MICRO-FINANCE IN INDIA

Present Scenario One out of four Indians lives below the poverty line GoI-poverty line is monthly per capital consumption expenditure of Rs 538.60 for urban areas and Rs 356.35 for rural area. A 2007 report conducted by National Commission for Enterprises in the Unorganized sector found that 25% of Indians lived on less than Rs 20 per day. According to the Dy. Governor of RBI, on All India basis, 59 % of the adult population in the country have banks accounts; In rural areas, coverage is 39% as against 60% in urban areas; The unbanked population is higher in the North Eastern and Eastern regions.

Challenges of Microfinance Movement Sustainability Lack of Capital Lack of credit information. No Collateral Transactions costs

Clients profile 75% population lives in rural areas: geographical access difficult Informal activities: need access at flexible times Illiteracy: difficult to deal with traditional services Low value of transactions Lack of collateral

Staff Lack of trained staff Lack of motivated staff Difficult to incentives staff

Providing financial services to the poor: Independent India: Credit was viewed as essential part of fight against poverty which led to following measures: Expansion of the institutional structure Directed lending to disadvantaged borrowers and sectors Interest rates supported by subsidies Institutional vehicles: cooperatives, commercial banks and Regional Rural Banks [RRBs].

Providing financial services to the poor: Timeline 1950 & 1969: emphasis on the promoting of cooperatives. 1969: nationalization of the major commercial banks: beginning of commercial bank branch expansion in the rural and semi-urban areas. 1976: Regional Rural Banks (RRB), low cost institutions mandated to reach the poorest in credit-deficient areas During this period, intervention of the RBI (Reserve Bank of India) was essential: special credit programmes for channeling subsidized credit to the rural sector (concept of “priority sector”)

Reform Process so far In March 2001 budget, the GoI announced the creation of Micro-finance Development Fund, operationalized by NABARD and funded by the RBI, NABARD and participation commercial banks; Easing the regulation for Non bank financing institutions; Enabling formal finance institutions to include microfinance in their priority lending portfolios; In Nov 2001, the government set up groups to work further on the reform process. SIDBI organized in Dec 2001 a workshop of performance standards in micro finance in India

Continued… Since 2000, commercial banks including Regional Rural Banks have been providing funds to MFIs for on lending to poor clients. Though initially, only a handful of NGOs were “into” financial intermediation using a variety of delivery methods, their numbers have increased considerably today. While there is no published data on private MFIs operating in the country, the number of MFIs is estimated to be around 800.

Addressing the Challenges RBI has established a microcredit cell NABARD has set up a Microcredit Innovations Department, while HUDCO is also forming a similar department; Financial Flows to the Unorganized Sector- 2001 For enhancing the flow of institutional funds to the unorganized sector In 2002, RBI, through informal groups looked into various aspects of microfinance operations like a) Structure & sustainability b) Resource Mobilization c) Regulation d) Capacity Building issues.

Continued…. Later in 2004, RBI set up an Advisory Committee on ‘Flow of Credit to Agriculture Credit and Related Activities from the Banking System’. Critical recommendations: Recognized importance of thrift services by MFIs Lenders ensure that MFIs were adopting a ‘cost plus reasonable margin’ in determining the interest to clients;

Micro Credit Segment Three Segments on the basis of demand: At the bottom level: landless, people engaged in agricultural work on a seasonal basis, manual labors, etc. Main demand is consumption credit Credit for acquiring small productive assets such as livestock, from which they can generate additional income; 2. Small marginal farmers and rural artisans, hawkers, vendors, etc Need capital for working capital, small part also goes toward consumption needs 3. Segment consisting of small and other farmers who have gone in for commercial crops- not always poor

Demand for micro Finance Technically, second and third segments are eligible for loans from bank. Yet in reality they have not been fully covered by banks. The 2001 Census shows that the total of the total 89.23 million marginal workers, 54.96 million were women. National Sample Survey Organization (NSSO) found that rural women combine a wide range of other work with household work Among the women surveyed, 27.5% rural women were seeking regular, full time work, 65.3 % women were seeking part-time work. To start such work forward, 53.6% women wanted initial finance on easy terms and 22.2% wanted working capital facilities.

Demand for Micro Saving and Insurance Services Until recently, savings mobilization was often considered the forgotten half; It is acknowledged that poor will deposit their surplus capital in financial institutions if the institutions are properly structured and offer various products to clients to meet their needs Poor people face irregular income streams and therefore, savings services can play a vital role in emergencies by smoothening their consumption Microfinance institutions which promoted savings within groups, make it convenient for their clients to build a resource base. Increased level of savings with banks provides them with additional avenues of resource mobilization.

Supply of microfinance and insurance As far as the commercial banking is concerned, the SCBs including RRBs 48% of their branches, 31% of their deposit accounts and 43% of their loan accounts are in the rural areas. The SCBs have covered only 18.4% of the rural population. Thus, there is a wide gap in the availability of banking services in the rural areas; This is one of the reasons why rural individuals are inclined towards the informal financial intermediaries. However, these savings also do not offer a combination of safety, liquidity, return, etc. Access to savings helps individuals to protect themselves against periods of low income. Also,savings provides a vehicle for future expenditure needs.