REMF 4

What is a microfinance intermediary?

I am using the term microfinance intermediary to refer to both loan funds and
structured funds (which together I’ll just refer to as “microfinance funds” or
“funds”) through which investors can channel their capital to MFIs in a risk-
mitigated way without investing directly in the MFIs themselves. These funds
are diversified and professionally managed. They can be time-bound, so they
only exist for as long as the capital is raised, deployed, and repaid to
investors, or they can be perpetual life, which operate continuously and raise,
deploy, and repay investor capital on an ongoing basis. The capital they
provide can be equity and/or debt and many funds invest in others sectors
besides microfinance. In this blog, I’ll be focusing primarily on debt lenders
with a majority of their portfolio targeted to microfinance.

Loan funds versus structured funds

A mutual fund in your 401K would be an example of what I’m calling a
structured fund except for two big differences. First, mutual funds typically
invest in public securities, such as public shares of stock traded on a stock
exchange, which makes them very liquid. The microfinance funds we are
discussing typically invest in private securities only which means you have to
leave your money in for months if not years. Second, mutual funds managed
by a Fidelity or a Vanguard would be widely available to retail investors
whereas most microfinance funds are only available to institutional investors.

MicroVest is a microfinance fund manager that manages multiple funds, each

of which is separately structured with its own specific investment strategy. In
2004, MicroVest launched its first microfinance fund, named MicroVest I.
Similar to the structure of a traditional private equity fund, the investment
strategy was defined, the funds were raised upfront, and the capital was
returned to investors at the end of the fund life. A great case study on that first
fund was prepared by a research partnership between InSight at Pacific
Community Ventures, CASE at Duke University and ImpactAssets. It also has
the following diagram which shows some of the other funds MicroVest
manages (bottom row).

Lead bank program

Lead Bank Scheme (LBS) was introduced in 1969, based on the recommendations of the Gadgil Study
Group.

Objectives of Lead Bank Scheme:

Eradication of unemployment and under employment

Appreciable rise in the standard of living for the poorest of the poo

Provision of some of the basic needs of the people who belong to poor sections of the society

Area Approach

The basic idea was to have an “area approach” for targeted and focused banking. The banker’s
committee, headed by S. Nariman, concluded that districts would be the units for area approach and
each district could be allotted to a particular bank which will perform the role of a Lead Bank.

Lead Bank as Consortium Leader

Under the Scheme, each district had been assigned to different banks (public and private) to act as a
consortium leader to coordinate the efforts of banks in the district particularly in matters like branch
expansion and credit planning. The Lead Bank was to act as a consortium leader for co-ordinating
the efforts of all credit institutions in each of the allotted districts for expansion of branch banking
facilities and for meeting the credit needs of the rural economy.

Allotment of districts= All the districts in the country excepting the metropolitan cities of Mumbai,
Kolkata, Chennai and Union Territories of Chandigarh, Delhi and Goa were allotted among public
sector banks and a few private sector banks. Later on, the Union Territories of Goa, Daman and Diu
as also the rural areas of the Union Territories of Delhi and Chandigarh have been brought within the
purview of LBS.

DLRC
A District Co-operative Central Bank (DCCB) is a cooperative bank operating at the district level in
various parts of India. [1][2] It was established to provide banking to the rural hinterland for the
agricultural sector with the branches primarily established in rural and semi-urban areas.[3]

Structure

The banking model consists of a district central bank for each district in every state of India known
with a name as a respective District Central Co-operative Bank. The members and their elected
directors who represent a multitude of professional cooperative bodies like milk unions, urban
cooperatives, rural cooperatives, agricultural and non-agricultural cooperatives, and various others
in turn elect the bank's president. These banks are collectively represented by a State Apex Central
Co-operative bank for each state and it acts as the ultimate bank and apex body for the DCCBs in
each state. It has been widely observed all over the country that the local politicians who hold the
sway over the cooperatives get elected as President of the DCC bank and a president post would
mean nurturing for their future political ambitions.[citation needed] However, this trend, which has
become a national phenomenon, carries its own advantages and disadvantages.[4]

Service Area Approach (SAA)

The Service Area Approach (SAA) was a scheme launched by the
RBI in 1989 for an orderly development of the rural areas with the
of the country. Under the SAA, all rural and semi-urban branches
of banks were allocated specific villages, generally in geographical
difficult areas, the overall development and the credit needs of
which were to be taken care of by the respective branches. The
concerned bank should meet the banking needs of the service area
by creating link between bank credit- production and productivity
and income expansion.

Financial Inclusion
Financial Inclusion is described as the method of offering banking and financial
solutions and services to every individual in the society without any form of
discrimination. It primarily aims to include everybody in the society by giving them
basic financial services without looking at a person’s income or savings. Financial
inclusion chiefly focuses on providing reliable financial solutions to the economically
underprivileged sections of the society without having any unfair treatment. It intends
to provide financial solutions without any signs of inequality. It is also committed to
being transparent while offering financial assistance without any hidden transactions
or costs.
Financial Inclusion is important for improving the living conditions of poor farmers,
artisans and rural non-farm enterprises. Apart from formal banking channels, the role
of MFIs, NABARD, Self Help Group movement is important to improve Financial
Inclusion. Banks need to take bold decisions and reach out to rural India with strategies
and Business models which are beyond the realm of conventional thinking.
They need to identify the emerging opportunities in rural India and innovate with low
cost platforms, lean branch models, low cost subsidiaries, cost effective technologies,
leverage on Aadhar, shared Infrastructure and build collaborative business models to
serve in Rural India.
3. Financial Inclusion
Financial Inclusion means providing financial services to all sectors of the society which
includes the underprivileged, the poor and the disadvantaged people. It does not only mean
to open Savings Account of people but it also includes providing financial advice, insurance
and credit services.
State Of Financial Inclusion In Rural India
Even after 6 decades of independence, banking facilities has not reached to rural and
unprivileged sector of the society. This led to financial gap and instability among the rural
people. Now a days Govt. and RBI are formulating various policies to build the financial
strength in Rural India through Financial Inclusion.
3.2 Need For Financial Inclusion
Due to absence of proper banking avenues, people in rural India are not able to channelize
their savings. Through Financial Inclusion saving habit can be developed by educating
people to utilize their funds in various Financial Instruments rather than investing in
building, lands and bullion etc.
Secondly, Absence of formal credit channels, farmers and deprived section of society are
dependent mainly upon the private money lenders who charge exorbitant interest rates.
This type of money lending does not result in increase in GDP in the country. By providing
easy finance through formal channels like banks, micro-finance institutions and co-operative
credit societies entrepreneurial spirit of the population can be developed that will bring
prosperity in the society.
3.3 RBI Efforts Towards Financial Inclusion
RBI set up Khan Commission in 2004 to expand the reach of financial inclusion. The
significant recommendations were implemented through midterm policy in 2005-06 which
includes Opening of a basic „No Frill‟ bank account. It is a type of bank account, with low or
zero balance with minimum formalities and relaxed KYC (Know Your Customer) norms. RBI
came up with this concept because poor people cannot open regular bank account having
requirement of minimum balance i.e. Rs 1000/- , Rs 5000/- etc. The Account can be opened
and maintained with a minimum initial deposit of Rs. 5/- having no penalty charges in case
the minimum balance reaches to zero. To avail easy credit General Credit Cards (GCC)
should be issued to the poor section of the society. Commercial banks are advised to make
use of intermediaries such as Non Govt. Organizations, Micro Finance Institutions and Self
Help Groups to provide financial services to the unprivileged section of the society.
4. Role of Banks
Commercial Banks: CBs are the main contributor of Financial Inclusion because of their vast
network.
More than 50% of India‟s overall consumption comes from rural India which account for
about 70% of our population. There are 32,600 branches in rural area, 14,400 semi-urban
branches as per report of Feb 2013, 196 exclusive RRBs in the interior of Rural India. The
number of saving accounts in rural and semi-urban branches are nearly about 60%. The
current business model of a commercial bank has a cost structure that is not economically
viable for Rural Banking. The average distribution cost of Banks at Rs 5.5 lacs per employee
is prohibitive. Banks need to look at ways to leverage cost effective technological solutions,
cutting down on human resource cost, building a low cost distribution network, setting up
lean branch models, leveraging on the „Aadhar‟ platform, creating targeted products and
services etc.
Cooperative banks: These banks are managed and organized by their own members who
can very easily help and provide the financial services in the rural areas that are not
entertained by commercial banks.
Regional Rural Banks: RRBs are set up in rural area for providing finance to the marginal
farmers. They should take help of Non-Government Organizations for the upliftment of poor
and weaker section of the society by providing them easy credits.
Non-Banking Financial Companies: The NBFCs could help both large and small
organizations. They should also participate in the process of Financial Inclusion in the
country by providing Micro insurance, Micro credit and by spreading financial education
among the weaker section of the society.
Micro Finance Institutions: The specific aim of constituting MFIs is to provide easy finance
to poor and weaker section of the society. They should help unbanked section of the society
which are neglected by other financial institutions.
Post-office: The Post offices are present even in the remotest area of the Rural India. In
view of their wide network, they can provide all kinds of small and micro-financial services
in rural area by providing door to door services, if Govt. permits.

SOCIAL BANKING
India lives in villages and they comprise a major portion of the Indian population. Financial
inclusion will be complete if banking services are made available at ease to the people who
are totally unaware of its benefits and are too poor to start with a minimum balance
requirement. The mainstream bbanking practices in India has marginalised a large section of
the poor population of the country. The concept of social banking was to provide banking
for the poor population, working for their developmental needs, providing them with easy
formal credit, minimal requirements to open accounts, ease of access and friendly staff etc.
Thus, broadly stating, banking system in which banks subsidize the provision of banking
services to poor and the orientation is towards serving the masses is known as social
banking.
Social banking system has caught the eye of bankers internationally especially after the
economic crisis which left many homeless, jobless and without any savings. Financial
institutions which were severely hit were the ones which were completely disconnected
with the ground realities in society and real sector. Thus, post crisis several jurisdictions
introduced legislations and measures for keeping banks relevant to the changing needs and
sources of society.
Thus the process of social banking in India can broadly be classified into three phases.
(i) During the First Phase (1960-1990), after nationalization of banks wherein main
emphasis was on channeling of credit to the neglected sectors especially weaker sections
of the society through “branch multiplication and Priority Sector Lending”.
(ii) Second Phase (1990-2005) focused mainly on strengthening the financial institutions
as a part of financial sector reforms. During this period social banking was exercised
mainly through Self Help Group (SHG) Bank Linkage Programme and Kisan Credit Cards
(KCC) etc. Self Help Group (SHG) Bank Linkage Programme was launched by
NABARD in 1992, backed by Reserve Bank of India, to assist cohesive group activities
by the poor so as to provide them easy access to banking.
(iii) During the third phase i.e. from 2005 onwards, the financial inclusion was extensively
exercised on national level with main emphasis on providing basic banking facilities
through no frill accounts.