Why Microfinance is the Secret Ingredient in Indian Financial Growth.
Table of Contents
Concept of Microfinance
The main intention of Microfinance is to help women by providing financial services like small loans to those who are of low income and unable to access the bank for improving their economic status.
Definition of Microfinance
“Banking and/or financial services targeted to low- and moderate-income business or households, including the provision of credit.” By ACCION
“Microfinance was referred to as loans, savings, insurance, transfer services, and other financial products targeted at low-income clients.”
Women who are in poverty and needed of financial products and services mostly do not have access to formal financial institutions to sustain their status, provide finance to run their business, finance to build their assets, and to reduces their risk.
Microfinance institutions (MFIs)
MFIs are financial companies that provide small loans to people who do not have any access to banking facilities.
MFIs are taken a major responsibility to services a microfinance product as it is one of the economic tools to promote financial inclusion which enables the poor and low-income households to come out of poverty, increase their income levels and improve overall living standards.
- Microfinance institutions have important microfinance products are:
- Micro credit
- Micro saving
- Micro Insurance
The Indian microfinance sector has witnessed phenomenal growth over the past two decades in terms of an increase in both the number of institutions providing microfinance as also the quantum of credit made available to the microfinance customers.
Microcredit is delivered through a variety of institutional channels are and types of Microfinance:
- scheduled commercial banks (SCBs) (including small finance banks (SFBs) and regional rural banks (RRBs)) lending both directly as well as through business correspondents (BCs) and self-help groups (SHGs),
- cooperative banks,
- non-banking financial companies (NBFCs), and
- microfinance institutions (MFIs) registered as NBFCs as well as in other forms
History of Microfinance:
In 1960, the Indian Government has taken many initiatives in the rural credit market and the Nationalization of commercial banks to access the rural market.
The All-India Rural Credit Survey Committee has recommended the expansion of the cooperative credit system for rural people. To strengthen cooperatives the Lead Bank Scheme was introduced.
In the 1969’s the government did not reach the demand of rural credit from the cooperative and the commercial banks so the Multi-agency Approach was accepted by the government to reach the demand.
In 1975, the Regional Rural Banks (RRB) and Agricultural Refinance and Development Corporation was set up.
In 1976, National Commission on Agriculture (NCA) was a collaboration of commercial banks that experimented with the Farmer service cooperatives, and majorly most scheduled commercial banks had operated from rural areas.
In 1980 the concept of microfinance was generated as a result of credit policy toward poverty farming communities and in 1982 “Development of Women and Children in Rural Areas (DWCRA) was started as a sub-schemes of the rural development program.
The government has realized the importance of Microfinance and in the 1990s RBI recognized it as a new idea, with large potential and was very supportive of its growth. When the demands for regulating the MFIs were made, Shri Jagdish Capoor, the then Deputy Governor.
In 1990 the Non-government organization became an instrument in providing financial services to the poor.
In 2001 stated that “As MFIs are significantly different from commercial banks both in terms of institutional structure and product portfolio, application of the same set of regulatory and prudential guidelines to MFIs, in our view, not only runs the risk of distorting the emerging market but it may also reduce the efficiency of these institutions.”
the Governor, Dr. YV Reddy in 2005 stated that “Microfinance movement across the country involving common people has benefited immensely by its informality and flexibility.
As stated earlier, in the wake of the AP microfinance crisis in 2010, RBI had constituted a committee under the chairmanship of Shri Y H Malegam to study issues and concerns in the MFI sector. The regulatory approach towards microfinance has been largely based on the recommendations of the Malegam Committee.
The key recommendations of the Malegam Committee were as follows:
- Creation of a separate category of NBFC operating in the microfinance sector to be designated as NBFC-MFI
- Criteria for defining ‘microfinance loans’ classified as ‘qualifying assets’
- Prudential norms on capital adequacy and provisioning requirements
- Prescriptions related to pricing of credit in terms of a margin cap and interest rate ceiling on individual loans
- Transparency in interest charges as well as other terms and conditions of the loan
- Measures to address multiple lending, over-borrowing and coercive methods of recovery
- Establishment of a proper system of grievance redressal
How to Start a Microfinance Company in India.
or
How does Microfinance work
A. Definition and Entry Point Norms
An NBFC-MFI has been defined as a non-deposit taking NBFC with a minimum net owned fund of ₹5 crores (₹2 crores for NBFC-MFIs registered in the North Eastern Region) and having a minimum of 85 percent of its net assets (assets other than cash, bank balances and money market instruments) like ‘qualifying assets’.
B. Criteria for ‘Qualifying Assets’
To be classified as a ‘qualifying asset’, a loan is required to satisfy the following criteria:
(i) Loan which is disbursed to a borrower with household annual income not exceeding ₹1,25,000 and ₹2,00,000 for rural and urban/semi-urban households respectively;
(ii) Loan amount does not exceed ₹75,000 in the first cycle and ₹1,25,000 in subsequent cycles;
(iii) Total indebtedness of the borrower does not exceed ₹1,25,000 (excluding loan for education and medical expenses);
(iv) Minimum tenure of 24 months for loan amount exceeding ₹30,000;
(v) Collateral free loans without any prepayment penalty;
(vi) Minimum 50 percent of the aggregate amount of loans for income generation activities;
(vii) Flexibility of repayment periodicity (weekly, fortnightly, or monthly) at borrower’s choice.
C. Prudential Norms
Following prudential norms have been specifically made applicable to NBFC-MFIs:
(i) Capital adequacy ratio: 15 percent of the aggregate risk-weighted assets
(ii) Asset classification: A loan asset is recognized as a non-performing asset if interest/principal payment is overdue for 90 days or more.
(iii) Provisioning requirements: The loan provisions should be higher of –
- 1 per cent of the outstanding loan portfolio, or
- 50 per cent of the aggregate loan instalments which are overdue for more than 90 days and less than 180 days and 100 per cent of the aggregate loan instalments which are overdue for 180 days or more.
D. Pricing of Loans
NBFC-MFIs are required to comply with the following norms for pricing of microfinance loans:
(i) They are permitted to charge only three components viz., interest charge, processing fees (limit of 1 percent of the gross loan amount), and insurance premium on an actual basis.
(ii) Interest rate should be lower of –
- cost of funds plus margin of 10 per cent for NBFC-MFIs with loan portfolio exceeding ₹100 crore and 12 per cent for others;
- 2.75 times of the average base rate of the five largest commercial banks.
The average base rate of the five largest commercial banks is announced by RBI at the end of each quarter which determines the interest rate for the ensuing quarter.
E. Other Customer Protection Measures
Certain other customer protection measures have been specifically made applicable to NBFC-MFIs which include the following:
(i) Not more than two NBFC-MFIs can lend to the same borrower.
(ii) No security deposit/ margin shall be collected from the borrower.
(iii) There shall be no penalty charged on delayed payment.
(iv) All sanctions and disbursement of loans shall be done only at a central location.
(v) Recovery shall normally be made only at a central designated place. Field staff shall be allowed to make recovery at the place of residence or work of the borrower only if the borrower fails to appear at the central designated place on two or more successive occasions.
(vi) Every NBFC-MFI is required to become a member of at least one self-regulatory organization (SRO) recognized by RBI and is also required to comply with the code of conduct prescribed by the SRO.
To view: Microfinance Institution in India, sources: RBI
