ICON COMMERCE COLLEGE

Academic Publication Series 2021

STUDY MATERIAL, 2021

MICRO FINANCE (CBCS)

[Link]. 4th SEMESTER

Prepared by

Esha Chetri, Asst. Prof

ICON Commerce College

 Preface
The study materials are prepared for the students of B. Com Semester- II, IV and VI courses under
G.U. for the session 2021. Our considered opinion is that the students need structured academic
inputs as per G.U. course contents in order to supplement their studies. The members of the
academic faculty of the college have prepared the study materials which contain answers to the
sorted out long questions, short questions and very short questions. Learned lecturers of the
respective departments worked as a team and this publication is the embodiment of team effort. In
preparing the study materials the need and interest of the students are attached prime importance.
The study materials are expected to serve the purpose of providing an overall direction to study
keeping in view the examination priority.

List of the members of Academic Faculty

Department of Accountancy :
Dr. Smita Roy, [Link], PGDBFS, PhD, [Link].
Prof. Rubi Das, [Link], [Link], [Link]., (SLET)
Dr. Mallika Das, [Link], [Link], PhD.
Prof. Basu Mandal, [Link]., (NET)
Department of Management
Dr. Mandira Saha, [Link], [Link], PhD.
Prof. Rikia Chakraborty, [Link], PGDBM.
Prof. Pankaj Sharma, MBA, [Link].
Prof. Jinty Dutta, MBA (NET)
Department of Finance :
Prof. Esha Chetri, [Link], [Link]
Prof. Kongkona Bhagawati, [Link], MBA.
Dr. Jinti Sharma, [Link]. (SLET), PhD.
Prof. Anuradha Bhuyan, [Link], MBA, (SLET)
Department of Economics/Eng./IT:
Prof. Tridib K r . Handique, M.C.A.
Prof. Pallabi Dutta, MA.
Prof. Niti Mazumdar, MA., [Link], (SLET),
Prof. Manas Kr. Chakraborty, M.C.A.
Prof. Dipannita Chakraborty, MA.
Department of Mathematics and Statistics :
Prof. Mandira Sharma, [Link]., [Link]. (HOD)
Prof. Sanjoy Dutta, [Link], PGDCA

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 We record our deep sense of gratitude to Sri Radha Bora [Link]. and Sri Debasish
Bora [Link]. PGDMM, the President and Secretary respectively of the Managing
Committee of the college for their patronage to the scheme of publishing the study
materials. Prof K.R. Das and Prof S.C. Chanda has rendered academic assistance in
preparing study materials. Our office staff is also associated with this venture in their
respective capacities.
We regret errors, omissions and commissions, if any, in the study materials with a
pledge that in subsequent editions more sincere efforts will be made to make the
publication free from errors as far as possible. We also acknowledge the services rendered by
the printer Jasper and we expect more co-operation from them in near future.
The members of the academic faculty will deem their efforts duly rewarded if the
study materials are found to be helpful to the students for whom the publication is made.

Dr. Nilanjan Bhattacharjee Dr. P.K. Bhattacharjee

Principal Director

Icon Commerce College Icon Commerce College

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 UNIT-1
MICRO FINANCE
1. What is Micro finance?
Ans: Microfinance consists of two words, i.e, ‘micro’, which means ‘small’ and ‘finance’ which
implies ‘money and monetary services’. Micro Finance refers to the provision of affordable
financial services such as small loans, small savings, micro insurance and funds transfer facilities
extended to socially and economically poor and disadvantaged segments of the society to enable
them to increase their income levels and improve standard of living. The main aim of microfinance
is to help poor to get out of poverty. It is emerged as a means of economic development of the poor.
In India, micro-finance has been defined by NABARD Task Force-2000 as “provision of thrift,
credit and other financial services and products of very small amounts to the poor in rural, semi-
urban or urban areas enabling them to raise their income levels and improve living standards.”
2. Who is known as the father of Microfinance?
Ans: [Link], winner of 2006 Nobel Peace Prize and founder of micro-credit movement.
3. What is the difference between micro-credit and micro finance?
Ans: Micro credit refers to very small loans for poor people with little or no collateral security
provided by legally registered institutions like MFIs and Banks. Microfinance refers to micro credit,
small savings, insurance and money transfers of poor and low income people. Microfinance is a
broad category of financial services which includes micro credit also. Micro credit is the provision
of credit services to the poor people and is a part of micro finance. Micro credit consists of providing
a financial service, i.e., micro credit. Micro finance is the provision of financial services like
savings, micro credit, micro insurance and funds transfer.
4. Write the nature of Microfinance.
Ans: The nature of Microfinance is discussed below:
a) Meeting financial needs of the poor- The poor need not only credit facility or loan facility
but different type of financial products/services such as insurance, saving, cash transfer,
payment services. These products/services should be flexible, suitable and affordable to the
poor.
b) Banking with the poor- Microfinance is based on the notion that poor are bankable. In the
past, the poor were not considered bankable as they neither had a regular flow of income
nor any asset to offer as collateral. But Grameen bank in Bangladesh, which is the pioneer

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 in the field of microfinance, had proved that the poor are bankable. Poor borrowers run
profitable micro enterprises with microcredit from Grameen and repaid loan on time. The
most distinctive feature of Grameen credit is that it is without collateral, without guarantee
and without legally enforceable contracts. It is based on trust and belief that poor are
bankable.
c) Targeted to the poor and vulnerable: Microfinance is a paradigm to serve the financial needs
of the poor which are not satisfied by the traditional banking system. It is that part of the
financial system which serves the small and frequent needs of the poor. It helps to build an
‘inclusive financial system’. Microfinance is a supportive activity and not a donating
activity. It is for the empowerment of the poor by supporting and encouraging them in their
income generating activities to enable them to break the various obstacles and come out of
poverty.
d) Sustainable social business: Microfinance, as conceived originally, is a business but not with
a profit maximization objective. It is not a charity programme but a business programme
whose main focus is on social good with a reasonable amount of profit for the financial
sustainability of the business. To achieve financial sustainability in the long run
microfinance institutions aim at earning a reasonable amount of profit to cover its cost of
operation. The surplus funds are reinvested for increasing the outreach of the programs.
e) Local institutional machinery: Microfinance is delivered through local microfinance
institutions of multiple forms which better understands the needs and requirements of the
local people. They have proved themselves to be successful in designing the
products/services which best satisfies the need and requirement of the local poor.
f) Advantage of availability over the cost: Although the cost, i.e., the interest rate of micro-
credit are higher compared to the rates charged by the other financial institutions, but it is
very conveniently available at the door steps of the poor without much procedural
difficulties.
g) Donor support: The main source of finance of micro finance institutions is funding from
donors. Financial support provided by external donors to the MFIs for on-lending to the
groups. These donors may be international development organizations, trusts, voluntary
organizations and banks.

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5. Discuss the features/characteristics of microfinance.
Ans: Microfinance has the following features/characteristics:
a) Low income groups: The most prominent basic feature of microfinance is that credit under
microfinance is only targeted to the low income group people who do not have easy access
to formal institutional sources of credit. They are the people having low and irregular flow
of income.
b) Micro loans: The loans provided by microfinance institutions are small in size to suit the
small and frequent needs of the poor. Microfinance starts with a smaller amount giving an
opportunity to the poor to best utilize the skills they know and to generate income to reduce
their poverty. Subsequently, the amount is enhanced enabling them to undertake enterprise
in bigger scale. The micro loans are easy to borrow and convenient to repay.
c) High Interest rates: Another important feature of microfinance is that the rate of interest
associated with the micro-credit is higher compared to formal banks. This is due to the fact
that, the MFIs need to serve many small accounts; transaction costs of which are very high.
They also require a large number of people to serve the borrowers at door step.
d) Group lending approach: Another unique characteristics of microfinance is that loans are
offered to a group of people called Self-help Group (SHG) or Joint Liability Group (JLG).
The individuals carry their own business activities but form a group to obtain the loans and
are jointly or collectively liable to repay the loan amount. If one member defaults, others
are liable to repay the amount in full to the bank. Under group liability, members have an
incentive to screen other members so that only trustworthy and likeminded individuals are
only allowed to take membership in the group.
e) Collateral free: A basic feature of microfinance is that it does not insist on collateral
securities from the borrowers. The poor are denied financial services by the formal banking
system due to lack of assets to be offered as security. Microfinance has effectively provided
a solution to this problem by using trust and group liability as the base for microfinance.
f) Easy access to finance: Getting finance from a formal banking institution was never easy
especially for the poor. Banks were not easily accessible due to structural difficulties like
illiteracy of the customers, lack of identity proof, lack of collaterals etc. In fact, poor were
considered not bankable. In case of microfinance, clients need not go to bank/MFIs but

5
 banks/MFIs visits the clients. Receiving and repaying a loan becomes easy as credit facility
is available at the door step of the poor.
g) Flexibility: Unlike the formal banking/financial institutions, there is greater flexibility in
microfinance operations. The clients may deposit and borrow on daily, weekly and
monthly basis as per their ability and requirements.
h) Loan for income-generating activities: The loans are normally availed for income
generating activities, although loans also provided for consumption, housing and other
purposes.
i) Microfinance plus: Microfinance plus concept implies that microfinance is not only about
micro-credit. Micro-credit is the first step which leads to other facilities such as micro-
saving, micro-insurance, transfer facilities and payment services, education and other basic
necessity.
j) Development of thrift habit: Microfinance motivates and enables the clients to save in
small amounts. Members of Self-help groups save a small amount to be qualified for
getting microfinance which is the initial motivation for saving. Group members also save
for repaying the loan amount. Thus, they save small amount either to build or to repay the
lump sums and thereby it helps in developing a thrift habit among the poor and low income
group.
6. Write about the benefits of microfinance.
Ans: The microfinance industry is fastly growing in India. The recent studies show that the top sixty
microfinance institutions in India have nearly ten million customers who have been provided small
loans under microfinance. The microfinance aims at removal of poverty, empowering poor, mostly
women to start their own economic activities, earn money and achieve financial independence. The
recent studies also show that the recovery in microfinance is as high as 97% which facilitates cycling
of banks funds for the productive purposes. Generally, the loan under microfinance is given without
any collateral security. Thus the poor are in position to get the loan and come out vicious cycle of
poverty. Microfinance promotes gender equality and empowers women by providing them finance
for carrying out economic productive activities. Microfinance helps in creating long term financial
independence in the backward and poverty ridden areas.

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 7. Mention about the role of microfinance.
Ans: The role of microfinance is discussed below:
(i) Microfinance provides finance to the poor people for carrying out their economic activities
and helps them to meet the basic needs of life.
(ii) Microfinance helps the poor people to increase their income, savings and standard of living.
(iii) Microfinance provides employment to the poor people by providing self employment
opportunities in various sectors and activities.
(iv) Microfinance protects the poor people against the risks by providing life insurance and
assets insurance.
(v) Microfinance helps in alleviating poverty by providing affordable financial services.
(vi) Microfinance helps in increasing economic growth and development in the country.
(vii) Microfinance promotes gender equity by supporting women empowerment and their
economic participation and hence improving well being of the poor households.
(viii) Micro finance helps in increasing savings, investments and developments.

8. Discuss the evolution of Microfinance.

Ans: Microcredit can actually be traced back to the early 1800s when Jonathon Swift tried to empower
families in poverty through the Irish Loan Fund. While the theory was there, the system was flawed and its
goal of financial independence for the rural population wasn’t achieved.
Over a century later, Muhammad Yunus provided a small amount of his own money to a community in
Bangladesh. He was astonished at how his money was able to rebuild the community. In 1983 he founded
the Grameen (Village) Bank, which created a huge microcredit industry in Bangladesh.
Similarly, Opportunity International was founded in the 1970s by two businessmen, Australian David
Bussau and American Al Whittaker. David was living in Indonesia, while Al was in Columbia. The local
communities were poor, disempowered and lacking in hope. But David and Al recognised the clever
business ideas of the local people who wanted to work but were unable to access funding from formal
financial institutions, and as a result, were without opportunity. Their response was offering women small
loans and a hand up out of poverty.
Stories like this led to the boom in microcredit in the 1990s. Traditionally, the microcredit model was based
on the concept of ‘social collateral’, where a group of rural or semi-urban women would meet and receive
training in financial literacy, small businesses and other profit related theories. They would then gather

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together and one woman would receive her loan. Upon the repayment of this loan, it would be passed to
the next community member and so on.
The 1990s saw this trend evolve into ‘microfinance.’ Not only was microcredit something available to
people in poverty, but a broader suite of products such as savings, insurance, pensions and remittances were
developed. The Microcredit Summit in Washington (1997) legitimised the concept and aimed to build upon
the success of the previous three decades in order to alleviate poverty.
The 21st century has also produced notable achievements in microfinance. In fact, the United Nations
declared 2005 the International Year of Microcredit in order to draw attention to the cause and give it global
importance. Muhammad Yunus won the Nobel Peace Prize for microfinance in 2006 and David
Bussau was awarded Senior Australian of the Year in 2008 for his work in microfinance, social justice and
human rights.
However, between 2008 and 2010, there was a microfinance crisis that affected developing countries
heavily. Some say this crash was due to the repercussions of the microfinance industry expanding too
quickly and others maintain the opinion that there were direct links to the Global Financial Crisis in 2008.
Regardless of the cause, the Universal Standards for Social Performance were developed in order to
regulate the operations of microfinance organisations.
Later in 2013, the Smart Campaign Client Protection Certification outlined the minimum standards of
service that an organisation could offer their clients. The values include transparency, privacy and
mechanisms for complaint resolution. Opportunity has a dedicated team working to equip all our program
partners globally to make progress in implementing best practices in providing client-focused services that
meet people’s needs through Social Performance Management. And despite the financial crisis,
microfinance recovered quickly with Opportunity’s client numbers growing from 500,000 in 2005 to 3.5
million in 2015.
It is important to note that most organisations have maintained focus on women as their target clients. There
are many reasons for this including the evidence that women tend to use their profits to provide for their
families first rather than for personal use. This trend is important in the microfinance industry as it gives
hope to empowering the next generation.
9. Write in detail regarding the development of Microfinance in India.
Ans: The microfinance sector has covered a long journey from micro savings to micro credit and then to
micro enterprises and now micro insurance, micro remittance, micro pension, and micro livelihood. This
gradual and evolutionary growth process has given a boost to the rural poor in India to reach reasonable

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economic, social, and cultural empowerment, leading to better life of participating households. The
development of the microfinance sector in India can be divided into three phases. The first phase started in
the pre-independence days. The role prescribed for the financial sector to achieve developmental goals has
its origins during that period. The agriculture credit department was set up in 1935 by the Reserve Bank of
India to promote rural credit. In its early days, the government sought to promote rural credit by
strengthening the cooperative institutions. According to Sa-Dhan (2004), the need to replace costly
informal credit with institutional credit was strongly felt as the All India Rural Credit Survey report of 1954
found that informal sources accounted for 70 per cent of rural credit usage, followed by cooperatives (6.4
per cent) and commercial banks (0.9 per cent). The second phase started in the late 60s. The Lead Bank
Scheme was introduced by the Reserve Bank of India in 1969, thereby starting a process of district credit
plans and coordination among different financial intermediaries. It was during the same period that the
nationalization of fourteen commercial banks took place. According to Sa-Dhan (2004), these initiatives
resulted in the share of the formal financial sector in total rural credit usage rising to 30 per cent in 1971.
The Regional Rural Banks (RRBs) were conceptualized in 1975 to augment the delivery of financial
services in rural areas. This resulted in the creation of a network of banks which is one of the largest in the
world even today. The All India Survey Debt and Investment Survey of 1981 found that the share of the
formal financial sector in total credit had risen to over 60 per cent. The government initiated the Integrated
Rural Development Programme (IRDP) in 1980-81. The objective was to direct subsidized loans to poor
self-employed people through the banking sector. The National Bank for Agriculture and Rural
Development (NABARD) was established in 1982. In the same year the government initiated the
Development of Women and Children in Rural Areas scheme as a part of IRDP. It was around this time
that the first Self Help Groups (SHGs) started emerging in the country mostly as a result of non-government
organizations’ (NGO) activities. The Mysore Resettlement and Development Authority (MYRADA) was
one of the pioneers of the concept of SHGs in India. It was in 1984-85 when MYRADA started linking
SHGs to banks. SHGs in turn were also very responsive and flexible to the needs of their members. While
MYRADA did not directly intervene in the credit market for the poor, it facilitated banking with micro
institutions established and controlled by the poor. SHGs were a step in that direction. This was the
beginning of the current microfinance movement. IRDP is estimated to have reached over 55 million poor
families until 1999. IRDP, in spite of its immense outreach, experienced very low repayment rates and
created 40 million defaulters which, coupled with the subsidy component, ruled out long-term sustainability
of the programme. Therefore, the government merged several programmes into a new programme -

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Swarnajayanti Gram Swarojgar Yojna (SGSY). The mandate of SGSY is to continue to provide subsidized
credit to the poor through the banking sector to generate self-employment through a self-help group
approach. SGSY has been growing at a fast rate. The total number of swarojgaris assisted during the year
2009-10 were 3 13,28,868 out of which approximately 67 per cent were women. The formal financial sector
has been criticized to be supply driven during this phase (Fisher and Sriram, 2002). Financial services were
viewed as a social obligation. Given the high rates of default, a formal loan waiver was announced by the
government in 1989. This had a negative impact on credit discipline, and reinforced the view that lending
to the poor was not a profitable business among the mainstream financial institutions. The third phase
marked the modern microfinance movement. The SHG–Bank Linkage Programme was formally launched
by NABARD in 1992, with it circulating guidelines to banks for financing SHGs under a pilot project that
aimed at financing 500 SHGs across the country through the banking system. While the banks had financed
about 600 SHGs by March 1993, they continued to finance even more SHGs in the coming years. This
encouraged the Reserve Bank of India (RBI) to include financing SHGs as a mainstream activity of banks
under their priority sector lending in 1996. The government bestowed national priority to the programme
through its recognition of microfinance. The banking system comprising public and private sector
commercial banks, regional rural banks, and cooperative banks has joined hands with several organizations
in the formal and non-formal sectors to use this delivery mechanism for providing financial services to a
large number of the poor.
Concurrently, in 1993, the Rashtriya Mahila Kosh (RMK) was formed to accelerate the flow of funds to
self-employed women in the unorganized sector. It is worth mentioning that the SEWA Cooperative Bank
has been operating in Gujarat with similar objectives since 1974. The bank has been viable right from its
inception and is an ideal example of community-owned sustainable financial service delivery. Microfinance
received greater recognition when the Small Industries Development Bank of India (SIDBI) set up a
Foundation for Microcredit with an initial capital of Rs100 crore in 1998. The same year also saw the
formation of Sa-Dhan as an apex level association of community development finance institutions. The
passing of the Mutually Aided Cooperative Societies (MACS) Act by Andhra Pradesh in 1995 and followed
by some other states has also acted as a stimulant as many new microfinance initiatives have come up under
this legislation. In addition to the success of the NABARD-SHG bank linkage programme, alternative
microfinance initiatives following the Grameen and/or SHG methodology or at times individual lending
model were also successful. The year 2004 also saw some very important development in the microfinance
sector in India. The banking sector led by ICICI Bank showed interest in microfinance as a viable

10
commercial opportunity. The total disbursement of the banking sector to microfinance was estimated at
around Rs1000 crore for the year 2003-4. ICICI Bank took a lead in establishing innovative partnerships
with microfinance institutions which allowed for risk sharing between the two.

10. Indicate whether the following statements are true or flase:

a) The main aim of microfinance is to help poor to get out of poverty. TRUE
b) Microfinance is a charity programme. FALSE
c) Access to credit is regarded as the fourth most important development need after food, health and
education. TRUE
d) Microfinance is a broader concept whereas micro-credit is a narrower concept. TRUE
e) The concept of micro-finance was founded by Dr. Mohammad Yunus. TRUE

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 UNIT 2
MICRO FINANCE INSTITUTIONS

1. What are Micro Finance Institutions?

Ans: In broad sense, an organization providing financial services to the poor is known as Micro
Finance Institutions(MFI). It includes a wide range of institutions having distinct legal structure,
mission and methodology. However, they have the unique feature of providing financial services to
low income clients who are poorer and more vulnerable than traditional bank clients. Nobel Laureate
Muhammad Yunus is credited with laying the foundation of the modern Micro Finance Institutions
with the establishment of Grameen Bank in Bangladesh in 1976. In India, MFIs not only offer micro-
credit but also provide other financial services like savings, insurance, remittance and nonfinancial
services like counselling, training and support to start a small business activity. As microfinance is
regarded as one of the most effective tools of reducing poverty, it has an important role in bridging
the gap between the formal financial system and the underprivileged section of the society in the rural
areas. The Micro Finance Institutions (MFIs) work as a link as they access financial resources from
the banks and other mainstream Financial Institutions and provide financial and other services to the
poor in underserved areas.
2. Discuss the various legal forms of MFIs.
Or
Who are the lenders under MFI approach? Discuss
Ans: The various legal forms of micro-finance institutions or lenders under the MFI approach are as
follows:
a) MFI as Companies: A non-banking financial company (NBFC) is a company registered
under the Companies Act, 1956 of India and is engaged in the business of loans and advances,
acquisition of shares/securities/bonds, leasing, hire purchase, insurance business but does not
include any institution whose principal business is that of agriculture activity, industrial
activity, sale/purchase/construction of immovable property.
As per the Section 45- I of the RBI Act, an NBFC is a company which carries on any of the
following activities as its business or part of its business: lending; acquisition of shares, stocks
or other securities; hire-purchase or leasing; insurance etc.
NBFCs perform functions similar to that of banks; however there are a few differences:

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 (i) an NBFC cannot accept demand deposits;
(ii) an NBFC is not a part of the payment and settlement system and as such an NBFC
cannot issue cheque drawn on itself

MFIs with Rs 2 crore as its initial funds can operate as a Non- Banking Financial
Companies (NBFCs). These MFIs are required to obtain a registration certificate from
RBI after satisfying the initial conditions. Some of the leading NBFC-MFIs in India
are Fusion Microfinance Pvt. Ltd., Annapurna Microfinance Pvt. Ltd., Arohan
Financial Services Ltd., Bandhan bank etc.
b) MFIs as Banking Institutions: The MFIs who are operating as banks are registered under
RBI and regulated by RBI. To set up a MFI as a bank it would require initial capital from Rs
100 to 300 crore. For Local Area Bank the amount is Rs 5 crore. Local Area Banks are
permitted to operate on three contiguous districts in a state. These MFIs are permitted to
deliver credit, to mobilize savings and to give insurance (under the regulation of IRDA).
c) MFIs as Charitable Institutions: These are societies registered under Societies Registration
Act, 1860 and Trusts registered under Trust Act, 1882. They work on grants. They are not
able to handle funds of SHGs or act as an intermediary beyond a level. They are not allowed
to raise equity and mobilize deposits. Often these institutes are found to survive on foreign
grants.
d) MFIs as Co-operatives: Co-operatives have legal sanction to work as financial
intermediaries. The activities of State Co-operatives are restricted in the state. Their activities
are heavily controlled by the controlling authority, Registrar of the Cooperative Societies and
the State Government. Cooperatives are allowed to raise share, to mobilize deposits. No tax
is charged on cooperatives. They can get foreign debt but are not allowed to raise foreign
equity.
3. Write in detail the MFI model of delivering financial services.
Ans: MFIs use two basic methods in delivering financial services to their clients. These are:
A. Individual method: MFIs are also increasingly providing loans to individuals. In Individual
lending method, MFIs provide loans to an individual based on his/her own personal credit
worthiness. Individual lending is more prevalent with clients who generally need bigger size
loans.

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B. Group method: The common method of providing microfinance is the Group method. It
primarily involves a group of individuals, which becomes the basic unit of operation for the
MFIs. Group methodologies help in creating social collateral (peer pressure) that can
effectively substitute physical collateral. Group becomes a basic unit with which MFIs deal.
The advantage of group methodology is that:
• Groups avail loan and are trained for joint liability for the loans that are taken by
individuals in the group. This ensures repayment of the loan amount in case of a
default.
• They conduct meetings and form their own set of rules and regulations which are
followed by the group members.
• The MFIs get all the clients at one place instead of visiting each individual house, this
increases efficiency and also control costs for the MFIs.
Under Group Method there are three models:
a) Joint Liability Group Model:
➢ This is usually an informal group that consists of 4-10 individuals
who seek loans against mutual guarantee.
➢ The loans are usually taken for agricultural purposes or
associated activities.
b) Self-Help Group Model:
➢ It is a group of individuals with similar socio-economic
backgrounds.
➢ The SHG are small and informal groups of 10 to 20 members. It may
be registered or unregistered.
➢ Groups are composed either by male or by female only. In India 90
percent of the SHGs are composed of female only.
➢ The group should meet regularly. So members can understand each
other in a better way and solve their problems. Attendance is
compulsory in the meeting. They meet at an appointed time and
place for carrying out the savings and credit activities and other
issues of development.

14
 ➢ Members themselves determine the rules and norms and they follow
them religiously. This act as a self-controlling mechanism.
➢ The main motive of the SHG is to empower poor socio-
economically and improve their livelihood pattern.
The SHGs can again be grouped under the following categories:
• SHG Bank Linkage Programme (SBLP) Model: These are the groups promoted
and constituted either by themselves, or by NGOs. These groups get assistance from
banks either directly or indirectly. Under the SBLP model there are three sub
models:
i. SBLP sub-model 1
ii. SBLP sub-model 2
iii. SBLP sub-model 3
Under the first sub-model groups are formed by members. These groups
approach banks for financial assistance and bank directly finances the
groups by extending credit at rates prescribed by banks. NGOs have no role
to play in these formation or promotion of these SHGs and linking them
with banks.

Under second sub-model, bank finances the groups but groups are assisted
by NGOs working in the area. However, the role of the NGOs is passive in
connecting the groups with the banks and it just helps the SHGs in securing
the assistance. In this model NGO plays the role of facilitator in linking the
SHGs to banks.

In sub-model three, the SHGs are formed and constituted by NGOs. The
NGOs secure the loans from banks and then extend it to SHGs. Thus, in the
third sub-model of SBLP, NGOs have an active role to play. In this model
NGOs act as intermediary in linking the SHGs to banks.
• SGSY Model: Swarnajayanti Gram Swarojgar Yojana (SGSY) was launched in
April 1999 by restructuring and combining the Integrated Rural Development
Programme (IRDP) with Training of Rural Youth for Self-Employment

15
 (TRYSEM), Supply of Improved Tools for Rural Artisans (SITRA), Ganga Kalyan
Yojana, Million Wells Scheme (MWS) nad Development of Women and Children
in Ruural Areas (DWCRA), and to introduce a single self-employment programme
SGSY. It is a credit based programme which primarily aimed at below poverty line
(BPL) households. The goal is to bring the families (swarozgaries) assisted by the
program above the poverty line by appreciable sustainable levels of income over a
period of time. In this model the rural poor are organized into SHGs through process
of social mobilization, training and capacity building and provision of income
generating assets. The approach of SGSY is based on SHGs that have to act as a
financial intermediary and in many cases there are women SHGs which are also
expected to serve as a vehicle for their empowerment. SGSY has been conceived
as a holistic self-governing programme covering all aspects of self-employment of
the rural poor such as organization of the poor into SHGs, their capacity building,
selection of key activities, infrastructure build up, technology and market support.
It is a centrally sponsored self-employment scheme and funding is shared between
the centre and the state in the ratio of 75:25 except North-Eastern states where the
ratio is 90:10.
• NGO/MFI Model: In this model, the SHGs are constituted and promoted by
NGOs/MFI. These NGOs/MFIs get funding from different international and
national donor agencies and they lend those funds to SHGs at certain rates of
interests. Due to the various advantages, this methodology is widely accepted and
used in micro-finance across the world.
c) Grameen Model: Established in 1976, the Grameen Bank of Bangladesh
was the brainchild of Prof. Muhammad Yunus. It has over 1000 branches (
a branch covers 25-30 villages, around 240 groups and 1200 borrowers) in
every province of the country, borrowers groups in 28,000 villages, 12 lakh
borrowers with over 90% being women. It has an annual growth rate of 20%
in terms of its borrowers. The most important feature is the recovery rate of
loans, which is as high as 98%. It has inspired the creation of Regional Rural
Banks (RRBs) in India. The primary motive of this system is the
development of rural economy.

16
4. What are the sources of funding of Micro finance institutions?
Ans: The sources of funding of Micro Finance Institutions are discussed below:

➢ Donor and government grants and soft loans:

Microfinance has received significant attention from the donor community, based upon its
potential as a powerful tool for poverty alleviation. As such, many millions of dollars have
been spent on promoting microfinance programs around the world. For most MFIs, the
principal source of funding is from grants and highly subsidized loans, or socalled soft loans.
Soft loans are obtained from multilateral banks (e.g., the World Bank, Inter-American
Development Bank alike), government aid agencies (e.g., United States 3 Agency for
International Development (USAID), UK Department for International Development (DFID),
foundations (e.g., Ford Foundation) and apex organizations (e.g., Women’s World Banking,
ACCION, FINCA). Usually such grants and soft loans include conditions and requirements
as to how the funds should be spent and are in limited dollar amounts. However, most would
agree that in order to achieve the goal of reaching the remaining 81 millions poorest
households, MFIs would need to access capital above and beyond grants and soft loans.
➢ Shareholders’ Equity
Many financial institutions are owned by wealthy individuals and corporate institutions. They
put together the initial or seed capital of the business to kick-start the operation. This initial
capital is used to get the license, to acquire offices, hire key personnel and help to start the
operation of the business. On many occasions, just one individual could commence the
funding until others would join later on. These individuals are called Founders of the
organization.
➢ Venture Capital
A venture capital is defined as a capital invested in a project in which there is a substantial
element of risk, typically a new or expanding business. In other words, a venture capital is
financing that investors provide to start-up companies and small businesses that are believed
to have long-term growth potential.

17
 Venture capital generally comes from well-off investors, investment banks and any other
financial institutions that pool similar partnerships or investments.
➢ Bank Loan
Borrowing to augment the capital of the business is the normal thing in banking and financial
services industry. Banks lend among themselves and lend to other institutions in their brackets
other than outsiders.
With this, MFIs do borrow from the banks to expand their loan portfolios and also meet critical
fixed assets and operational needs. But the majority of these MFIs only borrow to fund their
loan portfolios. This is done after they have exhausted their shareholders’ capital or need a
bridging finance. A Bridging finance is used when expected fund is delayed and a quick fund
is needed to cover the gap between the shortfall now and the time of receiving the expected
fund.
➢ Debenture/Qualifying medium to long term loans:
Where the MFI is unable to mobilise sufficient deposit to fund the business, it can resort to
longterm borrowings at a fixed cost and tenor. Such funding can take the shape of overdraft
to cover short term gaps, medium term loans from other financial institutions or long term
funds that can be categorized as secondary capital of the MfB. Where applicable, these
borrowings may require security in the form of debenture.
➢ Revenue sources:
These are the various sources through which financial value is added when your cashflow is
put into use through the sale of Micro finance product and services.
i). Fees and Commissions: These are the rewards MFIs receive on rendering specific
services. Management, processing, commitment, transfer fees are familiar to customers when
loans are disbursed to them or when they request for local transfer services.
ii). Interest income: This is the reward the MFI receives when loans are granted to customers.
It usually constitutes over 70% of the total MFI revenue.
5. Write about the top 10 micro finance companies in India.
Ans: (i) Equitas Small Finance
The lender offers small loans between Rs.2,000 and Rs.35,000 to the Economically Weaker Section
(EWS) and Low Income Group categories in the country.
Loan Details:

18
 Loan Amount Interest Rate Processing Fee

Up to Rs.25,000 24% p.a. Nil

More than Rs.25,000 23% p.a. 1% + GST

(i) ESAF Microfinance and Investments (P) Ltd

ESAF Microfinance is a leading MFI in India that has empowered more than 4 lakh members through
its 150 branches. It offers an extensive range of business development and financial services to the
economically and socially challenged members of the society. The institution offers a bouquet of loan
products to suit the varied needs of customers:
Loan Details:

Loan Amount Rs.1,000 - Rs.1 lakh

Interest Rate 22% - 26% p.a. on diminishing basis

Processing Fee 1% - 2% of loan amount + GST

Loan Tenure 3 months – 60 months

(ii) Fusion Microfinance Pvt Ltd

Fusion Microfinance is an RBI registered NBFC-MFI that works on a JLG lending model of
Grameen. The institution offers loans to women in the rural and semi-urban regions. Apart from
offering financial support and insurance protection, the company also imparts financial literacy to
its customers.
Loan Details:

Loan Amount Rs.3,000 – Rs.60,000

Loan Tenure 8 months – 2 years

Interest Rate 21% - 21.50% p.a. on reducing balance method

Processing Fee 0 – 1% of loan amount + GST

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 (iii) Annapurna Microfinance Pvt Ltd
The purpose of Annapurna Microfinance is to provide loans to the financially underserved
population. Technical and financial education is also imparted to beneficiaries to strengthen their
entrepreneurial skills. It is one of the top ten NBFC-MFIs in India today.
Loan Details:

Loan Amount Rs.1,500 – Rs.25 lakh

Loan Tenure 12 months – 240 months

Interest Rate 18% - 26% p.a. (reducing)

Processing Fee 1% - 2% + GST

(iv) Arohan Financial Services Limited

Eastern India’s largest NBFC MFI, Arohan Financial Services Limited offers financial inclusion products
to 1.9 million customers throughout India. The local partners of the company help in improving its reach
to remote locations. Non-financial products are also offered by the company at affordable costs. Arohan
also has an MSME lending business in its portfolio.
Loan Details:

Loan Amount Rs.1,100 - Rs.50,000

Loan Tenure 3 months - 24 months

Interest Rate 20.70% - 21.25% p.a.

(v) BSS Microfinance Limited

The company offers microloans to poor women so that they can be part of income generating activities that
bring them out of poverty. The institution offers loans in the states of Maharashtra, Karnataka, Tamil Nadu,
and Madhya Pradesh.
Loan Details:

Loan Amount Rs.8,000 - Rs.60,000

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 Interest Rate 25% p.a.

Processing Fee 1% + GST (for loans above Rs.25,000)

(vi) Asirvad Microfinance Limited

This microfinance institution has an extensive network of branches throughout 22 states in India. It offers
microloans to women entrepreneurs from low-income households for income generation activities.
Currently, three types of loans are offered to borrowers, i.e., Product Loan, Income Generation Program
(IGP) Loan, and Small and Medium Enterprise (SME) Loan.
Loan Details:

Loan Amount Rs.2,498 - Rs.45,000

Loan Tenure 12 months - 24 months

Interest Rate 21.70% p.a.

(vii) Cashpor Micro Credit

Cashpor is a microfinance institution that works towards bringing the economically backward sections
of the society out of poverty. The products offered by the company include credit facilities, savings
services, insurance coverage, and pension services.
Loan Details:
Credit facilities offered by Cashpor is predominantly for undertaking income generation activities.
Loans are also provided for non-income generation activities and acquisition of assets that improve the
health and social status of the beneficiaries. For instance, loans for the construction of toilets, women
empowerment, and the procurement of gas connections are commonly offered by the company.
(viii) Bandhan Financial Services Limited
The motive of the institution is to reduce socio-economic poverty by generating employment
opportunities for low-income households. Cost-effective financial and non-financial products are
provided in this regard.
(ix) Fincare Business Services Limited
The Fincare group consists of two NBFC-MFIs, i.e., Disha Microfin Ltd. (now referred to as Fincare
Small Finance Bank) and Future Financial Services Pvt. Ltd. (FFSPL). The company caters to the

21
 semi-urban and rural households of the country, offering Microenterprise Loans (MEL) and loan
against gold with quick disbursals.
6. What are the functions of SHGs?
Ans: Self help groups mean small, socially and economically homogenous group of rural or urban
people, who assembled together for some productive purpose. The functions performed by the SHGs
are as follows:
a) Financial inclusion: By forming SHGs the poor and marginalized sections, living in remote and
inaccessible area can be link with mainstream financial institutions leading to financial inclusion.
b) Reduction in transaction cost: It reduces the transaction costs of banks while dealing with poor.
It makes the banking services easily accessible for poor and also eases the loan recovery process
of banks.
c) Savings and thrift: The amount may be small, but saving have to be regular and continuous habit
with all the members. ‘Saving first- Credit later’ should be the motto of every group member.
By this method group members learn how to handle large amounts of cash through savings.
d) Internal lending: The savings to be used as loans for members. The purpose of loan, amount to
be sanction, rate of interest etc. is to be decided by the group itself. The groups maintain proper
accounts.
e) Discussing problems: The group organize regular meeting and they discuss their problems and
try finding solutions to the problems faced by the members of the group.
7. Discuss the role of SHG in delivery of micro-finance.
Ans: In India, there is a huge expansion in micro finance sector through SHGs. SHGs are the basic
unit of micro-finance movement in India. A majority of MFIs are non-profit organizations; they
encourage the formation of SHGs and link them with financial organizations/banks. This accounts
for 70 percent of microfinance in India. The major contribution in the development of micro-finance
is by the SHG bank linkage programme.
Experience of different anti-poor, anti poverty and other welfare programmes implemented through
the world has shown that the key to their success lies in the evolution and participation of community
based organization at the primary level. People’s participation in rural financing and their realization
through intermediaries of Self Help Groups (SHGs) have been recognized as a supplementary
mechanism for improving micro financing support to the poor. Micro finance for providing credit
and other related financial service to the poor has been accepted as one of the instruments for poverty

22
alleviation of the nations. In India, micro finance has been promoted by linking SHGs of the poor
with banks either through NGOs or directly in a large scale.
Microfinance activity has witnessed a rapid expansion since the late 1990s due to benefits like ability
to reach out to the poor through the provision of informal and flexible operating mechanisms and user
friendly procedures. Microfinance service providers have used an innovative and experimental
approach in launching the various products to satisfy the unique and different needs of the poor. The
provision of collateral-free micro credit to the poor has been of immense help to meet their need for
small credit and other financial services and as a result the microfinance drive has revolutionized in
the country. Admitting the importance of microfinance as an effective tool for inclusive development,
GOI as well as the RBI has facilitated an environment conducive for orderly development of the
microfinance sector in the country. RBI advised commercial banks to cater to provide housing and
other loans along with consumption and production loans for various farm and non-farm activities of
the poor.
As we know, SHGs are group of 10-20 individuals who pool their savings into a fund from which
they can borrow as and when necessary. Formal financial institutions like commercial banks, co-
operative banks and rural banks support the SHGs in their operations. These groups have their
accounts in these banks. These groups are self monitored and self motivated. The actions of each
member are monitored by other members. All members of the group are responsible for the repayment
of the amount. These groups usually consist of members from their own locality and social status.
The groups have their unique name. The group is lead by a leader who is selected by all other
members. The members decide among themselves the amount they will deposit for the fund. The
SHG members approach their nearest bank for help. The bank employee assists the members in
opening their bank account. The success of the group depends on the members of the group. This
practice encourages the poor people to manage their savings in a purposeful way. Several studies are
conducted on SHG performance and their growth. It was found that from over the years SHGs are
increasing in numbers. Some studies suggested that SBLP had significantly improved the access to
financial services by the rural poor. It was found that net household income has increased
significantly. The households have started investing for education and health.
In India three models have emerged for SHG Bank linkages (which has been already discussed in Q
no.3). A milestone in SHG movement was achieved when NABARD launches SHG-Bank linkage
programme in India. It was started formally in 1992. Commercial banks support the programme. It

23
was the first time when the rural and vulnerable group was considered as bankable by banks. Policies
are formulated by Reserve Bank of India, which advised commercial banks to support and guide the
SHGs, it was beneficial for both the parties, the rural people are getting financial support from formal
groups and on the other hand banks can expand their outreach in rural sector. The linking of SHG
with the bank aim people at using intermediation of the SHG between the banks and the rural for
cutting down the transaction costs.

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 UNIT 3
MICROFINANCE IN INDIA

1. Describe the historical evolution of microfinance in India.

Ans: Indian Microfinance can be chronologically classified into four phases. The four stages are:
Phase I: 1900s – 1969 Cooperative Movement
Phase II: 1969 - 1991 Subsidized social banking
Phase III: 1992 – 2000 SHGs Bank Linkage program and Growth of NGO-MFIs
Phase IV: 2000 – Commercialization of Microfinance
While each phase represents distinct features of its own, there are some overlaps and crosscutting
themes among them. An overriding feature of Indian Microfinance through out its evolution is its
focus on poverty alleviation in rural areas. This focus has broadly determined the approach and
operations of microfinance in India. In addition to this Indian microfinance is characterized by
existence of both State and Civil Society Organization in delivery of microfinance services while
private players joining the wagon during phase IV. In context of Indian Microfinance, it is important
to note that each phase was influenced not only by learning from earlier phase but also from
development discourse, government policies and international trends in microscope eco-space among
other things. The remaining section describes each phase in detail.
Phase I: Early 1900s – 1969
The earliest phase of Indian Microfinance can be described from early 20th century until 1969, when
credit cooperatives largely dominated as an institution in provision of microfinance services. This
phase began with passing of Cooperative Societies Act 1904, to extend credit in Indian villages under
government sponsorship. The rural credit cooperatives in India became a means of pooling the few
resources of the poor and providing them with access to different financial services. However, not
much was achieved until independence when credit cooperatives were chosen by the government as
an institutional mechanism for delivering credit to the farm sector. Choice of credit cooperatives was
inevitable in immediate context of post independence. On one hand commercial banks had very low
presence in the rural areas and on the other all commercial banks were in the private sector and
political imperative of the time did now allow government to provide an appropriate set of incentives
to commercial banks to venture into the rural areas. In such a situation, cooperatives were the only

25
option given their spatial spread and penetration in remote areas. However, rural cooperatives were
facing a lot of problems. The 1945 Cooperative Planning Committee found that a large number of
cooperatives were “saddled with the problem of frozen assets because of heavy over dues in
repayment.” All India Rural Credit Survey in 1947 brought out that only 3% of the total borrowing
of the cultivators was being met through the cooperatives. It also revealed that the share of
Institutional agencies, comprising the government, the cooperatives and the commercial banks, in
financing the borrowings of rural household was only 7.3 per cent in 1951-52 corresponding to the
share of private money lenders which was as high as 68.6 per cent. With large scale failure of credit
cooperatives the stage was set for some fundamental changes in microfinance institutional delivery.
Phase II: 1969 – 1991
With failure of cooperatives, the government focused on measures such as nationalization of banks,
expansion of rural branch networks, establishment of Regional Rural Banks(RRBs) and the setting
up of apex institutions such as the National Bank for Agriculture and Rural Development (NABARD)
and the Small Scale Industries Development Bank of India (SIDBI), including initiation of a
government sponsored Integrated Rural Development Programme (IRDP). While these steps led to
reaching a large population, the period was characterized by large-scale misuse of credit, creating a
negative perception about the credibility of micro borrowers among bankers, thus further hindering
access to banking services for the low-income people.
Phase III: 1992 – 2000
By 1990s the problems with both State promoted institutional forms viz. credit cooperative and RRBs
in delivery of rural credit were quite evident. The credit cooperatives were paralysed with poor
governance, management and the poor financial health due to interrupting state funding and
politicization. RRBs financial position deteriorated due to the burden of directed credit and priority
sector lending and a restrictive interest rate regime. An important development in this phase was
SHG Bank linkage program by NABARD which greatly increased banking system outreach to
otherwise unreached people and initiated a change in the bank’s outlook towards low-income families
from beneficiaries to customers. The SHG–Bank linkage program was scaled-up on a large scale by
the NABARD in the year 1992 by giving guidelines to banks for financing SHGs through the banking
system. With the success of this program RBI in 1996 took the policy decision to include financing
to SHGs as a mainstream activity of banks under their priority sector lending. Since then the banking
system comprising public and private sector commercial banks, regional rural banks and cooperative

26
banks has joined hands with several organizations in the formal and non-formal sectors to use this
delivery mechanism for providing financial services to a large number of poor. Following such
attempts the face of the Indian financial sector changed and the focus changed from excessive
subsidization of bank credit to lending at market rates. This period also witnessed the entry of another
set of stakeholders Microfinance Institutions (MFIs), largely of non-profit origins, with existing
development programs. MFIs consist of Refinance Institutions, Banks, Non Government
Organizations (NGOs) and Self Help Groups dealing with small loans and deposits in rural, semi
urban or urban areas enabling people to raise savings, productive investments and thereby their
standard of living (Nadarajan and Ponmurugan, 2006). (Jayasheela et at, 2007). International success
of Microfinance in Bangladesh, Indonesia and in Latin America also influenced the thinking in Indian
Microfinance towards commercialization.
Phase IV: 2000 –
Since 2000, the microfinance sector saw some radical changes in many aspects. While the prime
objective remains poverty alleviation with new terms of inclusive growth or financial inclusion, sector
moved from sole social return approach to double bottom line approach of social and financial returns.
This change in approach led to many changes in the functioning of microfinance. The emphasis on
‘bottom of the pyramid’ and good financial returns of some of leading MFIs, brought many main
stream commercial entities taking interest in the sector not only as part of their corporate
responsibility but as new business line. One among prominent example in Indian context is ICICI
Bank that adopted innovative ways in partnering with NGO MFIs and other rural organizations to
extend their reach into rural markets. UN declaration of Microfinance year in 2005 gave further
impetus towards recognition of microfinance as a poverty alleviation tool and was able to attract a lot
interest from large commercial entities such as foreign banks, investors, pension funds etc. This
resulted in their participation in the sector for social and commercial return. The MFIs side
experienced similar appetite for increasing commercialization to scaleup its operations and profit.
This translated into a number of changes. Increasingly NGO-MFIs began transforming into regulated
legal formats such as Non-Banking Finance Companies (NBFCs) or section 25 companies to attract
commercial investment and become eligible for deposit taking entity which could be an easy source
of fund for lending but remains untapped. Today's MFIs, particularly those which were founded after
2000, look and think differently from those of the 1990s. Many of these “second generation” MFIs
are promoted by entrepreneurs with mainstream corporate experience. Today, MFIs relate better to

27
the market and see themselves as businesses in the financial services space, catering to an untapped
market segment while creating value for their shareholders. This overriding shift in orientation from
development to social entrepreneurship has brought about changes in institutions' legal forms, capital
structures, sources of funds, growth strategies, and strategic alliances. Many first generation MFIs
have subsequently transformed into regulated, for profit business models and legal structures. With
increasing out reach and focus on profit, increasingly MFIs emerged as strategic partners to banks,
consumers finance, retailers interested in reaching out to India's low income client segments. At the
policy level, government has recognized the microfinance as important player towards achieving
Financial Inclusion. In 2006, government has also table a Microfinance Regulation and Development
Bill which seek to promote and regulate the microfinance organizations. While the bill itself has come
under severe criticism on account of some critical loopholes, this is a landmark step towards
recognition of civil society organization in microfinance space.
2. What do you mean by Financial Inclusion?
Ans: Financial inclusion may be defined as the delivery of banking services at an affordable cost,
especially to the vast sections of disadvantaged and low-income group. In other words, it is the
process of ensuring access to financial services and timely and adequate credit where needed by
vulnerable groups such as weaker sections and low-income groups at an affordable cost. The term
“financial inclusion” has gained importance since the early 2000s. But there are evidences that a
large section of population is still excluded from the formal financial services. Reserve Bank of
India (RBI) and Government of India(GOI) are very much concerned about the financial
exclusion and are taking various initiatives to achieve financial inclusion. Financial inclusion has
gained momentum over past few years as an important national initiative for including the poor
into formal financial system by making available a variety of essential financial services such as
savings, credit, insurance, cash payment and transfer facilities at an affordable cost for poverty
reduction and social enhancement of underprivileged section.
Objectives of financial inclusion:
• To address all the needs of the poor and disadvantaged through the formal financial
system.
• To shift the dependency of rural poor from money lenders to formal financial institutions.
• To eliminate the high-cost interest regime from the lives of the poor.
• To build up diversified and multiple livelihoods of the poor.

28
 • To inculcate a strong savings culture among the poor.
3. Discuss the initiatives undertaken to promote financial inclusion.
Ans: With a view to convert banking services from the “class phenomenon” to the “mass
phenomenon”, the Central government nationalised fourteen major commercial banks in 1969. It
was considered that banks were controlled by business houses and thus failed in catering to the
credit needs of poor sections such as cottage industry, village industry, farmers, craft men, etc.
The second dose of nationalization came in April 1980 when six more banks were nationalized.
The broad objectives of nationalization of banks were-
• Social Welfare
• Controlling Private Monopolies
• Expansion of Banking
• Reducing Regional Imbalance
• Priority Sector Lending
• Developing Banking Habits
To further the goal of financial inclusion, the government launched the Lead Bank Scheme in
1969 itself. It was based on the recommendation of the Gadgil Study Group. The basic idea was
to have an “area approach” for targeted and focused banking. Under the scheme a cluster of
villages were to be allotted to public sector banks for serving to their credit needs. Thus, the RBI
has adopted a bank-led model for achieving financial inclusion and removed various regulatory
bottle necks in achieving greater financial inclusion in the country. Further, for achieving the
targeted goals, RBI has created conducive regulatory environment and provided institutional
support for banks in accelerating their financial inclusion efforts. In more specific terms,
following were some of the initiatives taken by the RBI for promoting Financial Inclusion in the
country-
(a) Priority Sector Lending: It is an important role given by the Reserve Bank of India (RBI)
to the banks for providing a specified portion of the bank lending to few specific sectors like
agriculture or small scale industries. This is essentially meant for an all round development of the
economy as opposed to focusing only on the financial sector.
(b) Setting up of the “Ultra Small Branches”: These are non brick-mortar branches, the purpose
of which is to reduce the infrastructural costs in setting up branches in rural areas. Under this
initiative, the banks will appoint banking correspondent who will deal with all cash transactions

29
and other routine work in that area. A bank officer will visit this ultra small branch once a week
and connect this business correspondent to the banks’ core banking solution (CBS) through a
secured network enabling data access and transfer between the small branch and the bank.
(c) Opening of no-frills accounts: Basic banking no-frills account is with nil or very low
minimum balance as well as charges that make such accounts accessible to vast sections of the
population. Banks have been advised to provide small overdrafts in such accounts.
(d) Relaxation on know-your-customer (KYC) norms: KYC requirements for opening bank
accounts were relaxed for small accounts in August 2005; thereby simplifying procedures by
stipulating that introduction by an account holder who has been subjected to the full KYC drill
would suffice for opening such accounts. It has now been further relaxed to include the letters
issued by the Unique Identification Authority of India containing details of name, address and
Aadhaar number.
(e) Engaging business correspondents (BCs): In January 2006, RBI permitted banks to engage
business facilitators (BFs) and BCs as intermediaries for providing financial and banking services.
The BC model allows banks to provide doorstep delivery of services, especially cash in-cash out
transactions, thus addressing the last-mile problem.
(f) Use of technology: Recognizing that technology has the potential to address the issues of
outreach and credit delivery in rural and remote areas in a viable manner, banks have been advised
to make effective use of information and communications technology (ICT), to provide doorstep
banking services through the BC model where the accounts can be operated by even illiterate
customers by using biometrics, thus ensuring the security of transactions and enhancing
confidence in the banking system. (g) General-purpose Credit Card (GCC): With a view to
helping the poor and the disadvantaged with access to easy credit, banks have been asked to
consider introduction of a general purpose credit card facility up to Rs 25,000 at their rural and
semi-urban branches. The objective of the scheme is to provide hassle-free credit to banks’
customers based on the assessment of cash flow without insistence on security, purpose or end
use of the credit. This is in the nature of revolving credit entitling the holder to withdraw up to
the limit sanctioned.
(h) Simplified branch authorization: To address the issue of uneven spread of bank branches,
in December 2009, domestic scheduled commercial banks were permitted to freely open branches
in tier III to tier VI urban centers, subject to reporting. In the north-eastern states and Sikkim,

30
 domestic scheduled commercial banks can now open branches in rural, semi-urban and urban
centers without the need to take permission from RBI in each case, subject to reporting.
(i) Opening of branches in unbanked rural centers: To further step up the opening of branches
in rural areas so as to improve banking penetration and financial inclusion rapidly, the need for
the opening of more bricks and mortar branches, besides the use of BCs, was felt. Accordingly,
banks have been mandated to allocate at least 25% of the total number of branches to be opened
during a year to unbanked rural centers.

4. Write in detail about the growth of microfinance in India.

Ans: The term microfinance came into existence in 1970s when organizations, such as Grameen
Bank of Bangladesh with the microfinance pioneer Muhammad Yunus, were starting and shaping
the modern industry of microfinancing. Even Microfinance in India can map out its origins back
to the early 1970s when the Self Employed Women’s Association (“SEWA”) of the state of
Gujarat formed an urban cooperative bank, called the Shri Mahila SEWA Sahakari Bank, with
the objective of providing banking services to poor women employed in the unorganized sector
in Ahmadabad City, Gujarat. The microfinance sector went on to evolve in the 1980s around the
concept of SHGs, informal bodies that would provide their clients with much-needed savings and
credit services. Due to large size and population of around 1000 million, India's GDP ranks among
the top 20 economies of the world. However, around 400 million people or about 60 million
households, are living under the poverty line. With about 60 million households below or just
above the strictly defined poverty line and with more than 80 percent unable to access credit at
reasonable rates, it is obvious that there are certain issues and problems, which have banned the
reach of micro finance to the needy. With globalization and liberalization of the economy,
opportunities for the unskilled and the illiterate people are not increasing fast enough, as compared
to the rest of the economy. In this context, the institutions involved in micro finance have a
significant role in reducing inequality and contribution in rural development for overall growth.
Microfinance, now clearly a worldwide movement, is embraced by governments, corporation,
banks, development agencies, business communities, civil societies. Although the exact scale of
the microfinance industry is imperfect because of incomplete data and self-reporting, several data
sources shed some light on the industry. The growth of microfinance is visible in many aspects.
There are more than 2000 NGOs involved in the NABARD SHG-Bank linkage program. Out of

31
these, approximately 800 NGOs are involved in some form of financial intermediation. Further,
there are 350 new generation co-operatives providing thrift and credit services. According to our
estimate, the present total outstanding, including Sa-Dhan members and bank linkages is
approximately Rs.700 crores (Rs. 150 crores of Sa-Dhan members and another Rs. 550 crores
from the Banking system). The total client base is estimated at 6-8 million as opposed to the
Government of India (GOI) intention to reach 25 million clients. The growth of community
institutions has taken place with the role to take social and financial intermediation. A numbers
of community banks have come into existence at village and block levels call ' Federation of Self
Help Groups'. The inadequacies of the formal financial system to cater to the needs of the poor
and the realization of the fact that the key to success lies in the evolution and participation of
community based organizations at the grassroots level led to the emergence of new generation of
MFIs. One kind of MFI is an NGO engaged in promoting Self Help Groups (SHGs) and their
federations at a cluster level and linking SHGs with Banks under the Scheme. Examples are
Myrada in Karnataka, which has promoted Sanghmitra, a company of its village saving and credit
sanghas, PRADAN which has established a large number of SHGs and federated them under
Damodar in Bihar, Sakhi Samiti in Rajasthan. Another kind is NGO-MFI directly lending to the
poor borrowers, who are either organized into SHGs or into Grameen Bank type of groups after
borrowing bulk funds from SIDBI, RMK and FWWB. Examples in this category are Rashtriya
Gramin Vikas Nidhi (RGVN) which runs credit and savings programme in Assam and Orissa on
the lines of Grameen Bank, Bangladesh. Also we have SHARE in AP, ASA in Tamil Nadu under
this category. There are MFIs which are specifically organized as cooperatives, such as over 500
Mutually Aided Cooperative Thrift and Credit Socities (MACTS) in AP, promoted among others
by Cooperative Development Foundation (CDF) and the SEWA Bank in Gujarat which also runs
federations of SHGs in nine districts. Then we have MFIs, which are organized as Non-Banking
Finance Companies (NBFC) such as BASIX, CFTS Mirzapur, SHARE Microfin. Ltd. and
Sarvodaya Nanofinance Ltd.
Indian Government has considerably enhanced allocation for the provision of education, health,
sanitation and other facilities which promote capacity building and well being of the poor. The
Indian government puts emphasis on providing financial services to the poor and underprivileged
since independence. The commercial banks were nationalized in 1969 and were directed to lend
40% of their loan at concessional rate to priority sector. The priority sector included agriculture

32
and other rural activities and weaker section of society in general. The aim was to provide
resources to help the poor to start their micro enterprise to attain self sufficiency. The government
of India had also launched various poverty alleviation programs like Small Farmers Development
Scheme (SFDS) 1974-75, Twenty Point Programme (TPP) 1975, National Rural Development
Programme (NRDP) 1980, Integrated Rural Development Programme (IRDP) 1980, Rural
Landless Employment Guarantee Programme (RLEGP) 1983, Jawhar Rozgar Yojna (JRY) 1989,
Swarna Jayanti Gram Swarojgar Yojana (SGSY) 1999 and many other programs. But none of
these programs achieved their desired goal due to poor execution and mal - practices on the part
of government officials. Public funds meant for poverty alleviation are being misappropriated or
diverted through manipulation by the locally powerful or corrupt (Mehta, 1996). To supplement
the efforts of micro credit government of India had started a very good scheme viz. Integrated
Rural Development Programme (IRDP) in 1980. But these supply side programs (ignoring
demand side of economy) achieved little. It involved the commercial banks in giving loan of less
than Rs 15000/- to socially weaker section. In a period of nearly 20 years the total investment was
around Rs 250 billion to roughly 55 million families. But it was far from realizing its desired goal.
The problem with IRDP was that its design incorporated a substantial element of subsidies (25-
50% of each family’s project cost) and this resulted in extensive malpractice and mis-utilisation
of funds. This situation led bankers to view the IRDP loan as motivated handout and they largely
failed to follow up with borrowers. The net result is that estimates of repayment rates in IRDP
ranged from 25-33%. The two decades of IRDP experience in the 1980s and 1990s affected the
credibility of micro borrowers in the view of bankers and ultimately, hindered access of the less
literate poor to banking services. This act of government had a serious long term impact on
development of micro entrepreneurship among the underprivileged of the society. Thus a very
good and potential program which once claimed to be “The world’s largest microfinance
programme” failed due to poor execution and political interference. The mid- term appraisal of
the ninth plan had indicated that these programmes presented a matrix of multiple programmes
without desired linkages. The programmes suffered from critical investments, lack of bank credit,
over-crowding in certain projects and lack of market linkages. The programmes were basically
subsidy driven and ignored the process of social intermediation necessary for success of self-
employment programmes. A one-time provision of credit without follow up action and lack of a
continuing relationship between borrowers and lenders also contributed to the failure of the

33
programmes. The planning commission constituted a committee in 1997 to review the
effectiveness of self-employment and wage employment programmes. The committee
recommended the merger of all self employment programmes. It also recommended a shift of
importance from individual beneficiary approach to a group based approach. It emphasized the
identification of activity clusters in specific areas and strong training and marketing linkages. The
government of India accepted the recommendations of the committee. On 1st April 1999 a new
programme called Swarnajayanti Gram Swarojgar Yojana (SGSY) was launched by
amalgamating programmes like IRDP (Integrated Rural Development Programme) and a number
of allied programmes such as TRYSEM (Training of Rural Youth for Self Employment),
DWCRA (Development of Women and Children in Rural Areas), SITRA (Supply of Improved
Toolkits to Rural Artisans), GKY (Ganga Kalyan Yojana) and MWS (Million Wells Schemes).
This is a holistic programme covering all aspects of self-employment such as formation of Self
Help Groups (SHGs), training, credit, technology, infrastructure and marketing. The programme
aims at establishing a large number of microenterprises in rural areas. SGSY is a credit-cum-
subsidy programme. It lays emphasis on activity clusters. This programme has got tremendous
response from the beneficiaries. The number of SHGs under this program is about 2.25 million
with an investment of Rs 14,403 crore, profiting over 6,697million people (Wikipedia). Similarly,
the entire network of primary cooperatives and RRBs, established to meet the need of the rural
sector in general and poor in particular, has proved a colossal failure. Saddled with burden of
directed credit and a restrictive interest regime, the position of the RRBs deteriorated quickly
while cooperatives suffered from the malaise of mismanagement, privileged leadership and
corruption born of excessive state patronage (Sinha,2003).The microfinance initiative in the
private sector in India can be traced back to initiative undertaken by Shri Mahila SEWA (Self
Employed Women’s Association) Sahakari Bank in 1974 for providing banking services to the
poor women employed in the unorganized sector in Ahmadabad in Gujarat. This Bank was
established at the initiative of 4000 self employed women workers who contributed a share of
Rs10 each with a specific objective of providing credit to these women so as to empower them
and free them from vicious circle of debt. Currently SEWA Bank has over 318,594 account
holders with total working capital of Rs 1291.89 million (Mar’09).
MYRADA (Mysore Rehabilitation and Development Agency) of Karnataka was another NGO to
start in 1968 to foster a process of ongoing change in favour of the rural poor. While the objective

34
is to help the poor help themselves, MYRADA achieves this by forming Self Help Affinity
Groups (SHGs) and through partnership with NGOs and other organization in 1984-85. At present
it is managing 18 projects in 20 backward districts of Karnataka, Tamil Nadu and Andhra Pradesh.
These initial initiatives had a much localized operation and were limited to their members only.
Hence it failed to take the shape of a mass movement. In India, initially many NGO microfinance
institutions (MFIs) were funded by donor support in the form of revolving funds and operating
grants. But it is only after intervention of National Bank for Agriculture and Rural Development
(NABARD) in 1992 in the field of microcredit, the movement of microfinance got a boost in
India.
In India around 70% of landless and marginal farmers did not have a bank account and 87% of
poor had no access to credit from a formal source (NCAER Rural Financial Access Survey 2003).
The share of formal financial sector in total rural credit was 56.6% compared to informal finance
at 39.6% and unspecified source at 3.8% (RBI Report 1992). There is a huge potential of
microcredit in rural India. The Reserve Bank of India has advocated for financial inclusion of
majority of population for economic development of our country. Access to affordable financial
services specially credit and insurance enlarges livelihood opportunities of poor. Apart from
social and political empowerment, financial inclusion imparts formal identity and provides access
to the payment system and to saving safety net like deposit insurance. Hence financial inclusion
is considered to be critical for achieving inclusive growth (U Thorat, 2007). The RBI Governor,
[Link] (2007) gave a simple definition of financial inclusion as “Ensuring bank account to
all families that want it”. He said it would be the first step towards reaching the goal of bank credit
as a human right as advocated by Nobel laureate Professor Mohammed Yunus. Now 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 MahilaKosh (RMK). At the lower level we have commercial Banks, Regional Rural
Banks and cooperatives to provide microfinance services. The private institutions that undertake
microfinance services as their main activity are generally referred to as Micro Finance Institutions
(MFIs) in Indian context. There are also some NGOs which lend credit to SELF HELP GROUP
(SHGs). The NGOs that support the SHGs include MYRADA in Bangalore, Self Help Women’s
Association (SEWA) in Ahmadabad, PRADAN in Tamilnadu and Bihar, ADITHI in Patna,

35
 SPARC in Mumbai. The NGOs that are directly providing credit to the borrowers include SHARE
in Hyderabad, ASA in Trichy, RDO LOYALAM Bank in Manipur (Tiwari, 2004).
5. Write a short note on NABARD.
Ans: The importance of institutional credit in boosting rural economy has been clear to the Government
right from its early stages of [Link] Reserve Bank of India (RBI) at the insistence of the
Government of India, constituted a Committee to Review the Arrangements for Institutional Credit
for Agriculture and Rural Development (CRAFICARD) in 1979, under the Chairmanship of Shri
B. Sivaraman, former member of Planning [Link] Committee’s report (1979) outlined the
need for a new organisational device for providing undivided attention, forceful
direction and pointed focus to credit related issues linked with rural [Link] resulted in
foundation of NABARD (National Bank for Agriculture and Rural Development) in 1982 as a statutory
body under Parliamentary act-National Bank for Agriculture and Rural Development Act, [Link]
initial paid up capital was Rs. 100 cr. contributed with 50: 50 by government of India and Reserve
bank of India. It stood at Rs. 10,580 cr. as on 31 March 2018.
To support Indian Rural economy with credit facility, RBI was apex body before formation of
[Link] resulted in making NABARD as an apex development financial institution in
[Link] NABARD’s role is basically a continuation of the RBI role in the sphere of Agriculture
and Rural [Link] functions of the 3 institutes of RBI (1) the Agricultural Credit
Department (ACD), (2) Rural Planning and Credit Cell (RPCC), (3) and Agricultural Refinance
and Development Corporation (ARDC) were transferred to NABARD.

• ACD: RBI provided through its ACD short term refinance to cooperatives.
• RPCC: It was dealing with the Regional Rural Banks (RRBs) since 1979
• ARDC: RBI set up the Agricultural Refinance Corporation (ARC) in 1963 to work as a
refinancing agency in providing medium term and long term agricultural credt to support
investment credit neds for agricultural development.

In 1975, ARC was renamed as Agriculture Refinance and Development Corporation

(ARDC) to give focused attention to credit off-take, development and promotion of the
agricultural sector. NABARD is a development bank focussing primarily on the rural sector
of the country. It is the apex banking institution to provide finance for Agriculture and rural

36
 development. Its headquarter is located in Mumbai, the country’s financial [Link] is
responsible for the development of the small industries, cottage industries, and any other such
village or rural projects.
6. What are the functions of NABARD?
Ans: Following are the functions of NABARD:
i. Credit functions: It involves preparation of potential-linked credit plans annually for all districts of
the country for identification of credit potential, monitoring the flow of ground level rural credit,
issuing policy and operational guidelines to rural financing institutions and providing credit facilities
to eligible institutions under various programmes.
ii. Development functions: Development functions of NABARD relate to strengthening the credit
functions and thereby making credit more productive. Credit is important for development of
agriculture and rural sector as it facilitates investment in capital formation and technological
upgradation. Hence, NABARD has been focusing in the area of strengthening the rural financial
institutions engaged in extending credit to the rural sector. In the process of ensuring dlivery of
adequate and timely credit to the needy, various initiatives have been taken by NABARD to
strengthen the cooperative credit structure and the regional rural banks. The various developmental
and promotional activities of NABARD relate to helping cooperative banks and RRBs to prepare
developmental action plans for themselves. It also provides financial support for the training institutes
of cooperative banks. Provide training for senior and middle level executives of commercial banks,
RRBs and cooperative banks. It also provides financial assistance to cooperative banks for building
improved management system, computerization of operations and development of human resources.
iii. Supervisory functions: Under this function NABARD aims at ensuring the proper functioning of
cooperative banks and regional rural banks. NABARD has been sharing with the RBI certain
supervisory functions in respect of cooperative banks and RRBs mainly with regard to the refinancing
credit needs of major financial institutions in the country engaged in offering financial assistance to
agriculture and rural development operations and programmes. It undertakes inspection of RRBs and
Cooperative Banks under the provisions of Banking Regulation Act, 1949. It provides
recommendations to RBI on opening of new branches by State Cooperative Banks and RRBs.
7. Discuss the role of NABARD as Microfinance facilitator.
Ans: (i) NABARD has truly played the role of an enabler in the Microfinance Drive helping it to
evolve rapidly into a global movement dedicated to providing access to a range of financial services

37
 to the financially excluded through various products and delivery channels in a cost effective and
sustainable manner. During 2019-20, NABARD continued with its role as the facilitator and mentor
of microfinance initiatives in the country through sanction of grant assistance for formation, nurturing
and credit linking of SHGs with the banks, capacity building of various stakeholders through training,
exposure visits, seminars, workshops etc, sanction of LEDPs for promoting sustainable and holistic
livelihood opportunities, commissioning of studies etc.
(ii) Refinance to Banks NABARD has been extending 100% refinance to banks towards their lending
to SHGs and MFIs to supplement their resources. During 2019-20, NABARD extended refinance to
the extent of R15,434 crore against their SHG lending forming 28% of the total refinance provided
to banks for investment credit, as against R12,885.68 crore disbursed during the previous year.
Cumulative disbursement of refinance by NABARD for SHG lending now stands at R78,594.65
crore.
(iii)Expenditure on SHGs/JLGs –
➢ Funds utilized
‘Financial Inclusion Fund’ and ‘Women Self Help Group Development Fund’ were utilized during
the year for various microfinance related activities such as formation and linkage of SHGs/JLGs
through SHPIs/JLGPIs, training and capacity building of stakeholders, livelihood promotion,
studies, documentation, awareness and innovations etc. An amount of R78.84 crore was expended
during 2019-20 from these funds for the above purposes.
➢ Support for training and capacity building of microfinance clients
NABARD gave due recognition to training and capacity building of various stakeholders such as
bankers, NGOs, Government officials, SHGs, SHG Federations and trainers. During 2019-20
more than 3500 training programmes were conducted and about 2.22 lakh participants were
trained. Cumulatively, around 40.45 lakh participants under FIF and 2.79 lakh participants under
WSHG have been imparted training till the end of 31st March 2020 creating a strong team for
implementation of the microfinance programmes.
➢ Grant Support to Partner Agencies for Promotion and Nurturing of SHGs
NABARD extended grant support to NGOs, Federations of SHGs, RRBs, NGOMFIs, CCBs,
PACS, Farmers’ Clubs and Individual Rural Volunteers (IRVs) for promotion, nurturing and
credit linkage of SHGs with the banks. These supports have proved to be catalysts for the
movement. Untiring efforts of the Self Help 6,981.37 12,885.68 15,434.00 - 2,000.00 4,000.00

38
 6,000.00 8,000.00 10,000.00 12,000.00 14,000.00 16,000.00 18,000.00 2017-18 2018-19 2019-
20 ` in crore 58 “SHGS, SAVING FOR THE PRESENT, SECURING THE FUTURE”
Promoting Institutions (SHPIs) have led to spectacular growth of the movement and has spread
the concept to every corner of the country.
➢ Village Level Programmes
With a view to foster better understanding of mutual requirements between banks, SHGs &
SHPIs and to sort out issues like credit linkage, repayment etc. at ground level, Village Level
Programmes (VLPs) are being conducted with the support of banks and NRLM. VLPs
sponsored by NABARD resulted in better interface between bankers and SHGs leading to
increased credit flow and appreciation of each other’s needs. During 2019-20, NABARD
supported more than 13,000 village level programmes with a sum of R273.39 lakh covering
4,44,483 beneficiaries.
➢ Conferences, Seminars and Meets
The successful journey of SHG-BLP spanning more than two and a half decades has been
possible with the support of all stakeholders, including bankers, NGOs, Farmers Clubs, PACs,
SHG Federations etc. To take the movement forward both in increasing its width and depth,
conduct of Conferences, meets and “SHGS, SAVING FOR THE PRESENT, SECURING THE
FUTURE” 59 seminars prove pivotal for conveying issues, experiences and ground reality to
policy makers, implementers, facilitators etc. During 2019-20, across the country, a total of 46
such seminars and meets were supported by NABARD with an amount of Rs 11.73 lakh.
➢ Centre for Research on Financial inclusion and Microfinance (CRFIM)
The Centre for Research on Financial inclusion and Microfinance (CRFIM) set up within
Bankers Institute of Rural Development (BIRD) takes up research activities in the field of
Microfinance and financial inclusion, publishes an half yearly journal titled “The Microfinance
Review”, organizes National seminar on financial inclusion and microfinance etc. towards
facilitating policy initiatives and improvement in design and delivery system in the said space.
ON GOING INITIATIVES
(i) Scheme for Promotion of Women SHGs in backward districts of India
NABARD, in association with the Department of Financial Services, Ministry of Finance, Govt.
of India continued to implement a scheme for promotion and financing of Women Self Help
Groups in 150 identified Left Wing Extremism (LWE) and backward districts of the country.

39
 As on 31 March 2020, 2.11 lakh WSHGs promoted / savings linked and 1.29 lakh WSHGs
credit linked. The detailed progress under the scheme as on 31 March 2020 is given in Statement
X. (In case of abridged version, refer to enclosed CD for Statements).
(ii) SHG BLP Strategic Advisory Board
A Strategic Advisory Board was constituted in NABARD in 2015 with members drawn from
DFS, MoRD / NRLM, RBI, Commercial banks, SIDBI, RRBs, Cooperative banks and
Microfinance experts to focus on strategic action plan on SBLP, evolving quality standards,
financial literacy, digitisation of SHGs, livelihood promotion, etc. The Advisory Board
deliberates the issues of gap in savings and credit linkage, credit deepening, Recovery and NPA
under SHG-BLP, Bank Sakhi as BCs, Micro Credit limit etc. Advisory Board recommends
action points for addressing issues such as credit gap, low level of credit flow to SHGs, tackling
NPAs, Digitization of SHGs, Studies, Capital Provisioning of SHG Loans, Credit Guarantee
Scheme for SHG loans etc.
(iii) Financing of Joint Liability Groups
NABARD extends grant support for formation and nurturing of JLGs to banks and other JLG
promoting agencies. Apart from extending 100% refinance support to Banks, NABARD also
extends financial support for awareness creation and capacity building of all stakeholders of this
programme. As against 16.04 lakh JLGs promoted during 2018-19, JLGs promoted during
2019-20 were 41.80 lakh taking the cumulative number of JLGs promoted and financed by
banks to 92.56 lakh as at the end of March 2020. The Eastern States top the list with over 31.01
lakh JLGs organized cumulatively, Southern Region follows closely with 26.62 lakh JLGs. With
a view to sensitizing the stakeholders of the JLG programme, NABARD has been arranging
training programmes and exposure visits to successful JLGs, to the functionaries of these
institutions including financing banks. Over 94,000 personnel have already benefitted from
these trainings and exposure visits.
(iv) Livelihood Interventions for SHGs Poverty alleviation through livelihood creation is one of the
stated goals of micro finance. Graduating SHG members to the next stage of taking up livelihood
activities is an important task and NABARD has been supporting skill and entrepreneurship
training of SHG members through the Micro Enterprise Development Programme (MEDP)
since March 2006 with the goal of development of sustainable livelihoods/ micro-enterprise
ventures by matured SHG members. Around 12,719 members were trained through 425 MEDPs

40
 during 2019-20 for enabling them to start micro enterprises. Cumulatively, around 5 lakh SHG
members have received training through 17,700 MEDPs. Further to bring in ease of application
processing, NABARD operationalized MEDPs on NABSKILL portal in July 2019. During
2019-20, 561 MEDP applications were processed on NABSKILL.
8. Discuss the problems and prospects of Microfinance in India.
Ans: PROBLEMS
• Deserving poor are still not reached: The microfinance delivery models are not exclusively
focused on those who are below the poverty line or very poor. Though the programme is
spreading rapidly but with a slow progress in targeting the bottom poor households.
According to Ghate (2008), approximately 75 million households in India are poor and about
22 percent of these poor households (i.e. 16.5 million) are currently receiving microfinance
services.
• Regional Disparity: It has been observed that the microfinance programme is mainly run by
formal financial institutions with the help of SHGs. As a result, microfinance programme is
progressing in those areas of the country where there is tremendous growth of formal
financial institutions. Microfinance institutions were expected to reach those areas where the
formal banking system failed to reach and the poor people have to depend on the
moneylenders in order to meet their financial requirements.
• Limited spread in poorer states: The coverage of microfinance programme is comparatively
low in the states which have a larger share of the poor. Unfortunately, these seven states, i.e.,
Orissa, Bihar, Chattisgarh, Jharkhand, Uttaranchal, Madhya Pradesh and Uttar Pradesh are
lagging behind in microfinance programme.
• High Interest rates: Affordability of loan is equally important to the access of financial
services to the poor. Economic fundamentals incites that every borrower is interest sensitive
and the capacity of borrowing decreases with increase in interest rates. High interest rates
may prove to be counterproductive, and weaken the social and economic condition of poor
clients. The high interest rate charged by the MFIs from their clients is perceived as
exploitative.
• Low depth of Outreach: Another problem faced by the microfinance programme is the depth
of services provided. Though the outreach of the programme is expanding, large numbers of
people are provided with microfinance services but the amount of loans is very small. The

41
 average loans per member are between Rs 3500 and 5000. This amount is not sufficient to
fulfil the financial needs of the poor people. The duration of the loans are also short.
• Unregulated Microfinance Institutions: In India, micro finance is provided by a variety of
institutions. These include banks (including commercial banks, RRBs and co-operative
banks), primary agricultural credit societies and MFIs that include NBFCs, section 25
companies, trusts and societies. But only the banks and NBFCs fall under the regulatory
purview of the Reserve Bank of India. Other entities, eg., MFIs are covered in varying
degrees of regulation under their respective State legislations.
• Lack of Insurance Services: Poor people are vulnerable to financial shocks. A small change
in their earning patterns due to natural calamities, health problems, death of earning member
etc can push them become penniless. So a provision of insurance under the microfinance
programme is very essential to help the poor to cross the poverty line. But, in reality, the
current microfinance programme in India is just focused on regular saving and micro-credit.
PROSPECTS
• growth Prospects: Microfinance programme has a wider prospect to expand both the outreach
and depth of services provided. According to Ghate (2008) microfinance programme has
covered just 16.5 million of the total 75 million poor households. So, there is an ample scope
to cover these unreached poor people.
• Reducing Regional Disparity: As discussed in the problems, the spread of microfinance
programme is unequal among various regions of India and there is limited spread in the
poorer states. So, there is ample scope to spread microfinance programme in the unreached
areas including the poorer states. However, taking a step in this direction NABARD has
recently identified 13 states to scale up the microfinance programme in these states in order
to reduce the regional disparity. These priority states are Assam, Bihar, Jharkhand, Gujarat,
Himachal Pradesh, Maharashtra, Madhya Pradesh, Chhattisgarh, Orissa, Rajasthan, Uttar
Pradesh, Uttaranchal and West Bengal.
• Schemes to support MFIs: MFIs are meant to play an important role in reaching the poor
people who are not served by the formal financial institutions. But most of these institutions
are restricted by RBI to collect savings from their members and raise public funds. As these
institutions do not publish their annual financial reports, it is difficult to determine their
financial health. Therefore, the formal financial institutions also hesitate to provide loans to

42
 these institutions. As a result, they face paucity of funds which becomes a hurdle in
expanding the microfinance programme. To tackle this problem, some schemes may be
adopted to provide support and help for the capacity building of MFIs for the expansion of
microfinance programme.
• Insurance services: In India, the penetration of insurance services among rural poor people
is very limited and there is a great potential for the same. Moreover, poor are very much
vulnerable to the natural uncertainties and insurance is necessary for them. The network used
for microfinance programme can be used to tap the potential of insurance in rural markets.
Non- Government Organizations, Microfinanace Institutions and Self-Help 5Groups can be
used as micro-insurance agents. They can offer target specific insurance products at a
relatively lower cost, for a lower coverage of amount.
• Flexibility in the programme: Some main features of the microfinance programme includes
compulsory savings, regular group meetings, record maintenance etc. These bindings lead to
exclusion of poor from joining the microfinance programme. Therefore, in order to expand
the outreach of the programnme to the poorer people, there is a need to introduce more
flexible system such as the one adopted in Bangladesh, where even the beggars are provided
with micro-loans by the Grameen bank.
• Technical Innovations: In order to improve the quality of microfinance services some
technical innovations may be introduced. A number of electronic devices are being used in
different countries to expand the outreach and to improve the microfinance functioning.
Some of these devices are mobile phones, ATMs, computers etc.

43
 UNIT 4
MANAGEMENT OF MFIs
1. What is fund management?
Ans: Funds Management is the overseeing and handling of a financial institution’s cash flow. The
fund manager ensures that the maturity schedules of the deposits coincide with the demand for
loans. To do this, the manager looks at both the liabilities and the assets that influence the bank’s
ability to issue credit. In general terms we can say that fund management is the act of taking the
collected pool of funds and taking the necessary decisions regarding the same. The decisions are
usually related to investing in new securities and selling off securities that are depreciating.
2. What do you mean by risk management?
Ans: Managing risk is a complex task for any financial organization, and increasingly important in
a world where economic events and financial systems are linked. Global financial institutions and
banking regulators have emphasized risk management as an essential element of long-term success.
Rather than focusing on current or historical financial performance, management and regulators
now focus on an organization’s ability to identify and manage future risks as the best predictor of
long-term success. For the financial institutions, effective risk management has several benefits:
Early warning system for potential problems: A systematic process for evaluating and measuring
risk identifies problems early on, before they become larger problems or drain management time
and resources. Less time fixing problems means more time for production and growth. Risk
management is the process of managing the probability or the severity of the adverse event to an
acceptable range or within limits set up by the MFI.
3. Why is Risk Management Important to MFIs?
Ans: As MFIs play an increasingly important role in local financial economies and compete for
customers and resources, the rewards of good performance and costs of poor performance are rising.
Those MFIs that manage risk effectively – creating the systematic approach that applies across
product lines and activities and considers the aggregate impact or probability of risks – are less
likely to be surprised by unexpected losses (down-side risk) and more likely to build market
credibility The core of risk management is making educated decisions and capitalize on new
opportunities (up-side risk)

44
 • The core of risk management is making educated decisions about how much risk to tolerate,
how to mitigate those that cannot be tolerated, and how to manage the real risks that are part
of the business.
• For MFIs that evaluate their performance on both financial and social objectives, those
decisions can be more challenging than for an institution driven solely by profit.
• A risk management framework allows senior managers and directors to make conscious
decisions about risk, to identify the most cost-effective approaches to manage those risks,
and to cultivate an internal culture that rewards good risk management without discouraging
risk-taking.
• More sophisticated approaches to risk management are important to MFIs for several
reasons. Many MFIs have grown rapidly, serving more customers and larger geographic
areas, and offering a wider range of financial services and products.
• Their internal risk management systems are often a step or two behind the scale and scope
of their activities.
• Second, to fuel their lending growth, MFIs increasingly rely on market-driven sources of
funds, whether from outside investors or from local deposits and member savings.
Preserving access to those funding sources will require maintaining good financial
performance and avoiding unexpected losses.
• Third, the organizational structures and operating environments of MFIs can provide unique
challenges. They may be very decentralized or too centralized (both can be a risk), tend to
be labor- and transaction-intensive, have concentration risk in certain regions or sectors
(e.g., agriculture) due to their mission, and often operate in volatile and less mature financial
markets.
4. Discuss the risks faced by MFIs.
Ans: Microfinance institutions face many risks that threaten their financial viability and long-term
sustainability. Some of the most serious risks come from the external environment in which the
MFI operates, including the risk of natural disaster, economic crisis or war. A simple way to begin
the process of thinking about risk management in an MFI is first to identify, understand and assess
the risks that can have a severe impact on the organization and their likelihood of occurrence. Once
risks are identified, the MFI can design strategies and control mechanisms to deal with them and
assign responsibility to key individuals and teams to address them. Many risks are common to all

45
financial institutions. From banks to unregulated MFIs, these include credit risk, liquidity risk,
market or pricing risk, operational risk, compliance and legal risk, and strategic risk. Most risks can
be grouped into three general categories: financial risks, operational risks and strategic risks.

Financial Risks
The business of a financial institution is to manage financial risks, which include
• Credit risks: Credit risk is the risk to earnings or capital due to borrowers late and non-
payment of loan obligations
• Liquidity risks: Liquidity risk is the possibility of negative effects on the interests of owners,
customers and other stakeholders of the financial institution resulting from the inability to
meet current cash obligations in a timely and cost-efficient manner. Liquidity risk usually
arises from management’s inability to adequately anticipate and plan for changes in funding
sources and cash needs. Effective liquidity management protects the MFI from cash
shortages while also ensuring a sufficient return on investments. Cash management refers
to the mechanics of consolidating cash at the head office and investing it at the local bank
in interest bearing accounts. Effective liquidity risk management requires a good
understanding of the impact of changing market conditions and the ability to quickly
liquidate assets to meet increased demand for loans or withdrawals from savings.
• Interest rate risks: Interest rate risk arises from the possibility of a change in the value of
assets and liabilities in response to changes in market interest rates. Also known as asset and
liability management risk, interest rate risk is a critical treasury function, in which financial
institutions match the maturity schedules and risk profiles of their funding sources
(liabilities) to the terms of the loans they are funding (assets). In MFIs, the greatest interest
rate risk occurs when the cost of funds goes up faster than the institution can or is willing to
adjust its lending rates. The cost of funds can sometimes exceed the interest earned on loans
and investments, resulting in a loss to the MFI.
• Foreign exchange risks: Foreign exchange risk is the potential for loss of earnings or capital
resulting from fluctuations in currency values. Microfinance institutions most often
experience foreign exchange risk when they borrow or mobilize savings in one currency and
lend in another.

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• Investment portfolio risks: The investment portfolio must balance credit risks (for
investments), income goals and timing to meet medium to long term liquidity needs. An
aggressive approach to portfolio management maximizes investment income by investing
in higher risk securities. A more conservative approach emphasizes safer investments and
lower returns.
Operational Risks
Operational risk arises from human or computer error within daily product delivery and
services. It transcends all divisions and products of a financial institution. This risk includes
the potential that inadequate technology and information systems, operational problems,
insufficient human resources, or breaches of integrity (i.e. fraud) will result in unexpected
losses. This risk is a function of internal controls, information systems, employee integrity,
and operating processes. For simplicity, this section focuses on just two types of operational
risk: transaction risk and fraud risk.
• Transaction risk: Transaction risk exists in all products and services. It is a risk that
arises on a daily basis in the MFI as transactions are processed.12 Transaction risk
is particularly high for MFIs that handle a high volume of small transactions daily.
When traditional banks make loans, the staff person responsible is usually a highly
trained professional and there is a very high level of cross-checking. Since MFIs
make many small, shortterm loans, this same degree of cross-checking is not cost
effective, so there are more opportunities for error and fraud. The loan portfolio
usually accounts for the bulk of the MFI’s assets and is thus the main source of
operational risk.
• Fraud risk: Effective internal controls play a key role in protecting against fraud at
the branch level, since line staff handle large amounts of client and MFI funds. While
fraud risks exist in all financial institutions, if left uncontrolled, they inevitably
increase as fraudulent behaviors tend to be learned and shared by employees. Internal
controls should include ex-ante controls that are incorporated within the
methodology and design or procedures (prior to operation), as well as ex-post
controls that verify that policies and procedures are respected (after operations). Two
principles are paramount: i) the use of preventive measures to reduce fraud, and ii)
the importance of client visits to verify branch information.

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Strategic Risk
Strategic risks include internal risks like those from adverse business decisions or
improper implementation of those decisions, poor leadership, or ineffective
governance and oversight, as well as external risks, such as changes in the business
or competitive environment. This section focuses on three critical strategic risks:
Governance Risk, Business Environment Risk, and Regulatory and Legal
Compliance Risk.
• Governance risk: One of the most understated and underestimated risks
within any organization is the risk associated with inadequate governance or
a poor governance structure. Direction and accountability come from the
board of directors, who increasingly include representatives of various
stakeholders in the MFI The social mission of MFIs attracts many high
profile bankers and business people to serve on their boards. Unfortunately,
these directors are often reluctant to apply the same commercial tools that
led to their success when dealing with MFIs. As MFIs face the challenges of
management succession and the need to recruit managers that can balance
social and commercial objectives, the role of directors becomes more
important to ensure the institution’s continuity and focus.
• Business Environment Risks: Business environment risk refers to the
inherent risks of the MFI’s business activity and the external business
environment. To minimize business risk, the microfinance institution must
react to changes in the external business environment to take advantage of
opportunities, to respond to competition, and to maintain a good public
reputation.
• Regulatory and Legal Compliance Risks: Compliance risk arises out of
violations of or non-conformance with laws, rules, regulations, prescribed
practices, or ethical standards, which vary from country to country. The costs
of non conformance to norms, rules, regulations or laws range from fines and
lawsuits to the voiding of contracts, loss of reputation or business
opportunities, or shut-down by the regulatory authorities.

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5. What are the steps taken for effective risk management?
Ans: Classic risk management requires an organization to take four key steps:
• Identify the risks facing the institution and assess their severity (either frequency or potential
negative consequences)
• Measure the risks appropriately and evaluate the acceptable limits for that risk;
• Monitor the risks on a routine basis, ensuring that the right people receive accurate and
relevant information; and
• Manage the risks through close oversight and evaluation of performance. Managing risk is
a continual process of systematically assessing, measuring, monitoring, and managing risks
in the organization. Effective risk management ensures that the “big picture” is not lost to
the urgent demands of day to day management.
Risk management has only recently become a hot topic among financial institutions.
Regulation and supervision historically have focused on past performance and current
financial condition as predictors of future financial safety and soundness. In the mid 1990s,
after several “surprise” bank failures, US regulators shifted the focus of their reviews to
place greater emphasis on an institution’s internal risk management capabilities in each area
of operations, since those are better predictors of the bank’s ability to withstand internal or
external uncertainties.
As MFI’s become larger and more sophisticated, risk management should become a more
conscious part of their management and governance. The goal of good risk management is
to reduce uncertainty and qualify potential financial losses as “reasonable,” in other words
to eliminate surprises. Implementing risk management, however, is both art and science.
6. What is Risk Management Framework?
Ans: A risk management framework is a guide for MFI managers to design an integrated and
comprehensive risk management system that helps them focus on the most important risks in an
effective and efficient manner. For effective management of risk ‘Risk Management Feedback
Loop’, which is a six-stp cycle, can be followed, which are as follows:
• To Identifying, assessing, and prioritizing risks
• To Developing strategies and policies to measure risks
• To Designing policies and procedures to mitigate risks
• To Implementing and assigning responsibilities

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 • To Testing effectiveness and evaluating results
• To Revising policies and procedures as necessary
7. Discuss the measurement of operational efficiency and productivity of MFIs.
Ans: Microfinance being a financial business requires some management expertise to be successful,
apart from sound financial knowledge and accounting discipline. While the development approach
is essential for a client-focused business like microfinance, systematic strength is required to scale
up the operations to a significant level and enhance outreach.
In a business context, operational efficiency can be defined as the ratio between an output gained
from the business and an input to run a business operation. When improving operational efficiency,
the output to input ratio improves. Inputs would typically be money (cost), people or time/effort.
Outputs would typically be money (revenue, margin and cash), new customers, customer loyalty,
market differentiation, production, innovation, quality, speed and agility, complexity or
opportunities. There are different ways to improve efficiency and augment productivity. Some of
them are discussed as follows:
➢ Opportunity to develop cross-discipline expertise: With proper training and orientation to the
employees’ time to time the productivity of the employees can be enhanced. Workplaces can
be made more exciting by rotating the staff through various departments. For example,
someone in the assembly line may find it exhilarating to observe how marketing happens and
similarly, a marketer may be glad to understand HR and its process, and how employees are
appraised. Not only does it make a job less monotonous, but a worker or staff gets to have a
fresh perspective.
➢ Raise the corporate culture: every workplace has a culture that is unique. Not only does it
depend on the product or services that the company offers but its core values.
A work culture that stresses the importance of building team relationships and encourages the
development of trust between employer and employees goes a long way towards improving
productivity. MFIs have their own work culture. They work as an informal team.

➢ Effective communication: Communication is a significant criterion for raising efficiency of

the organization as a whole. It’s the source of information and provides clarity about what,
where, why, and how of any task. Lack of communication may lead to confusion, and as a

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 result, the execution of a task may not be up to the mark. Improper communication would
bring a drop in quality and subsequently, a reduction in the performance of the MFIs.
➢ Appropriate Technology: To perform well, one needs the right tools. Most often, this is in the
form of new technology that assures and assists the staff. At one time, small businesses
couldn’t afford hi-tech equipment. But due to rapid improvements, technology has become
affordable and easy to procure. MFIs can use suitable technology to reduce operating costs.
➢ Appreciation: Nothing can provide more joy than a few words of appreciation. No employee
works for money alone. When you encourage your workers, they feel a rapport toward you
that is worth more than any monetary bonus. So, appreciation can also be a tool for success
of MFIs.

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 UNIT 5
LEGAL AND REGULATORY FRAMEWORK FOR MICRO FINANCE

Legal structure of microfinance in India

According to the Bharat Microfinance Report, through MFIs microfinance is servicing 43
million accounts. About 85% of the accounts serviced with 83% gross loan portfolio are being
serviced through NBFC MFIs. NBFCs and NBFC MFIs are directly regulated by RBI for
microfinance operations where the quantum of overall lending to the borrower, the number of
providers for each borrower, rate of interest, additional charges are stipulated by RBI.
A microfinance institution acquires permission to lend through registration. Each legal structure
has different formation requirements and privileges. Microfinance Institutions in India are
registered as one of the following entities:
• Non- Government Organizations engaged in microfinance (NGO-NFIs), comprised of
Societies and Trusts.
• Cooperatives registered under the conventional state-level cooperative acts, the
national level Multi-State Cooperative Legislation Act (MSCA 2202), or under the
new state-level Mutually Aided Cooperative Acts (MACS Act)
• Section 8 companies ( not for profit)
• For profit Non-Banking Financial Companies (NBFCs)
• NBFC- MFIs

a) NGO- MFIs, Cooperatives and Section 8 Companies

Microfinance institutions operating as a non-profit company operate as either an
NGO- MFI, Cooperative, or Section 8 companies. Each is structured slightly
differently in terms of ability to accept equity investments and dividends. There
exists little regulation that applies to these structures, aside from registration
requirements.
b) NBFCs
The mainstream financial sector in India is divided primarily into two categories,
banks and NBFCs. Banks adhere to much more strict regulation than NBFCs
because they are permitted to accept public deposits and are considered to possess

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 systematic risk. The NBFC encompasses many different types of financial
companies, which are all subject to the same regulatory requirements. Many
microfinance institutions have recently registered as NBFCs to take advantage of
access to capital markets. Microfinance institutions operating as NBFCs account
for the great majority of the microfinance market in India, with about 50 NBFCs
responsible for 80 percent of all microfinance loans.
c) NBFC- MFIs
For profit institutions that qualify for priority sector lending funds are registered
as NBFC- MFIs. This NBFC sub-category was created by RBI in May 2011 as a
way to classify NBFCs operating as microfinance institutions which meet certain
requirements. Currently it is unclear how many NBFCs will elect to register as
NBFC- MFIs, and how many will continue to operate as NBFCs.

Various Laws governing Microfinance Activities in India

MFIs are functioning under different networks from the organizations concerned. By nature,
MFIs must be incorporated under the new Companies Act, 2013, or the earlier Companies Act,
1956 and to be registered with appropriate agencies and obtained necessary licenses/permits.
The microfinance sector is supported by a regulatory framework that aims to assist the growth
and development of Microfinance Institutions (MFIs). This sector falls under the regulatory of
multiple laws and supervisors, each spanning varying degrees of control over the sector. The
main instruments governing the MFIs financial activities are the Law of Banks, Microfinance
Institutions and Non-bank Financial Institutions, Co-operative Acts and many regulations from
the RBI.
1. THE COOPERATIVE ACTS
i. Co-operative Societies Act, 1904
ii. Mutually Aided Co-operative Societies Act, 1995 (Andhra Pradesh)
iii. Societies Registration Act, 1860
iv. The Indian Trusts Act, 1882
The term ‘cooperative’ covers a range of institutions, both formal (state owned cooperative
banks) and semi-formal (cooperative societies), which are regulated and/or unregulated.

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 Cooperative Societies Act, 1904 covers cooperative, SEWA bank is registered as a co-operative
society, under this act but is regulated by the RBI from which it obtained a banking license.
Enterprises registered under the Societies registration or Indian Trusts Acts are semi- formal
institutions engaged in microfinance. The Acts donot provide a basis for any of the regulations
so far.
With the post-liberalization era, a market-oriented approach to rural finance advocated a new
form of co-operative societies act. Andhra Pradesh enacted the Mutually Aided Co-operative
Societies Act in 1995, allowing the formation of cooperatives largely immune from government
intervention. Three other states subsequently enacted similar legislation (Bihar, Madhya Pradesh
and Jammu & Kashmir). The Multi- State Co-operatives Societies Bill Act 2002 is operative
currently and it replaces the MCS Act, 1984.
2. RESERVE BANK OF INDIA ACT, 1934
The Reserve bank of India, the Banking Regulatory Authority of India was established under the
Reserve Bank of India Act 1934. For the interest of the regulation of microfinance in India, 1977
amendment of thi act contains provisions for the establishment and operations of non- bank
finance companies. According to this act, the non- banking institutions can be a company, a
corporation or a cooperative society. A non- bank financial company (NBFC) is a non- banking
institution company and takes deposits. NBFCs are registered under this Act.
3. THE BANKING REGULATION ACT, 1949
The Banking Regulation Act 1949 covers ‘Banking Companies’. It does not apply to primary
agriculture credit societies and any other cooperative society. It is not directly relevant to micro-
finance, other than the fact that it covers local area banks and commercial banks, which are
involved in linkage operations. The Banking Regulation Act provides the basis for the licensing
of local area banks and mutual benefit societies.
4. THE COMPANIES ACT, 1956
The Companies Act, 1956 provides the basis for the incorporation of Local Area Banks, Non-
Bank Finance Companies, not for profit ‘Section 8 Companies’ and Nidhis under section 620.
Certain revisions have been proposed in the Companies Act which would allow cooperatives in
the form of companies and could offer microfinance services.
Micro finance is a source of financial services for entrepreneurs and small businesses. It is a type
of Non- Banking Financial Company (NBFC) which is a business of microcredit finance to

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 individuals and small businesses. In India there are two types of business models for
microfinance activities:
i. NGOs- Not for profit (Trust, Society, Section 8 companies) and
ii. For profits (NBFI- MFI)
An NGO can be registered as a company under section 8 of the Companies ACT, 2013 and can
also be registered as Trust and a Society. Trust and Societies are registered and governed State
Government Acts and regulation, but a section 8 company is registered under Companies Act,
2013 and governed by the Ministry of Corporate Affairs. A company status is always highly
recognized in comparison to trust or society, therefore Section 8 Companies have higher
credibility amongst Government departments, donors and other stakeholders.
Micro Finance Institutions (Development and Regulation Bill), 2012
There are four most important Micro Finance models prevalent in India as follows:
• Model I – individuals or group borrowers are financed directly by banks without the
intervention/facilitation of any Non-Government Organisation (NGO).
• Model II – borrowers are financed directly with the facilitation extended by formal or informal agencies
like Government, Commercial Banks and Micro-Finance Institutions (MFIs) like NGOs, Non Bank
Financial Intermediaries and Co-operative Societies;
• Model III – financing takes place through NGOs and MFIs as facilitators and financing agencies;
• Model IV – is the Grameen Bank Model, similar to the model followed in Bangladesh.
Out of them, model II constitutes three-fourths of total micro-financing where activity/joint liability/Self-
Help Groups are formed and nurtured by facilitating agencies and are linked directly with banks for the
purpose of receiving credit.
The Government has recently introduced the much-awaited legislation governing microfinance institutions
(MFIs) in the Lok Sabha. The bill seeks to empower the central bank to regulate the sector and provide an
overarching legislative framework for it. So far, MFI’s have been out of regulation, though in late 2010,
RBI had issued regulations to govern MFIs operating as NBFCs based on the recommendations of an
expert committee headed by Y.H. Malegam.

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 The MFI Bill 2012 seeks to regulate this sector in the following ways:
1. Microfinance Institutions (Development and Regulation) Bill, 2012, will take MFIs outside the purview of
state-level legislation, including the controversial Andhra Pradesh law that saw the asset base of the
microfinance industry shrinking and led to a drastic increase in bad debts due to restrictions on collection
practices.
2. As per this bill, all MFIs will have to register themselves with the Reserve Bank of India (RBI).
The central bank can specify lending rates and margins that can be charged by an MFI, the recovery
methods to be followed, the processing fees, the tenure and ceiling of the loan. RBI will also specify
a threshold on the assets deployed for classifying any institution as an MFI.
3. The MFIs registered with RBI won’t be treated as moneylenders, thereby keeping them out of the
purview of the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act,
2010.
4. The Bill proposes the setting up of a microfinance development council with members from various
central government ministries, including finance and rural development, RBI, the Small Industries
Development Bank of India, the National Bank for Agriculture and Rural Development, the
National Housing Bank and another four independent members.
5. The council will advise the central government on the formulation of policies for the sector and will
have a non-government official with relevant banking experience as chairman.
6. For greater involvement of the states, the Bill also proposes the setting up of state development
councils with representatives from state governments.
7. This council can report unfair recovery methods used by MFIs and also monitor over-indebtedness
due to MFI lending practices. There will also be district microfinance committees to closely monitor
MFI activities.
8. The government has also retained the inclusion of thrift or collection of deposits in the definition
of services that can be provided by the microfinance institutions despite objections from the Reserve
Bank of India, which was concerned about the safety of depositors’ money.
9. As per the legislation, RBI will constitute a microfinance development fund for funding MFIs,
either through debt or equity participation and to fund research for development of the sector. The
corpus of the fund will be partly funded by the central government.
10. The Bill also proposes establishing credit information bureaus for the creation of a database of
clients who avail of microfinance services from various agencies.

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Need for separate regulation for Microfinance
Though the NBFCs are regulated by Reserve Bank of India under Chapter III- B, III- C and V of
the Reserve Bank of India Act, there is no separate category created for NBFCs operating in the
Microfinance sector. The need for a separate category of NBFCs operating in the Microfinance
sector rises for a number of reasons.
• First, the borrowers in the Microfinance sector represent particularly the vulnerable section
of society. They lack individual bargaining power, have inadequate financial literacy and
live in an environment which is fragile and exposed to external shocks which they are ill-
equipped to absorb. They can, therefore, be easily exploited.
• Second, credit to the Microfinance sector is an important plank in the scheme for financial
inclusion. A fair and adequate regulation of NBFCs will encourage the growth of this sector
while adequatelyprotecting the interests of the borrowers.
• Third, over 75% of the finance obtained by NBFCs operating in this sector is provided by
banks and financial institutions including SIDBI.
• Finally, to encourage the growth of the Microfinance sector, there may be a need to give
special facilities or dispensation to NBFCs operating in this sector, alongside an appropriate
regulatory framework. This will be facilitated if a separate category of NBFCs is created for
this purpose.
****

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