1. MICROFINANCE
SHAGUN JAIN

2. Table of Content
Definition, Features and Need of the Microfinance
Evolution of Microfinance in India
Difference between Microcredit vs. Microfinance
Microfinance Institutions (MFIs)
Self Help Group (SHG) and Joint Liability Group (JLG)
Channels for Microfinance
Regulatory Framework
Andhra Pradesh Microfinance Crisis of 2010
Data about Microfinance India

3. Microfinance: Definition
“Microfinance is an economic development tool whose
objective is to assist the poor to work their way out of
poverty. It covers a range of services which include, in
addition to the provision of credit, many other services
such as savings, insurance, money transfers,
counselling, etc.” – Reserve Bank of India
In other words, Microfinance serves as a tool for providing
financial services to the low-income population., which do
not have access to the mainstream financial services.

4. Microfinance: Definition
The proposed Microfinance Services Regulation Bill defines
microfinance services as “providing financial assistance to an
individual or an eligible client, either directly or through a group
mechanism for :
i. Rs. 50000 or lesser amount, for an individual for small and
tiny enterprise, agriculture, allied activities (including for
consumption purposes of such individual) or
ii. Rs. 150000 or lesser amount for an individual for housing
purposes, or
iii. any other purpose nor exceeding Rs. 150000

5. Salient features of Microfinance
Beneficiaries are from low income group.
Loans are of small amount.
Short duration loans
Loans are offered without collateral.
for income generation
High frequency of payment
Loans are generally taken
purposes.

6. Financial Needs
Disasters: Such as flood, fire, cyclone and man-made events
like war
Investment Opportunities: Such as expanding a business,
buying land or equipments, improving housing, securing a job
(may require giving a large amount of money)
Lifestyle Needs: Such as wedding, funerals, childbirth,
education of children, widowhood, homebuilding or old age
Personal Emergencies: Such as sickness, injury, death,
sudden unemployment, theft or harassment

7. Need for Microfinance - Demand
India‟s poverty estimates range from 26% to 50%. Out of
these, 87% do not have access to credit.
Demand for microfinance is $30 Bn. whereas supply is
only $2.2 Bn.
Only 5% people in rural India has access to microfinance.
Even deposit account facility is out of reach by 70% of
rural poor.
Less than 15% of people have access to insurance.
Healthcare access is negligible.

8. Need for Microfinance - Supply
Total user base
as on 31st
March 2012 was
22.56 million.
Source: Microscape Nov 2012, Microfinance Institutions
Network

9. Evolution of Microfinance in India
Association1974 – Establishment of Self-Employed Women‟s
(SEWA) in Gujarat.
Sep 26, 1975 – Rural bank Ordinance was passed.
Oct 02, 1975 – Prathama bank (first RRB) came into existence.
1976 – Ordinance was replaced by Regional Rural BankAct.
July 12, 1982 – NABARD was established on the recommendations
of Shivaraman Committee, by an act of Parliament to implement the
National Bank for Agriculture and Rural Development Act1981.

10. Evolution of Microfinance in India
Apr 02, 1990 – SIDBI was established through Small Industries
Development Bank of India Act 1989.
1992 – NABARD launched SHGs-Bank Linkage program.
1999 – SIDBI created Microcredit (SFMC) to create a national
network of strong, viable and sustainable Microfinance Institutions
from the informal and formal financial sector to provide microfinance
services to the poor, especially women‟‟.
2006 – NABARD launched the „Micro-Enterprise Development
Programme‟(MEDP) for skill development.

11. Microcredit vs. Microfinance
Microcredit refers to very small loans for unsalaried
borrowers with little or no collateral, provided by legally
registered institutions. Currently, consumer credit
provided to salaried workers based on automated credit
scoring is usually not included in the definition of micro
credit, although this may change.
Microfinance typically refers to microcredit, savings,
insurance, money transfers, and other financial products
targeted at poor and low-income people.

12. NBFCs
The NBFC encompasses many different types of financial
companies, which are all subject to the same regulatory
requirements. Many microfinance institutions have
recently registered as NBFCs to take advantage of
access to capital markets. Microfinance institutions
operating as NBFCs account for the great majority of the
microfinance market in India.

13. NBFC-MFIs
For-profit institutions that qualify for priority sector lending
funds are registered as NBFC-MFIs. This NBFC sub-
category was created by RBI in May 2011 as a way to
classify NBFCs operating as microfinance institutions
which meet certain requirements. Currently, it is unclear
how many NBFCs will elect to register as NBFC- MFIs,
and how many will continue to operate as NBFCs.

14. Self Help Group (SHGs)
A SHG is a group of 15 to 20 members from very low
income families, usually women, which mobilises savings
from members and uses the pooled funds to give loans to
those members who need them, with the interest rates on
deposits and loans being determined entirely by
members.
- Reserve Bank of India

15. Joint Liability Group (JLGs)
JLG is an informal group of individuals coming together for
the purpose of availing of bank loan either singly or
through the group mechanism against mutual guarantee
in order to engage in similar type of economic activities.
- Reserve Bank of India

16. Difference between SHG and JLG
The SHG would normally consist of 10 to 20 members whereas a
JLG would normally have between 4 and 10 members.
The maximum amount of loan to SHGs should not exceed four
times of the savings of the group. The limit may be exceeded in
case of well managed SHGs subject to a ceiling of ten times of
savings of the group. JLGs are not obliged to keep deposits with
the bank and hence the amount of loan granted to JLGs would be
based on the credit needs of the JLG and the bank's assessment
of the credit requirement.
In case of a SHG the individual carries the responsibilities
whereas in case of JLG all members share responsibility and
stand as guarantee for each other.

17. Channels for Microfinance
34%
The players in the Microfinance sector can be classified as falling into
three main groups:
The SHG-Bank Linkage Model
Non-Banking Finance Companies
Others including trusts, societies, etc
8%
Outstanding Loan Portfolio as on 31-Mar-
2011
SHG-Bank Linkage
Model
NBFC
58%
Others
Source: RBI

18. PROCESS OF MICROFINANCE

19. SHG-Bank Linkage Model
The SHG-Bank Linkage Model was pioneered by NABARD in 1992.
Under this model, women in a village are encouraged to form a Self
help Group (SHG) and members of the Group regularly contribute
small savings to the Group. These savings which form an ever
growing nucleus are lent by the group to members, and are later
supplemented by loans provided by banks for income-generating
activities and other purposes for sustainable livelihood promotion.
The Group has weekly/monthly meetings at which new savings come
in, and recoveries are made from members towards their loans from
the SHGs, their federations, and banks. NABARD provides
grants, training and
Promoting Institutions
capacity building assistance to Self Help
(SHPI), which in turn act as facilitators/
intermediaries for the formation and credit linkage of the SHGs.

20. SHG-Bank Linkage Model
Model 1: In this model, the bank itself acts as a Self Help
Group Promoting institution (SHPI). It takes initiatives in
forming the groups, nurtures them over a period of time
and then provides credit to them after satisfying itself
about their maturity to absorb credit.

21. SHG-Bank Linkage Model
Model 2: In this model, groups are formed by NGOs (in
most of the cases) or by government agencies. The
groups are nurtured and trained by these agencies. The
bank then provides credit directly to the SHGs, after
observing their operations and maturity to absorb credit.
While the bank provides loans to the groups directly, the
facilitating agencies continue their interactions with the
SHGs. Most linkage experiences begin with this model
with NGOs playing a major role. This model has also
been popular and more acceptable to banks, as some of
the difficult functions of social dynamics are externalized.

22. SHG-Bank Linkage Model
Model 3: Due to various reasons, banks in some areas are
not in a position to even finance SHGs promoted and
nurtured by other agencies. In such cases, the NGOs act
as both facilitators and micro- finance intermediaries.
First, they promote the groups, nurture and train them
and then approach banks for bulk loans for on-lending to
the SHGs.

23. Progress of SHG-Bank Linkage Model
145.48
312.21
165.35
363.4
70.1665.5182.17
205.85
393.75
450
400
350
300
250
200
150
100
50
0
2010-11 2011-12 2012-13
SHG saving with banks as on 31st March
Loans disbursed to SHGs during the year
Loans outstanding against SHGs as on 31st March
Amt in Rs. Hundred Crore
Source: NABARD

24. Non-Banking Financial Companies (NBFCs)
Under the NBFC model, NBFCs encourage villagers to form Joint
Liability Groups (JLG) and give loans to the individual members of
the JLG. The individual loans are jointly and severally guaranteed by
the other members of the Group. Many of the NBFCs operating this
model started off as non-profit entities providing micro-credit and
other services to the poor. However, as they found themselves
unable to raise adequate resources for a rapid growth of the activity,
they converted themselves into for-profit NBFCs. Others entered the
field directly as for-profit NBFCs seeing this as a viable business
proposition. Significant amounts of private equity funds have
consequently been attracted to this sector.

25. Priority Sector Lending
Priority sector refers to those sectors of the economy which may not get
timely and adequate credit in the absence of this special
dispensation. Typically, these are small value loans to farmers for
agriculture and allied activities, micro and small enterprises, poor
people for housing, students for education and other low income
groups and weaker sections. - RBI
Priority Sector includes the following categories:
Agriculture
Micro and Small Enterprises
Education
Housing
Export Credit
Others

26. Regulators in Indian Microfinance
The NBFC-MFIs are regulated by the Reserve Bank of India.
The insurance products offered by NBFC-MFIs come under the
purview of Insurance Regulatory and Development Authority(IRDA).
The pension products offered by NBFC-MFIs come under the purview
of Pension Fund Regulatory and Development Authority (PFRDA).
Section 35(6) of the Banking Regulation Act, 1949, empowers
NABARD to conduct inspection of State Cooperative Banks (SCBs),
Central Cooperative Banks (CCBs) and Regional Rural Banks
(RRBs). In addition, NABARD has also been conducting periodic
inspections of state level cooperative institutions such as State
Cooperative Agriculture and Rural Development Banks (SCARDBs),
Apex Weavers Societies, Marketing Federations etc., on a voluntary
basis.
Currently very little or no regulation to not-for-profit organizations.
Proposed Microfinance Bill recommends RBI to be sole regulator for
microfinance industry.

27. Andhra Pradesh Microfinance Crisis of 2010
The state of Andhra Pradesh experienced a impressive expansion of
microfinance operations from the 1990s into the 2000s, becoming
known as the „Mecca of Microfinance‟ in India.
In October of that year a media storm blew up over the suicides of
close to 50 microcredit clients whom, it was claimed, had taken their
lives under the duress of crippling debt burdens and coercive
repayment tactics initiated by microfinance employees.
Considerable anger was vented at microfinance institutions that were
seen to be accumulating riches at the expense of the poor.

28. Some data about Microfinance in India
As on Mar 31 2018, total employee strength of MFIs was over 1 lakh,
11% of them being women.
Around 97% of MFI clients are women.
As on Mar 31 2018, there was 9743 MFI branches across 26 states.
One microfinance branch served 2070 clients on average. There was
307 clients per employee.
In percentage terms NPA against loans to SHGs increasedfrom
6.09% in 2017 to 7.08% during 2018.

29. Thank You