I.

Difference between JLG and SHG models of Microfinance

Both SHG and JLG models are channels for financial inclusion of poor. These people generally
lack hard collateral and hence, groups are formed in which peer pressure acts as social
collateral. Members in the group are generally from the neighbourhood and trust each other
and want to work together for poverty alleviation. There are some differences in the formation
and functioning of SHGs and JLGs which are as follows:
1. SHG model is mainly used by banks for lending. NABARD promote SHG-Bank
linkage. While JLG lending is mainly used by MFIs.
2. SHGs have group size of 10-20 members while JLG have smaller group size of 5-10
members.
3. SHGs are more formal structure as compared to JLG. SHG has positions defined like
secretary, treasurer which act as an interface of all SHG members with the financial
institutions. All members of JLG have to directly interact with financial institutions
themselves.
4. SHG members make regular savings and deposit it with the financial institution.
Lending to SHGs is based upon the amount of savings that SHG has in the bank
account. Generally, loan amount is 5 times the amount of savings. JLG model is mainly
used for lending only irrespective of savings.
5. In case of SHG lending is done on the name of SHG not individuals i.e. group lending
is done while in case of JLGs lending is done to individual members though all
members are guarantor of each other. SHG members generally undertake same activity
and work together while JLG members invest loan amount for different purposes.

II. Positive Impacts of MFI

Easy Access to Credit: - Banks Simply won’t extend loan to those with little or no asset
and don’t engage in small size of loan due to high operational cost. Micro finance institute
provide all the service at the door step of the customer, which reduces the transaction cost
for the consumer and also does not hamper their daily business.
Microcredit has helped businesses to some extent and it may have helped the most
profitable businesses the most. This microcredit help in maintaining the working capital for
small business. Interest rate charged to the customers are lower than what money lenders
are charging but still the interest rate are on higher side. Expenditure on durable goods
increased, Consumption thus shifted from consumables to durable goods.

III. Negative Impacts of MFI

Money from loans are often used for durable consumer goods or consumption instead of
being used for productive investments. The concept of Ring Leader is prevalent in urban
poor, where there is a middle man who arranges everything and takes a cut of the loan from
the poor. Due to huge competition in the industry and sales target for the field staffs huge
corruption has entered in the business. Generally the loan size is small, which generally
isn’t adequate for the purpose the loan is availed. Multiple loan are given to the same
members just to meet the sales target without checking their credit taking appetite.
IV. CIBIL
Credit Information Bureau (India) Limited or CIBIL is a Credit Information Company
(CIC) which collects and maintains records of an individual‘s payments pertaining to loans
and credit cards. These records are submitted to CIBIL by banks and other lenders, on a
monthly basis. This information is then used to create Credit Information Reports (CIR)
and credit scores which are provided to lenders in order to help evaluate and approve loan
applications.
The credit score helps loan providers quickly determine, who they would like to evaluate
further to provide credit. The CIBIL TransUnion Score ranges from 300 to 900. Loan
providers prefer credit scores which are greater than 750. This number is generated based
on the previous loan repayment history by that customer to any of the bank.

Since, the credit score and CIR not only helps loan providers identify consumers who are
likely to be able to pay back their loans, but also helps them to do this more quickly and
economically. This translates into faster loan approvals.

V. High Mark and Equifax

CIBIL score is being checked in case of secured loans (Loans with collaterals) by Banks.
MFIs do not use CIBIL score for a loan given to a JLG group or SHG group. Those loans
are unsecured loans (without collateral) and to check the credit scores for those group loan
customers, as per the MFIN (Microfinance Institutions Network) regulations MFIs use
“High Mark” or “Equifax”.
These two are also the credit bureaus only like CIBIL but unlike CIBIL where the banks
submit the data of borrowers, here the MFIs and other financial service institutions submit
the data of borrowers to them. Different organizations have different cycle period of
uploading the borrowers’ data. Any of the organization can avail the data base by paying a
fix amount per borrower. High Mark also has credit information about the MSME and
Commercial borrowers, Retail consumers, Microfinance borrowers etc.
Some of the MFI which are also in the personal loans business uses CIBIL scores as well
as Equifax or High Mark scores to check the credit history before lending a huge amount
without collateral.

VI. RBI’s guidelines for Payments Banks

 The Payments Banks would be required to use the word ‘Payments’ in its name to
differentiate it from other banks.
 The minimum capital requirement is Rs.100 crore
 What is the scope of activity? – Payments Banks can offer Deposits (only
current/saving accounts), issue ATM / Debit cards, payments and remittances services
 and can also act as Distributor of Third party products (can cross sell insurance, mutual
funds etc.)
 They would initially be restricted to holding a maximum balance / deposit of Rs.100000
per customer. (Based on performance, the RBI could enhance this limit)
 They cannot issue Credit Cards.
 Payment Bank can not undertake Lending activities. They should not offer loans.
 How safe is your money in a Payments Bank? – A Payments bank will be required
to invest 75% of its demand deposits balances in Government Securities (G-Sec) &
Treasury Bills. They have to meet Cash Reserve Ratio (CRR) and Statutory Liquidity
Ratio requirements set by RBI. A maximum of 25% of its deposits will have to be held
in current and fixed deposits with other scheduled commercial banks.

VII. RBI’s guidelines for Small Banks

 Eligibility – Professionals with 10 years of experience in banking / finance / Micro

Finance Institutions.
 The minimum capital requirement is Rs.100 crore (minimum paid-up equity capital).
 Local focus and ability to serve smaller customers will be a key criterion in licensing
such banks.
 The bank shall primarily undertake basic banking activities of accepting deposits and
lending to small farmers, small businesses, micro and small industries, and unorganized
sector entities. It cannot set up subsidiaries to undertake non-banking financial services
activities. After the initial stabilization period of five years, and after a review, the RBI
may liberalize the scope of activities for Small Banks.
 The area of operations would normally be restricted to few districts (near-by) of a state.
However, if necessary, it would be allowed to expand its area of operations beyond
contiguous districts in one or more states with reasonable geographical proximity.
 Small Banks have to meet RBI’s prudential norms and regulations regarding risk
management. They have to meet CRR and SLR requirements, like any other commercial
bank.
 The maximum loan size and investment limit exposure to single/group
borrowers/issuers would be restricted to 15 per cent of capital funds.
 For the first three years, 25 per cent of branches should be in unbanked rural areas.
 Of the loans issued by Small Banks, 75% should be to the priority sector which includes
agriculture and small businesses. And half the loan portfolio of the banks should be
loans and advances of up to Rs.25 lakh to micro finance businesses.
VIII. RBI Guidelines for NBFC-MFIs

i. An NBFC-MFI should have minimum Net Owned Funds of Rs.5 crores. (For NBFC-MFIs
registered in the North Eastern Region of the country, the minimum NOF requirement
shall stand at Rs. 2 crores).
ii. Not less than 85% of its net assets should be in the nature of “qualifying assets.”
For the purpose of ii above,
“Net assets” are defined as total assets other than cash and bank balances and money
market instruments.
“Qualifying asset” shall mean a loan which satisfies the following criteria:-
a. Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income
not exceeding Rs.1,00,000 or urban and semi-urban household income not exceeding
Rs.1,60,000 ;
b. Loan amount does not exceed Rs.60,000 in the first cycle and Rs.1,00,000 in
subsequent cycles;
c. Total indebtedness of the borrower does not exceed Rs.1,00,000 ;
d. Loan to be extended without collateral;
e. Aggregate amount of loans, given for income generation, is not less than 50 per cent of
the total loans given by the MFIs;
f. Further the income an NBFC-MFI derives from the remaining 15 percent of assets shall
be in accordance with the regulations specified in that behalf.
iii. All new NBFC-MFIs shall maintain a capital adequacy ratio consisting of Tier I and Tier
II capital which shall not be less than 15 percent of its aggregate risk weighted assets.
iv. A borrower cannot be a member of more than one SHG/JLG.
v. Not more than two NBFC-MFIs should lend to the same borrower.
vi. With effect from the quarter beginning April 01, 2014, the interest rates charged by an
NBFC-MFI to its borrowers will be the lower of the following:
a. The cost of funds plus margin; or
b. The average base rate of the five largest commercial banks by assets multiplied by 2.75.
The average of the base rates of the five largest commercial banks shall be advised by
the Reserve Bank on the last working day of the previous quarter, which shall determine
interest rates for the ensuing quarter.
vii. Processing charges shall not be more than 1 % of gross loan amount.
viii. All NBFC-MFIs are encouraged to become member of at least one Self-Regulatory
Organization (SRO) which is recognized by the Reserve Bank and will also have to
comply with the Code of Conduct prescribed by the SRO.
ix. Link for RBI Circular
https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9012

All are strongly advised to go through NBFC-MFI master circular: It’s a 10 page doc