Microfinance - 2

Financial Inclusion

• Financial inclusion is defined as the availability

and equality of opportunities to access financial
services.
• It refers to a process by which individuals and
businesses can access appropriate, affordable,
and timely financial products and services. These
include banking, loan, equity, and insurance
products.
• Financial inclusion efforts typically target those
who are unbanked and under banked, and directs
sustainable financial services to them.
 Significant Developments
related to microfinancing
Self Employed Women's Association (SEWA), the first Micro-finance
1974
Institution, was established in year 1974, as an Urban Co-operative Bank
1975 Establishment of Regional Rural Banks by Government of India
Establishment of National Bank for Agriculture and Rural Development
1982
(NABARD)
1990 Establishment of Small Industries Development Bank of India (SIDBI)
RBI included MFI lending in priority sector lending and recognize MFI as a
2004
tool for financial inclusion
Microfinance Institutions Network (MFIN) was started as a self regulatory body
2009
for the sector and all the NBFC-MFI are eligible for membership.
a) 9.2 million borrowers in Andhra Pradesh (AP) in default on MFI loans,
largest number of defaulters in any single location in the world.
b) AP crisis strikes; state issues ordinance to
2010
regulate MFI sector while banks refuse to lend to the MFI
companies.
 Significant Developments
related to microfinancing
2011 RBI releases Malegam Committee regulations.
Malegam recommendations fully implemented and industry back on
2013
the growth path.

a) The RBI issues Universal Banking license to Bandhan, the largest

micro-lender in terms of assets.
2014
b) MFIN was formally recognized as a self regulatory body by the
RBI

2015 Micro Units Development and Refinance Agency Bank established

Small Finance Bank (SFB) license awarded to 8 MFI companies

2015 namely Disha, ESAF, JFS, RGVN, Suryoday, Ujjivan,Equitasand
Utkarsh
SEWA Bank

• In 1972 the Self Employed Women's Association

(SEWA) was registered as a trade union in Gujarat.
• Then it was established as SEWA Bank in 1974, which
is the first micro-finance institution, as an urban co-
operative bank.
• SEWA Bank exists to reach to maximum number of
poor women workers engaged in the unorganized sector
and provide them suitable financial services for socio-
economic empowerment and self-development,
through their own management and ownership.
• Products: Loans, Savings, Fixed deposit, Insurance, etc.
Regional Rural
Banks
• RRBs were set up under the provisions of an ordinance
passed on 26 September 1975 and the RRB Act 1976.
• Prathama Bank, with head office in Moradabad, Uttar
Pradesh was the first RRB on 2 October 1975.
• The RRBs were owned by the central government, state
government, and the sponsoring bank with 50%, 15%,
and 35% shareholding respectively.
• At present, there are 43 Regional Rural Banks (RRBs) in
India with 21,856 branches across 26 States and 3 UTs.
They are sponsored by 12 Scheduled Commercial Banks
(SCBs).
Objectives of
RRBs

• To provide loan for backward class public

• To opening branches of bank in rural areas.
• To save the rural poor from the moneylenders.
• To cultivate the banking habits among the rural
people and mobilize savings for the economic
development of rural areas.
• To increase employment opportunities by
encouraging trade and commerce in rural areas.
 Features of Regional Rural Bank

• RRBs are a new form of scheduled commercial banks which

is backed by a strong commercial bank.

• Each RRB is operated within a certain limit only.

• RRBs provide banking facilities to small, marginal farmers,

artisans, etc. in rural areas.

• RRBs reduce regional imbalances by checking the outflow of

rural deposits to urban areas. This will increase the
employment generation in rural areas.

• RRBs provide 75% of their total credit as Priority Sector

Lending to fulfill the criterion applicable to commercial banks.
 Issues Related to RRBs

• Rising Cost: The rising cost of operations of Regional Rural Banks

(RRBs) as compared to scheduled commercial banks. The
government wants them to work towards increasing their earnings.

• Limited Activities: Due to the fact that many of these branches

don't have enough business, they are incurring losses. In rural
areas, they mainly offer government schemes like Direct Benefit
transfer disbursement of wages of MGNREGA workers and
distribution of pensions.

• Low Internet Banking: At present, only 19 RRBs have Internet

banking facilities and 37 have mobile banking licenses.
National Bank for Agriculture
and Rural Development

• NABARD was established on the recommendations of B.

Sivaramman Committee on 12 July 1982 to implement
the National Bank for Agriculture and Rural Development
Act 1981.

• NABARD is an apex regulatory body for overall

regulation of regional rural banks and cooperative banks
in India. It is under the jurisdiction of Ministry of
Finance, Government of India.

• It launched SHGs-Bank linkage program in 1992. Then, it

launched ‘Micro-Enterprise Development Programme’ for
skill development.
Functions of
NABARD
• Framing policy and guidelines for rural financial
institutions.
• Providing credit facilities to issuing organizations
• Monitoring the flow of ground level rural credit.
• Preparation of credit plans annually for all districts
for identification of credit potential.
• Help cooperative banks and Regional Rural Banks to
prepare development action plans for themselves.
• Undertakes inspection of Regional Rural Banks
(RRBs) and Cooperative Banks.
Small Industries Development
Bank of India

• Small Industries Development Bank of India (SIDBI) is

the apex regulatory body for overall licensing and
regulation of micro, small and medium enterprise finance
companies in India.
• SIDBI is formed on 2nd April 1990.
• SIDBI is active in the development of Micro Finance
Institutions through SIDBI Foundation for Micro Credit
(SFMC), and assists in extending microfinance through
the Micro Finance Institution (MFI) route.
 Role of SIDBI

• Provide financial aid to micro, small and medium-sized

businesses.
• Provide easy reach to a large population through indirect
lending to banks and other financial institutions.
• Help in the modernization of small-scale industry and
upgrade technology for improved efficiency.
• Promote products of the small-scale industry through
better marketing strategies.
• Support national plans on climate change.
Malegam committee

• The Board of Directors of the Reserve Bank of

India, at its meeting held on October 15, 2010,
formed a Sub-Committee of the Board to study
issues and concerns in the microfinance sector
in so far as they related to the entities regulated
by the Bank.
• Sub-Committee Constituted by RBI under Shri
Y.H. Malegam Submits its Report regarding
Micro Finance Sector.
Malegam committee
recommendations

• (i) Creation of a separate category of NBFCs viz. NBFC-

MFIs to be regulated, and supervised, by the RBI.

• (ii) An interest cap of 24% on individual loans of MFIs.

• (iii) In the interest of transparency, an MFI can levy only

three charges, namely, (a) processing fee (b) interest
and (c) insurance charge.

• (iv) A borrower can be a member of only one Self- Help

Group (SHG) or a Joint Liability Group (JLG).
Micro Units Development
and Refinance Agency Bank

• The formation of the agency was initially announced in

the 2015 Union budget of India in February 2015. It
was formally launched on 8 April 2015.
• MUDRA has been initially formed as a wholly owned
subsidiary of Small Industries Development bank of
India (SIDBI) with 100% capital being contributed by it.
• The bank started with an authorized capital of 1000
crores and paid up capital is 750 crore, fully subscribed
by SIDBI. More capital is expected to enhance the
functioning of MUDRA.
 Responsibilities of MUDRA

• MUDRA has been formed with a primary objective of

developing the micro enterprise sector in the country by
extending various support including financial support in the
form of refinance, so as to achieve the goal of funding the
unfunded•.
• The bank will classify its clients into three categories and the
maximum allowed loan sums will be based on the category:

Shishu (शििु ): Allowed loans up to ₹50,000 (US$630)

Kishor (शििोर): Allowed loans up to ₹5 lakh (US$6,300)
Tarun (तरुण): Allowed loans up to ₹10 lakh (US$13,000)
Role of Technology
Management Information Systems
 The MIS involves all aspects of gathering, storing,
tracking, retrieving and using information within a
business or organization.
 The information system helps loan officers track their
clients repayment schedules and balances.
 It helps management to assess the quality of the loan
portfolio.
 And it can help the entire institution monitor progress
toward operational objectives.
Role of Technology
Mobile banking
 Mobile banking is a popular method of
technologically oriented banking. Also called as M-
Banking or SMS banking.

 Mobile banking allows the user to log into his

account from a cell phone, and then use the phone to
make payments, check balance, transfer money
between accounts, view monthly statements and etc.
Role of Technology
Internet Banking
• It is the type of electronic banking service which
enables customers to perform several financial and
non-financial transactions via the internet.

• With internet or online banking or net-banking,

customers can transfer funds to another bank account,
check account balance, view bank statements, pay
utility bills, and much more.
Role of Technology
Automated Teller Machines (ATM)
• It is one of the most popular types of e-banking. ATMs
allow customers to withdraw funds, deposit money,
change Debit Card PIN, and other banking services.
• ATMs with operating instructions in vernacular
languages facilitate the access poor people with
reading ability.
• ATMs with voice recognition for the illiterates for
transactions relating to savings, credit and payment
services.
• Biometric enabled ATMs to bring more illiterate
people to the banking fold.
 Benefits of Technology for
MFIs
1. Customer centricity

2. Reducing operational risk

3. Consumer protection

4. 24×7 Availability

5. Convenient Financial Transactions

6. Organized Statements and Transaction History

Digital Transformation

• Outreach through digital channels: Digitalize traditional

distribution channels, such as branches, field services and
agency banking. Expand into remote, underserved markets
at a minimal cost.
• Digitize operations: Reduce paper-based processes.
Improve data quality and speed through real-time
integrations (credit bureaus, scoring, identity, etc.) and
flexible end-to-end workflows between the front and back
office to achieve efficiency.
• Deliver customer centric products: Acquire customers
anywhere with remote customer onboarding and loan
origination for both individual and group lending products
and processes. Personalize offerings based on data to
improve portfolio quality.
 Barriers of Technology
• Even after years of introduction, acceptance of technology by
microfinance customers is the major barrier that is not allowing the
industry to excel by IT intervention.

• Rural population are not comfortable in operating mobile phones

which is the major hurdle for IT intervention in Microfinance
industry.

• Many areas in the country are still deprived of 24 hour

electricity and communication channels which act as a barrier.

• Level of literacy among the rural masses act as a barrier for the
implementation of IT practices as the knowledge level is not
sufficient to effective utilization of IT services.
 References
• Beatriz Armendariz & Jonathan Morduch (2007), The
economics of Microfinance, MIT Press.
• M S Sriram (2011). Microfinance Industry in India :
More Thoughts, Economic and Political Weekly , Vol.
46, No. 50 (DECEMBER), pp. 110-112.
• S Teki and R.K. Mishra (2012), Microfinance and
Financial Inclusion, Academic foundation, New Delhi.
• Thomas Fisher & M S Sriram (2002). Beyond Micro-
credit: Putting Development Back Into Micro-finance,
Oxfam Publisher, India.
• https://www.nabard.org