan products extended by microfinance institutions are given to women, as well as those with disabilities, those who are unemployed, and even those who simply beg to meet their basic needs, Vitanna notes. Microfinance services can help recipients take control of their own lives.
(iv) It creates the possibility of future investments. Microfinance disrupts the cycle of poverty by making more money available. When basic needs are met, families can then invest in better housing, health care, and even, eventually, small business opportunities.
(v) It is sustainable. There's little risk with a $100 or loan, says Vitanna, adding: "Yet $100 could be enough for an entrepreneur in a developing country to pull themselves out of poverty." Plan International agrees, stating that a $100 loan can be enough to launch a small business in a developing country that could help the benefactor pull herself and her family out of poverty.
(vi) It can create jobs. Microfinance is also able to let entrepreneurs in impoverished communities and developing countries create new employment opportunities for others.
(vii) It encourages people to save. "When people have their basic needs met, the natural inclination is for them to save the leftover earnings for a future emergency," says Vitanna.
(viii) It offers significant economic gains even if income levels remain the same. The gains from participation in a microfinance program including access to better nutrition, higher levels of consumption, and eventually, growing economies, even in small and impoverished communities.
(ix) It leads to better loan repayment rates. "Microfinance tends to target women borrowers, who are statistically less likely to default on their loans than men. So these loans help empower women, and they are often safer investments for those loaning the funds," says Plan International.
(x) It extends education. Families receiving microfinance services are less likely to pull their children out of school for economic reasons, says Plan International.
4. Discuss the Role of Self Help Groups (SHGs) in Accelerating Financial Inclusion?
Ans: Access to finance by the poor and vulnerable groups is a prerequisite for pover reduction and social cohesion. This has to become an integral part of our efforts to promote inclusive growth. In fact, providing access to finance is a form of economic empowerment of the vulnerable groups. Financial inclusion denotes delivery of financial services at an affordable cost to the vast sections of the disadvantaged and low-income groups. The various financial services include savings, credit, insurance and remittance facilities. The objective of financial inclusion is to extend the scope of activities of the organized financial system to include within its ambit people with low incomes. Through graduated credit, the attempt must be to lift the poor from one level to another, so that they can come out of poverty. To achieve financial inclusion or to reach the un-reached the Reserve Bank India has been taken many steps such as i) no frill accounts, ii) overdraft in savings, bank accounts, iii) business correspondent and business facilitator model.
iv) KCC/GCC guidelines, v) liberalised branch expansion, vi) liberalised policy for ATM, vii) introducing technology products and services, viii) allowing RRBs/ Co-operative banks to sell insurance and financial products, ix) financial literacy program, x) creation of special funds (FIF and FITF) and xi) identification of 431 districts by the SLBC Convenor Banks for 100 percent financial inclusion across the country. The poverty ratio in rural areas among the social categories, Scheduled Tribes exhibit the highest level of poverty (47.4%) followed by Scheduled Castes (SCs) (42.3%) and Other Backward Classes (OBC) (31.9%) against 33.8% for all classes (Planning Commission, Government of India, 2012). According to NSSO survey, 51.4% of farmer households are financially excluded from both formal/non-formal sources. Of the total farmer households, only 27% access formal sources of credit and one third of this group even borrow from other non-formal sources. About 36% of Scheduled Tribe (ST) farmer households are indebted mostly to non-formal sources (Rangarajan, C. 2008). The Committee has recommended to 'encourage SHGs in excluded regions' as one the recommendations to achieve financial inclusion. India's Self Help Group (SHG) movement has emerged as the world's largest and most successful community based poverty alleviation and empowerment program. It is predominantly a women's movement. As some experts have pointed out, it is a development innovation in its own right. The SHG bank linkage program (SBLP), which is the India's own innovation has proved to be one of the most effective community based microfinance programs. The SBLP had a modest beginning with 255 credit linked groups and loan amount of Rs. 29 lakh in 1992-93. Since then the program has grown exponentially. In the process, SHGs emerged as a mass movement across the country and largest community based microfinance model in the world. As per NABARD's microfinance report by March 2012, 79.6 lakh SHGs, with an estimated membership of 9.7 crores, have savings accounts in the banks, with aggregate bank balance of Rs. 6,551 crores. Over 43.54 lakh SHGs have loan accounts with total loan outstanding of Rs. 36,340 crores. However, there remain regional disparities in the growth of the SHG movement with limited progress in eastern and western regions.
5. Define microfinance institutions? Discuss the various types of Micro Finance 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 for:
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 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).
Various types of Micro Finance Institutions in India are: The microfinance models are developed in order to cope with the financial challenges in financially backward areas. There are various types of microfinance companies operating in India.
(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 Overseas 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).
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