Microfinance in India Dr Shikha Tripathi. MICROFINANCE IN INDIA India: poverty alleviation is our...

Microfinance in IndiaMicrofinance in India

Dr Shikha TripathiDr Shikha Tripathi

MICROFINANCE IN INDIA

India : poverty alleviation is our main priority

• 51.4% of farmer households are financially excluded from both formal / informal sources.

• Of the total farmer households, only 27% access formal sources of credit; one third of this group also borrow from non-formal sources.

• Overall, 73% of farmer households have no access to formal sources of credit.

MICROFINANCE IN INDIA (contd..)

• Access to finance by the poor and vulnerable groups is a prerequisite for poverty reduction and social cohesion.

• Many policy initiatives were introduced to facilitate poverty reduction

• The banking sector witnessed large scale branch expansion after the nationalization of banks in 1969, which facilitated a shift in focus of banking from class banking to mass banking.

IIt was, however, realized that, t was, however, realized that, notwithstanding the wide notwithstanding the wide spread of formal financial spread of formal financial

institutions, these institutions institutions, these institutions were not able to cater were not able to cater

completely to the small and completely to the small and frequent credit needs of most frequent credit needs of most

of the poor.of the poor.

…… in the 1980s

Savings and credit products did not suit the needs of the

poor

Procedures were complicated and cumbersome

High transaction costs for the poor and the delivery

system

Even special poverty alleviation programmes did not

recognise importance of savings

Resources handled were often larger than the poor’s

capacity to handle

“Others” decided everything

Findings from Research studies …..Findings from Research studies …..

Findings from Research studies …..

the POORthe POORjust wanted….just wanted….

•Mechanism to keep theirMechanism to keep theirlimited resources safely limited resources safely

• Credit to meetCredit to meet emergencies emergencies • Credit for mEsCredit for mEs

Or just Or just HassleHasslefree free

financial financial servicesservices

So we were So we were looking for…looking for…

Sustainable Sustainable approachesapproaches

Products that match Products that match Needs & capacitiesNeeds & capacitiesReduce transactionReduce transaction

costs costs Collateral freeCollateral free

LendingLending

MICROFINANCEMICROFINANCE

• Micro finance is the provision of Micro finance is the provision of thrift, credit and other financial thrift, credit and other financial services and products of very services and products of very small amounts to the poor for small amounts to the poor for enabling them to raise their enabling them to raise their income levels and improve their income levels and improve their living standardsliving standards

• The beginning of micro finance movement in India The beginning of micro finance movement in India could be traced to the self-help group (SHG) - bank could be traced to the self-help group (SHG) - bank linkage programme (SBLP) started as a pilot linkage programme (SBLP) started as a pilot project in 1992 by National Bank for Agricultural project in 1992 by National Bank for Agricultural and Rural Development (NABARD). and Rural Development (NABARD).

• This programme not only proved to be very This programme not only proved to be very successful, but has also emerged as the most successful, but has also emerged as the most popular model of micro finance in India. Other popular model of micro finance in India. Other approaches like micro finance institutions (MFIs) approaches like micro finance institutions (MFIs) also emerged subsequently in the country. also emerged subsequently in the country.

• Recognising the potential of micro finance to Recognising the potential of micro finance to positively influence the development of the poor, positively influence the development of the poor, the Reserve Bank, NABARD and Small Industries the Reserve Bank, NABARD and Small Industries Development Bank of India (SIDBI) have taken Development Bank of India (SIDBI) have taken several initiatives over the years to give a further several initiatives over the years to give a further fillip to the micro finance movement in India.fillip to the micro finance movement in India.

MICROFINANCE IN INDIAMICROFINANCE IN INDIA

• The informal and flexible services offered to low-income borrowers for meeting their modest consumption and livelihood needs have not only made micro finance movement grow at a rapid pace across the world, but in turn has also impacted the lives of millions of poor positively

Micro Finance Delivery Models in India

SHG-Bank Linkage Programme

• The concept of micro finance implies informal and flexible approach to the credit needs of the poor. As such, each model has to be tailored according to the circumstances and the local needs.

• One of the oldest and most successful models internationally has been the Grameen Bank Model in Bangladesh.

The Grameen ModelThe Grameen Model• Launched in 1976 in Bangla DeshLaunched in 1976 in Bangla Desh• To assist the poor families to overcome To assist the poor families to overcome

poverty through creditpoverty through credit• Transformed into a formal bank under a Transformed into a formal bank under a

special law in 1986special law in 1986• Owned by poor borrowers of the bank- Owned by poor borrowers of the bank-

mostly womenmostly women• Reversed conventional practice of banks by Reversed conventional practice of banks by

doing away the need of collateralsdoing away the need of collaterals• Created a new banking with mutual trust, Created a new banking with mutual trust,

accountability, transparency, participation accountability, transparency, participation and creativityand creativity

• Door step bankingDoor step banking

The Grameen Model The Grameen Model (contd..)(contd..)

• The loan can be obtained by a person as a The loan can be obtained by a person as a member of 5 member group.member of 5 member group.

• Loan can be received in a continuous sequence.Loan can be received in a continuous sequence.

• New loans can be obtained if previous loan is New loans can be obtained if previous loan is repaid.repaid.

• All loans are paid in weekly or fortnightly All loans are paid in weekly or fortnightly installments.installments.

• Initially more focus on credit facilities and less Initially more focus on credit facilities and less focus on deposit mobilisation but with policy focus on deposit mobilisation but with policy change in 2000 now focus on deposit change in 2000 now focus on deposit mobilization also.mobilization also.

The Grameen Model The Grameen Model (contd..)(contd..)

• Four kind of savings:• Personal• Special• Grameen Pension• Credit life insurance

• Grameen II- Switched to individual lending• More flexible for the products more suitable

for every day money management and micro enterprise

• GB II has general loans, seasonal loans, family loans and a variety of other loans.

Does SHG mode empowers women?Does SHG mode empowers women?

• As early as December 1984, the Fifth General Assembly of the Asia Pacific Regional Agricultural Credit Association (APRACA) held at Bangkok exhorted the agricultural and rural development finance institutions in the region to mobilise savings from the rural areas with the objective of providing loanable funds for agriculture and rural development.

• The experience in some of the countries where informal self help groups (SHGs) of rural people which promoted savings among members and used these resources for meeting their credit needs, were considered useful innovations.

• Further, the Third Consultation on the Scheme for Agricultural Credit Development (SACRED) held at Rome in 1985 called for active promotion of linkages between banking institutions and SHGs as a mean of improving the access of low income group to banking services.

• The Executive Committee Session of APRACA held at Seoul in October 1985 approved the holding of a South-East Asian sub-regional workshop to devise ways and means of improving such linkages.

• APRACA Regional Workshop held at Nanjing, APRACA Regional Workshop held at Nanjing, China in May 1986 recommended national level China in May 1986 recommended national level consultation and organisation of national surveys consultation and organisation of national surveys of SHGs in collaboration with APRACA + other of SHGs in collaboration with APRACA + other agencies.agencies.

• The Sixth General Assembly of APRACA held at The Sixth General Assembly of APRACA held at Kathmandu, Nepal in December 1986 considered Kathmandu, Nepal in December 1986 considered a project proposal on ‘promotion of linkages a project proposal on ‘promotion of linkages between banking institutions and SHGs in rural between banking institutions and SHGs in rural savings mobilisation & credit delivery to rural savings mobilisation & credit delivery to rural poor’. It was decided that each member country poor’. It was decided that each member country would form a Task Force to conduct a survey of would form a Task Force to conduct a survey of SHGs, thereafter, formulate suitable national SHGs, thereafter, formulate suitable national level programmes.level programmes.

• Consequent upon this, a Task Force was set up Consequent upon this, a Task Force was set up in India in the Ministry of Agriculture, to in India in the Ministry of Agriculture, to identify the existing SHGs, undertake a survey identify the existing SHGs, undertake a survey of the groups and draw a plan of action for of the groups and draw a plan of action for channeling the flow of savings and credit channeling the flow of savings and credit between the rural poor and banks through between the rural poor and banks through SHGs and identify concrete projects for action SHGs and identify concrete projects for action research in this field.research in this field.

• Accordingly, in February 1987, it was decided Accordingly, in February 1987, it was decided that a study team led by NABARD and that a study team led by NABARD and comprising of representatives from various comprising of representatives from various financial institutions, should be constituted to financial institutions, should be constituted to undertake the survey.undertake the survey.

• The survey was undertaken in September 1987 The survey was undertaken in September 1987 and the report discussed at the 18th Executive and the report discussed at the 18th Executive Committee Session and 10th Foundation Committee Session and 10th Foundation Anniversary of APRACA held at New Delhi in Anniversary of APRACA held at New Delhi in November 1987.November 1987.

• This survey report laid the foundation of the This survey report laid the foundation of the SHG-bank linkage programme in India and SHG-bank linkage programme in India and thereafter was launched as a pilot project in thereafter was launched as a pilot project in 1992.1992.

• The pilot project launched by NABARD after The pilot project launched by NABARD after extensive consultations with RBI, commercial extensive consultations with RBI, commercial banks and NGOs with the following objectives; banks and NGOs with the following objectives;

• (i)(i) to evolve supplementary credit strategies for to evolve supplementary credit strategies for meeting the credit needs of the poor by meeting the credit needs of the poor by combining the flexibility, sensitivity and combining the flexibility, sensitivity and responsiveness of the informal credit system with responsiveness of the informal credit system with the strength of technical and administrative the strength of technical and administrative capabilities and financial resources of the formal capabilities and financial resources of the formal credit institutions;credit institutions;

• (ii)(ii) to build mutual trust and confidence between to build mutual trust and confidence between the bankers and the rural poor;the bankers and the rural poor;

• (iii)(iii) to encourage banking activity, both on the to encourage banking activity, both on the thrift as well as on credit sides, in a segment of thrift as well as on credit sides, in a segment of the population that the formal financial the population that the formal financial institutions usually find difficult to cover.institutions usually find difficult to cover.

The Core Strategy of SHG-Bank Linkage Programme

• Basic human feeling of Self Worth at its Core.Basic human feeling of Self Worth at its Core.

• Building financial capabilities and self Building financial capabilities and self confidence in the rural poor, through internal confidence in the rural poor, through internal savings and lending from the owned funds of the savings and lending from the owned funds of the SHGs.SHGs.

• Leveraging the strength of the formal banking Leveraging the strength of the formal banking system and the flexibility of informal Self Help system and the flexibility of informal Self Help Groups (SHGs) in providing adequate financial Groups (SHGs) in providing adequate financial services to the rural poor.services to the rural poor.

• Enables exclusion of rich Enables exclusion of rich

• Self-selection Self-selection

• Focus on women (85% of SHGs) Focus on women (85% of SHGs)

• Savings first and credit later Savings first and credit later

• Group financed only after 6 monthsGroup financed only after 6 months

• Intra group appraisal systems and Intra group appraisal systems and prioritizationprioritization

• Shorter repayment terms Shorter repayment terms

Design features of SHGs

• Progressive lending Progressive lending

• Multi-layered operation Multi-layered operation

• Maintenance of accounts by SHGsMaintenance of accounts by SHGs

• Developing a relationship with Developing a relationship with BanksBanks

• Market rates of interest Market rates of interest

• AND ABOVE ALL… AND ABOVE ALL…

FLEXIBILITY IN APPROACHFLEXIBILITY IN APPROACH

• Model I:Model I:

SHGs promoted, guided and financed by SHGs promoted, guided and financed by banks.banks.

• Model II:Model II:

SHGs promoted by NGOs/ Government SHGs promoted by NGOs/ Government agencies and financed by banks.agencies and financed by banks.

• Model III:Model III:

SHGs promoted by NGOs and financed by SHGs promoted by NGOs and financed by banks using NGOs/formal agencies as banks using NGOs/formal agencies as financial intermediaries.financial intermediaries.

Micro Finance Institution Approach

• The MFI model in India is characterised by a diversity of institutional and legal forms.

• MFIs in India exist in a variety of forms like-- Trusts registered under the Indian Trust Act, Trusts registered under the Indian Trust Act, 1882 / Public Trust Act, 1920;1882 / Public Trust Act, 1920;

-- Societies registered under the Societies Societies registered under the Societies Registration Act, 1860;Registration Act, 1860;

-- Co-operatives registered under the Mutually Co-operatives registered under the Mutually Aided Cooperative Societies Acts of the States;Aided Cooperative Societies Acts of the States;

-- Non-banking financial companies (NBFC)-MFIs, Non-banking financial companies (NBFC)-MFIs, which are registered under Section 25 of the which are registered under Section 25 of the

Companies Act, 1956 or NBFCs registered with Companies Act, 1956 or NBFCs registered with the the Reserve Bank. Reserve Bank.

As per the Bharat Micro Finance As per the Bharat Micro Finance Report of Sa-Dhan, in March Report of Sa-Dhan, in March

2008, the 223 member MFIs of 2008, the 223 member MFIs of Sa-Dhan had an outreach of Sa-Dhan had an outreach of 14.1 million14.1 million clients with an clients with an outstanding micro finance outstanding micro finance portfolio of portfolio of Rs.5,954Rs.5,954 crore. crore.

Bank Partnership ModelBank Partnership Model• Banks can use MFIs as their agent for Banks can use MFIs as their agent for

handling credit, monitoring, supervision and handling credit, monitoring, supervision and recovery.recovery.

• In this model, the bank is the lender and the In this model, the bank is the lender and the MFI acts as an agent for handling items of MFI acts as an agent for handling items of work relating to credit monitoring, work relating to credit monitoring, supervision and recovery, while the supervision and recovery, while the borrower is the individual.borrower is the individual.

• The MFI acts as an agent – it takes care of The MFI acts as an agent – it takes care of all relationships with the client, from first all relationships with the client, from first contact through final repayment.contact through final repayment.

Policy Initiatives in India Policy Initiatives in India • In Jan. 1993, SHGs, registered or unregistered were

allowed by the Reserve Bank to open savings bank a/c with banks.

• RBI constituted a ‘Working Group on NGOs and SHGs’ in 1994 to study the potential of the micro finance movement.

• Based on its recommendations, banks were advised, inter alia, that financing of SHGs should be included by them as part of their lending to the weaker sections and that SHG lending should be reviewed at the State level banker’s committee (SLBC) level and by the banks at regular intervals.

Policy Initiatives in India Policy Initiatives in India (contd..)(contd..)

• To further promote the SHG momentum in the country, banks were advised by the Reserve Bank in 1998 that SHGs which were engaged in promoting the savings habits among their members would be eligible to open savings bank accounts and that such SHGs need not necessarily have availed of credit facilities from banks before opening savings bank accounts.

Policy Initiatives in India Policy Initiatives in India (contd..(contd..

• Subsequent to the Monetary and Credit Subsequent to the Monetary and Credit Policy announcement for the year 1999-Policy announcement for the year 1999-2000, banks were also advised that 2000, banks were also advised that interest rates applicable to loans given interest rates applicable to loans given by banks to micro credit organisations by banks to micro credit organisations or by the micro credit organisations to or by the micro credit organisations to SHGs/ member beneficiaries, would be SHGs/ member beneficiaries, would be left to their discretion.left to their discretion.


• Task Force on Supportive Policy & Regulatory Framework for micro finance set up by NABARD in 1999 having RBI as a member.

• Task Force looked into the entire gamut of issues related to micro finance, particularly regulatory issues.

• RBI constituted a micro credit special cell in 1999 to suggest measures for mainstreaming micro credit & accelerating flow of credit to MFIs.


• The special cell has since been converted into a micro finance and financial inclusion division in the Reserve Bank.

• Based on the reports of the special cell constituted in the Reserve Bank and the Task Force on Supportive Policy and Regulatory Framework, the RBI issued comprehensive guidelines to banks in February 2000 for mainstreaming micro credit and enhancing the outreach of micro credit providers.

• These guidelines, These guidelines, inter aliainter alia, stipulated , stipulated that micro credit extended by banks to that micro credit extended by banks to individual borrowers directly or individual borrowers directly or through any intermediary would from through any intermediary would from then onwards be reckoned as part of then onwards be reckoned as part of their priority sector lending.their priority sector lending.

• Banks were given freedom to formulate Banks were given freedom to formulate their own model/s or choose any their own model/s or choose any conduit/intermediary for extending conduit/intermediary for extending micro credit. micro credit.

Policy Initiatives in India Policy Initiatives in India contd..)contd..)

• Banks were also permitted to prescribe their Banks were also permitted to prescribe their own lending norms so as to provide maximum own lending norms so as to provide maximum flexibility with regard to micro lending. Such flexibility with regard to micro lending. Such credit was to cover not only consumption and credit was to cover not only consumption and production loans for various farm & non-production loans for various farm & non-farm activities of the poor, but also include farm activities of the poor, but also include their other credit needs.their other credit needs.

• Banks were asked to delegate adequate Banks were asked to delegate adequate sanctioning powers to branch managers & to sanctioning powers to branch managers & to keep the loan procedures & documents simple keep the loan procedures & documents simple for providing prompt and hassle free micro for providing prompt and hassle free micro credit.credit.


• The rapid development of the sector The rapid development of the sector necessitated addressing the various issues necessitated addressing the various issues associated with the sector. In October 2002, the associated with the sector. In October 2002, the Reserve Bank set up four informal groups to Reserve Bank set up four informal groups to look into issues relating to: (i) structure and look into issues relating to: (i) structure and sustainability; (ii) funding; (iii) regulations; sustainability; (ii) funding; (iii) regulations; and (iv) capacity building of micro finance and (iv) capacity building of micro finance institutions.institutions.

• Taking into consideration the Taking into consideration the recommendations of the groups, banks were recommendations of the groups, banks were advised that they should provide adequate advised that they should provide adequate incentives to their branches for financing the incentives to their branches for financing the SHGs and that the group dynamics of working SHGs and that the group dynamics of working of the SHGs should be left to them. of the SHGs should be left to them.


• Based on the recommendations of the Based on the recommendations of the Advisory Committee on Flow of Credit to Advisory Committee on Flow of Credit to Agriculture and Related Activities from the Agriculture and Related Activities from the Banking System (Chairman: Prof. V S Vyas), Banking System (Chairman: Prof. V S Vyas), which submitted its final report in June 2004, which submitted its final report in June 2004, it was announced in the Annual Policy it was announced in the Annual Policy Statement for the year 2004-05 that in view of Statement for the year 2004-05 that in view of the need to protect the interest of depositors, the need to protect the interest of depositors, MFIs would not be permitted to accept public MFIs would not be permitted to accept public deposits unless they complied with the extant deposits unless they complied with the extant regulatory framework of the Reserve Bank. regulatory framework of the Reserve Bank.


• However, as an additional channel for However, as an additional channel for resource mobilisation, the Reserve resource mobilisation, the Reserve Bank in April 2005 enabled NGOs Bank in April 2005 enabled NGOs engaged in micro finance activities to engaged in micro finance activities to access the external commercial access the external commercial borrowings (ECBs) up to US$ 5 borrowings (ECBs) up to US$ 5 million during a financial year for million during a financial year for permitted end use, under the permitted end use, under the automatic route. automatic route.


• In order to examine issues relating to rural credit and micro finance, an internal group (Chairman: Shri H.R. Khan) was set up in 2005.

• Based on the recommendations of the group and with the objective of ensuring greater financial inclusion and increasing the outreach of the banking sector, banks were permitted in January 2006 to use the services of NGOs/SHGs, MFIs (other than NBFCs) and other civil society organisations as intermediaries in providing financial and banking services through business facilitator and business correspondent models.


• All Regional Directors of the Reserve All Regional Directors of the Reserve Bank were advised in April 2006 that Bank were advised in April 2006 that whenever issues relating to micro finance whenever issues relating to micro finance were noticed in the areas under their were noticed in the areas under their jurisdiction, they may offer to constitute jurisdiction, they may offer to constitute a coordination forum comprising a coordination forum comprising representatives of SLBC convenor banks, representatives of SLBC convenor banks, NABARD, SIDBI, State Government NABARD, SIDBI, State Government officials, & representatives of MFIs officials, & representatives of MFIs (including NBFCs) and NGOs/SHGs to (including NBFCs) and NGOs/SHGs to facilitate discussion on the issues facilitate discussion on the issues affecting the operations in the sector and affecting the operations in the sector and find local solutions to the local problems.find local solutions to the local problems.

• In May 2006, a joint fact-finding study was conducted by Reserve Bank and a few major banks.

• It was observed during the study that some of the MFIs financed by banks or acting as their intermediaries/partners were focussing on relatively better banked areas and trying to reach out to the same set of poor, resulting in multiple lending and overburdening of rural households.


• Further, many MFIs supported by banks were not Further, many MFIs supported by banks were not engaging themselves in capacity building and engaging themselves in capacity building and empowerment of the groups to the desired extent empowerment of the groups to the desired extent and banks did not appear to be engaging them and banks did not appear to be engaging them with regard to their systems, practices and lending with regard to their systems, practices and lending policies with a view to ensuring better policies with a view to ensuring better transparency and adherence to best practices.transparency and adherence to best practices.

• Guidelines were, therefore, issued to banks in Guidelines were, therefore, issued to banks in November 2006, advising them to take November 2006, advising them to take appropriate corrective action.appropriate corrective action.


• The Union Budget for the year 2008-09 announced that banks would be encouraged to embrace the concept of total financial inclusion.

• The Government would request all scheduled commercial banks to follow the example set by some public sector banks and meet the entire credit requirements of SHG members, namely: (a) income generation activities; (b) social needs like housing, education, marriage: and (c) debt swapping. Consequent upon this, in April 2008, banks were advised by the Reserve Bank to meet the entire credit requirements of SHG members, as envisaged in the Union Budget.


Recent Initiatives by NABARD

• Organising/ sponsoring training Organising/ sponsoring training programmes and exposure visits for the programmes and exposure visits for the benefit of bank officials, NGOs, SHGs and benefit of bank officials, NGOs, SHGs and Government agencies to enhance their Government agencies to enhance their effectiveness in the field of micro finance.effectiveness in the field of micro finance.

• The best practices and innovations with The best practices and innovations with respect to the sector are widely circulated respect to the sector are widely circulated among Government agencies, banks and among Government agencies, banks and NGOs.NGOs.

• NABARD also provides support for capacity NABARD also provides support for capacity building, exposure and awareness building of building, exposure and awareness building of the SHGs and NGOs.the SHGs and NGOs.

• launched the ‘Micro-Enterprise Development launched the ‘Micro-Enterprise Development Programme’ (MEDP) for skill development Programme’ (MEDP) for skill development in March 2006.in March 2006.

• Basic objective was to enhance the capacities Basic objective was to enhance the capacities of matured SHGs to take up micro of matured SHGs to take up micro enterprises through appropriate skill enterprises through appropriate skill upgradation.upgradation.

• The programme envisaged development of The programme envisaged development of enterprise management skills in existing or enterprise management skills in existing or new livelihood activities, both in farm and new livelihood activities, both in farm and non-farm sectors.non-farm sectors.

Recent Initiatives by NABARD (contd..)

• Duration of training can vary between 3 to 13 Duration of training can vary between 3 to 13 days depending upon the objective and the days depending upon the objective and the nature of training.nature of training.

• In 2005-06, a pilot project for ‘promotion of In 2005-06, a pilot project for ‘promotion of micro-enterprises’ was launched among micro-enterprises’ was launched among members of matured SHGs.members of matured SHGs.

• Provides marketing support to the SHGs for Provides marketing support to the SHGs for exhibiting their products.exhibiting their products.

• During the year 2007-08, NABARD supported During the year 2007-08, NABARD supported three exhibitions of products prepared by three exhibitions of products prepared by various SHGs at Bhopal, Chennai and Navi various SHGs at Bhopal, Chennai and Navi Mumbai.Mumbai.


• In addition, NABARD also provides promotional grant support to NGOs, RRBs, DCCBs, farmer’s clubs and individual volunteers and assists in developing capacity building of various partner agencies. NABARD has been making efforts to increase the number of partner institutions as self-help promoting institutions.


• NABARD launched a pilot project in December NABARD launched a pilot project in December 2003 to link post-offices with the SHGs with the 2003 to link post-offices with the SHGs with the objective of examining the feasibility of objective of examining the feasibility of utilising the vast network of post offices in utilising the vast network of post offices in rural areas for disbursement of credit to rural rural areas for disbursement of credit to rural poor on an agency basis.poor on an agency basis.

• The SHG Federations are emerging as The SHG Federations are emerging as important players in nurturing SHG, important players in nurturing SHG, increasing the bargaining power of group increasing the bargaining power of group members and livelihood promotion. The members and livelihood promotion. The features and functions of SHG federation features and functions of SHG federation models promoted in the country vary, models promoted in the country vary, depending on the promoting agencies.depending on the promoting agencies.


• Recognising the growing role of the SHG Recognising the growing role of the SHG Federations and their value addition to SHG Federations and their value addition to SHG functioning, NABARD, in 2007-08 decided to functioning, NABARD, in 2007-08 decided to support the Federations on a model neutral support the Federations on a model neutral basis.basis.

• Support is extended to the Federation by way Support is extended to the Federation by way of grant assistance for training, capacity of grant assistance for training, capacity building & exposure visits of SHG members.building & exposure visits of SHG members.

• NABARD has also formulated the broad NABARD has also formulated the broad norms for deciding the grant of financial norms for deciding the grant of financial assistance to SHG Federations.assistance to SHG Federations.


• Recognising the role played by MFIs, in extending micro finance services in the unbanked areas, NABARD extends support to these institutions through grant and loan based assistance.

• NABARD provides loan funds in the form of revolving fund assistance (RFA) on a selective basis to MFIs to be used by them for on-lending to SHGs or individuals. This loan has to be repaid along with service charge, within a period of 5 to 6 years.


• In order to identify, classify and rate MFIs, In order to identify, classify and rate MFIs, NABARD introduced a scheme for NABARD introduced a scheme for commercial banks and RRBs to enable them commercial banks and RRBs to enable them to avail the services of accredited rating to avail the services of accredited rating agencies for rating of MFIs.agencies for rating of MFIs.

• Banks can avail the services of credit rating Banks can avail the services of credit rating agencies like CRISIL, M-CRIL, ICRA, agencies like CRISIL, M-CRIL, ICRA, CARE and Planet Finance for rating of CARE and Planet Finance for rating of MFIs and avail financial assistance by way MFIs and avail financial assistance by way of grant to the extent of 100 per cent of the of grant to the extent of 100 per cent of the total professional fees of the credit rating total professional fees of the credit rating agency, subject to a maximum of Rs. one agency, subject to a maximum of Rs. one lakh. lakh.


• The assistance is available for the first rating The assistance is available for the first rating of MFIs with a minimum loan outstanding of of MFIs with a minimum loan outstanding of Rs.50 lakh and maximum loan outstanding Rs.50 lakh and maximum loan outstanding of Rs.500 lakh.of Rs.500 lakh.

• Recognising the need for upscaling the micro Recognising the need for upscaling the micro finance intervention in the country, the finance intervention in the country, the Union Finance Minister, in the budget for Union Finance Minister, in the budget for the year 2000-01, announced creation of a the year 2000-01, announced creation of a Micro Finance Development Fund (MFDF).Micro Finance Development Fund (MFDF).


• The objective of the MFDF is to facilitate The objective of the MFDF is to facilitate and support the orderly growth of the micro and support the orderly growth of the micro finance sector through diverse modalities for finance sector through diverse modalities for enlarging the flow of financial services to the enlarging the flow of financial services to the poor, particularly for women and poor, particularly for women and vulnerable sections of society, consistent vulnerable sections of society, consistent with sustainability.with sustainability.

• Consequently MFDF with a corpus of Consequently MFDF with a corpus of Rs.100 crore was established in NABARD. Rs.100 crore was established in NABARD. The Reserve Bank and NABARD The Reserve Bank and NABARD contributed Rs. 40 crore each to the fund, contributed Rs. 40 crore each to the fund, while the balance was contributed by eleven while the balance was contributed by eleven select public sector banks.select public sector banks.


• As per the Union Budget announcement As per the Union Budget announcement for the year 2005-06, the MFDF was re-for the year 2005-06, the MFDF was re-designated as ‘Micro Finance Development designated as ‘Micro Finance Development and Equity Fund’ (MFDEF) with an and Equity Fund’ (MFDEF) with an increased corpus of Rs.200 crore.increased corpus of Rs.200 crore.

• The fund is being managed by a board The fund is being managed by a board consisting of representatives of NABARD, consisting of representatives of NABARD, commercial banks and professionals with commercial banks and professionals with domain knowledge. The Reserve Bank is a domain knowledge. The Reserve Bank is a member of the Advisory Committee of the member of the Advisory Committee of the MFDEF.MFDEF.


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Microfinance in India Dr Shikha Tripathi. MICROFINANCE IN INDIA India: poverty alleviation is our...

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