What is microfinace?

A type of banking service that is provided to

the unemployed or low-income individuals or
groups who would have otherwise no other
means of gaining financial services
Microfinance recognizes that poor people are
remarkable reservoirs of energy and
knowledge. It creates an opportunity to
create markets, bring people in from the
margins and give them tool to help
themselves. KOFI ANNAN (Sec. Gen. of UN)
HOW MICROFINANCE STARTED?
Grameen bank of Bangladesh with the
microfinance pioneer Mohammad
Younus kept the base and started
shaping the modern industry of
Mirofinance.
On the field, he saw that
Even Poor people need loans.
They can have an activity and repay
He set up financials institutions with social mission
Listen to the needs and constraints of the needy and offer
them adapted tools to empower themselves.
Micro finance (case study)
MICRO FINANCE (CASE STUDY)



Mrs. Bharti needs Rs. 1000
1. Visit of Mrs. Bharti to
the MFI meeting ,loan
officer convinced and grants
loan of Rs. 1000. (+30
Interest rate)
2. Purchase of
Sewing Machine.
Starts sewing and
selling Clothes.
(Daily profit = Rs. 100)
3. Weekly repayment
(Rs.86).
Remaining amount is
used to buy
accessories
4. Final repayment after
12 weeks. Demand for
2
nd
loan over Rs. 1500 to
expand her business.
NEED OF MICROFINANCE IN INDIA
India is said to be the home of one third of the worlds poor
About 87 % of the poorest households do not have access to
credit.
The demand for microcredit has been estimated at up to $30
billion; the supply is less than $2.2 billion combined by all
involved in sector.
Microfinance has been present in India in one form or another
since the 1970s and is now widely accepted poverty alleviation
strategy .
Commercial banks played an important part in development
of microfinance industry. Despite this growth, the poverty
situation in India continues to be challenging.
Need of microfinance in india (CONTD.)
The indian microfinance sector has been rated as one of
the fastest growing sectors in the world.
There are 1000 mfis operating in india as on march 2009
Mfis have reached 234 of the 331 poorest districts
identified by the government.
At present lending of the economically active poor both
rural and urban is pegged at around 7000 crores in the
Indian banks credit outstanding.
As against this, according to even most conservatives
estimates, the total demand for credit requirements for
this part of the indian society is somewhere around Rs.
2,00,000 Crores.
Need of microfinance in india (contd)
More than 350mn people in India live below
poverty line
MFIs cater to over 55mn people in India, with
90% of them being women.
Advantages of Microfinance
Self Employment
Microfinance Increases household income
Increase food security
The building of assets
Increase likelihood of educating ones
children
It reduces their vulnerability to external
shocks like illness, weather and more.

Who requires microfinance
In India , generally Microfinance is sought by
Small and marginal farmers
Rural artisans; and
Economically weaker sections
Women constitutes a vast majority of users of
Microcredit and Micro saving Facilities.

Rural Poor
Dependent on agriculture as primary source
of Income
Majority are of them are small or marginal
farmers
Poorest households are landless
Uncertain and irregular income streams
Urban Poor
KYC norms of Banks and NBFC require proof
of residence (unable to provide).
Requires facilities like housing finance, health
insurance, remmitances, saving and
investments
PRESENT SCENARIO of INDIA
India falls under low income class according
to world bank.
It is second populated country in the world
and around 70% of its population live in rural
area.
60% of people depend on agriculture, as a
result there is chronic underemployment and
per capita income is only Rs. 5729
Result is abject poverty, low rate of
education,exploitation,etc
Present scenario of india
Low asset base According to RBI, about 51% of the
people house possess only 10% of total assets of India.
Resulted in low production capacity of both agriculture (
which contributes around 22-25 % of GDP) and
manufacturing sector.
Rural people have very low access to institutional credit
(from commercial bank).
CHALLENGES FACED BY MFIS
Heavy dependence on Banks and FIs
MFIs are dependent on borrowings from
Banks and Fis
For more MFIs ,the funding source are
restricted to private banks and apex MFIs
Available bank funds are generally short
terms ( 2 years)

Political sensitivity and Interest
rates
Interest rates charged by the MFIs are primarily to the
poor people, thereby it can become a politically sensitive
issue.
Over the past few years, MFIs in southern India states
were accused of excessively charging high interest rates
and have been targeted by local administration

Operational Issues
MFIs risk management practices have
weakened over the past few years in search of
growth and expansion.
Credit sanctioning and monitoring practices
have weakened.
Also High debt ratios are the cause of
concern.
Competition


Indias microfinance sector is fragmented, having
more than 3000 MFIs, NFO- MFIs present
Top 10 MFIs account for 74 % of the total loans
outstanding.
More than 17 MFIs have one million outstanding
loan.
Also, entry of commercial banks present to be a
key competitor to the MFIs
Challenges ahead
Appropriate legal structure for the structured
growth of MF operations
Ability to access loan funds at reasonably low
rate of interest.
Ability to attract and retain professional and
committed human resources.
Design of apt MIS including user friendly
software for tracking accounts and
operations.
Appropriate loan products for different
segments.

Challenges ahead (contd)
Ability to innovate, adapt and grow.
Bring out a compendium of small and micro
enterprises for the MF clients.
Identify and prepare a panel of locally
available trainers.
Ability to train trainers.
Capacity to provide backward linkages or
create support structures for marketing
FUTURE OF MICROFINANCE
Future of Microfinance
Estimated that in the next 5 years, 65 % of
the poor people will have access to MFIs
Many private banks and foreign banks would
enter the segment because of very low NPAs
Estimated that 5% of the number of people
below poverty line will get reduced in the
next 5 years. (World bank report)
Conclusion
In Bangladesh, microfinance has successfully
enabled impoverished people to engage in self
employment project that allow them to generate
an income and, in many cases, begin to build
wealth and exit poverty.
In India MF has succeeded with repayment rates
upto 98% reported all across the country.
This tells us that microfinance certainly has
the capacity to reduce poverty by great
margin