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Role of Microfinance Institutions in Rural Credit With Reference To Financial Inclusion by

Role of Microfinance Institutions in Rural Credit With Reference To Financial Inclusion by Dr. Tapasree Banerjee Prabhujagatbandhu College FIRST YEAR B.COM CLASS. Institutional Rural Credit Prior To 1991. Prevalence of Commercial Banks,Cooperatives and Regional Rural Banks

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Role of Microfinance Institutions in Rural Credit With Reference To Financial Inclusion by

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  1. Role of Microfinance Institutions in Rural Credit With Reference To Financial Inclusion by Dr. Tapasree Banerjee Prabhujagatbandhu College FIRST YEAR B.COM CLASS

  2. Institutional Rural Credit Prior To 1991 Prevalence of Commercial Banks,Cooperatives and Regional Rural Banks Short term credit provided by Primary AgriculturalCooperative Societies(PACs) Long tem credit provided by Primary Cooperative Agriculture and Rural Development Banks(PCARDBs) Heavy incidence of overdues,Non-Performing Assets(NPAs),high transaction costs, regulated interest rates plagued the system Net outcome was that the RFIs especially the co –operatives headed towards a state of financial unsustainability.

  3. Self-Help Group Bank Linkage Programme • Motivated by the success stories of institutional rural credit in Asian developing countries and Grameen Bank of Bangladesh NABARD in 1992 initiated the microfinance (MF) programme through formation of Self-Help Groups with the help of village level NGOs • From bankers point of view ,compared to conventional bank lending in the rural areas ,lending through SHGs has helped the banking institutions in achieving high recovery percentage through peer pressure and in substantial reduction in the transaction cost to the small borrowers (Gulati,Bathla 2002) Available information indicates that transaction cost for borrowers under the SHGs is reduced by 21 percent as compared to situation under direct lending.

  4. Microcredit Concepts • Microfinance is defined as the provision of thrift ,credit and other financial services such as money transfer and micro-insurance products for the poor, to enable them to raise their income levels and improve living standards • Microfinance refers to the entire range of financial services such as savings, money transfers, production and investment credit as also housing finance and includes the need for skill upgradation and entrepreneurial development • Thus microfinance provides credit support in small doses (usually in the range of Rs 5,000 to Rs 20000) along with training and other related services to people who are resource –poor but who are able to undertake economic activities.

  5. Microfinance Credit Table1:- Client Outreach- Borrowers With Outstanding Accounts (Millions) And Percentage Growth Source:- Calculated on the basis of data in Microfinance inIndia, A State Of The Sector Reports

  6. Banking systen vis a vis MFI:client outreach 70 Banking System-SHG MFIs 62.5 60 59.6 54 Customers(millions) 50 47.1 40 38.02 31.4 30 26.7 22.6 20 14.1 10.04 10 0 2006-07 2007-08 2008-09 2009-10 20010-11 Year Client outreach Figure 1:Banking systen vis a vis MFI : client outreach

  7. Average Loan Size Table 2 :- Comparison of Average Loan Size Source:- Calculated on the basis of data in Microfinance in India, A State Of The Sector Reports

  8. SHG vis-a-via MFI:average loan /customer SHG member MFI customer 6610 7000 6060 6000 5190 4900 4570 5000 4120 4000 Rs 3000 2000 1000 0 2008-09 2009-10 2010-11 YEAR Average loan per customer Figure 2 : SHG vis-a-via MFI:average loan /customer

  9. Estimate of Microfinance Clients Table 3 :- Estimate of Microfinance Credit Clients Source:- Calculatedon the basis of data in Microfinance in India, A State Of The Sector Reports

  10. Types of Lending • SHG (Self Help Group) model of lending • Under the SHG model an MFI lends to a group of 10 TO 20 women. Under the SHG-bank linkage model ,an NGO promotes a group and gets banks to extend loans to the group. Here the monthly repayment structure is usually followed. In the SHG model the MFIs usually charge 18 to 24 percent interest per annum based on reducing balance method.In addition to interest rates, some MFIs also charge a processing fee comprising a certain proportion of the loan amount sanctioned, at the time of disbursement. • JLG (Joint Liability Group) model of lending • Under the JLG model loans are extended to, and recovered from , each member of the group. The most popular JLG models are the Grameen Bank Model developed by Grameen Bank, Bangladesh) and ASA, a leading Bangladesh-based NGO-MFI)Most MFIs following the JLG model charge flat interest rates of 12 to 18 percent on their loans. • Diversified lending methodology • A MFI is said to have a diversified lending methodology when it offers loan products through various lending methodologies:SHG model,JLG model,and individual based • Individual based • In India, MFIs adopting the group-lending models extend individual loans to more successful borrowers who have completed a few loan cycles as part of a group( who have relatively large credit requirements and good repayment track record)

  11. Performance of top 50 MFIs in 2008 • A look into the performance of 50 top performing MFIs across states reveals that MFIs in Andhra Pradesh are performing better in terms of their client outreach. As on September 2008 ,16 out of 50 MFIs had their headquarters in Andhra Pradesh. Their outreach was 49.08 percent of the total outreach of the MFIs considered and their outstanding balance was 67.24 percent of the total. The eastern states of West Bengal, Orissa and Assam accounted for 11.35 percent of total borrowers among the top 50 MFIs and 8.81 percent of total outstanding balance. The Western staes and the northern states(exception being Uttar Pradesh) are marked by their absence among the top 50 MFIs.

  12. Performance of select MFIs in India Table:- 4 Performance of top 50 MFIs in 2008

  13. Source: Calculated on the basis of CRISIL report

  14. Performance criteria for MFIs • Average outstanding loan balance • =Gross amount of loans or savings outstanding/Number of active borrowers • An average outstanding loan balance below 20 percent of percapita SDP indicates that clients are very poor. A look at the top 50 leading MFIs reveals that only 9 have their average outstanding loan balance as a proportion of percapita net state domestic product (PCNSDP at 2004-05 prices) more than 20 percent. The rest are all below 20 percent.

  15. Operating Self Sufficiency(OSS)Ratio • The operation self sufficiency is a percentage which shows the ratio between total income and total expenses of the MFI. This ratio does not include revenue grants received and expenses out of revenue grants. A OSS more than 100 implies that total income is greater than total expenses. Barring a few , almost all the top functioning MFIs have their OSS greater than 100 percent , the highest being that of RORES Micro Entrepreneur Development Trust of Karnataka followed by Utsarga Welfare Society(SUWS) OF West Bengal .

  16. Portfolio Yield and Net Worth • Portfolio yield is the ratio between interest income and average total total loan outstanding. It is expressed as percentage. The highest portfolio yield has been achieved by Janalakshmi Financial Services Pvt. Limited (JFSPL) in Karnataka (33.65 percent) followed by Grama Vidiyal Microfinance Pvt. Limited (GVMFL) in Tamil Nadu (32.46 percent ) • Net Worth refers to the net owned funds of the MFIs. Of the MFIs studied the highest net worth is of SKS Microfinance Pvt. Limited (SKSMPL) of Andhra Pradesh.

  17. What is Financial Inclusion • Financial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups. • Unrestrained access to public goods and services is the sine qua non of an open and efficient society • As banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of public policy

  18. Existing Banking System and Financial Inclusion • Banking industry has • shown tremendous growth in volume and has made significant improvements in several areas relating to financial viability,profitabilty and competitiveness • BUT….vast segments of the population, especially the underpriviledged sections of the society are still out of bank’s fold. Coverage is only 9.5 percent in rural areas • Percentage of adult population having bank account is only 59% meaning 41% of population is still unbanked ( percentage higher in rural areas) Assumption: Each individual has only one bank account ,which is not always true. • Extent of exclusion from credit markets is much more- number of loan accounts cover only 14% of adult population • Out of 89 million farm households, 51.4% have no access to formal or informal sources of credit, 73% have no access to the formal sources of credit.

  19. Who are excluded ? • Marginal farmers • Landless labourers • Oral lessees • Self employed and unorganised sector enterprises • Urban slum dwellers • Migrants/ ethnic minorities and socially excluded groups • Senior citizens and women

  20. Financial Inclusion in the Indian Context • Policy of the Reserve Bank of India on ‘Financial Inclusion’: • RBI places a lot of emphasis on financial inclusion to make banks give the desired attention • With proactive role for enhancing the financial inclusion, RBI in its Annual Policy Statement of the year 2005-06, urged banks to review their existing practices to align them with the objective of financial inclusion. • The SHG-Bank Linkage Programme and other microfinance initiatives by NABARD has contributed much towards financial inclusion process in India.

  21. THE IMPACT

  22. Challenges faced by MFIs in India • High rates of default • Steady access to capital • Absence of regulatory control and weak governance

  23. Towards new directions in rural agricultural finance • Micro-finance Development and Equity Fund (MFDEF) • Support to partner agencies like NGOs, RRBs, individual rural volunteers(IRVs) • Training and capacity building of stake holders including bankers, NGOs, Government officials , SHG members and trainers • Special initiatives in backward region • Rajiv Gandhi Mahila Vikas Pariyojana in select districts of UP • Priyadarshini Project- the women empowerment and livelihood programme in BIhar and UP • Scaling-up of Microfinance Programmes like financing of JLGs and MicroEnterprise Development Programme by NABARD • Relaunching of SHG Bank Linkage Programme: SHG-2 • Scheme for Promotion of Women SHGs in backward Districts of India and Left Wing Extremism(LWE) affected Districts of India

  24. Conclusion The key factors that can ensure a robust institutionalised rural credit processes system in India are flexible and efficient which will not only ensure productivity but also target to achieve the inclusive growth plans as envisaged by our social thinkers.

  25. THANK YOU

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