Contemporary Banking – A Micro Finance Perspective

Section 5(b) of The Banking Regulation Act, 1949 defines the term banking as “the
accepting, for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawable by cheque, draft, order or
otherwise”.

Over time, though the definition of banking has not been changed, there has been a tide of
changes in the Banking sector as a whole. Banks have expanded from being a source of
funds and a repository of excess money to encompass various functions such as providing
broking services, underwriting of shares, lending to micro finance institutions, advisory
services, just to name a few.

If banking were to be defined based on the services offered now, a concise definition could
be on the lines of “providing financial assistance, advisory services, and investment avenues
and participating in the upliftment of the society by ensuring financial inclusion of one and
all”. This article would focus on the last part of the definition and enumerate as to how
contemporary banking is ensuring financial inclusion of all the segments of the population.

What we are seeing in the banking sector today is an emerging trend of banks participating
in the rural sector. Where earlier, barring a couple of banks, the Regional Rural Bank was the
main caterer to the rural market; we are now seeing an increased participation of even
commercial banks in the sector. One of the mediums of entering the rural sector adopted by
the Banks in India has been through the Micro Finance sector.

Presence through Micro Finance Institutions:

Micro-Finance, as the word signifies is providing loans, savings and other basic financial
services at a micro level – to the people at the bottom of the pyramid. Loans in the range of
Rs.5000-Rs.20000 are provided by Non-Governmental Organizations (NGOs), Cooperatives
and Non-Bank Financial intermediaries to buy livestock, sewing machines or set up small
shops. The interest rates for such loans are generally in the range of 18% to 33%.

India has the largest microfinance market in the world with 25 million participants and a
population of nearly 1.2 billion. India alone is host to more than 3000 MFIs and NGO MFIs,
of which about 400 have active lending programmes. MFIs watched their loan portfolio in
India jump from $252 million to $2.5 billion between 2005 and 2009.

How can Commercial Banks contribute to the Micro Finance industry?

Even though the microfinance industry has grown to the size that it is today, there is no
systematic regulatory authority to control the sector. The lack of transparency and
regulation leads to difficulties in procurement of capital. Furthermore, it is difficult and
costly for a small Microfinance institution to get rated by a credit rating agency. This is
where banks can come in and solve the problem. With a regulatory authority in place and a
huge pool of money available for investment, commercial banks can take part in the process
by providing the institution with the capital required. Also, with the infrastructure that is at
the disposal of the bank, they can also offer a wide range of financial services to the poor,
which are in line with the goal of the MFIs.

There are various ways for a bank to participate in the microfinance sector. The two most
preferred ways are given below.

1. Direct Lending:
In such a form, the bank is engaged in the direct lending of funds to the self-help
groups and is in charge of the entire operation. Such banks are established with the
sole purpose of helping the under privileged through the provision of small loans to
self-help group, the liability of which is jointly undertaken by all the members of the
group. Grameen bank, established by Nobel Laureate, Mohammad Yunus is an
example of one such bank.
2. Partnership with Microfinance Institution:
In this case, banks provide the microfinance institution with the loans, and the
institution is in charge of the application and the disbursements of loans. The
institutions, along with the capital can also make use of the banks facilities and staff
and can thus increase the operational efficiency. This kind of partnership is most
beneficial to the banks as well as the institutions. ICICI Bank, Axis Bank and various
other banks in India follow this form of association.
Scenario in India:

Various banks are part of the microfinance movement in India. As stated earlier, these
banks mainly indulge in the partnership model. To name a few banks and their
contributions:

ICICI Bank:

ICICI Bank has been at the forefront of this movement. The movement started from early
2001, when the concept of microfinance was not even prominent in the country. It then had
10,000 clients. From there on, it has expanded to cater to 1.2 million clients, with an
outstanding loan portfolio of INR 9.98 billion. One of the prominent partners of ICICI Bank is
Spandana.

Axis Bank:

Axis Bank is actively involved in microfinance and extends financial assistance to

Microfinance Institutions (MFIs) in the form of term loans for on lending to its clients.

They have supported MFIs in Andhra Pradesh, Tamil Nadu, Karnataka, Kerala, Gujarat, Uttar
Pradesh, Delhi, Orissa, West Bengal, Rajasthan and North East Region by way of Term Loans.

Others:

Other Banks involved in the sector include:

 State Bank of India: SBI has an exposure of INR 300 crores to the microfinance
sector. Further, State Bank of Hyderabad has an outstanding loan portfolio of INR 70
crores.
 As of 2007, UTI had outstanding loans of $3.2 million, and had partnered with SKS
Microfinance and Grameen Koota.

The Micro Finance Institution has the potential to become a revolution which would change
the face of rural India. Despite the recent slump in the industry, with assistance from Banks
and the existing demand for the services, MFI are bound to stage a comeback.
References:

 http://www4.economictimes.indiatimes.com/news/news-by-
industry/banking/finance/finance/sbi-has-rs-300-cr-exposure-in-aps-microfinance-
sector/articleshow/6950370.cms
 http://www.uncdf.org/english/microfinance/pubs/newsletter/pages/2005_10/news
_ICICI.php
 http://www.axisbank.com/corporate/credit/microfinance/Micro-Finance.asp
 http://repository.upenn.edu/cgi/viewcontent.cgi?article=1042&context=curej