Micro Finance

MicroFinance

Rating /Capital /RFA support to MFIs

Grant Assistance for rating of MFIs

Capital Support as Soft Loan to MFIs under MFDEF

Revolving Fund Assistance

Financial Assistance provided to Micro Finance Institutions as above, has been discontinued with effect from April 01, 2011.

MicroFinance

mF Institutions

Introduction

A range of institutions in public sector as well as private sector offers the microfinance services in India. They can be broadly categorized into two categories namely, formal institutions and informal institutions. The former category comprises of Apex Development Financial Institutions, Commercial Banks, Regional Rural Banks, and Cooperative Banks that provide microfinance services in addition to their general banking activities and are referred to as microfinance service providers. On the other hand, the informal institutions that undertake micro finance services as their main activity are generally referred to as Micro Finance Institutions (mFIs). While both private and public ownership are found in the case of formal financial institutions offering microfinance services, the mFIs are mainly in the private sector.

MicroFinance Service Providers

The microfinance service providers include apex institutions like National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and, Rashtriya Mahila Kosh (RMK). At the retail level, Commercial Banks, Regional Rural Banks, and, Cooperative banks provide microfinance services. Today, there are about 1,61,480 retail credit outlets of the formal banking sector in the rural areas comprising 13,000 branches of District level cooperative banks, over 15,480 branches of the Regional Rural Banks (RRBs) and over 38,400 rural and semi-urban branches of commercial banks besides almost 94,600 cooperatives credit societies at the village level. On an average, there is at least one retail credit outlet for about 4600 rural people. This physical reaching out to the far-flung areas of the country to provide savings, credit and other banking services to the rural society is an unparalleled achievement of the Indian banking system. An attempt is made here to deal with various aspects relating to emergence of private microfinance industry in the context of prevailing legal and regulatory environment for private sector rural and microfinance operators.

The Emergence of Private Microfinance Industry

The microfinance initiative in private sector can be traced to the initiative undertaken by Ms.Ela Bhat for providing banking services to the poor women employed in the unorganised sector in Ahmedabad City of Gujarat State. Shri Mahila SEWA (Self Employed Women's Association) Sahakari Bank was set up in 1974 by registering it as a Urban Cooperative Bank. Since then, the bank is providing banking services to the poor self-employed women working as hawkers, vendors, domestic servant etc. As on March 2010, the bank had a membership of 67,000. The deposit and loan portfolio stood at Rs 1050.49 million ($ 22.83 million) and Rs 466.69 million ($ 10.14 million) respectively. Though the bank is making profit, yet the SEWA bank model has not been replicated elsewhere in the country.

In the midst of the apparent inadequacies of the formal financial system to cater to the financial needs of the rural poor, NABARD sponsored an action research project in 1987 through an NGO called MYRADA. For this purpose a grant of Rs. 1 million ($22,222) was provided to MYRADA for an R&D programme related to credit groups. Encouraged by the results of field level experiments in group based approach for lending to the poor, NABARD launched a Pilot Project in 1991-92 in partnership with Non-governmental Organisations (NGOs) for promoting and grooming self help groups (SHGs) of homogeneous members and making savings from existing banks and within the existing legal framework. Steady progress of the pilot project led to the mainstreaming of the SHG-Bank Linkage Programme in 1996 as a normal banking activity of the banks with widespread acceptance. The RBI set the right policy environment by allowing savings bank accounts of informal groups to be opened by the formal banking system. Launched at a time when regulated interest rates were in vogue, the banks were expected to lend to SHGs at the prescribed rates, but RBI advised the banks not to interfere in the affairs of SHG management, particularly on the terms and conditions on which the SHGs disbursed loans to their members.

The uniqueness of the microfinance through SHG is that it is a partnership based approach and encouraged NGOs to undertake not only social engineering but also financial intermediation especially in areas where banking network was not satisfactory. The rapid progress achieved in SHG formation, which has now turned into a women empowerment movement across the country, laid the foundation for emergence of mFIs in India.

mFIs and Legal Forms

Firm data regarding number of MFIs operating in the country is not available. An attempt to create an information base on micro finance institutions operating in 13 microfinance intense States was made in 2008 under “NABARD GIZ Rural Financial Institutions Programme” (RFIP). Micro Finance Institutions operating in the 13 microfinance intense States were advised to send their responses to a Standardised questionnaire. 786 MFIs responded to the questionnaire as detailed in Table 1. About 120 MFIs working in the North-East, were not covered under the survey.

The survey revealed that there was high geographic concentration (75%) of MFIs in two States viz., Andhra Pradesh and Tamil Nadu. Most of the MFIs (95%) were found to operate in one State only. Further, 68% of the MFIs operated in only one district.

Table 1 - State-wise position of MFIs (2008)

The mFIs in India can be broadly sub-divided into three categories of organizational forms. Category wise number of MFIs, which responded to the questionnaire, are appended in the Table 2.

Table 2-Legal form wise number of MFIs

The total outstanding loan portfolio was Rs.41,417 millions ($ 900 millions) as on March, 2008.

The MFI sector is extremely polarised in terms of numbers and loan volume. Company MFIs which formed 4% of the total MFIs accounted for 67% of the total loans outstanding. Mutual Benefit MFIs which formed 57% of the total MFIs accounted for 7% of the total loan outstanding. Similarly, NGO-MFIs which formed 39% of the MFIs accounted for 25% of the total loan outstanding.

NGO mFIs:There are a large number of NGOs that have undertaken the task of financial intermediation. Majority of these NGOs are registered as Trust or Society. Many NGOs have also helped SHGs to organise themselves into federations and these federations are registered as Trusts or Societies. Many of these federations are performing non-financial and financial functions like social and capacity building activities, facilitate training of SHGs, undertake internal audit, promote new groups, and some of these federations are engaged in financial intermediation. The NGO mFIs vary significantly in their size, philosophy and approach. Therefore these NGOs are structurally not the right type of institutions for undertaking financial intermediation activities, as the byelaws of these institutions are generally restrictive in allowing any commercial operations. These organisations by their charter are non-profit organisations and as a result face several problems in borrowing funds from higher financial institutions. The NGO mFIs, which are large in number, are still outside the purview of any financial regulation. These are the institutions for which policy and regulatory framework would need to be established.

Non-Profit Companies as mFIs: Many NGOs felt that combining financial intermediation with their core competency activity of social intermediation is not the right path. It was felt that a financial institution including a company set up for this purpose better does banking function. Further, if mFIs are to demonstrate that banking with the poor is indeed profitable and sustainable, it has to function as a distinct institution so that cross subsidisation can be avoided. On account of these factors, some NGO mFIs have set up a separate Non-Profit Companies for their microfinance operations. The mFI is prohibited from paying any dividend to its members. In terms of Reserve Bank of India’s Notification dated 13 January 2000, relevant provisions of RBI Act, 1934 as applicable to NBFCs will not apply for NBFCs licensed under Section 25 of Companies Act, 1956, provided it lends credit not exceeding Rs. 50,000 ($1087) for a business enterprise and Rs. 1,25,000 ($2717) for meeting the cost of a dwelling unit to any poor person, and not accepting public deposits.

Mutual Benefit mFIs: The State Cooperative Acts did not provide for an enabling framework for emergence of business enterprises owned, managed and controlled by the members for their own development. Several State Governments therefore enacted the Mutually Aided Co-operative Societies (MACS) Act for enabling promotion of self-reliant and vibrant co-operative Societies based on thrift and self-help. MACS enjoy the advantages of operational freedom and virtually no interference from government because of the provision in the Act that societies under the Act cannot accept share capital or loan from the State Government. Many of the SHG federations, promoted by NGOs and development agencies of the State Government, have been registered as MACS. Reserve Bank of India, even though they may be providing financial service to its members, does not regulate MACS.

For Profit mFIs: Non Banking Financial Companies (NBFC) are companies registered under Companies Act, 1956 and regulated by Reserve Bank of India. Earlier, NBFCs were not regulated by RBI, but in 1997 it was made obligatory for NBFCs to apply to RBI for a certificate of registration and for registration with RBI, NBFCs were to have minimum Net Owned funds of Rs 2.5 million and this amount has been gradually increased to Rs 20.0 million w.e.f April 21, 1999.

RBI introduced a new regulatory framework for those NBFCs who want to accept public deposits. All the NBFCs accepting public deposits are subjected to capital adequacy requirements and prudential norms. Many mFIs view NBFCs more preferred legal form and are aspiring to be NBFCs but they are finding it difficult to meet the requirements stipulated by RBI.