Group Members

Sr no. Name Roll

No.
1. Nishit 49
2. Rohit 43
3. Jignesh 40
4. Anita 46
5. Pooja 56
6. Vinay 37
 “BANKING AND
INSURANCE”

TOPIC:-

Submitted to:-
Prof.Rupali.
“Self realization and self initiative are the two most powerful weapons to wash
poverty out from the world” – Chanakya

(World’s Greatest Ancient Economic and Political Scholar)

“The poor stay poor, not because they are lazy but because they have no access to
capital”

-Milton Friedman
SR.
NO. TOPIC Page no.

1. What is Microfinance 5

2. Origin 6

3. How does microfinance work 7

4. Why microfinance 8
5, Principles of microfinance 9
6. Financial needs of poor 10

7, Microfinance in India 11

8, Current scenario 12

9. Key concerns 13

10. Proven impact of microfinance 16

 MICRO FINANCING
What is micro financing?

They are very small loans, typically less than $100 (£54), made to the rural poor in
developing countries who normally do not qualify for traditional banking credit.
This is often the only way they can establish a business and lift themselves out of
poverty.
Professor Yunus founded his Grameen Bank in 1976 during a devastating famine
in Bangladesh.
Today it has 6.6 million borrowers of whom 97% are women.
This focus on female borrowers in a society where women are frequently forced to
take responsibility for their entire family is one of the characteristics that caught
the Nobel Committee's attention.
Grameen, which means village, is an idea that has spread to more than 40 countries
including Sri Lanka where women's banks were already a familiar concept.

Hence, Microfinance refers to the provision of financial services to low-income

clients, including consumers and the self-employed. The term also refers to the
practice of sustainably delivering those services.
More broadly, it refers to a movement that envisions “a world in which as many
poor and near-poor households as possible have permanent access to an
appropriate range of high quality financial services, including not just credit but
also savings, insurance, and fund transfers. Those who promote microfinance
generally believe that such access will help poor people out of poverty.

Micro credits have helped

change the lives of many
rural people
 ORIGIN
• Although neither of the terms microcredit or
microfinance were used in the academic
literature before the 1980s or 1990s, the
concept of providing financial services to low
income people is much older.
• While the emergence of informal financial
institutions in Nigeria dates back to the 15th
century, they were first established in Europe
during the 18th century as a response to the
enormous increase in poverty since the end of
the extended European wars.(1618 –1648).
• In 1720 the first loan fund targeting poor
people was founded in Ireland by the
author Jonathan Swift.
• Professor Yunus founded his
Grameen Bank in 1976 and termed it
as MICROFINANCE.
Prof. Yunus
 HOW DOES MICRO CREDIT WORK?
Grameen transactions take place at the village level, usually in a local hall or
temple.
Typically a Grameen borrower will use a loan to buy tools and equipment to set up
on their own.
As the microcredit idea has grown the Grameen organization has extended into
foundations dedicated to fisheries and irrigation.
By avoiding both employers and unscrupulous local money lenders the Grameen
loan aims to break a circle of exploitation that frequently condemns rural villagers
to lives of poverty.
The Nobel Committee cited how his Grameen Bank aids the poor "to bring about
their own development".
And the concept of extending loans to a largely female client base has also been
credited with reducing domestic violence by giving women a previously
unattainable degree of independence.
So it's worry free money then?
Not quite. Critics argue that the Grameen idea is in danger of being oversold.
And because the loans are often repaid by villagers banding together in loan clubs,
this has led to accusations that some of the poor can come under peer pressure to
repay the money they owe when times are tough.
Grameen Bank has also survived accusation that it lacked adequate funds, though
Professor Yunus was adamant that his bank could repay all of the money it raised
from the commercial sector.
Despite some concerns, Professor Yunus and his ideas have attracted a growing
band of advocates, including the former US President Bill Clinton and his wife
Hillary.

Community-based
savings bank in
Cambodia. There
are a rich variety of
financial
institutions serving
poor people.
 WHY MICRO FINANCING?
Traditionally, banks have not provided financial services to clients with little or no
cash income. Banks must gain substantial costs to manage a client account,
regardless of how small the sums of money involved. For example, the total
revenue from delivering one hundred loans worth $1,000 each will not differ
greatly from the revenue that results from delivering one loan of $100,000. But the
fixed cost of processing loans—of any size—is considerable: assessment of
potential borrowers, their repayment prospects and security; administration of
outstanding loans, collecting from delinquent borrowers and so on. There is a
break-even point in providing loans or deposits below which banks lose money on
each transaction they make. Poor people usually fall below it.
In addition, most poor people have few assets that can be secured by a bank as
collateral.

Because of these difficulties, when poor people borrow they often rely on relatives
or a local moneylender, whose interest rates can be very high. An analysis of 28
studies of informal money lending rates in fourteen countries in Asia, Latin
America and Africa concluded that 76% of moneylender rates exceed 10% per
month, including 22% that exceed 100% per month. Moneylenders usually charge
higher rates to poorer borrowers than to less poor ones. While moneylenders are
often demonized and accused of usury their services are convenient and fast, and
they can be very flexible when borrowers run into problems. Hopes of quickly
putting them out of business have proven unrealistic, even in places where
microfinance institutions are very active.

The founders of the microcredit movement in the 1970s Muhammad Yunus have
tested practices and built institutions designed to bring the kinds of livelihood
opportunities and risk management tools that financial services provide to the
doorsteps of poor people. While the success of Grameen Bank (which now serves
over seven million poor Bangladeshi women) has inspired the world, it has proved
difficult to replicate this success in practice. In nations with lower population
densities, meeting the operating costs of a retail branch by serving nearby
customers has proven considerably more challenging.

Although much progress has been made, the problem has not been solved yet.
Microfinance has been growing rapidly. The industry has been growing rapidly
and there have been concerns that the rate of capital flowing into microfinance is a
potential risk unless managed well.
PRINCIPLES OF MICRO FINANCING
Some principles that summarize a century and a half of development practice were
sum up in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by
the Group of Eight leaders at the G8 Summit on June 10, 2004:

1. Poor people need not just loans but also savings, insurance and money
transfer services.
2. Microfinance must be useful to poor households: helping them raise income,
build up assets and/or soften themselves against external shocks.
3. “Microfinance can pay for itself.” Subsidies from donors and government
are scarce and uncertain, and so to reach large numbers of poor people,
microfinance must pay for itself.
4. Microfinance means building permanent local institutions.
5. Microfinance also means integrating the financial needs of poor people into
a country’s mainstream financial system.
6. “The job of government is to enable financial services, not to provide them.”
7. “Donor funds should complement private capital, not compete with it.”
8. “The key block is the shortage of strong institutions and managers.” Donors
should focus on capacity building.
9. Interest rate ceilings hurt poor people by preventing microfinance
institutions from covering their costs, which chokes off the supply of credit.
10.Microfinance institutions should measure and disclose their performance –
both financially and socially.

Microfinance can also be distinguished from charity. It

is better to provide grants to families who are poor, or so
poor they are unlikely to be able to generate the cash
flow required to repay a loan. This situation can occur
for example, in a war zone or after a natural disaster.
 FINANCIAL NEEDS OF POOR PEOPLE
Financial needs and financial services.

In developing economies and particularly in the rural areas, many activities that
would be classified in the developed world as financial are not monetized: that is,
money is not used to carry them out. Almost by definition, poor people have very
little money. But circumstances often arise in their lives in which they need money
or the things money can buy.

Types of financial needs:-

 Lifecycle Needs: such as weddings, funerals, childbirth, education,
homebuilding, widowhood, old age.
 Personal Emergencies: such as sickness, injury, unemployment, theft,
harassment or death.
 Disasters: such as fires, floods, cyclones and man-made events like war or
bulldozing of dwellings.
 Investment Opportunities: expanding a business, buying land or equipment,
improving housing, securing a job (which often requires paying a large
bribe), etc.

Poor people find creative and often joint ways to meet these needs, primarily
through creating and exchanging different forms of non-cash value. Common
substitutes for cash vary from country to country but typically include livestock,
grains, jewellery and precious metals.

The obstacles or challenges to building a sound commercial microfinance industry

include:

• Inappropriate donor subsidies

• Poor regulation and supervision of deposit-taking MFIs
• Few MFIs that meet the needs for savings, remittances or
insurance
• Limited management capacity in MFIs
• Institutional inefficiencies
• Need for more spreading and adoption of rural,
agricultural microfinance methodologies.
 MICRO FINANCING IN INDIA
Since independence, various governments in India have experimented with a large
number of grant and subsidy based poverty alleviation programmes. These
programmes were based on grant/subsidy and the credit linkage was through
commercial banks only. As a result, these programmes became unsustainable,
perpetuated a dependant status on the beneficiaries and depended ultimately on the
govt. employees for delivery. This not only led to misuse of both credit and
subsidy but banks never looked at it as a profitable and commercial activity as
well.
Hence was adopted the concept of micro-credit in India. Success stories in
neighboring countries, like Grameen Bank in Bangladesh, Bank Rakiat in
Indonesia, Commercial & Industrial Bank in Philippines etc, gave further boost to
the concept in India in the 1980s. India thus adopted the similar model of
extending credit to the poorest sector and took a no. of steps to promote micro-
financing in the country.

TYPES OF ORGANIZATIONS AND COMPOSITION

OF THE SECTOR
Microfinance providers in India can be classified under three broad categories:
 formal,
 semiformal,
 And informal.

Formal Sector

The formal sector comprises of the banks such as NABARD, SIDBI and other
regional rural banks (RRBs). They primarily provide credit for assistance in
agriculture and micro-enterprise development and primarily target the poor. Their
deposits at around Rs. 350billion and of that, around Rs. 250billion has been given
as advances. They charge an interest of 12-13.5% but if we include the transaction
costs (number of visits to banks, compulsory savings and costs incurred for
payments to animators/staff/local leaders etc) they come out to be as high as 21-
24%.

Semi - formal Sector

The majority of institutional microfinance providers in India are semi-formal

organizations broadly referred to as MFIs. Registered under a variety of legal acts,
these organizations greatly differ in philosophy, size, and capacity. There are over
500 non-government organizations (NGOs) registered as societies, public trusts, or
non-profit companies.

The following are the some of leading microfinance

institutions in India working in the sector.
 Association for Sarva Seva Farms (ASSEFA)
 Mitrabharati - The Indian microfinance
Information Hub Mysore Resettlement and
Development Agency (MYRADA)
 SADHAN - The Association of Community
Development Finance Institutions
 SEWA: Self-help Women's Association
 SKS India - Swayam Krishi Sangam
 Streedhan - Banking with Rural Women
 Working Women's Forum, Madras, India

Some of the NGOs in India have adopted the approach of micro-enterprise

development through micro-finance. The examples are CDF (Co-operative
Development Foundation) in Andhra Pradesh, LHWRF (Lupin Human Welfare
Research Foundation) in Rajasthan, UPLDC (Uttar Pradesh Land Development
Corporation) in Uttar Pradesh and Group Enterprise Development Project of EDI
(Entrepreneurship Development Institute of India) in Nagaland.
 Informal Sector

In addition to friends and family, moneylenders, landlords, and traders constitute

the informal sector. While estimates of their importance vary significantly, it is
undeniable that they continue to play a significant role in the financial lives of the
poor.

Steps taken by India to promote micro-financing

It set up development banks, such as SIDBI, NABARD which focused on rural

credit and micro-financing. NGOs and SHGs were encouraged to become the
govt’s arm in extending micro-credit to the poor. They were provided
supplementary credit needed to fund the credit, paper work was reduced between
them and the banks. Also, the govt assisted in mobilizing funds from formal
financial institutions to meet the larger credit needs of these organizations.

Focus on Women for micro - credits

A lot of Micro-financing schemes are now

increasingly focusing on women primarily as well.
There are compelling reasons for this.

 Among the poor, the poor women are the most

disadvantaged - they are characterized by lack
of education and access to resources, both of
which are required to help them work their
way out of poverty and for upward economic
and social mobility.

 The problem is more acute for women in

countries like India, despite the fact that
women’s labor makes a critical contribution to
the economy.

 Evidence shows that groups of women are better customers than men - they
are better managers of resources - benefits of loans are spread wider among
the household if loans are routed through women - mixed groups are often
inappropriate in Indian society - record of all-male groups is worse than that
of all-women groups, everywhere.
 Current Scenario of Micro - financing in India

With 75 million poor households potentially requiring financial services, the

microfinance market in India is among the largest in the world. Estimates of
household credit demand vary from a minimum of Rs. 2,000 to Rs. 6,000 in
rural areas and Rs. 9,000 in urban settings. Given that 80 percent of poor
households are located in rural areas, total credit demand ranges between Rs.
255 billion and Rs. 500 billion. However, only Rs.18 billion of this amount
has been generated so far. The reason for this is that major portion for rural
crediting has been from the informal sector and this is at a very high interest
rate, thus reducing the volumes of such credits, and by far has been for
investment purposes (13%) and more for family emergencies (29%) and
social expenditures (19%).

There are a number of factors why rural crediting by the formal sector
has not taken pace so far.
 High fiscal deficits have meant that Government is appropriating a large share of financial
savings for itself.

 Persisting interest rate restrictions reduce the attractiveness of lending, particularly to small,
rural clients.

On the other hand, informal credits have been attractive albeit high interest
rates due to:

 Flexible repayment options

 Convenience and frequency with which such loans can be accessed

 Less reliance on collateral (only 16.5% of households report providing

collateral against the loan)

Meeting the Demands

Inadequacies in rural access to formal finance and the seemingly
extortionary terms of informal finance for the poor provide a strong need
and ample space for innovative approaches to serve the financial needs of
India’s rural poor. A gap of as high as 85%-90% in supply and demand
 cannot be closed by only the existing MFIs because many, particularly the
younger and smaller organizations, lack the institutional capacity to expand.

KEY CONCERNS
All said and done however, there are certain key issues that need to be tackled
before ensuring the benefits of micro-financing would reach their optimum levels.

Scaling-Up Microfinance:

Micro financing through formal and semi-formal can reach self-

sustainability only when there is substantial volume which they can generate.

Effective policy, legal and regulatory framework :-

An enabling policy, legal and regulatory framework is critical to scaling-up.

For this the govt. needs to take certain steps as:

 Reducing minimum start-up capital requirements to facilitate the

transformation of MFIs into NBFCs

 Encouraging multiple sources of equity for MFIs

 Developing a set of prudential norms that are more appropriate to

institutions serving the poor, and set up supervision mechanisms around
those norms.

Inclusiveness and competition in the microfinance sector can generate high

payoff. This will not only give the borrower a no. of options for raising debt, but
also drive the costs down to raise them.
PROVEN IMPACT OF MICRO-FINANCING
The effects of micro-financing trickling down to the poorest of Indians can already
be observed in the Indian economy.

Improvement in Asset Position

The average increase in assets was about 72%, from Rs6,843 to Rs11,793 in real
terms (in one to three years) in most of the households where micro-financing has
been extended. Before given the credit, one in three households had no assets; after
that, it changed to one in six.

Increase in Savings

While most households given micro-credits were having negligible or no savings,

this improved to Rs. 160-Rs. 460 and in some cases, the average household savings
rose to as high as Rs. 1444.

Changes in Borrowing Patterns

With improvement in above two factors, people were more ready to borrow from
the semi-formal and formal sector rather than their traditional creditors i.e. friends
and family, moneylenders, landlords.

Impact on income

The average net income per household increased from Rs 20177 to Rs. 26889.