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MICROFINANCE

Writing During Exam Hall and Able to Think and Inter Relate Differs. Issues related to Social Justice
News
MFIN Report 2022-23 → Micro Finance Institutions Network. Released Report wrt to Performance of MFIN
Its a Self Regulatory Body for MFI’s
Imp for Vocal for Local, SHG, Inclusive Growth, MSME, FLFP → Allmost to all Social Justice Related Topics
Microfinance
Definition
Micro Finance is Financial Service through Formal Institutions for Institutional Credit to Low Income Groups/SEBC
Core Financial Services Are
  1. Micro Credit
    1. Small Loan w/o Collateral
    2. They dont have collateral then they are dependent on Informal Groups → Predatory Lending Practises → Debt Trap and Suicides
    3. Hence, Micro Finance is also called as Anti Poverty Vaccine
  1. Micro Savings
    1. For Low Income Groups. They do not have huge surplus
    2. But it is done for Financial Discipline and Culture of Savings → this is also the model for SHG’s
  1. Micro Insurance
    1. For Social Security
    2. Problems
      1. Accidents of Birth - Born in Poor Family
      2. Accidents of Life - Some accidents which put them in poverty again
    3. Feature
      1. Low Premium - Accidental Coverage & Other Coverages
Delievery Channel
Channels Are
  1. Normal Commercial Banks
  1. Cooperative Banks
  1. Regional Rural Banks
  1. NBFC’s
  1. MFI registered as NBFC’s
Delivery Models
Feature
Self Help Groups (SHGs)
Joint Liability Groups (JLGs)
Definition
Groups formed voluntarily to improve standard of living or address poverty
Groups formed under NBFC guidance mainly for finance and loans
Delivery Model
Bottom-Up Approach
Top-Down Approach
Approach Characteristics
Decentralized, Participative
Centrally coordinated
Primary Objective
Improve standard of living, address poverty
Provide finance and loans for various objectives
Ownership
With the SHG itself
With the Non-Banking Financial Company (NBFC) encouraging formation
Formation Encouragement
Self-motivated and community-driven
Encouraged by NBFCs
Group Liability
Responsibility and ownership lie within the group itself
Liability rests with the group, but overseen by NBFC
Size
Typically smaller, community-based groups
Can vary, often larger due to NBFC coordination and objectives
This additional row provides insight into the general size and scale of these groups, which can impact their functionality and the type of activities they engage in.
Data
As Per MFIN 2022-23 Report
  1. MFI is catering to 6.6 Cr Women Clients covering around 729 Districts→ Financial Empowerement of Women (relevant in financial inclusion as well)
      2. Meaning there is still some scope to penetrate more districts → #Reaching the Last Mile
      Lack of Last Mile MFI Penetration
  1. Providers → NBFC MFI are the major provider → then comes Banks
      2. ILFS Crisis of NBFC in 2018-19 → Affected working of many NBFC’s → Increase Interest Amount for Borrowers
  1. Used to be around 5.6% 21-22 of NPA’s now its 2.7% in 22-23 → Meaning there is improvement of better Financial Discipline by Low Income Group People
      2. notion image
Benefits / Postitves
  1. Different Financial Services → Hence Helps in Financial Inclusion → Banking the Unbanked or reaching the Last Mile
  1. They are instrumental in reducing poverty by providing finance for Income Geneating Activities
  1. Promotes Small Scale Industries and Businesses
  1. Helps in Various Asset Creation → Durable Assets for Family → Helps in improving time available. It addresses time poverty which in turn helps in increasing labour participation → Especially Women in Rural Areas
  1. More than 6.6 Cr women in MFI → Women Empowerement
      2. Women Empowerement is Power To, Power With, Power Within
Challenges
Borrowers
  1. Lack of Credit Hisory - Hence not easy to measure the Credit Worthiness of a client
  1. Lack of Financial Literacy → Basics of Repayment Schedule, Term and Other Issues
  1. Coercive Loan Recovery Practise in Andhra Pradesh → MF Crisis in 2010. This Crisis happened because of Harrasment and Bad Loan Recovery Practises of MFI
      2. This lead to Suicides by Many Borrowes → In Lack of Collateral for Provider & Cyclical Unemployment by Borrower → NBFC resorted to Harrasment
      Based on this AP Crisis → Malegam Committee was constituted
3. High Interest Rate due to
NBFC borrowing from Bank and then NBFC lending it to Client
  1. Over InDebtedness of Borrowers → A Borrower may take loan from Multiple MFI’s. This happens becaue providers are NOT following Due Dilligence.
Providers
  1. Model - High Interest
  1. Due Dilligence Lacking
  1. Corruption in Disbursement
  1. Regulatory Gaps → No Proper Umbrella Regulations for Delievery Channels for Bodies → despite MF is considered as Anti Money Lending Model it is still considered as Lending Institute
      2. Some Digital Lending Companies are also called as Micro Finance Institutes. Hence Better Regulation from RBI is needed
  1. Regional Disparities
Committee - Malegam Committee
  1. Regulation of NBFC’s
  1. Cap on Interest Rate → NBFC charging high interest rare from clients → Hence, Banks are also charging High RoI to NBFC’s
      2. This is not Market Model
      Market Model → When Funds Available → Banks reduce RoI → cuz for Banks Loan is Asset and Deposit is Liability
  1. Transperancy in Fixing Interest Rate
Govt Steps
  1. SHG BLP → SHG Bank Linkage Program
      2. SHG will do saving and based on this saving Banks will lend money. Started in 1992, Supported by NABARD
  1. PM Mudra Yoajan - Collateral Free Loans to Non Corporate Non Farm Sectors to extend affordable credits to
      2. Shishu 50,000
      Kishore 5,00,000
      Tarun 10,00,000
Way Forward
  1. Look Into Debt Income Ratio → Financial Indicator of Financial Health
      2. Generally EMI is Linked to Monthly Incomes
      Specific Checking to prevent Indebtedness
  1. Removing Interest Rate Ceiling to control Interst Rate according to Market Mechanism
  1. Delinking Loan to Income Generation so that for personal reasons he doesnt have to go to predatory lending
  1. Tech & Capacity Building for both Borrower as well as Income
Loan Model
  1. Anglo Sexan Model - Private Led Model
  1. Chinese Model - Public Led Model
Committe by Basal Committee - Banks will fall in Crisis every 10 years irrespective of all due dilliegence
Hence, Recapitalisation is Important for Banks, to keep the Capital Adequacy Ratio to desired Levels
Why is MFI in News these days
Allegation on Dr Mohd Yunus, Bangladesh → Founder of MFI → Founder of Gramin Bank
Question - Last Year Mains UPSC Question
MFI as a Anti Poverty Vaccine is aimed at Asset Creation and Income Security of the Rural Poor. Evaluate the Role of SHG’s in achieving these ibjectives along with Empowering Women in Rural India
QI → MF as Anti Poverty Vaccine
MF & SHG → Asset Creation and Income Security
SHG & Women Empowerement
Way Forward & Conclusion
Extra Content
Millet System Network & Backyard Poultry & Millet Cultivation
SHG - Ensure Last Mile Connectivity - Cuz Still Unbanked Area
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