Micro Finance Final

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    MICRO FINANCE

    Venkatakrishnan. S Gayatri Kuntal

    Ronika Soni Parth Patel

    Pratik J Shah Mayank Shrivatava

    Swapna K Joshi

    ---- PRESENT

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    Micro Finance is the supply of loans, savings, and otherbasic financial service to the poor .

    To most, micro finance means providing very poor

    families with very small loans (micro credit) to help themengage in productive activities or grow their tinybusinesses.

    -> Financial Gateway

    Source: Text

    WHAT IS MICRO FINANCE ?

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    ABOUT MICRO FINANCE

    The modern micro finance movement dates back to the1970s when experimental programs in Bangladesh, Brazil,and a few other countries began to extend tiny loans togroups of poor women to invest in micro enterprises

    By lending to groups of women where every member of the

    group guaranteed the repayment of all members, these microcredit programs challenged the prevailing conventionalwisdom and proved that poor people without collateral couldbe "credit worthy". When offered the opportunity, they wouldrepay loans with interest, at extraordinary rates of repayment.

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    Micro finance refers to loans, savings,insurance, transfer services and other financialproducts targeted at low-income clients.

    Micro credit refers to a small loan to a clientmade by a bank or other institution. Micro credit

    can be offered, often without collateral, to anindividual or through group lending.

    Source: Text

    MICRO FINANCE AND MICROCREDIT

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    MICRO FINANCE IN INDIA

    Evolution of Micro finance in India

    Micro finance has been in practice for ages ( though informally).

    Legal framework for establishing the co-operative movement set upin 1904.

    Reserve Bank of India Act, 1934 provided for the establishment of

    the Agricultural Credit Department. Nationalization of banks in 1969

    Regional Rural Banks created in 1975.

    established as an apex agency for rural finance in 1982.

    Passing of Mutually Aided Co-op. Act in AP in 1995.

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    THE PROFILE OF MICRO FINANCE ININDIA

    The scenario Estimated that 400 million people live Below Poverty Line

    This translates to approximately 75 million households.

    Annual credit demand by the poor in the country is estimated to be aboutRs. 60,000 crores.

    Cumulative disbursements under all micro finance programmes is onlyabout Rs. 5000 crores.(March 10)

    Total outstanding of all micro finance initiatives in India estimated to beRs. 1600 crores. (March 10)

    Only about 5 % of rural poor have access to micro finance

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    Considerable gap between demand and supply for all financial

    servicesMajority of poor are excluded from financial services. This is due to,inter-Alia, the following reasons

    Bankers feel that it is fraught with risks and uncertainties.

    High transaction costs

    Unfavourable policies like caps on interest rates which effectivelylimits the viability of serving the poor.

    While MFIs have shown that serving the poor is not an unviableproposition there are issues that have constrained MFIs whilescaling up. These include

    Lack of an appropriate legal vehicle

    Limited access to equity

    Difficulty in accessing low cost on-lending funds (as of now theyare unable to offer savings services in a legitimate

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    Limited access to Capacity Building support which is animportant variable in terms of quality of the portfolio, MIS,and the sustainability of operations.

    About 56 % of the poor still borrow from informalsources.

    70 % of the rural poor do not have a deposit account

    87 % have no access to credit from formal sources.

    Less than 15 % of the households have any kind ofinsurance.

    Negligible numbers have access to health insurance

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    FEATURES OF INDIAN MF

    About 60 % of the MFIs are registered as societies.

    About 20 % are Trusts

    About 65 % of the MFIs follow the operating model of SHGs.

    Large concentration in South India

    600 MFI initiatives have a cumulative outreach of 1.25 crore poo

    households

    NABARDs bank linkage program has cumulatively reached a totof 9.4 lakh SHGs with about 1.4 crore households.

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    PROJECTIONS FOR THE FUTURE

    Annual growth rate of about 20 % during the next five years.

    75 % of the total poor households of 80 million (i.e. about 60million will be reached in the next five years.

    The loan outstanding will consequently grow from the presentlevel of about 1600 crores to about 42000 crores

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    WHAT IS THE MICRO FINANCE DEVELOPMENT

    FUND ?

    Union Finance Minister in his budget speech for the year 2000-01, this Rs. 100 croreFund has been created in NABARD to support broadly the following activities:

    a) giving training and exposure to self-help group (SHG) members, partner NGOs, banksand govt. agencies

    (b) providing start-up funds to micro finance institutions and meeting their initialoperational deficits

    c) meeting the cost of formation and nurturing of SHGs; (d) designing new deliverymechanisms

    e) promoting research, action research, management information systems anddissemination of best practices in micro finance.

    This Fund is thus expected to address institutional and delivery issues like institutionalgrowth and transformation, governance, accessing new sources of funding, buildinginstitutional 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 publicsector banks.

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    MICRO CREDIT AND RBI

    RBI defines Micro Credit as :

    Micro Credit is defined as provision of thrift, credit and other financial services andproducts of very small amount to the poor in rural, semi-urban and urban areas for

    enabling them to raise their income levels and improve living standards. Micro CreditInstitutions are those which provide these facilities.

    DO RBI ENFORCE INTERESR RATES ?

    No. The reform of the interest rate regime has constituted an integral part of thefinancial sector reforms initiated in our country in 1991. In consonance with this reformprocess, interest rates applicable to loans given by banks to micro credit organizationsor 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 bybanks to individual borrowers, however, continues to remain in force.

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    MICRO CREDIT AND RBI ( CONTD.,)

    DO RBI IMPOSE THE TERMS & CONDITIONS FOR ACCESSING MICROCREDIT ?

    No . Banks have been given freedom to formulate their own lending norms keeping in view groundrealities. They have been asked to devise appropriate loan and savings products and the relatedterms and conditions including size of the loan, unit cost, unit size, maturity period, grace period,margins, etc

    IS FOREIGN INVESTMENT ALLOWED IN MICRO CREDIT PROJECTS ?

    Govt. of India with their notification dated August 29, 2000 have included Micro Credit/Rural Credit inthe list of permitted non-banking financial company (NBFC) activities for being considered for

    Foreign Direct Investment (FDI)/Overseas Corporate Bodies (OCB)/Non-Resident Indians (NRI)investment to encourage foreign participation in micro credit projects. This covers credit facility atmicro level for providing finance to small producers and small micro enterprises in rural and urbanareas

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    TYPES OF MICRO CREDIT PROVIDERS ININDIA

    SUCCESSFUL MICRO FINANCE MODELS THAT

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    SUCCESSFUL MICRO FINANCE MODELS THATHAVE EMERGED IN INDIA

    An Intermediate Model that works on banking principleswith focus on both savings and credit activities and wherebanking services are provided to the clients either directly orthrough SHGs

    There is also a Wholesale banking Model where the clients

    comprise NGOs and SHG Federations. This Model involves aunique package of providing both loans and capacitybuilding support to its partners.

    Further, there is an Individual Banking-based Model thathas its clients as individuals or joint liability groups. While

    programme management and client appraisal in this Modelmay be a challenge, it is best suited to lending to enterprises.

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    SKS Microfinance

    SKS founded in 1998 by Vikram Akula is Indias largest and worlds fastest growing MFI.

    It is spread in 19 states with more than 2400 branches andapprox 7.7 million clients.

    It lends money for a range of income generating activitieslike livestock, agriculture, basket weaving, pottery, beauty

    parlors, etc.

    SKS has a unique ultra poor program for the destitute in thesociety.

    Under this progr