Micro finance refers to loans,savings, insurance, transfer services and other financial products targeted at low-income clients.

Microfinance refers to small savings, credit and insurance services extended to socially and economically disadvantaged segments of society. In the Indian context terms like "small and marginal farmers", " rural artisans" and "economically weaker sections" have been used to broadly define micro-finance customers. The recent Task Force on Micro Finance has defined it 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". At present, a large part of micro finance activity is confined to credit only. Women constitute a vastmajority of users of micro-credit and savings services. Micro credit refers to a small loan to a client made by a bank or otherinstitution.Micro credit can beoffered, often without collateral, to an individual or through grouplending. The role of microfinance institutions (MFI) assumed increased importance after the financialcrisis in the USA. Microfinance has demonstrated that poor people are viablecustomers as long as their financing is approached in a right was such that moralhazard, adverse selection and other agency problems are mitigated. Microfinancedevelopment led to a number of strong institutions focusing on poor peoplesfinance and it begun to attract the interest of private investors. But despite theseachievements, there is still a long way to go to extend access to all who needfinancial services.

WHAT IS MICROFINANCE? Microfinance is the provision of a broad range of financial services to low-income householdsand microenterprises. The range of financial services usually includes voluntary savings andloans. Other products might also include insurance, leasing, and money transfers. The termmicrofinance encourages exploration of the entire range of financial needs and requirementsof poor people. It is important to distinguish this term from the term microcredit. Microcredit refers to theprovision of credit services to low-income clients, usually in the form of small loans for thepurpose of microenterprise and income-generating activities. A focus on credit only in financial development interventions ignores the reality that

creating access to credit will not necessarily meet the financial needs of the poorest or alleviate poverty. This strategy may further marginalise those poor people who are unable or unwilling to take up loans and risk increased debt. Financial inclusion: theprocess of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost in a fair and transparent manner by mainstream Institutional players. Financial Inclusion Includes Accessing Of Financial Products And Services Like, Savings facility Credit and debit cards access Electronic fund transfer All kinds of commercial loans Overdraft facility Cheque facility Payment and remittance services Low cost financial services Insurance (Medical insurance) Financial advice Pension for old age and investment schemes Access to financial markets Micro credit during emergency Entrepreneurial credit MFIs Institutions:A range of institutions in public sector as well as private sector offers the micro finance servicesin India. They can be broadly categorized in to two categories namely, formal institutions andinformal institutions. The former category comprises of Apex Development FinancialInstitutions, Commercial Banks, Regional Rural Banks, and Cooperative Banks that providemicro finance services in addition to their general banking activities and are referred to as microfinance service providers. On the other hand, the informal institutions that undertake microfinance services as their main activity are generally referred to as

micro Finance Institutions(MFIs). While both private and public ownership are found in the case of formal financialinstitutions offering micro finance services, the MFIs are mainly in the private sector.

THE GRAMEEN BANK The largest and most studied example of the Microfinance institutions is the Grameen Bank in Bangladesh. With over 2 million borrowers, it has served as a blueprint for many subsequentMicrofinance schemes. The Grameen Bank was established in the late 1970s by economics professor, Muhammad Yunus. Initially, credit was provided to men in poor rural farming communities near the Chittagong University, in order to extend and secure year-round income. Bangladesh had just emerged from the War of Liberation which had caused serious social and political disruption. The economy was stagnating, the population was rapidly growing, there was high unemployment and low agricultural productivity. The Government was looking for innovative solutions and together with donors was encouraging government-owned banks to increase their rural development efforts and test innovative approaches to rural credit. The banking industry had been deregulated and economic liberalisation policies were being pursued. As the Grameen Bank developed, it was discovered that women managed loans with a significantly better rate of repayment. As a result, rural women became the primary loan recipients. This winning formula caught widespread attention because it achieved uncharacteristically high repayment rates on loans.

Key features of the Grameen Bank include: targeting women borrowers;

small initial loans increasing in size over time; the establishment of group lending.

Group lending is a process whereby members gain access to a loan within a small self-selected group in which all members guarantee to cover an individuals payment if she is unable to pay. This unique social collateral serves to reduce the risk and costs to the bank, and ensures repayment compliance. Loans are disbursed to group members in rotation. The principles of the Bank discipline, unity, courage and hard work are reinforced in a social contract of The Sixteen Decisions (see Appendix 3). Payments are collected and monitored at weekly group meetings, fostering transparency and compliance. Institutional financial viability was an important goal for the Grameen Bank. Its close initial relationship with formal financial institutions in Bangladesh and their early support was crucial. In the following decade significant expansion in the institution was achieved with heavy foreign donor support. However, the move to financial independence was significantly strengthened, first through membership subscription and then a share float. Bank viability hinged on increasing the membership, increasing the product range (which now includes many types of loans and voluntary savings), and providing access to increasing loan sizes.

SELF HELP GROUPS (SHGS) Self-help Group concept has its origin in India. SHGs are now considered to be very important bodies in rural development and are therefore found in almost all parts of the country and their number is still rapidly growing. SHGs are formed by Non-Government Organisations as well as Government agencies and are used as channels for various development programmes. A Self-Help Group is an association of generally up to 20 members (not exceeding20 members), preferably from the same socio-economic background. SHGs are facilitated by Government agencies or NGOs for members to come together for discussing and solving their common problems either financial or social through mutual help. An SHG can be all-women group, all-men group, or even a mixed Group. However, it has been the experience that womens groups perform better in all the important activities of SHGs. Mixed group is not preferred in many of the places, due to the presence of conflicting interests.

Some of the distinct features of SHGs are (i) Recognized by government: SHGs are well recognized and accepted by government, SHGs can open bank accounts in the name of SHG. They can also receive government grants and funds for development activities. (ii) SHGs are social intermediaries: SHGs do not restrict their functions only to financial transactions. SHGs are often involved in many social activities. There are example where SHGs have taken up social issues and fought against social evils like alcoholism, violence, against women, dowry, getting into village politics and being elected as Sarpanch. (iii) Books of accounts: SHGs maintain their own books of accounts. These are simple books to keep records of their savings, loans income and expenditures. Strong SHGs also make their Balance sheets and Income statements. (iv) Have office bearers: SHGs gave a structure where there is a Group President, Secretary and Treasure. They are elected by the group. (v) SHGs are more autonomous as they decide their own rules and regulations. (vi) SHGs mobilize thrift and rotate it internally. (vii) SHGs can hold bank account and can also borrow from banks and other financial institutions. We see that SHGs are groups, which are more autonomous. While they areinvolved in financial transactions, their role is not just restricted to it. SHGs are also involved in various social issues.As more SHGs are formed they have started federating themselves into clustersand clusters in turn as SHG Federations. The Federations are able to channelisefunds to the SHGs and also help in improving the managing and financial skills of SHGs. A Brief History of Microfinance in India The post-nationalization period in the banking sector, circa 1969, witnessed a substantial amount of resources being earmarked towards meeting the credit needs of the poor. There were several objectives for the bank nationalization strategy including expanding the outreach of financial services to neglected sectors (Singh, 2005). As a result of this strategy, the banking network underwent an expansion phase without comparables in the world. Credit came to be recognized as a remedy for many of the ills of the poverty. There spawned several pro-poor financial services, support by both the State and Central governments, which included credit packages and programs customized to the perceived needs of the poor.

While the objectives were laudable and substantial progress was achieved, credit flow to the poor, and especially to poor women, remained low. This led to initiatives that were institution driven that attempted to converge the existing strengths of rural banking infrastructure and leverage this to better serve the poor. The pioneering efforts at this were made by National Bank for Agriculture and Rural Development (NABARD), which was given the tasks of framing appropriate policy for rural credit, provision of technical assistance backed liquidity support to banks, supervision of rural credit institutions and other development initiatives. In the early 1980s, the GoI launched the Integrated Rural Development Program (IRDP), a large poverty alleviation credit program, which provided government subsidized credit through banks to the poor. It was aimed that the poor would be able to use the inexpensive credit to finance themselves over the poverty line. Also during this time, NABARD conducted a series of research studies independently and in association with MYRADA, a leading non-governmental organization (NGO) from Southern India, which showed that despite having a wide network of rural bank branches servicing the rural poor, a very large number of the poorest of the poor continued to remain outside the fold of the formal banking system. These studies also showed that the existing banking policies, systems and procedures, and deposit and loan products were perhaps not well suited to meet the most immediate needs of the poor. It also appeared that what the poor really needed was better access to these services and products, rather than cheap subsidized credit. Against this background, a need was felt for alternative policies, systems and procedures, savings and loan products, other complementary services, and new delivery mechanisms, which would fulfill the requirements of the poorest, especially of the women members of such households. The emphasis therefore was on improving the access of the poor to microfinance rather than just micro-credit. To answer the need for microfinance from the poor, the past 25 years has seen a variety of microfinance programs promoted by the government and NGOs. Some of these programs have failed and the learning experience from them have been used to develop more effective ways of providing financial services. These programs vary from regional rural banks with a social mandate to MFIs. In 1999, the GoI merged various credit programs together, refined them and launched a new programme called Swaranjayanti Gram Swarazagar Yojana (SGSY). The mandate of SGSY is to continue to provide subsidized credit to the poor through the banking sector to generate self-employment through a self-help group approach and the program has grown to an enormous size.

MFIs have also become popular throughout India as one form of financial intermediary to the poor. MFIs exist in many forms including co-operatives, Grameen-like initiatives and private sector MFIs. Thrift co-operatives have formed organically and have also been promoted by regional state organizations like the Cooperative Development Foundation (CDF) in Andhra Pradesh. The Grameen-like initiatives following a business model like the Grameen Bank. Private sector MFIs include NGOs that act as financial services providers for the poor and include other support services but are not technically a bank as they do not take deposits. Recently, microfinance has garnered significant worldwide attention as being a successful tool in poverty reduction. In 2005, the GoI introduced significant measures in the annual budget affecting MFIs. Specifically, it mentioned that MFIs would be eligible for external commercial borrowings which would allow MFIs and private banks to do business thereby increasing the capacity of MFIs. Also, the budget talked about plans to introduce a microfinance act that would provide some regulations on the sector. It is clear from the previous that the objectives of the bank sector nationalization strategy have resulted into several offshoots, some of which have succeeded and some have failed.Today, Self-Help Groups and MFIs are the two dominant form of microfinance in India. This report focuses on the aspects of the SHG as an effective means to provide financial services to the poor. Ordiance by ap The Andhra Pradesh Microfinance Institutions Ordinance 2010 which was issued by the states Governor for protecting the Women Self Help Groups form exploitation by the microfinance institutions through usurious interest rates and coercive means of recovery has brought more controversies to the table than it seeks to address. The ordinance was issued by the Andhra Pradesh government in the wake of a series of suicide cases in the state that were blamed upon the MFIs who are charging high interest rates and using coercive recovery methods. It was reported that the deaths have kicked up a furore with opposition parties and the State Human Rights Commission demanding action from the government.

The high interest rates charged by MFIs in the state however finds no mention in the ordinance as the state government stands perplexed over its powers of regulating the interest rates. In a letter written to the Finance Minister, Mr. Pranab Mukherjee and RBIGovernor, Mr. Subbarao by Andhra Pradesh Chief Minister, Mr. Rosaiah, whose copies were made available to the media, the Chief Minister has seeked clarifications about the appropriate agency responsible for regulation of interest rates charged by microfinance institutions to their borrowers. Get More IBTimes While while the RBI had communicated that the state governments were the best agencies to regulate the interest rates of MFIs, officials in the Union finance ministry advised us against any such moves, Mr. Rosaiah wrote. Meanwhile, the Reserve Bank of India (RBI) is reported to have formed a sub committee to look into the functioning of microfinance institutions. Under the ordinance, all MFIs operating within the states have to apply for registration with the registering authority of the district within 30 days of issue of ordinance thereby giving details like the purpose of operating, the interest rate charged, system of conducting due diligence and effecting recovery and the list of persons authorized for lending or recovery of money. Registering authorities include Project Director District Rural Development Agency for the rural areas and Project Director MEPMA (Mission for Elimination of Poverty in Municipal Areas) for urban areas. Microfinance institutions are further barred from granting or recovering loans without obtaining registration under this ordinance. The registering authority can anytime cancel the registration of an MFI after assigning sufficient reasons for such cancellation. The Ordinance prohibits members of SHG from holding memberships of more than one SHG. For those who already have more than one membership, the option of retaining the membership of one SHG and terminating membership in other SHGs is given. The member has to issue a notice about her termination and settle the amount payable to which has lent monies to such MFIs. With the ordinance in place, no MFI can recover from the borrower an interest which is in excess of the principal amount and all loans for which an MFI has

realized from the borrower an amount equal to twice the amount of the principal shall be discharged. The borrowers shall be entitled to obtain refund form the MFI. The ordinance also made it mandatory for MFIs to make public the rates of interest charged by them. Moreover, MFIs are now barred from extending further loans to an SHG or to its members which already has an outstanding loan from a Bank unless the MFIs obtain prior approvals from the registering authority. For putting a check on the increasing use of coercive methods by MFIs for recovering repayments, the ordinance says that MFIs shall not deploy any agents for recovery nor shall use any coercive action for recovering money from the borrowers. It empowers the registering authority to suspend or cancel the license of MFIs found engaged in coercive methods. Further, the registering authority has also been given the power to require production of records, inspection and seizure for examination and legal actions. MFIs are also required to submit monthly statements to the registering authority. The ordinance also empowers SHGs and their members to file a complaint regarding violation of the stated provisions by an MFI before the registering authority. The State government will also be establishing fast-track courts for settlings disputes of MFIs and SHGs. Minister for Rural Development Vatti Vasant Kumar is also reported to have said that SHGs were expected to get further relief as the soft loans being arranged to them from banks under debt swap scheme, to clear the MFI loans, would be charged only 3 per cent. The government would bear 10% out of the 13% interest charged by the banks on these loans. In the meantime, SKS Microfinance which is based out of Andhra Pradesh and is also the largest microfinance institution in the country has a sent a letter to the BSE (Bombay Stock Exchange) seeking legal clarification as to whether the ordinance will apply to NBFC (Non-Banking Financial Companies) MFIs as SKS is not an NBFC as defined under the Sec 58 A of the RBI Act 1934 as outlined in the ordinance. SKS went ahead to say that lack of interest rate ceiling works out to a flat interest rate of 100% compared to its flat rate of 12.5% with 1% upfront interest (26.7 per

cent effective on a declining balance). So the provision is unlikely to have an adverse impact on its interest rate structure. The letter further clarifies that SKS welcomes the provisions of ordinance which prohibit harsh recovery practices and since its inception it has never had any aforementioned policies. SKS is fully equipped to meet the various data requirements called for by the ordinance as it holds all its members data in digitized form and also holds Know Your Customer (KYC) data for all its borrowers. SKS has even offered to reduce its interest rates by two percent point if the RBI or the government asks so. We are willing to reduce our rate of interest if the RBI or Finance Ministry asks us to do so. We reduced rate of interest in the past, voluntarily. We are ready to lend at 24 per cent, SKS Microfinance Founder and Executive Chairman Vikram Akula said in an interview. No sooner than the ordinance was issued, Telugu Desam and other opposition parties in Andhra Pradesh termed it as inadequate and decided to seek Prime Minister Manmohan Singhs intervention on the issue. The Ordinance is not going to help the poor borrowers. The government says it cannot decide the rate of interest to be charged by the MFIs. But it says the interest cannot be higher than principal. How can it be, TDP Chief N Chandrababu Naidu told reporters according to Press Trust ofIndia. Rate of interest is decided for car loans and home loans. But it is not so for the poor people, he said. He was speaking after a meeting of Opposition parties organised by TDP to discuss the issue of MFIs and also the problems of farmers. Repudiating these remarks, Mr. AR Reddy, the Minister for Municipal Administration blamed the Telugu Desam for the mushrooming of MFIs in the state during the time when it was in power. Mr. Reddy is reported to have said that the criticism of opposition parties against the ordinance is unfounded. This is not the first that the government is intervening into the functioning of MFIs and prior to this ordinance successive governments have tried to control the MFIs in the state. Earlier this year, Andhra had sought to bring non banking finance companies under its purview but the bill did not become a law. In the early years of the past decade, Tamil Nadu sought to cap the interest rates of lending companies but the measure was quickly stayed by the courts.

Industry Associations like MFIN and Sa-Dhan are also gearing up to respond to the issued ordinance. The Microfinance Institution Network (MFIN) has today filed a petition in the Andhra Pradesh High Courtagainst the ordinance and it will come up for hearing tomorrow morning. Industry body Sa-Dhan has also called for a meeting on Thursday of all its members to discuss the potential consequences of the ordinance.

Andhra Pradesh Microfinance Institutions Ordinance 2010 comes into force Today the Governor of Andhra Pradesh E S L Narasimhan gave his assent to the Andhra Pradesh Microfinance Institutions (regulation of money lending) Ordinance, 2010 thus making it into a law which would come into effect immediately. The government of Andhra Pradesh was forced to introduce this bill to check the rising unrest in the state of Andhra Pradesh after media reports of MFIs alleged coercive practices led to public outcry and backlash. Speaking to CNBC- TV 18, Mr. Vatti Vasantha Kumar, Minister for Rural Development of Andhra Pradesh said The interest rate declared by the MFIs is different from the actual and indirect rate that includes hidden charges. If you take the hidden charges into consideration, the interest rate ranges from 50% to 84%. The Ordinance now makes it mandatory for all Microfinance Institutions in Andhra Pradesh to register with the District Registering Authority, the Project Director (PD)of District Rural Development Agency (DRDA) for rural areas andPD ofMEMPA for urban areas, within 30 days starting from Friday. The government has stated that the objective of the ordinance is to clamp down on unregulated lending by MFIs. The state government has said it will soon come up with a financial package to assist MFI clients who are burdened with debt. Arrangements for the swapping of high cost debt of MFI customers with low interest bearing loans by banks are being made. Some of the other Provisions of the Andhra Pradesh Microfinance Institutions Ordinance 2010 are:1.MFIs will now have to specify the area of their operations, the rate of interest and their system of operation and recovery while registering with the Registering Authority. 2.The Registering Authority may, at any time, either suo motu or upon receipt of complaints by Self-Help Groups (SHGs) or the general public can cancel the registration of the MFI after assigning sufficient reasons. 3.The MFIs cannot seek collateral from a borrower by way of pawning or any other security and they will now be required to display the rates of

interest rates charged by them in prominent places at their offices. 4. MFIs cannot charge any other amount from the borrower except the charge prescribed in the Rules for submission of an application for grant of a loan. 5.The ordinance also states that the amount of interest should not be in excess of the principal amount. 6.MFIs cannot extend a second loan unless the first loan has been fully paid off. 7.The MFIs will now be required to submit a monthly statement to the Registering Authority giving the list of loanees, the loan given to them and the amount of interest charged on these new loans. 8. MFI clients can now complain to the Registering Authority in case of any problems and they can also call the grievance cell through a toll free number 15532. 9.The Ordinance also mandates that only those staff members with identity cards can go for recovery and which can be done only in a public place. This is to check the use of rowdy elements by MFIs for loan recovery. 10. The state government will soon establish fast track courts after consultation with the High Court for settlement of disputes of civil nature. 11. All those connected with errant MFIs would be liable for punishment of imprisonment for upto three years or a fine upto Rs 1 lakh or both if they resort to any coercive measures. 12.The Ordinance also mandates SHG members cannot take a second loan without the permission of the Registering Authority. 13. The bill does not specify a cap on Interest Rates that can be charged.