:- Explain the concept of microfinance. Discuss the role of micro financing and dominant models of microfinance.
Ans: MICROFINANCE IN INDIA
The National bank for Rural and Agricultural Development (NABARD) Conducted various research studies on ‘rural credit' that revealed that a large number of poor population in rural India did not have access to the banking system.
The banking policies, procedures and systems did not suit their requirements.
Hence, the RBI promoted the policy of ‘Financial Inclusion' whereby vulnerable groups (weaker and low income groups) found easy access to financial services and timely and adequate credit at affordable costs.
Micro finance is one of the most important tools of financial inclusion.
Microfinance can be defined as financial services (such as savings, insurance, fund, credit, etc) provided to poor low income groups to help them raise their income, thereby improving their standard of living.
The above definition makes it clear that microfinance is a very broad concept and that microcredit (provision of credit to the poor ) is one of the elements of microfinance.
*MICROFINANCE MODELS IN INDIA:
In 1992, NABARD stated the self Help Group-Bank Linkage Programme (SBLP) that initiated the microfinance movement in India.
This programme achieved tremendous success and thus developed as the most popular model of microfinance in India.
Various banks and financial institutions provide microfinance service in India. These include NABARD, Small Industries Development Bank Of India (SIDBI), Rashtriya Mahila Kosh, Commercial Banks, Regional Rural Banks (RRBs), Co-operative Banks, Non Banking Finance Companies (NBFCs) and Microfinance Institutions (MFIs).
Microfinance services are provided through two models:
1) SHG-Bank Linkage Programme Model: (SBLP)
2) Micro-finance Institution (MFI).
1) SHG-Bank Linkage Programme Model: (SBLP)
The ‘Self-Help Group' movement in India began with SBPL launched in 1992 by the NABARD.
It was for the first time, SHGs were directly financed by banks.
The SBLP has three different Models.
(a) Model I. SHGs are promoted, guided and financed by banks.
(b) Model II: SHGs are promoted by NGOs / government agencies and are financed by banks.
(c) Model III: SHGs are promoted by NGOs and are financed by banks through financial intermediaries.
Model II is the most popular model under SBLP.
Commercial banks, co-operative banks and regional rural banks are very actively participating under SBLP.
2) MICROFINANCE INSTITUTION:
Micro-Finance Institutions in India exist in the form of Registered Trusts, Registered Societies, Registered CO-operatives, Non-Banking Financial Companies, etc.
MFIs provide various services like credit, capacity building, training, marketing products of NGOs and micro-insurance.
It operates under these models:
a) Bank Partnership Model:
# MFI as AGENT:
In this model, the bank is the lender and MFIs act as an agent.
As an agent it takes care of all relationships with the borrower from the first contact to the final repayment.
# MFI as Holder of Loans:
A NBFC holds the loan of an individual on its book for a while, before securitizing them and selling them to the bank.
Securitization involves gathering of a group of financial assets by an institution and creation of new securities representing interests on the loans and selling them to invest.
b) Banking Correspondents:
Banks are now permitted to use the services of NGOs, MFIs (except NBFCs) and other civil society organizations.
These organization act as intermediaries in providing banking/finance services to the poor.
These intermediaries act as business correspondents and carry out banking functions in a village or areas where it is not possible to open a branch.
Q2) Discuss the role and performance of microfinance?
Microfinance is an important tool of financial inclusion.
Through micro-finance, vulnerable sections of the economy can have easy access to financial services at an affordable rate. It also includes provision of credit facilities.
*ROLE AND IMPORTANCE:
POVERTY ALLEVIATION. Microfinance provides funds/employment to poor people thereby increasing their income level. This reduces poverty to a certain extent.
EMPLOYMENT GENERATION. Microfinance results in generation of employment Infect, it promotes self employment through promotion of micro-credit.
ECONOMIC GROWTH. Microfinance increases the production of goods and service which enhanced the GDP of an economy. This leads to economic growth.
SAVING AND INVESTMENT. The members of the SELF HELP GROUP promote saving habits among the people. These saving along with the micro credit obtained from banks are invested in setting up small business units or other requirements of existing units.
DEVELOPMENT OF SKILLS. Microfinance promotes self-employment which helps them learn and develop various skills to operate a successful business unit. This eventually leads to development of rural areas.
SOCIAL WELFARE: Microfinance leads to increase in income level. This has a better effect on their education, health, family welfare. This leads to betterment of society.
WOMEN EMPOWERMENT: Microfinance leads to women empowerment as 50% of Self Help Groups are formed and leaded by women. They are also supported by NGOs. This leads to economic and social upliftment of women.
EFFECTIVE USE OF RESOURCES: Microfinance results in optimum use of local resources. This results in development and enhancement of the local people.
Q3: Discuss the various policies and regulation of microfinance?
Ans: MICROFINANCE POLICIES AND REGULATION:
Microfinance is a very important tool of financial inclusion that was initiated by the RBI and the NABARD.
For effective implementation of microfinance, various policies have been developed by the RBI, the NABARD and the SIDBI.
These policies are the guidelines for the functioning of SHGs and MFIs.
*POLOCY BY THE RBI:
1) Savings Bank Account For SHGs:
Self Help Groups (registered and unregistered) were allowed by the RBI to open saving banks A/C with commercial banks.
2) Incentives to Banks:
The RBI set up informal groups to conduct research on various issues related to microfinance institutions. These groups researched on structure and sustainability, funding, regulations and capacity building of microfinance institutions.
Based on their recommendations, the RBI provided attractive incentives to commercial banks that gave financial services to the SHGs and MFIs.
3) Business Correspondent:
Banks provided financial services to the SHGs and MFIs.
However, there were certain problems related to rural credit.
So banks were allowed to use the services of NGOs, MFIs (except NBFCS) to act as business correspondents (intermediaries) in providing finance and other banking services to the poor.
4) Interest Rates:
The Interest rates on the loans given/taken by banks to/from SHGs or MFIs are mutually decided.
The RBI does not intervene with this decision.
*POLICY BY THE NABARD:
1) Micro-Enterprise Development Programme (MEDP)
In 2006, Micro-Enterprise Development Programme (MEDP) for the development of skills of SHG members.
This was done through various training programmes.
The main objective of MEDP was to enable SHGs to start micro-enterprises through skill up gradation.
2) Micro-Enterprise Promotion Agency (MEPA).
MEPA project was launched by the NABARD for the promotion of micro-enterprises.
The MEPA is headed by NGOs
3) SHG Federations:
Various SHG representatives have come together to form Federation.
Such federation enhance the bargaining power of SGH members.
The role of SHG federations is increasing significantly.
The NABARD supports these federations in their functioning.
4) Committee on financial Inclusion:
The NABARD appointed a committee on Financial Inclusion under the chairmanship of DrC.Rangarajan.
The committee recommended expansion in the microfinance programme.
It suggested the inclusion of NBFCs as Business Correspondents for banks providing only savings and remittance services.
It suggested opening special microfinance branches in urban centers for the poor.
1) SIDBI Microfinance Programme
SIDBI launched microfinance programme.
This programme provided small amount of credit funds to the NGOs through the country.
2) Finance to NGO/MFI
SIDBI recognized NGO/MFI channel for lending financial services to the poor.
At present SIDBI is one of the largest providers of microfinance through MFIs.
3) Capacity Assessment Rating: (CAR)
In absence of collateral securities microfinance lending is risky for banks.
To reduce such risks, the concept of CAR foe MFIs has been started by the SIDBI
4) TRANSFORMATION LOANS:
Transformation loans are granted to MFIs to transform their informal set up to a more formal entity.
These loans have longer repayment periods.
Also, a part of the loan can be converted into equity at a future date when the MFI transforms itself into a corporate entity.
There are various regulation for different microfinance entities. This leads to various problems.
To overcome these problems, the government passed the Microfinance sector (Development and Regulation) Bill to safeguard the interest of customers and to ensure development and organized growth of microfinance in rural and urban areas.
The following are the important aspects of the bills:
^ NABARD is to act as microfinance sector regulator.
^ Provision for microfinance registration.
^ Provision for penalties in case of non-compliance.
^ Constitution of Microfinance Development and Equity funds.
Thus, microfinance is emerging as an important sector for the development of the economy.
A lot of progress can be achieved in the development of vulnerable sections of the society through micro financing.
Q4: What is a Self Help Group? What are its important features?
Ans: SELF HELP GROUPS
A Self Help Group is a voluntary rural association formed to attain the common objective of social and economic empowerment.
The main aim of a Self Help Group (SHG) is generation of employment, thereby solving the problem of poverty to a certain extent.
Members of the SHG make small regular saving for a few months and then transfer the savings into a common fund called the group corpus fund. This fund is used for employment generation activities.
Generally, the fund is also used to set up micro enterprises.
SHGs are supported by NGOs / government agencies.
Number of persons: The SHG normally comprises of 10-20 people. However there is no upper limit for the number of people who form a SHG for minor irrigation projects.
Economic Status of Members: Normally, people who form a SHG are rural and poor. They usually live below the poverty line.
Restriction on membership: Normally, there is only one person from the family in one SHG. Similarly a person can be a member of one SHG at a time.
Management: All the members of the group take active part in the functioning of the group. Among themselves, they have a Group Leader, Assistant Group Leader and Treasures of the Group.
Registration: Registration of a SHG is optional. Any SHG that exceeds 20 members need to be registered.
Savings: All the members of the group regularly save a part of their income. These savings are transferred to a common fund called group corpus fund. This fund is used to lend money to group members to undertake employment generation activities.
Meetings: A SHG helds regular meeting. These meetings are conducted weekly / fortnightly.
Records: The SHG maintains simple basic records like minutes book, attendance register, loan ledger, bank pass book, individual pass book, cash book etc.
Q5: Explain the importance of Self Help Groups (SHGs) in India.
Ans: IMPORTANCE OF SELF HELP GROUPS IN INDIA.
A Self Help Group is a voluntary association of rural people who come together to attain the common objective of social and economic empowerment through employment generation activities.
SHG motivates its members to set up micro enterprises and thus become self employed.
A major part of Indian population still lives in villages.
The poor people in these rural areas suffer economically and socially due to low literacy, low income lend Social backwardness and lack of motivation. They are also unaware of latest technological achievements.
However, when they form a group, some of these problems can be easily solved.
So SHGs are instrumental in the upliftment of rural population.
SHG are the rural population. They are important instruments of microfinance. The following points bring out the significance of SHGs:
1) IMPROVEMENT IN THE EFFECIENCY OF CREDIT SYSTEM:
The Self Help Groups helps the vulnerable section of the society to meet their credit requirements that cannot be possible through formal banking system.
Thus, by providing large scale micro-credit, it reduces the costs of credit delivery and improves the efficiency of the credit system.
2) CHANNEL OF FINANCIAL INCLUSION:
Financial inclusion aims at providing easy credit at affordable costs to the vulnerable sections of the society. SHGs are an important tool in financial inclusion.
Through SHGs funds are provided to socially and economically backward people like Below Poverty Line Population, Scheduled Castes and Tribes, Minorities, Rural Women, etc.
3) RESOURCE MOBILIZATION:
SHGs plays a crucial role in mobilizing the savings of the poor.
As on March 2009, SHGs held a total savings of Rs: 5545 crores with the banks.
4) PROMOTION OF SAVINGS AND BANKING HABITS:
A large no of poor, rural population do not have access to banks. SHGs motivate these people to save by explaining to members the benefits derived from such savings.
These savings are pooled together and the fund so created is deposited in the banks.
5) IMPROVEMENT IN LIVING CONDITIONS:
One of the main aims of SHGs is reduction of poverty in rural areas.
The provision of micro-credit leads to self employment in the rural areas and help reduction in poverty.
This improves the living conditions of the people.
6) EMPOWERMENT OF WOMEN:
SHGs have empowered rural women to a great extent by enhancing their social, economic and political backgrounds.
There is a direct relation between SHG membership and women's participation in elections.
Many women members of SHGs have won panchayati elections.
7) SOCIAL AND ECONOMIC JUSTICE:
SHGs promote socio-economic justice in a unique manner.
Self-employment through SHGs promotes economic justice whereas empowerment of women, schedules castes and tribes and other weaker section promotes economic justice.
Members of SHGs spread social awareness among people of their locality / village.
They make people aware of their social rights and responsibilities like water supply, education, health care, hygiene, improving / maintaining village rods, protection of natural resources, anti-alcohol activities etc.
9) DEVELOPING INDIVIDUAL SKILLS OF GROUP MEMBERS:
The rural people are not very educated or skilled.
While working as members of SHDs, they develop various skills and acquire knowledge on various subjects like negotiations, accountancy, creativity, effective problem solving, team work, leadership, etc.
SHGs provide micro-credit to members and them to take up entrepreneurship and other self-employment activities.
This reduces disguised, seasonal or total unemployment in rural areas.
11) REDUCING INFLUENCE OF UNORGANISED SECTOR:
SHGs Provide bank supported credit to its members.
This reduces the influence of the unorganized sector of money market that comprises of moneylenders, chit funds, indigenous bankers who charge exhorbitant rates of interest, on the credit provided to the people.
12) BENEFICIAL TO THE FINANCIAL SECTOR:
The linkage of SHGs with the banks proved beneficial to the financial sectors.
It opened up a new, large market i.e low income households whose transaction costs are low and repayment rates are high.
Q6) Discuss the progress of SHGs in India?
Ans: PROGRESS OF SELF HELP GROUPS IN INDIA
Self Help Group (SHG) is a voluntary rural association formed with the objective of social and economic upliftment of its members.
SHGs are agents that bring about a transformation in the lives of the rural people through micro financing.
Over the years, SHGs have achieved remarkable progress in bringing about social and economic enhancement in the life of rural people.
SHGs have made a significant on the microfinance sector as well as on the lives of the rural people.
Their origin, structure, composition and current status are discussed as follows:
1) LINKAGE MODEL:
Traditionally SHGs in India were run by NGOs.
The self Help Group Bank linkage Programme (SBLP) initiated by the NABARD proved to be a crucial phase in the SHG movement. This was the first time that SHGs were directly financed by banks.
The SBLP has been important in connecting the poor people with the banks through NGOs.
According to the NABARD, approximately 5.8 crores poor households have been linked with the banking system through SBLP.
2) FINANCIAL SUPPORT:
Apart from NABARD, various other institutions provide financial support to SHGs.
These include the SIDBI, Rashtriya Mahila Koshak (RMK), Housing and Urban Development Corporation (HUDCO), Housing Development Finance Corporation (HDFC), Friends of Women's World Banking (FWWB), Regional Rural Banks (RRBs) and Co-operative banks.
The RBI motivates commercial banks to lend to SHGs as a part of their rural credit operations.
3) SWARNAJAYANTI GRAM SWARIOGAR YOJANA (SGSY).
In 1999, the Government launched the SWARNAJAYANTI GRAM SWAROJGAR YOJNA by restructuring various self-employment programmes and financing them by banks at various stages.
This scheme covers aspects like organizing the poor into SHGs, training, credit, infrastructure, technology, marketing, etc.
It thus aims to reduce poverty by providing SHGs with income generating assets through bank credit and government subsidy.
As on 31st March 2009, among the SHGs having saving bank account, SGSY's SB A/C formed 25% of total saving.
4) SHG FEDERATIONS:
Various SHG represent atitues have come together to form ‘SHG federations' to enhance the bargaining power of SHG members.
It provides such facilities to members that individual SHGs cannot provide.
Such SHG federations are supported by the NABARD.
5) COMPOSITION OF SHGs:
A SHG normally comprises of 10-20 members.
Generally all members live below the poverty line.
One SHG can have only one member of the family. Similarly, a person can be the member of only one SHG at a time.
A recent study shows the following general composition of a SHG in India:
6) CURRENT STATUS:
As on March 31, 2009, SHGs held total savings of Rs 5,545 crores.
During 2008-09, banks financed 16, 09,586 SHGs (31% increase from the previous year).
Pattern of SHG savings in banks:- Commercial banks (50%)
Co-operative banks (14.1%)
Q7: What are the various problems related to SHGs?
Ans: PROBLEMS RELATED TO SHGs
SHGs are important tools of micro financing. Over the years SHGs have achieved tremendous progress in bringing about social and economic upliftment in the life of its members.
However, despite the spread and success of SHGs, they suffer from various drawbacks that need to be overcome.
The following are some of the problems related to SHGs:-
i) MANAGEMENT AND CONTROL:
Many SHGs suffer from poor management and poor internal control systems.
Roles and responsibilities of members and office bearers are not clearly defined.
In some cases, cash flows also have been managed inappropriately.
ii) IMPACT ON POVERTY:
The main objective of SHGs is reduction of poverty.
Inspite of provision of credit to a large no of poor people, not many have successfully come above the poverty line.
Infact, SHGs and micro-credit cannot bring about solution to the complex problem of poverty.
iii) UNEQUAL REGIONAL IMPACT:
The SHG program has been predominant in the states of Andhra Pradesh, Tamil Nadu, West Bengal, Karnataka, and Uttar Pradesh.
40% of credit linkages were established only in the state of Andhra Pradesh.
The North Eastern states need to be focused upon.
iv) LEADERSHIP PROBLEMS:
Most SHGs are dominated by few well-off, educated members who get re-elected several times.
Over dependence on leaders is a problem associated with all successful SHGs.
SHGs are informal organizations and hence there is governance system.
This may be due to lack of experience or lack of experience or lack of capacity to review functions or comply with legal regulations.
Inability to make regular saving deposits is the major cause of dropouts.
vii) POOR RECORD KEEPING:
Many SHGs have inadequate and poor record keeping practices.
Lack of education and skills among members is the root cause of the problem.
SHGs are governed by various regulations of different entities.
This makes formation and functioning of SHGs difficult.
Q8) Write a note on COMPOSITE LOANS.
Micro and small business enterprises need loan for working capital as well as for fixed asset investments. Such loans given to serve both the purposes are called ‘COMPOSITE LOANS'.
Small amounts of composite loans are required by micro-entrepreneurs like weavers, service providers, fishermen, rickshaw owners, etc.
In order to make such credit available to the needy, the government motivates financial institutions to provide Single window composite loans without collateral security or third party guarantee.
This initiative of the Government is implemented through the following two schemes.
1) CREDIT GUARANTEE FUND SCHEME FOR MICRO AND SMALL ENTERPRISES (CGFSMSE):
This scheme was launched by the Government Of India to make available security free credit to small and micro enterprises and also to SHGs having the potential to start their own enterprises.
The SIDBI (Small Industries Development Bank Of India) and the Ministry of Micro, Small and Medium Enterprises formed the ‘Credit Guarantee Fund Trust For Micro And Small Enterprises' (CGTMSE) for effective implementation of CGFSMSE.
The loans provided by financial institutions are guaranteed by CGFSMSE.
The guarantee provide by the scheme motivates the financial institution to lend credit to micro enterprises.
Main features of the CGFSMSE:-
^ The Government and SIDBI contribute in the ratio of 4:1.
^ The institutions eligible to lend composite loans are commercial banks ( Public Sector / Private Sector / Foreign Banks) some Regional Rural Banks, National Small Industries Corporation LTD (NSIC), SIDBI and North Eastern Development Finance Corporation LTD.
^ Credit facilities (term loans as well as working capital) upto Rs 50 lakhs are extended without collateral security on third party guarantee.
^ Guarantee is given upto 75% of the sanctioned credit facility amount.
^ Guarantee cover is extended upto 50% for:
i) Micro enterprises for loans upto Rs 5 lakhs.
ii) Micro enterprises by women.
iii) All loans in the North-East Region.
2)SWAROZGAR CREDIT CARD SCHEME (SCC):
This scheme was launched in September 2003.
It aimed at providing adequate and timely composite credit small artisans, handloom weavers, fishermen, rickshaw owners, self employed people and other micro entrepreneurs and SHGs.
The following categories are covered under the SCC scheme:-
i) Borrowers / small business owners in urban areas and priority sectors.
ii) Any scheme / project generating income / employment.
iii) Farm sector activities.
Both CGFSMSE and SSC scheme are supported by NABARD.
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