A brief on

Microfinance

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 A Fund Accounting Ops., Noida initiative.

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The most important finding in the last two decades in the world of finance did not come from the world of the
rich or the relatively well-off. More important than the hedge fund or the liquid-yield option note was the
finding that the poor can save, can borrow (can indeed decide on loans to fellow poor), and will certainly repay
loans. This is the world of Microfinance.

“Microfinance refers to small-scale financial services for both credits and deposits — that are provided to
people who farm or fish or herd; operate small or microenterprises where goods are produced, recycled,
repaired, or traded; provide services; work for wages or commissions; gain income from renting out small
amounts of land, vehicles, draft animals, or machinery and tools and to other individuals and local groups in
developing countries, in both rural and urban areas”.

The most well known and cited international example of a microcredit institution is the Grameen Bank in
Bangladesh. But there are numerous others. Even during the Asian financial crisis, Bank Rayat Indonesia not
only survived but thrived; as did BancoSol in Bolivia.
The current scenario….
Estimated that 650 million people live Below Poverty Line
This translates to approximately 130 million households.
Annual credit demand by the poor in the country is estimated to be about Rs. 115,000 crores.
Cumulative disbursements under all microfinance programmes is only about Rs. 9000 crores.(Mar. 08)
Total outstanding of all microfinance initiatives in India estimated to be Rs. 2100 crores. (March 08)
Only about 6.2 % of rural poor have access to microfinance.

Origin of MFIs

Initially, many NGO microfinance institutions (MFIs) were funded by donor support in the form of revolving
funds and operating grants. In recent years (roughly since 1994), development finance institutions such as the
National Bank for Agriculture and Rural Development (NABARD) and the Small Industries Development Bank of
India (SIDBI) and micro-finance promotion organizations such as the Rashtriya Mahila Kosh (RMK—the National
Women’s Fund) have also started to provide bulk loans to MFIs. This has resulted in the MFIs becoming
intermediaries between the largely public sector development finance institutions and retail borrowers
consisting of groups of poor people or individual borrowers living in rural areas or urban slums. In another
model, NABARD refinances commercial bank loans to self-help groups (SHGs) in order to facilitate relationships
between the banks and poor borrowers. Though the (mainly) NGO micro-finance sector has made a start in
providing ‘user friendly’ formal financial services to the poor its outreach is still minuscule in comparison with
the need. Recent compilations of support provided by major financial institutions shows that the microfinance
outstanding of domestic financial institutions (including NGO-MFIs) did not exceed Rs 800 crores (US$170
million) by March 2002 with an outreach to less than 5.5 million families – at best less than 10% of the 60
million poor families in the country. This includes the NABARD scheme for linking self-help groups directly with
banks. The available data indicates that progress and outreach in the scheme was around Rs 650 crores (US$140
million) outstanding.

Types of Microfinancial Programmes

1. Self-help Group (SHG)

The SHG is the dominant microfinance methodology in India. The operations of 15-25 member SHGs are based
on the principle of revolving the members’ own savings.

2. Individual Banking Programmes (IBPs)

IBPs entail the provision by MFIs of financial services to individual clients – though they may sometimes be
organized into joint liability groups, credit and savings cooperatives or even SHGs. The model is increasingly

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popular for microfinance particularly through cooperatives. In the case of cooperatives, all borrowers are
members of the organization either directly or indirectly by being members of primary cooperatives or
associations which are members of the apex society.

3. Grameen Model

This model was initially promoted by the well known Grameen Bank of Bangladesh. These undertake individual
lending but all borrowers are members of 5-member joint liability groups which, in turn, get together with 7-10
other such groups from the same village or neighborhood to form a centre. Within each group and centre peer
pressure is the key factor in ensuring repayment. Each borrower’s creditworthiness is determined by the
overall creditworthiness of the group.

Bottomline:

Soon after Grameen bank and Mohd. Yunus (of Bangladesh) were awarded the Nobel Prize; the understanding
of microfinance has increased significantly among people. This was exhibited in the union budget of 2008 in
which banks were asked to focus in granting small loans in rural parts of the country. Government and people
understood the need of microfinance and Government invited parties with proven track record in managing
rural and micro finance. This brought a considerable change in the living standard of poor people. Due to this
initiative, govt was able to increase the employment opportunities in the rural India and this eventually
resulted in lesser migration of people in search of employment to the larger cities.

Disclaimer:
The contents are collected and arranged from different websites without any fabrication of data. We however believe that the data
published on these websites are authentic and are good for academic and other reference. Happy reading 

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