Factors Influencing the Success of Micro Finance Institutions
“Issue and Success Factors in Micro Financing”
Microfinance is defined as any activity that includes the provision of financial services such as credit, savings, and insurance to low income individuals which fall just above the nationally defined poverty line, and poor individuals which fall below that poverty line, with the goal of creating social value. The creation of social value includes poverty alleviation and the broader impact of improving livelihood opportunities through the provision of capital for micro enterprise, and insurance and savings for risk mitigation and consumption smoothing. A large variety of actors provide microfinance in India, using a range of microfinance delivery methods. Since the founding of the Grameen Bank in Bangladesh, various actors have endeavored to provide access to financial services to the poor in creative ways. Governments have piloted national programs, NGOs have undertaken the activity of raising donor funds for on-lending, and some banks have partnered with public organizations or made small inroads themselves in providing such services. This has resulted in a rather broad definition of microfinance as any activity that targets poor and low-income individuals for the provision of financial services. The range of activities undertaken in microfinance include group lending, individual lending, the provision of savings and insurance, capacity building, and agricultural business development services. Whatever the form of activity however, the overarching goal that unifies all actors in the provision of microfinance is the creation of social value.
3.1 Microfinance Definition
According to International Labor Organization (ILO), “Microfinance is an economic development approach that involves providing financial services through institutions to low income clients”.
In India, Microfinance has been defined by “The National Microfinance Taskforce, 1999” as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards”.
3.2 Strategic Policy Initiatives
Some of the most recent strategic policy initiatives in the area of Microfinance taken by the government and regulatory bodies in India are:
§ Working group on credit to the poor through SHGs, NGOs, NABARD, 1995
§ The National Microfinance Taskforce, 1999
§ Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002
§ Microfinance Development and Equity Fund, NABARD, 2005
§ Working group on Financing NBFCs by Banks- RBI
3.3 Activities in Microfinance
Microcredit: It is a small amount of money loaned to a client by a bank or other institution. Microcredit can be offered, often without collateral, to an individual or through group lending.
Micro savings: These are deposit services that allow one to save small amounts of money for future use. Often without minimum balance requirements, these savings accounts allow households to save in order to meet unexpected expenses and plan for future expenses.
Micro insurance: It is a system by which people, businesses and other organizations make a payment to share risk. Access to insurance enables entrepreneurs to concentrate more on developing their businesses while mitigating other risks affecting property, health or the ability to work.
Remittances: These are transfer of funds from people in one place to people in another, usually across borders to family and friends. Compared with other sources of capital that can fluctuate depending on the political or economic climate, remittances are a relatively steady source of funds.
Legal Regulations Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under the RBI Act of 1934, Banking Regulation Act, Regional Rural Banks Act, and the Cooperative Societies Acts of the respective state governments for cooperative banks.
NBFCs are registered under the Companies Act, 1956 and are governed under the RBI Act. There is no specific law catering to NGOs although they can be registered under the Societies Registration Act, 1860, the Indian Trust Act, 1882, or the relevant state acts. There has been a strong reliance on self-regulation for NGO MFIs and as this applies to NGO MFIs mobilizing deposits from clients who also borrow. This tendency is a concern due to enforcement problems that tend to arise with self-regulatory organizations. In January 2000, the RBI essentially created a new legal form for providing microfinance services for NBFCs registered under the Companies Act so that they are not subject to any capital or liquidity requirements if they do not go into the deposit taking business. Absence of liquidity requirements is concern to the safety of the sector
RESEARCH METHODOLOGY
Research Objectives
Find out the issue of the micro finance
Comparative Analysis of Micro-finance Services offered to the poor.
How does the client of two main models of microfinance, the SHG and the MFI model, differ?
Does the level of indebtedness to moneylenders depend on the type of micro finance model one is client of?
FINDINGS
Comparison of alternative microfinance model client
In this study a modest attempt has been made to differentiate between the client characteristics of the two microfinance model prevalent in the study area.
Level of literacy
The head of the households interviewed were illiterate with 42 percent reporting they had never been school.
Housing
Given the rural focus of our study, it comes as no surprise that over 95 percent of our respondents live in the self –owned dwellings.
Landholdings and sources of income
Only 25 percent of the households were self employed among SHG clients. An interesting fact to note is that all the MFI clients were self employed engaged in dairy activities, owning small tea or tailoring shops and working as street hawkers
CONCLUSION
The basic idea of micro financing is simple- if poor are provided access to financial services, including credit, they may very well be able to start a expand a micro enterprise that will allow them to break out of poverty. In totality, its focus is on eradication of poverty form grass level, women upliftment, creating small and medium enterprises and therefore takes care of development of any economy from within
Comparing two microfinance models in the research area reveals that the level of indebtedness to moneylenders is higher in the case of clients of MFI model. Such cases illustrate the difficulties MFI clients’ face when they have unproductive financial requirements or they are compelled to ensure prompt and regular loan repayments through further borrowing from even money lenders. This makes poverty worse in the short run, and makes it harder to escape from poverty-and indeed can be source of poverty-and indeed can be source of poverty and inequality “traps”
RECOMMENDATIONS
Access to Credit
The poor people’s access to credit may be significantly improved through all the channels of SHG-Bank linkage programme, MFIs, Cooperative Banks, State Financial Corporations, RRB s and PACS. Some MFIs (i.e. Grameen Bank model/LABS, NBFCs) have been doing very well in selected states with dynamic markets and dynamic individuals. Beyond these jurisdictions, their outreach is non-existent. Any significant up scaling of micro-finance at the all India level will have to depend, therefore, on the large network of banks, the bank-SHG linkage programme and the MFIs. In addition, the post office network in the country may also be used to deliver banking services, especially in remote rural areas. The post offices may be further encouraged to work as “business facilitator” and as “banking correspondent” in accordance with RBI guidelines. The NABARD may consider setting up a Committee, consisting of various private and public sector banks, the Ministry of Rural Development, Small Industries Development Organisation (SIDO) of Ministry of Small Scale Industries (SSI), Rashtriya Mahila Kosh (RMK) of The Ministry of Women and Child Development, Department of Posts, SIDBI, MFIs and the NGOs in the micro finance sector to evolve an effective strategy to implement the Business Facilitators and Correspondents Model. Such a strategy should also take into account special target groups such as the SCs/STs and the minorities through their respective National Finance Corporations. The Eleventh Plan may target to extend micro-finance to at least 80 percent of the BPL households.
Formation of Consortiums by Banks
Both public and private sector banks have the expertise in financial intermediation. All the banks should come together and formulate a strategy at the national level to cover all regions of the country and to address the needs of the MFOs. The different banks may form ‘consortiums’ to leverage each other’s advantages and work out suitable strategies to address the needs of micro-finance at the national level. Relevant ‘Guidelines on Micro-Finance’ both for the MFI model and the Bank-SHG linkage model, may be prepared by NABARD for the field level officers. Some incentives may also be introduced to encourage lending to the poor. Internal monitoring may also be further strengthened to check exploitation of the poor by unscrupulous elements.
Uniform Legal Framework
To facilitate the expansion of micro credit, the Centre should prepare a model Bill on Money Lending and circulate it among the State Governments requesting them to enact similar state legislations. The Reserve Bank has constituted a ‘Technical Group for Review of Legislations on Money-lending’. The group is already drafting a model Bill which is expected to be completed by June 30. This draft bill can be used as an input for preparing model bill by the Central Government.
National Policy on Micro Finance
At present, both Government and the private agencies involved in micro finance have devised their own individual strategies in furtherance of their goals. Absence of comprehensive national level policy has hindered the orderly growth of the sector. There is an urgent need for a concerted effort on the part of the various agencies and the services providers involved in the sector to come together to evolve a coordinated strategy for a faster and smoother growth of the
sector. The proposed bill on micro finance may address some of the issues. The ‘regulator’ proposed in the ‘Bill’ may have to come out with a detailed strategy on issues like coordination among various agencies, accounting and auditing, transparency, good governance, consumer protection, micro insurance, statistics & research, rate of interest, subsidies etc., keeping in mind the fact that the strength of the micro-finance industry lies in its informality and flexibility.
Uneven Geographical Growth
One of the major reasons for the uneven growth of the sector is the absence of conducive socio-economic and political set-up. NABARD introduced special incentives in the north, north-eastern and western states. The Ministry of Rural Development, Ministry of Small Scale Industries, NABARD and SIDBI may devise further need based incentive schemes for a faster and even growth of the sector in all parts of the country in consultation with Ministry of Finance and RBI. SIDBI has also taken positive steps to reach the underserved states through the portfolio risk fund scheme of the ministry of SSI and through its own special efforts.
Mobilisation of Savings by MFIs
The absence of savings, apart from SHGs and MFI cooperatives, has unfortunately been one of the features of Indian Micro finance and it prevents providing financial service to the poor. The Indian MFIs survive on borrowed funds, unlike other countries where savings fund a large share of lending. The regulatory environment only allows cooperatives to collect savings. The MFIs may be allowed to mobilise savings at least from their members under a regulatory framework monitored by the NABARD. The proposed Microfinance Bill is expected to address this issue.
Cost Covering Interest Rates
There is a need to create awareness of the need to charge cost-recovering interest rates. The rate of interest charged by the MFIs depends upon the cost of funds, cost of delivery and payment, cost of purchasing bad debts and cost of margins. For economic viability and sustainable growth, the MFIs need to charge interest rate covering these costs. Various studies conducted on this aspect indicate that MFIs normally charge 21-24 % interest rate for their sustenance. Innovative techniques must be identified to reduce the cost and the interest rate. The cost of delivery and collection of payment, which forms a major component of cost, can be reduced substantially by using the proposed Common Service Centres, which can be shared by other agencies also. The sector should make all attempts to reduce the rate of interest by means of efficiency enhancing innovations with the aid of technology.
Credit-Linked Subsidy
The policy of providing credit-linked subsidy to SHGs and individuals may be revisited. There are SHGs which are borrowing from banks on a continuous basis without claiming subsidies. A comprehensive study may be commissioned to study the incidence and effects of subsidy as part of the 11th Plan and to work out modalities and long term strategies to use the subsidies more productively and effectively.
Role of Technology
The network of internet enabled Information and Communication Technology (ICT) access points termed as Common Service Centres (CSC), 100000 in number across the country being implemented by the Department of Information Technology (DIT), Ministry of Communications and Information Technology, Government of India also may be utilized for improving the reach and spread of various Micro-Finance and Poverty Alleviation Schemes in rural areas in the country. Further, the DIT may coordinate with NABARD, Ministry of Rural Development, Sa-Dhan and PRADAN to integrate the ‘Computer Munshi System’ of accounting into the ICT enabled CSCs.
ATMs and Gramteller (rural ATM) may be located in the Post Offices. The Common Service Centres being developed by the Department of Information Technology may also be linked to Post Offices to synergise the technology induction with experience of Posts to handle financial products. The proposed multi-purpose unique ID based smart card system can also be utilised for effective delivery of micro-credit.
NABARD, SIDBI, Ministry of Rural Development and Sa-Dhan, which is already working to evolve a standard book keeping procedure along with the Institute of Chartered Accountants of India, may come together to evolve a standardized, simplified and book keeping procedure for all forms micro finance organisations, which would not only understand the health of the micro finance organisation but also help in accurate and timely disclosure of financial statements and annual reports. Further, the ‘Computer Munshi System’ developed by PRADAN and which appears to have been adopted successfully for maintenance of accounts may also be integrated into the overall strategy of simplifying the accounting procedure.
Maintaining Standard Accounting System
The guidelines/best practices for SHG-Bank linkages and microfinance may be issued by NABARD, covering auditing and monitoring mechanisms. RBI may conduct evaluation studies as and when required.
Extension Services
Need for extension services in the different economic activities of crop husbandry, animal husbandry, agro & rural industries is being widely recognised for guidance and counselling of SHGs/individuals, to help them choose useful activities and acquire the required skills. These extension services may not always be provided in-house through the line departments of the State Government; rather they may be provided by the private sector (eg. NGOs/MFIs) adopting the PPP model reinforced by viability gap funding. The line departments may, nevertheless, continue to function as apex institutions determining the objectives and terms of contract for the private sector participation.
Micro Insurance
Micro insurance should be perceived as a key service in the financial needs package of the people and in conjunction with micro savings and micro credit could go a long way in keeping the vulnerable segment away from the poverty trap and could be an integral component of financial inclusion.
The Insurance Regulatory and Development Authority (IRDA) has notified Micro Insurance Regulations in November, 2005 with focus on the direction, design and delivery of the products including tie up with life and non life insurance players for integration of product to address various risks, introduction of a standalone Micro Insurance delivery channel consisting of NGO, SHG and MFIs., enlarging the service activities entrusted to micro insurance agent, issue of Policy documents in simple vernacular language etc.
The IRDA may continue to give adequate priority to the micro insurance sector with focus on removing the constraints and further developing the sectoMicro insurance is increasingly offered by MFIs acting as agents of the insurance companies. Life insurance is common among MFI members and some of the members are also availing asset insurance, mainly loan financed assets. Insurance is less widespread under the SHG model. MFIs and other civil society organizations are beginning to offer health insurance, which is of greatest relevance for poverty alleviation.NABARD may consider coordinating with various insurance companies, SIDBI, Ministry of Rural Development, Ministry of SSI, NGOs and their associations to bring out flexible micro insurance schemes, covering not only loan financed assets but also life, health, crop, animal husbandry, etc .
Capacity Building
Some financial institutions, particularly SIDBI, are tying up with capacity building providers to provide assistance to the microfinance institutions. A need-based capacity building programme to meet the requirements of all categories of MFOs is essential to bring about sustainability in the sector. Some of the important areas of capacity building are transformation, best practices, interest rate management, delivery management, managing growth, risk mitigation, product designing etc. Additional infrastructure for capacity building may be created on PPP basis with appropriate government assistance.
Formalities to access the credit are required to be simplified to enable semi literate and illiterate customers to access credit. The delivery mechanism also needs to be simplified to provide easy access to both credit and working capital. Activities suitable for women may be identified taking into consideration their traditional skills. A variety of enterprises may be offered to the women to select the best suited for them. Constant feedback on the market would also enable the women entrepreneurs to improve the product designs and marketing.
Transparency
The borrower needs to be protected from practises like lending without regard for the borrowers ability to repay, deceptive rate of interest and abusive collection techniques. Borrowers /consumer protection laws may be designed to take care of abusive lending and collection practices by defining them and by making provision for effective complaint redressal mechanisms. The consumer protection laws must also provide for transparent discloser of interest rate, cost and other terms of lending. The consumer laws must also educate the consumer on good money management practices for earning, spending, saving, borrowing and investing.
Availability of Information/Statistics
With a view to developing a detailed data base of the micro-finance sector, it may be desirable to conduct periodic surveys of all the micro-finance organizations in the country and their operations. The survey can be conducted jointly by the NSSO and the state governments.
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