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  Discussion Papers
  • Round Table on Micro Finance – Regulation and Governance, 1st July, 2006.




                                                                                                Dr.B. Yerram Raju and
                                                                                                Dr. V. Jalma Rao

“Microfinance may be intended for the masses, but its vocabulary can be understood only by professionals, and then only up to a point.” (Economist Nov 5,2005). The ‘Services’ under this umbrella cover ‘savings’, ‘credit’, money transfer, equity transaction’ ‘insurance’, ‘housing, and health’. While the former two types of services are largely in vogue the later five are yet to pick up.  Unlike in Bangladesh, Indonesia, Philippines or some of the European countries, India, because of the sheer size, expanse and diversity has different micro finance institution models operating for the benefit of the clients they serve. The Economist Survey referred above argues that the poor have been hurt by massive market and regulatory failure. The survey also specifies: “Incomplete and erratic regulation of financial institutions has also undermined the confidence of the poor in the financial services that are available.” When Bank Rakyat Indonesia, a failing state-controlled rural lender was transformed into a bank for the poor in 1984, it offered not only the usual loan products but also a government-guaranteed savings account with no minimum deposit. It has now more than 30mn savings accounts. While flexibility that India follows, has its advantages, it also provides for scope for exploitation as the clients the MFIs deal with are vulnerable groups incapable of articulation of their needs or resisting pressures. Andhra Pradesh, Karnataka and Tamilnadu occupy the largest MFI space in the country with several models of outreach. State Governments, Commercial Banks with and without external training support from NABARD, SIDBI, (FFIs) or international forming organizations, private –forming corporate (PFCs), NBFCs and NGOs are occupying the MFI territory. ICICI Bank signed up micro-finance institutions (MFIs) as intermediaries for micro lending. Their key strength “is not their ability to manage capital and assume risk, but their intricate knowledge of clients and the geography in which the operate”, says Nachiket Mor, convinced that such a twin-tier structure is the way ahead. The MFIs, needless to add, suddenly have huge sums under their charge. Take Spandana, for example, which has seen its disbursements soar from Rs 30mn 1998 to Rs 3000mn last year. It has 8,00,000 customers. It is a question of too much money chasing too few institutions. The operating environment witnessed for long mutually reinforcing efforts by different players. But, the happenings in A.P a few months back gave a serious jolt to the MFI movement in the country. A trend of the MFI borrowers in West Godovari and Krishna districts alleging harassment and oppressive recovery efforts forced the district administration to plunge into action. The state government appointed one-man commission which seems to have recommended action by the Human Rights Commission against the MFIs’ recovery practices. The State also intends to become a leader in providing a new sense of direction – the effort of which is going to have a bearing on the financial security for those sections of population who are distanced by normal banking channels for want of either collaterals or cognizable asset formations out of the money borrowed by them. This discussion paper would like to raise certain issues that affect the regulatory environment and look at the way forward. 
Different Models of Microfinance:

Quite a few models are under operation in delivering micro credit:

  1. SHGs promoted and financed  by banks
  2. SHGs  promoted by NGOs / Government Organizations and Finance  by banks
  3. SHGs promoted by and financed through NGOs by raising bank loans
  4. The federated SHG approach
  5. SHGs promoted by NGOs/Societies/ other organizations, and financed by Micro – Finance Institutions.
  6. SHGs promoted and financed by MFIs (Grameen RaplicatorApproach)
  7. Individuals directly financed by MFIs
  8. The Urban Corporation Banking model
  9. The Multi State Co. Operative Solidarity group model
  10. The NBFC approach

While the model no.2 above formed about 72%, the model no.1 worked out to 21% of bank finance under SHG- Bank linkage programme. A recent development among the SHGs at some places is to organize themselves into a federation at the village / mandal / district level for deriving benefits of scale and the banks have already recognized the village level federation as a viable unit for delivering financial assistance to individual members through SHGs. The MFIs at model No. 5 and 6 provide  finance to individual through SHGs.

Substantial progress has been achieved quantitatively in the field of Micro-Finance in India by way of SHG – Bank linkage Programme launched by NABARD in 1991-92 and through the support of SIDBI to Micro Finance Institutions (MFIs). While NABARD’s assistance (both refinance and for capacity building measures) covers 1.618mn, SHGs with bank loans of Rs.68985 mn through 573 banks (Commercial, RRBs and Cooperative Banks) and their 35294 retail entities and as many as 4323 partnership organization like NGOs, Voluntary organizations and Societies etc), SIDBI also sanctioned Rs. 7600mn by way of loan assistance to MFIs with an expected on lending, level of Rs. 7250mn by March 2007 apart from grant assistance of a loan Rs.680mn towards capacity improvement. It is estimated that the micro finance sector has potential to grow up to a level of Rs. 400bn to 500bn, covering as many as 40 million households.  It is thus a gigantic programme on any consideration towards poverty alleviation.

There is a need to have comprehensive analysis of the above models to understand structural issues, effective rate of interest, transaction cost, benefits and impact on the livelihoods of people, regulation, governance etc., so as to arrive at suitable choices for people and for the funding agencies for likely patronage.

*This discussion paper is prepared for the Round Table on the subject being held on the 1st  July 2006 at the Conference Room-1, Administrative Staff College of India, Bella Vista, Raj Bhavan Road, Khairatabad, Hyderabad-500 004.  Any reference to the paper should be acknowledged to the Institute.  Ph : 23393512, Email: iieaer@yahoo.com
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