Micro-finance refers to small savings, credit and insurance services extended to socially and economically disadvantaged segments of society. Indian context terms like “Small and Marginal Farmers”, “Economically weaker sections “have been used to broadly define micro-finance customer. Large part of micro finance activities is confined to credit.
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Large size and population of around 1000 million, India’s GDP ranks among top 15 economies of world.Around300 million people or about 60 million households are living below the poverty line. Group of micro finance practitioners estimated the annualize credit usages of all poor families about Rs45000crores of which some 80 percent is met by informal sources. Credit on reasonable terms to poor can bring a significant reduction in poverty. About 60 million households below or just above the austerely defined poverty line and with more than 80 percent unable to access credit at reasonable rate. There are certain issues and problems which have prevented reach of microfinance to needy.
MICRO FINANCE AND POVERTY ALLEVIATION:
Micro finance institution have expanded frontiers of institutional finance and have brought the poor, especially poor women into formal finance system and enabled them to access credit and fight poverty. Some significant strides have made in upscalling the large quantities of microfinance, observed that microfinance had an asymmetric growth across country with diverse rate of interest being charge to member which are area of concern.
The lack of access to credit for the poor is attributable to practical difficulties arising from the discrepancy between the mode of operation followed by financial institution and the economic characteristics and financing needs of low-income household. The income of many self-employed households is not stable, regardless of it size. Large numbers of small loans are needed to serve the poor, but lenders prefer dealing with large loans in small numbers to minimize administration costs. They also look collateral with a clear title which many low-income households do not have.
To the extent that Microfinance Institution becomes financially viable, self sustaining and integral to the communities in which they operate, they have the potential to attract more resources and expand services to clients. Despite the success of microfinance institutions only about 2% of world’s roughly 500 million small entrepreneurs is estimated to have access to financial services. Microfinance institution can broaden their resource base by mobilizing savings, accessing capital markets, loan funds and effective institutional development support. Saving facilities to tap small saving in a flexible manner.
Microfinance institution are engaged in deposit taking in order to mobilize household saving, they became financial intermediaries. Consequently financial regulations become necessary to ensure the solvency and financial soundness of institution and to protect the depositors. Excessive regulations that do not consider the nature of microfinance institution and their operation can hamper their viability.
In view of small loan size, microfinance institution should be subjected to minimum capital requirement which is lower than the applicable to commercial banks. More stringent capital adequacy rate should be maintained because microfinance institution provide uncollateralized loan.
Microfinance institution could also serve as intermediaries between borrowers and formal financial sector and on lend funds backed by public sector guarantee. Business like NGOs can offer commercial banks ways of funding micro entrepreneur at low cost and risk. There are many on-going researches on this line but context specific research is needed to identify the meet appropriate model.
FORMAL AND INFORMAL SECTOR IN INDIA
FORMAL SECTOR INSTITUTIONS:
The formal sector banking institution in India have been serving only the needs of commercial sector and providing loans for middle and upper income groups. For housing the HFIs primarily because of the perceived risk of lending to this sector .
Risks generally perceived by formal sector Financial Institution are credit risk, High transaction and services cost, Irregular flow of income due to seasonality, Lack of tangible proof of assessment of income, Absence of land tenure of financing housing.
Formal Financial Institution are concerned are Commercial Banks, Housing Finance Institution(HFI),NABARD, Rural Development Banks(RDB),Land Development Banks and Cooperative Banks(CBs).
The government has taken several initiatives to strengthen the institution rural credit system. The rural branch network of commercial banks have been expanded and certain policy prescriptions imposed, in order to ensure great flow of credit to agriculture and other preferred sectors. The commercial banks are required to ensure that 40% of total credit is provided to priority sectors out of which 18% in the form of direct finance to agriculture and 25% to priority sector in favor of weaker sections besides maintaining a credit deposit ratio of 60% in rural and semi urban branches. Further IRDP introduction in 1979 ensure supply of credit and subsidies to weaker section beneficiaries.
INFORMAL FINANCIAL SOURCES:
Informal financial sources generally include funds available from family sources or local money lender. Local money lenders charge exorbitant rates, generally ranging from 36% to 60% interest due to their monopoly in the absences of any other source of credit for non-conventional needs.
NGOs engaged in activities related to community mobilization for their socio-economic development have initiated saving and credit program for their target groups. Community based financial system (CBFS) can be categorized into two models. Group base financial intermediary and NGO linked financial intermediary.
NGOs like SHARAN in Delhi, FEDERATION of THRIFT AND CREDIT ASSOCIATION (FICA) or SPARC have adopted first model where they initiate groups and provide necessary management support.SEWA pertain to second model.
Experience of these informal intermediaries shows that although saving of group members, small in nature do not attract high returns, it is skill practiced due to security reasons. Most of loans are unsecured. Personal or group guarantees or other collaterals like jewellery is offered as security. There are some agencies which provide bulk funds to system through NGO. Organization engaged in micro finance activities in India may be categorized as wholesaler, NGOs supporting SHG and NGOs directly retailing credit borrowers or group of borrower. Wholesalers will includes agencies like NABARD, Rashtriya Mahila Kosh, New Delhi and Women’s world Banking,ASA in Trichy, RDO Layalam Bank in Manipur.
TARGETING PROGRAMMES FOR LOW INCOME GROUPS:
GRAMEEN BANK IN BANGLADESH:
Grameen Bank lending system is simple but effective. To obtain loans, potential borrowers must form a group of five; gather once a week for loan repayment meetings and to start with learn the bond rules and “16 Decision”, which they chant at start of their weekly session.
There decision incorporate code of conduct that members are encourage to follow in their daily life, e.g.: production of fruits and vegetables in kitchen gardens, investment of improvement of housing and education for children, safe drinking water for health,etc.For this physical training are held at meeting.
Key-unit in credit program is first necessary step to receive credit. Initially loans are providing to individuals in group, there were under pressure from other members to repay the loan. Credibility of group members and benefits in term of new loan will be stopped if any one default to repay and the group members are fined or expelled a member if they fail to attend the meeting.
FINANCIAL MODELING SELF-HELP GROUPS:
Typical SHG consist of 12 or 30 member. It is not only saving and loan association but serves as “affinity” group that provides platform for issues. SHG is system raises funds from individual and also from MCI. MCI arise fund from three sources: Capital, SHG saving and borrowing from outside and MCI have regulatory restriction on assets, liabilities and interest rates.
Some of the principles underlying that were issued to implementing:
SHG use almost 60% for lending to their members and rest for depositing.
Joint liability of members is to serves as substitute for physical collateral and saving are to come first.
Interest rates on saving and credit for members are market rates to determine locally by participating institutions.
All NGOs and SHGs will charge an interest margin to cover their costs.
SHGs may levy an extra charge to interest rate of internal fund generation which will force saving.
MECHANISMS FOR CREDIT FUNDING LOW INCOME GROUP BENEFICIARIES BY HDFC .
HDFC making sub-stained efforts to reach the lower income groups of society, especially the weaker section, thus enabling them to realize their dreams of possessing own house.
HDFC’s response to need for housing and living environment for poor both in rural and urban sectors materialized in collaboration with German Development Bank. It also ensures newly constructed houses are within the affordability of beneficiaries and promotes the usage of innovative low cost technologies and locally available material for constructing house. Purpose of implementation of low cost having projects, HDFC collaborate with Government and Non-Government.
Security for loan is mortgage of property being financed. Construction work is regularly monitored by coordinating agencies and HDFC. The loan is disbursed depending upon the stages of construction.
Microfinance operation experience poor repay their loans, saving and loan facilities. It also contribution to solving problem of inadequate housing. It has hot to contribute to this by building financial discipline and educating borrower about repayment requirements.
CHALLENGES OF MICROFINANCE:
The importance of microfinance in the process of poverty eradication is realized, it faces multiple problems. Offering financial services to poor individual and in itself leads to various challenges. Challenges are divided into challenges faced by Micro Entrepreneurs and challenges faced by Microfinance Providers.
Challenges Faced by Micro Entrepreneurs:
Inability to offer marketable collateral for loans:
They are either small businesses or poor individual who have few assets and low income. These clients have cannot offer any collateral for loans. Due to this microfinance providers may raise their interest rate or turn down hundreds of application.
Poor institutional viability of micro enterprises.
Business ideas with a lack of consideration of demand and cost render the micro venture unsustainable and microfinance may incorrectly get blame for it. For instance, In the case of micro crop farming farmer often fail to account for their personal consumption between the sowing and harvesting periods and realize they face shortage of more. Due to this they often end up using the micro loan for personal matter and problem arises when its time to pay back the loan, farmer are forced to take another loan.
Knowledge regarding sources of microfinance is lack.
Many micro entrepreneurs live in remote villages, so they have no access to microfinance service offered by MFIs.
Misallocation or shortage of finance.
Lack of fund, which can solve if MFIs build up their capital base by accessing various sources of funds without fund micro ventures, cannot grow.
Inability to exploit growth opportunities.
Shortage of finance is a contributor to this problem, because lack of access to funds means micro entrepreneurs cannot inject money into their business to grow. They may have little information pertaining to their market such as customer needs and competitor strengths and weakness, this may result May critics.
Lack of organizational resources and governance.
They may have limited skill, qualification and exposure to handling business. They need to be trained through capacity building initiative by MFIs; many micro entrepreneurs may not grow because of this problem.
Low bargaining power.
Micro entrepreneurs operates in competitive markets, their individual bargaining power is diminished. There still isn’t any respite because micro entrepreneurs deal with MFIs on individual basis, which also erode their bargaining power.
Most problems faced by micro entrepreneurs are caused by small size, improper skill, and location. When venture secures loan and begins to grow these problems will eventually.
Challenges faced by microfinance providers.
The importance of microfinance in the process of process of poverty eradication is realized, it faces multiple problems. The challenges faced by microfinance providers are
High risk of micro entrepreneurship and small business.
Micro entrepreneur usually no collateral to offer microfinance providers, no alternate source of income. Micro entrepreneurs are considered high risk ventures and micro finance providers are forced to compensate for this by changing interest rate.
High costs for Micro Lending.
Small micro enterprises increase the transaction cost for MFIs, because they cannot process micro loan in bulk. In study conducted by Asian Development Bank, Microfinance providers change interest rate ranging from 30 to 70% per year.
There are plenty of financial options available for MFIs there is an emerging shortage of money. This is due to lack of awareness of funding source by MFI managers.
Difficulty in measuring the social performance of MFIs.
Micro finance is delivering the economic returns its proponents promised but there are only a handful of tools available that measure the social return of microfinance.
Mixing of charity with business.
If microfinance providers fail to protect themselves against loan delinquency, they will in effect, prioritize social at expenses of financial sustainability. Improper delinquency management is result of inadequate implementation of corporate governance principle. As result loses control over microfinance deals will lead to higher default rates.
Lack of solution for poor.
Targeting of poor households by microfinance programs is common problem because MFIs fail to understand the various needs of micro entrepreneurs. MFI must spend time to develop microfinance tools for each micro entrepreneur.
Lack of microfinance training for MFIs.
Micro finance sector is different when compare to traditional financial sector, microfinance providers need special training to ensure they avoid problem such as under-serving clients.
Poor distribution system of MFIs and lack of information about microfinance investment opportunities.
All these problems can broadly fall into either financial or operational in nature, they should not be impossible to solve as microfinance sector move towards its optimal performance level in next several years. Microfinance can contribute to solving the problem of inadequate housing and urban service as an integral part of poverty alleviation programs. Microfinance institutions have a lot of contribution to this by building financial discipline and educating borrowers about repayment requirements. Micro Finance have more opportunity if the state Reduced direct involvement, increased outlays, Structuring of outlays and finding right outlets, Creating incentives and regulatory environment for implementation.