India falls among low income class countries according to World Bank. It is second populated country in the world and around 70 per cent of its population lives in rural area. Still 60 per cent of people depend on agriculture, as a result there is chronic underemployment and per capita income is only $ 3262 which is not enough to provide food to more than one individual. The obvious result is poverty, low rate of education, low sex ratio, and exploitation. The major factor account for high incidence of rural poverty is the low asset base. This has resulted low production capacity both in agriculture (which contribute around 22-25% of GDP) and Manufacturing sector. Rural people have very low access to institutionalized credit (from commercial bank).This piece of research analyzes socio economic impact of Self Help Group (SHG)-Bank Linkage programme of microfinance in India.
Key words: Micro Finance, Social economic development,
INTRODUCTION
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 $1 per day. It is further estimated that of these households, only about 20% have access to credit from the formal sector. Out of these 80 million house hold, 80% takes credit from the informal sources i.e. local Zamidars, Chit Funds etc. With about 80 million households below MFIs include non- governmental organizations (NGOs), credit unions, non bank financial intermediaries, and even a few commercial banks.
The industry began by providing small loans to emerging entrepreneurs to start or expand businesses like JKEDI.Along with providing more flexible loan products and business and personal development training,also offers savings and insurance to help clients effectively navigate the daily hardships they face. Without these services, clients are continually at risk of slipping back into poverty because of unforeseen circumstances.
Microfinance Institutions (MFIs) in India exist as NGOs (registered as societies or trusts), Section 25 companies and Non-Banking Financial Companies (NBFCs). Commercial Banks, Regional Rural Banks (RRBs), cooperative societies and other large lenders have played an important role in providing refinance facility to MFIs. Banks have also leveraged the Self-Help Group (SHGs) channel to provide direct credit to group borrowers.
The southern state of Andhra Pradesh, the biggest market for the country's microfinance institutions, was at the center of the storm, and populist moves by politicians led to mass default of loans of more than US$ 1.5 billion. Operations are almost at a halt there.The central government has now stepped in.The Microfinance Institutions (Development and Regulation) Bill,2013 puts the Reserve Bank of India firmly in control of the sector. Vijay Mahajan, the president of the Microfinance Institutions Network of India told that government has introduced the Microfinance Institutions (Development and Regulation) Bill.It allows the Reserve Bank of India (RBI) to fix the maximum interest rates microfinance institutions (MFIs) can charge.
Sl. No.
Type of MFI
Number
Legal Registration
Not-for Profit MFIs
1
NGOs
400-500
Society Registration Act, 1860
Indian Trust Act, 1882
2
Non-Profit companies
20
Section-25 of Indian Companies Act, 1956
Mutual Benefit MFIs
3
Mutual benefit MFIs - Mutually Aided Cooperative Societies (MACS)
200-250
Mutually Aided Co-operative societies, Act enacted by State Governments
For Profit MFIs
4
Non-Banking Financial Companies (NBFCs)
45
Indian companies Act, 1956
Reserve Bank of India Act, 1934
Source: NABARD ISSUES RELATED TO MICROFINANCE
NEED OF THE STUDY
The need of microfinance arises because the rural India requires sources of finance for poverty alleviation, procurement of agricultural and farms input.
Microfinance may be a tools to empower the farmers and rural peoples to make agriculture profitable
OBJECTIVE OF THE STUDY
To analyze the growth of microfinance sector developed in India and see potential for the microfinance institutions, NGOs, SHGs in the market.
To study the importance and role of microfinance in poverty alleviation and profitable agriculture activities.
To understands the marketing of microfinance products in rural market
RESEARCH METHODOLOGY
This is a descriptive research paper based on secondary data. Data have been find out by googling in different websites research paper,journals and magazines.
LEGAL AND REGULATORY FRAMEWORK FOR THE MICROFINANCE INSTITUTIONS IN INDIA:
Societies Registration Act, 1860:
Main purpose is:
• Relief of poverty
• Advancement of education
• Advancement of religion
• Purposes beneficial to the community or a section of the community.
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.
Not-For-Profit Companies Registered Under Section 25 Of 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.
A PROFILE OF RURAL INDIA
• 350 million Below Poverty Line
• 95 % have no access to microfinance.
• 56 % people still borrow from informal sources.
• 70 % don't have any deposit account.
• 87 % no access to credit from formal sources.
• Annual credit demand is about Rs.70,000 crores.
• 95 % of the households are without any kind of insurance. (SOURCE:WORLD BANK).
INDIAN MICROFINANCE
Increasing access to credit for the poor has always remained at the core of Indian planning in fight against poverty. It saw nationalisation of existing private commercial banks, massive expansion of branch network in rural areas, mandatory directed credit to priority sectors of the economy, subsidised rates of interest and creation of a new set of rural banks at district level and an Apex bank for Agriculture and Rural Development (NABARD20) at national level. These measures resulted in impressive gains in rural outreach and volume of credit. As a result, between 1961 and 2000 the average population per bank branch fell tenfold from about 140 thousand to 14000 (Burgess & Pande, 200521) and the share of institutional agencies in rural credit increased from 7.3% 1951 to 66% in 199122.
NABARD's search for alternative models of reaching the rural poor brought the existence of informal groups of poor to the fore. It was realised that the poor tended to come together in a variety of informal ways for pooling their savings and dispensing small and unsecured loans at varying costs to group members on the basis of need. This concept of Self-help was discovered by social-development NGOs in 1980s. Realising that the only constraining factor in unleashing the potential of these groups was meagreness of their financial resources, NABARD designed the concept of linking these groups with banks to overcome the financial constraint. The programme has come a long way since 1992 passing through stages of pilot (1992-1995), mainstreaming (1995-1998) and expansion phase (1998 onwards) and emerged as the world's biggest microfinance programme in terms of outreach, covering 1.6 million groups as on March, 2005-24. It occupies a pre-eminent position in the sector accounting for nearly 80% market share in India.(S Sriram and Rajesh Upadhyayula 2009).
Under the programme, popularly known as SHG-Bank Linkage programme there are broadly three models of credit linkage of SHGs with banks. However, the underlying design feature in all remains the same i.e. identification, formation and nurturing of groups either by NGOs/other development agencies or banks, handholding and initial period of inculcating habit of thrift followed by collateral free credit from bank in proportion to the group's savings. In accordance with the flexible approach, the decision to borrow, internal lending and rate of interest are left at the discretion of group members. Its design is built on combining the "collective wisdom of the poor, the organizational capabilities of the social intermediary and the financial strength of the Banks".
The success factors of the programme lie in it being beneficial for both banks and clients - another example of Win-Win proposition. The programme is an attractive proposition for banks due to high recovery rates and lowering of transaction costs by outsourcing costs associated with monitoring and appraisal of loans.
The programme has received strong public policy support from both Government of India and Reserve Bank of India. The importance attached to it by Government is exemplified by mention of yearly targets by Finance Minister in his annual budget speech as well as introduction of similar group based lending approach in government's poverty alleviation programme. The success of the programme in reaching financial services to the poor has won international admiration. World Bank policy paper28 hails the programme and states that it is particularly suited to India because the model capitalises on country's vast network of rural bank branches that are otherwise unable to reach the rural poor.
MARKETING OF MICROFINANCE PRODUCTS
CONTRACT FARMING AND CREDIT BUNDLING
ï€ Banks and financial institutions have been partners in contract farming schemes, set up to enhance credit. Basically, this is a doable model. Under such an arrangement, crop loans can be extended under tie-up arrangements with corporate for production of high quality produce with stable marketing arrangements provided - and only, provided - the price setting mechanism for the farmer is appropriate and fair.
AGRI SERVICE CENTRE - RABO INDIA
ï€ Rabo India Finance Pvt Ltd. has established agri-service centres in rural areas in cooperation with a number of agri-input and farm services companies. The services provided are similar to those in contract farming, but with additional flexibility and a wider range of products including inventory finance. Besides providing storage facilities, each centre rents out farm machinery, provides agricultural inputs and information to farmers, arranges credit, sells other services and provides a forum for farmers to market their products.
NON TRADITIONAL MARKETS
ï€ Similarly, Mother Dairy Foods Processing, a wholly owned subsidiary of National Dairy Development Board (NDDB) has established auction markets for horticulture producers in Bangalore. The operations and maintenance of the market is done by NDDB. The project, with an outlay of Rs.15 lakh, covers 200 horticultural farmers associations with 50,000 grower members for wholesale marketing. Their produce is planned with production and supply assurance and provides both growers and buyers a common platform to negotiate better rates.
APNI MANDI
ï€ Another innovation is that of The Punjab Mandi Board, which has experimented with a 'farmers' market' to provide small farmers located in proximity to urban areas, direct access to consumers by elimination of middlemen. This experiment known as "Apni Mandi" belongs to both farmers and consumers, who mutually help each other. Under this arrangement a sum of Rs. 5.2 lakh is spent for providing plastic crates to 1000 farmers. Each farmer gets 5 crates at a subsidized rate. At the mandi site, the Board provides basic infrastructure facilities. At the farm level, extension services of different agencies are pooled in. These include inputs subsidies, better quality seeds and loans from Banks. Apni Mandi scheme provides self-employment to producers and has eliminated social inhibitions among them regarding the retail sale of their produce.
RECOMMENDATIONS
1. Proper Regulation: The regulation was not a major concern when the microfinance was in its nascent stage and individual institutions were free to bring in innovative operational models. However, as the sector completes almost two decades of age with a high growth trajectory, an enabling regulatory environment that protects interest of stakeholders as well as promotes growth, is needed.
2. Field Supervision: In addition to proper regulation of the microfinance sector, field visits can be adopted as a medium for monitoring the conditions on ground and initiating corrective action if needed. This will keep a check on the performance of ground staff of various MFIs and their recovery practices. This will also encourage MFIs to abide by proper code of conduct and work more efficiently. However, the problem of feasibility and cost involved in physical monitoring of this vast sector remains an issue in this regard.
3. Encourage rural penetration: It has been seen that in lieu of reducing the initial cost, MFIs are opening their branches in places which already have a few MFIs operating. Encouraging MFIs for opening new branches in areas of low microfinance penetration by providing financial assistance will increase the outreach of the microfinance in the state and check multiple lending. This will also increase rural penetration of microfinance in the state.
4. Complete range of Products: MFIs should provide complete range of products including credit, savings, remittance, financial advice and also non-financial services like training and support. As MFIs are acting as a substitute to banks in areas where people don't have access to banks, providing a complete range of products will enable the poor to avail all services.
5. Transparency of Interest rates: As it has been observed that, MFIs are employing different patterns of charging interest rates and a few are also charging additional charges and interest free deposits (a part of the loan amount is kept as deposit on which no interest is paid). All this make the pricing very confusing and hence the borrower feels incompetent in terms of bargaining power. So a common practice for charging interest should be followed by all MFIs so that it makes the sector more competitive and the beneficiary gets the freedom to compare different financial products before buying.
6. Technology to reduce Operating Cost: MFIs should use new technologies and IT tools & applications to reduce their operating costs. Though most NBFCs are adopting such cost cutting measures, which is clearly evident from the low cost per unit money lent (9%-10%) of such institutions. NGOs and Section 25 companies are having a very high value of cost per unit money lent i.e. 15-35 percent and hence such institutions should be encouraged to adopt cost-cutting measures to reduce their operating costs. Also initiatives like development of common MIS and other software for all MFIs can be taken to make the operation more transparent and efficient.
7. Alternative sources of Fund: In absence of adequate funds the growth and the reach of MFIs become restricted and to overcome this problem MFIs should look for other sources for funding their loan portfolio. Some of the ways through which MFIs can raise their fund are:
By getting converted to for-profit company i.e. NBFC: Without investment by outside investors, MFIs are limited to what they can borrow to a multiple of total profits and equity investment. To increase their borrowings further, MFIs need to raise their Equity through outside investors. The first and the most crucial step to receive equity investment are getting converted to for-profit NBFC. Along with the change in status the MFI should also develop strong board, a quality management information system (MIS) and obtain a credit rating to attract potential investors.
Portfolio Buyout: It is when banks or other institutions purchase the rights to future payment stream from a set of outstanding loans granted by MFIs. In such transactions MFIs are responsible for making up any loss in repayment up to a certain percentage of the portfolio and this clause is known as "first loss default guarantee". The above clause ensures that the MFI retains the correct incentive to collect these loans. To ensure security to the buying institution, MFIs are allowed to sell off as much of the outstanding portfolio as is financed by accumulated earnings or equity.
Securitization of Loans: This refers to a transaction in which the repayments from a set of microloans from one or more MFIs are packaged into a special purpose vehicle, from which tradable securities are issued. As the loans from multiple MFIs can be pooled together the risk gets diversified. Though securitization of loans and portfolio buyout are similar in many ways like first loss default guarantee clause, limit to the amount of loans that can be sold off etc. The major difference between the two is that securitizations require a rating from a credit rating agency and that it can be re-sold, which makes securitized loans attract more potential buyers. Also unlike portfolio buyout, there can be multiple buyers and sellers for each transaction in case of securitization of loans as compared to single buyer and single seller in portfolio buyout. Through securitization, MFIs can tap new sources of investments because fund of certain types like mutual funds, which are barred from directly investing in MFIs, can invest through securitized loans.
FINDINGS
Considerable gap between demand and supply for all financial services:
Majority of poor are excluded from financial services. This is due to, the following reasons:
1,Bankers feel that it is risky to finance poor peoples because of their creditworthiness.
2,High transaction costs.
CONCLUSION
The potential for growing micro finance institutions in India is very high.The Indian economy at present is at a crucial juncture, on one hand, the optimists are talking of India being among the top 5 economies of the world by 205047 and on the other is the presence of 260 million poor forming 26 % of the total population. The enormity of the task can be gauged from the above numbers and if India is to stand among the comity of developed nations, there is no denying the fact that poverty alleviation & reduction of income inequalities has to be the top most priority. India's achievement of the MDG of halving the population of poor by 2015 as well as achieving a broad based economic growth also hinges on a successful poverty alleviation strategy. In this backdrop, the impressive gains made by SHG-Bank linkage programme in coverage of rural population with financial services offers a ray of hope.
