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INTRODUCTION
MICRO FINANCE:
Micro-Finance refers to small savings, credit and insurance services extended to socially and economically disadvantaged segments of society, for enabling them to raise their income levels and improve living standards. The main idea behind microfinance is that poor people, who can provide no collateral, should have access to some sort of financial services. Microfinance began with microcredit: the provision of small loans (20-50 Euros) to very poor families to help them engage in productive and self-sustaining activities. Since the successful initiation of formalized microcredit in the 1980s a number of other complementary services have popped up around the globe, including micro savings, micro insurance etc Micro financing is not a new concept. Small microcredit operations have existed since the mid 1700s. Although most modern microfinance institutions operate in developing countries, the rate of payment default for loans is surprisingly low - more than 90% of loans are repaid. It is not just a financing system, but a tool for social change, specially for women - it does
not spring from market forces alone - it is potentially welfare enhancing there is a public interest in promoting the growth of micro finance - this is what makes it acceptable as a valid goal for public policy. Over the past few decades, this innovative scheme has attracted a range of nongovernmental and State-sponsored institutions. Leading financial institutions are the Small Industries Development Bank of India (SIDBI), the National Bank for Agriculture and Rural Development (NABARD) and the Rashtriya Mahila Kosh (RMK). Microfinance Institutions Association for Sarva Seva Farms (ASSEFA) Mitrabharati - The Indian microfinance Information Hub Mysore Resettlement and Development Agency (MYRADA) SADHAN - The Association of Community Development Finance Institutions SEWA: Self-help Women's Association SKS India - Swayam Krishi Sangam Streedhan - Banking with Rural Women Working Women's Forum, Madras, India Microfinance Support Institutions in the Formal Sector National Bank for Agriculture and Rural Development Rashtriya Mahila Kosh SIDBI - Small Industries Development Bank of India Tamil Nadu Women's' Development Corporation Other Institutions: Commercial Banks: State Bank of India ABN-AMRO Andhra Bank ICICI-Citigroup ING-Vysya
MICROCREDIT: Micro Credit is defined as provision of thrift, credit and other financial services and products of very small amount to the poor people in rural ,semiurban, and urban areas for enabling them to raise their income levels and improve living standards.
The concept of micro credit is known more by its approach than by monetary limits to the amount of loans. Of course, the target segment is the poorest, but Mohammed Yunus tried the concept of jointliability or peer-pressure. Most micro credit loans are dispensed through village or community-level self-help groups (SHGs) who agree to create a pressure on the individual borrower to perform as per contract. Difference between microcredit and microfinance: The term Micro Finance is much broader than micro credit. The main components of micro Finance are: Deposits Loans Payment services Money transfers Insurance to poor and low-income households and their micro enterprises. Thus, micro credit is only a component of the broad spectrum of micro financing.
Microfinance is the provision of financial services to low -income clients, including consumers and these self-employed, who traditionally lack access to banking and related services. More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers." Those who promote microfinance generally believe that such access will help poor people out of poverty.
In 1974, Professor Muhammad Yunus, then a professor of economics, in Bangladesh was moved by the plight of people when the country faced a famine. Famine-struck skeleton-like people began showing up in the railway stations and bus stations of the capital, Dhaka. Soon this trickle became a flood. Hungry people were everywhere. Yunus left the campus and went to Jobra, a village in Chittagong of Bangladesh, to learn a new method of banking for the poor. That is where he tried the idea of tiny loans for self-employment of the poor, and thus, the idea of micro finance was born. It is from here that it took the shape of Grameen Bank, Bangladesh, and thereafter, has spread all over the world. Indias population is more than 1000 million, and its the second largest in term of population after China. India's GDP ranks among the top 15
economies of the world. However, around 300 million people or about 80 million households are living below the poverty line, i.e. less than $2 per day according to the World Bank and the poorest are which earns $1 per day. It is further estimated that of these households, only about 20% have access to credit from the formal sector. Out of these 80 million house hold, 80% takes credit from the informal sources i.e. local Zamidars, Chit Funds etc. With about 80 million households below poverty line and 80% out of this is access from informal sector, so its obvious to solve this problem and this gave birth to Micro Finance Institutions (MFIs). MFIs include non governmental organizations (NGOs), credit unions, non-bank financial intermediaries, and even a few commercial banks. India has about 153,000 retail outlets of the formal banking infrastructurecommercial banksThere are about 33,000 banks in rural areas, and also have special category of banks called regional rural banks, in the abbreviated form, RRBs. There are about 14,500 branches and the cooperatives The cooperativesabout 100,000 retail outletsthe population for the regional outlet comes down to as low as 4,700. Annual credit demand by the poor in the country is estimated to be about Rs 60,000 crores. In the Indian context terms like "small and marginal farmers", " rural artisans" and "economically weaker sections" have been used to broadly define micro-finance customers. Women constitute a vast majority of users of micro-credit and savings services. In short, Micro Finance means providing very poor families with very small loans to help them engage in productive activities or grow their very small businesses. It is firstly (and this is essential) a tool in the fight against poverty. It is not for poor people in general but for poor people who are considered to be economically active, in other words, those who carry out activities which generate revenues which in turn allow them to cover their needs and those of their families, even if these revenues are low and precarious. Microfinance offers to help them get started by giving
them access to financial services from which they are generally excluded (including savings and credit facilities, insurance and fund transfers), and in ways that are suited to their economic and management skills. Ultimately, the goal of microfinance is to give low income people an opportunity to become self-sufficient by providing a means of saving money, borrowing money and insurance. Micro Credit is defined as provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards. Micro Credit Institutions are those, which provide these facilities. (As per RBI Master Circular, 2008). Evidently, the word micro credit does not have an exact definition.
History :
The origins of microcredit in its current practical incarnation, with attention paid by economists and politicians worldwide, can be linked to several organizations founded in Bangladesh, especially the Grameen Bank in the1970s and onward, for which its founder Muhammad Yunus was awarded the Nobel Peace Prize in 2006. The World Bank estimates at there are now over 7000 microfinance institutions, serving some 16 million poor people in developing countries. The total cash turnover of MFIs world-wide is estimated at US$2.5 billion and the potential for new growth is outstanding. It is estimated that,
worldwide, there are 13 million microcredit borrowers, with US$ 7 billion in outstanding loans, and generating repayment rates of 97 percent. It has been growing at a rate of 30 percent annual growth. Microfinance in India through its major channels served over 33 million Indians in the financial year 2007-08, up by 9 million over the last financial year, out of which around 80% clients were women. As on 31st March, 2008, outstanding microcredit portfolio of India Microfinance was about Rs. 22,000 crore, out of which 75% are accounted for by SHG- Bank Linkage Program, 20% by large MFIs and 5% by medium and small MFIs. India's MFIs operate in 209 out of 331 poorest districts of the country; up by 5% over the previous year. The Table below gives the volumes of MFIs, that is, excludes the volume of SFG-Bank linkage program.
Advancement of religion . Purposes beneficial to the community or a section of the community. 2. INDIAN TRUSTS ACT, 1882: Some MFIs are registered under the Indian Trust Act, 1882 either as public charitable trusts or as private, determinable trusts with specified beneficiaries/members. 3. NOT-FOR-PROFIT COMPANIES REGISTERED UNDER SECTION 25 OF COMPANIES ACT, 1956: An organization given a license under Section 25 of the Companies Act 1956 is allowed to be registered as a company with limited liability without the addition of the words Limited or Private Limited to its name. It is also eligible for exemption from some of the provisions of the Companies Act, 1956. For companies that are already registered under the Companies Act, 1956, if the central government is satisfied that the objects of that company are restricted to the promotion of commerce, science, art, religion, charity or any other useful purpose; and the constitution of such company provides for the application of funds or other income in promoting these objects and prohibits payment of any dividend to its members, then it may allow such a company to register under Section 25 of the Companies Act.
2) Regional Rural Banks 3) Co-operative Banks 4) Unregistered Non Banking Financial Corporations 5) Registered Non Banking Financial Corporations, Co-operative Societies.
Microfinance must be useful to poor households: helping them raise income, build up Assets and/or cushion themselves against external shocks. "Microfinance can pay for itself." Subsidies from donors and government are scarce and uncertain, and so to reach large numbers of poor people, microfinance must pay for itself. Microfinance means building permanent local institutions. Microfinance also means integrating the financial needs of poor people into a Countrys mainstream financial system. "The job of government is to enable financial services, not to provide them." "Donor funds should complement private capital, not compete with it." "The key Bottleneck is the shortage of strong institutions and managers." Donors should focus on capacity building. Interest rate ceilings hurt poor people by preventing microfinance institutions from Covering their costs, which chokes off the supply of credit? Microfinance institutions should measure and disclose their performance both financially and socially Microfinance is considered as a tool for socio-economic development and can be clearly distinguished from charity. Families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan, should be recipients of charity. Others are best served by financial institutions.
Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, Widowhood, old age. Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of dwellings. Investment Opportunities: expanding a business, buying land or equipment, improving housing, securing a job (which often requires paying a large bribe), etc.
as useful to borrow for consumption as for microenterprise. A safe, flexible place to save money and withdraw it when needed is also essential for managing household and family risk.
'alternative financial institutions' in the developing world. The authors counted approximately 665 million client accounts at over 3,000 institutions that are serving people who are poorer than those served by the commercial banks. Of these accounts, 120 million were with institutions normally understood to practice microfinance. Reflecting the diverse historical roots of the movement, however, they also included postal saving banks (318 million accounts), state agricultural anti development banks (172 million accounts), financial cooperatives and credit unions (35 million accounts) and specialized rural banks (19 million accounts).
PARAMETER
Govt.Sponsored Financial Programs Program of MFIS LOW VERY HIGH HIGH LOWMEDIUM SHORT
Ease of Access HIGH Lead time for Loans Repayment Terms Interest Rates LOW
VERY SHORT EXTREME LONG FIXED AND RIGID FIXED AND EASY
FLEXIBLE
Incentives
NONE
NONE
NONE
REPEAT AND LARGER LOAN STREAM CREDIT IS ASSURED SIMPLE AND QUICK
POSSIBLE
VERY QUICK
Concentrating on few people only: India is considered as the second fastest developing country after China, with GDP over 8.5% from the past 5 years. But this all interesting figures are just because of few people. Indias 70% of the population lives in rural area, and that portion is not fully touched. Opportunity Huge demand and supply gap: There is a huge demand and supply gap among the borrowers and issuers. In India around 350 million of the people are poor and only few MFIs there to serving them. There is huge opportunity for the MFIs to serve the poor people and increase their living standard. The annual demand of Micro loans is nearly Rs 60,000 crore and only 5456 crore are disbursed to the borrower. Employment Opportunity: Micro Finance helps the poor people by not only providing them with loan but also helps them in their business, educate them and their children etc. So in this way Micro Finance is helping to increase the employment opportunity for them and for the society. Huge Untapped Market: Indias total population is more than 1000 million and out of 350 million is living below poverty line. So there is a huge opportunity for the MFIs to meet the demand of that unserved customers and Micro Finance should not leave any stones unturned to grab the untapped market. Opportunity for Pvt. Banks: Many Pvt. Banks are shying away from to serve the people are unable to access big loans, because of the high intervention of the Govt. but the door open for the Pvt. Players to get entry and with flexible rules Pvt. Banks are attracting towards this segment.
THREAT:
High Competition: This is a serious threat for the Micro Finance industry, because as the more players will come in the market, their competition will rise , and we know that the MFIs has the high transaction cost and after
entrant of the new players there transaction cost will rise further, players will come in the market, their competition will rise . So this would be serious threat. Neophyte Industry: Basically Micro Finance is not a new concept in India, but that was all by informal sources. But the formal source of finance through Micro Finance is novice, and the rules are also not properly placed for it. Over involvement of Govt.: This is the biggest that threat that many MFIs are facing. Because the excess of anything is injurious, so in the same way the excess involvement of Govt. is a serious threat for the MFIs. Excess involvement definition is like waive of loans, make new rules for their personal benefit etc.
WEAKNESS:
Not properly regulated: In India the Rules and Regulation of Micro Finance Institutions are not regulated properly. In the absent of the rules and regulation there would be high case of credit risk and defaults. In the shed of the proper rules and regulation the Micro finance can function properly and efficiently. High number of people access to informal sources: According to the World Bank report 80% of the Indian poor cant access to formal source and therefore they depend on the informal sources for their borrowing and that informal charges 40 to 120% p.a. Concentrating on few people only: India is considered as the second fastest Developing country after China, with GDP over 8.5% from the past 5 years. But this all interesting figures are just because of few people. Indias 70% of the population lives in rural area, and that portion is not fully touched.
OPPORTUNITY:
Huge demand and supply gap: There is a huge demand and supply gap among the Borrowers and issuers. In India around 350 million of the people are poor and only few MFIs there to serving them there is huge opportunity for the MFIs to serve the poor people and increase their living standard. The annual demand of Micro loans is nearly Rs 60,000 crore and only 5456 crore are disbursed to the borrower. (April 09). Employment Opportunity: Micro Finance helps the poor people by not only providing them with loan but also helps them in their business, educate them and their children etc. So in this Micro Finance helping in increase the employment opportunity for them and for the society. Huge Untapped Market: Indias total population is more than 1000 million and out Of 350 million is living below poverty line. So there is a huge opportunity for the MFIs to meet the demand of that unnerved customers and Micro Finance should not leave any stones unturned to grab the untapped market.
Opportunity for Pvt. Banks: Many Pvt. Banks are shying away from to serve the People are unable to access big loans, because of the high intervention of the Govt. but the door open for the Pvt. Players to get entry and with flexible rules Pvt. Banks are attracting towards this segment.
Microfinance, India's largest MFI, recently raised about 75 million dollars from private equity sources. The most immediate worry is that the global credit crunch will affect the cost and availability of funding. The most vulnerable MFIs will be those that get their money from foreign banks. Credit is now tighter, slower, and more costly. As financial institutions are struggling with their liquidity, they have less money to lend to microfinance institutions, which in turn means less to lend to the poor, and lending happens then at the higher rate. Current slowdown also increases the rate of interest on borrowed sum, this further increases the funding loan of the MFIs and the poor people who takes loan from the MFIs, would find it difficult to borrow and this further increases the more people Below Poverty Line (BPL)
Many microfinance banks are not disturbed by the global happenings due to, the fact that they all have high savings- and deposit this leads to less dependence on government, bank and external funding. But even savingsled institutions are not immune to a global economic crisis. MFI managers now report that high prices for food and fuel, a lack of demand for microenterprise products and decrease in the incomes of the earning members are hurting their clients. More and more clients withdraw their savings or have trouble repaying their loans.
FUTURE OF MICROFINANCE:
Microfinance expansion over the next decade can be expected to be an extension of what has been achieved so far while overcoming the hurdles that have been posing difficulty in effective microfinance operation and its
expansion. There may be several participants in this process and their participation may be seen in the following forms. Existing microfinance institutions can expand their operations to areas where there are huge number of Microfinance programs. More NGOs can incorporate microfinance as one of their programs. In places where there are less micro finance institutions, the government channels at the grassroots level may be used to serve the poor with microfinance. Postal savings banks may participate more not only in mobilizing deposits but also in providing loans to the poor and on lending funds to the MFIs. More commercial banks may participate both in microfinance wholesale and retailing. They many have separate staff and windows to serve the poor without collateral. International NGOs and agencies may develop or may help develop microfinance programs in areas or countries where micro financing is not a very familiar concept in reducing poverty. Considering that the majority of the 360 million poor households (urban and rural) lack access to formal financial services, the numbers of customers to be reached, and the variety and quantum of services to be provided are really large. It is estimated that 90 million farm holdings, 30 million nonagricultural enterprises and 50 million landless households in India collectively need approx US$30 billion credit annually. This is about 5% of India's GDP and does not seem an unreasonable estimate.
However, 80% of the financial sector is still controlled by public sector institutions. Competition, consolidation and convergence are all being discussed to improve efficiency and outreach but significant opposition remains.
Many private and foreign banks have unveiled their plans to enter the Indian microfinance sector because of its very low NPAs and high repayment rate of more than 95% in spite of offering loans without any collateral security. Microfinance is not yet at the centre stage of the Indian financial sector. The knowledge, capital and technology to address these challenges however now exist in India, although they are not yet fully aligned. With a more enabling environment and surge in economic growth, the next few years promise to be exciting for the delivery of financial services to poor people in India Development of Small-Scale Enterprises through microfinance will not only increase the outreach but will also help the generation of more employment and income for the poor. It is expected that in the following years there will be considerable deepening of microfinance in this direction along with simultaneous drives to reach and serve the poorest of the poor.
CONCLUSION :
The concept of Micro Finance is still new in India. Not many people are aware the Micro Finance Industry. So apart from Government programmers, we the people should stand and create the awareness about the Micro Finance. The purpose of this study was to understand micro finance in India Micro Finance n Industry has the huge potential to grow in future, if this industry grows then one day well all see the new face of India, both in term of high living standard and happiness.