| Microfinance
Microfinance is provision of financial services to poor households.
It includes provision of credit, micro insurance, saving services.
If you do not have access to have financial institution, you
are handicapped and hence microfinance is important.
Banking has a cost structure and not everyone has a banking
license. And getting license drives up cost structure. Broader
banking universe hence is unable to provide services to poor.
Microfinance provides credit at door step and I deliver credit
on time and allow easy collection. Microfinance has additional
cost structure. Microfinance borrows from bank and lends to
poor in a very convenient and costless manner.
Microfinance adjusts income volatility amoung poor household.
Microfinance helps expand business. Microfinance also helps
new businesses to be formed.
Microfinance rates may be higher, but this cost is cost for
providing easy and costless finance to poor.
Microfinance started with Ela Bhatt of SEWA Bank in 1970s and
it preceded Grameen Bank by a year. SEWA bank is first microfinance
institution in India.
Microfinance has grown very fast in India in last 5 years.
In 2004, Microfinance industry was merely around Rs. 433 crores
with 3.3 million clients and in 2010 it was Rs. 18344 crores
with 36.7 million clients. This is because government has made
microfinance as a priority sector.
There was multiple lending in this growth. Sometimes there
was competition was state finance machinery. Issues of client
practices are some of the problems facing Microfinance industry.
One criticism has been drift from social objective to profitability
objective.
Currently there is some controversy in Microfinance, but this
is too much influenced by Andhra Pradesh.
Reserve Bank of India in October 2010 set up a Sub-Committee
of its Central Board of Directors to study the issues and concerns
in microfinance sector, under the Chairmanship of Shri Y H Malegam,
a senior member on the Reserve Bank’s Central Board of Directors.
The Sub-Committee has recommended creation of a separate category
of NBFCs operating in the microfinance sector to be designated
as NBFC-MFIs.
The Sub-Committee has recommended creation of a separate category
of NBFCs operating in the microfinance sector to be designated
as NBFC-MFIs. The Sub-Committee has also recommended some additional
qualifications for NBFC to be classified as NBFC-MFI. The committee
sets ceiling on loans to single borrower at Rs. 25,000 and imposes
restriction that not less than 75% of loans should be for income
generation purposes.
The Sub-Committee has recommended an average “margin cap” of
10 per cent for MFIs having a loan portfolio of Rs. 100 crore
and of 12 per cent for smaller MFIs and a cap of 24% for interest
on individual loans.
The Sub-committee has made a number of recommendations to mitigate
the problems of multiple-lending, over borrowing, ghost borrowers
and coercive methods of recovery.
For monitoring compliance with regulations, the Sub-Committee
has proposed a four-pillar approach with the responsibility
being shared by MFI, Industry association, banks and Reserve
Bank of India.
Challenges
1. There is need to create facilitative environment for microfinance
2. Need for information on microfinance industry.
3. Need for code of conduct and norms for sound industry practice
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