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Micro Finance and Rural Development

Microfinance involves providing small loans, savings opportunities, and other basic financial services to the poor. This allows very poor families to access small loans to engage in productive activities or grow tiny businesses. Over time, various Indian institutions have been established to promote microfinance, such as regional rural banks in 1975 and establishing an apex agency for rural finance in 1982. However, there are still challenges around high interest rates, inappropriate targeting of the poor, and lack of distribution in rural areas. Transforming some large microfinance institutions into commercial entities and promoting partnerships between institutions are approaches being taken to further develop rural finance in India.

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235 views19 pages

Micro Finance and Rural Development

Microfinance involves providing small loans, savings opportunities, and other basic financial services to the poor. This allows very poor families to access small loans to engage in productive activities or grow tiny businesses. Over time, various Indian institutions have been established to promote microfinance, such as regional rural banks in 1975 and establishing an apex agency for rural finance in 1982. However, there are still challenges around high interest rates, inappropriate targeting of the poor, and lack of distribution in rural areas. Transforming some large microfinance institutions into commercial entities and promoting partnerships between institutions are approaches being taken to further develop rural finance in India.

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bobo_09
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m Micro finance is the supply of loans, savings and

other basic financial service to the poor.

m To most micro finance means providing very poor


families with very small loans to help them engage
in productive activities or grow their tiny businesses.

m Micro credit refers to small loan to a client made by


a bank which can be offered without collateral to an
individual or group.
m Micro finance has been practiced in India for ages.

m Reserve bank of India Act, 1934 provided for the


establishment of the Agricultural Credit Department.

m Regional rural banks was created in 1975.

m Nationalization of banks was done in 1969.

m Established an apex agency for rural finance in 1982.


m hortage of Financial Capital ± Or Misallocation?

m lack of awareness about sources of funds for


microfinance providers to pass on to the poor

m high interest rates of loans made to the poor (to cover


various costs and risks)

m inappropriate targeting of poor households by


microfinance programs

m lack of microfinance training for MFIs

m poor distribution system of MFIs, i.e. a need to spread


out loan facilities into rural areas
m Institutions that offer microfinance can be NGO,
Credit Unions, Non banking financial intermediaries
and commercial banks
m These institutions operate under RBI guidelines
m Main functions of these 4 groups :
£ tructure and sustainability
£ Funding
£ Regulations
£ Capacity building
m Transformation of four large Indian MFIs into commercial
entities:-
£   Microfinance
£ pandana poorthy Financials Limited
£ hare MicroFin Limited
£ Asmitha MicroFin Limited

m hare Microfin has 990 branches, with a loan portfolio of Rs


8,945 crore as of March 31st 2010
m hare Microfin Ltd and Asmitha Microfin Ltd in Hyderabad
are trying for a possible merger of their business
m It is a regulated NBFC
m From traditional days women are facing
discrimination in terms of access to credit and other
financial services.
Ê) Feminization of poverty
b) Financial services offer a unique opportunity for
greater empowerment of women
c) Overcome gender discrimination for enhanced
economic growth
d) Financial uplifts are widely distributed within
household and community.
R. O  
:. A study conducted on Women¶s
Empowerment shows that an average of 68 percent of women
in its program experienced an increase in their decision-
making roles in the areas of
„ family planning,
„ children¶s marriage,
„ buying and selling property, and
„ sending their daughters to school
ï      : Any program of its nature will
bring a drastic change in terms of self-confidence and
self esteem. The increased result will show an
improved effect in the level of knowledge in
understanding the issues around themselves and
business knowledge that will improve the financial
conditions.
m Women tatus and Gender Indiscrimination

m Family relationship:

m Women Involvement in the community

m Political participation and Women¶s rights:


„ Both governments and donors should explore ways of
developing innovative credit.
„ avings and credit programmes should be designed in a
way not to exclude women from participating.
„ enterprise, donors should encourage microenterprise
programmes to develop specific strategies for recruiting
women
„ upport for these organisations should include technical
assistance and training in programme and in developing
teams of female staff to assist clients in business
planning and management.
m Bring the commercial system closer to the rural
client

m Bring the commercial system closer to the financial


system

m Link rural finance to non-financial activities


ustainable Development of Rural Finance requires:

£ Continual growth and diversification of rural


economy
£ Access of all segments of the population including
rural microentrepreneurs, farmers and the poor to
sustainable financial services such as savings, credit
and insurance
£ Provide self reliant, sustainable financial
institutions
£ In a conductive macroeconomic policy environment
` To be successful, rural finance must assist borrowers
in total income generation, including marketing and
improving product.
` Formal financial institutions have scale but find
administrative costs too high in rural finance. Micro-
finance has reach, but can¶t break out of small scale.
` Investment in human capital is key to empowering
the poor to break out of poverty. [Teach a man to
fish, not to eat fish].
` ubstantial poverty reduction requires holistic
approach, not just finance.
- The following key innovative approaches are effective tools
for addressing rural finance challenges:

a. Firm vision/mission to reach the poor ± increasing


outreach with the ultimate goal of reaching large
number of clients and poverty reduction

b. imple and innovative products, i.e. development of


demand driven financial products

c. Cost effective MFI for attaining operational &


financial sustainability ± control over administrative
expenses and effective use of resources
d. Diversified funding sources
e. tandardized & imple delivery procedures/ methodology
f. Linkage of MFIs & banks
g. Continuous institutional capacity of MFIs so as to address:
Good governance
Human resource development
Portfolio quality improvement
MI strengthening
Loanable fund/savings mobilization
Quick information on repayment & default
h. Flexible loan terms & conditions, e.g. suitable loan repayment
schedule tailored to the client¶s cash flow
i. Close & frequent monitoring & follow up
j. Appropriate & standard criteria (ratios) for measuring MFIs¶
performance

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