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Micro-Finance & Micro Enterprises

Prayas in Micro Finance and Saving: Prayas Juvenile Aid Centre came into being in 1989 after a devastating fire broke out in jhuggis of Jahangirpuri area of North Delhi. Prayas is a national level NGO having operation 8 States/UTs of India. From children activities and home to alternative education to vocational training, Prayas is involved in all sorts of activities which are considered as panacea for socio economic development of community. Having served almost two decades, Prayas used to get demand of credit as well from the community.

Keeping need of community in view, Prayas ventured into Micro Credit business in January, 2007. So far, Prayas has disbursed Rs. 4.66 crore among 2814 beneficiaries. Prayas fulfill the credit need of community through SHG’s and JLG’s . Prayas is having micro finance operation in Delhi and Bihar. Apart from micro credit work, Prayas also involve in micro saving and working as business correspondent model of ICICI Bank and YES Bank. In August, 2009, RBI recognized Prayas as one of the best Business Correspondent model working in Delhi.

Micro Finance – Current Status and Growing Concerns in India

Microfinance sector has grown rapidly over the past few decades. Nobel Laureate Muhammad Yunus is credited with laying the foundation of the modern MFIs with establishment of Grameen Bank, Bangladesh in 1976. Today it has evolved into a vibrant industry exhibiting a variety of business models. Microfinance Institutions (MFIs) in India exist as NGOs (registered as societies or trusts), Section 25 companies and Non-Banking Financial Companies (NBFCs). Commercial Banks, Regional Rural Banks (RRBs), cooperative societies and other large lenders have played an important role in providing refinance facility to MFIs. Banks have also leveraged the Self-Help Group (SHGs) channel to provide direct credit to group borrowers. With financial inclusion emerging as a major policy objective in the country, Microfinance has occupied centre stage as a promising conduit for extending financial services to unbanked sections of population. At the same time, practices followed by certain lenders have subjected the sector to greater scrutiny and need for stricter regulation. Although the microfinance sector is having a healthy growth rate, there have been a number of concerns related to the sector, like grey areas in regulation, transparent pricing, low financial literacy etc. In addition to these concerns there are a few emerging concerns like cluster formation, insufficient funds, multiple lending and over-indebtedness which are arising because of the increasing competition among the MFIs. On a national level there has been a spate of actions taken to strengthen the regulation of MF sector including, enactment of microfinance regulation bill by the Government of Andhra Pradesh, implementation of sector-specific regulation by Reserve Bank of India and most recently, release of Draft Microfinance Institutions (development and regulation) Bill, 2011 for comments.
Micro Finance – Introduction
“Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services.” Microfinance is not just about giving micro credit to the poor rather it is an economic development tool whose objective is to assist poor to work their way out of poverty. It covers a wide range of services like credit, savings, insurance, remittance and also non-financial services like training, counseling etc.

Salient features of Microfinance:

  • Borrowers are from the low income group
  • Loans are of small amount – micro loans
  • Short duration loans
  • Loans are offered without collaterals
  • High frequency of repayment
  • Loans are generally taken for income generation purpose

Gaps in Financial system and Need for Microfinance
According to the latest research done by the World Bank, India is home to almost one third of the world’s poor (surviving on an equivalent of one dollar a day). Though many central government and state government poverty alleviation programs are currently active in India, microfinance plays a major contributor to financial inclusion. In the past few decades it has helped out remarkably in eradicating poverty. Reports show that people who have taken microfinance have been able to increase their income and hence the standard of living. About half of the Indian population still doesn’t have a savings bank account and they are deprived of all banking services. Poor also need financial services to fulfill their needs like consumption, building of assets and protection against risk. Microfinance institutions serve as a supplement to banks and in some sense a better one too. These institutions not only offer micro credit but they also provide other financial services like savings, insurance, remittance and non-financial services like individual counselling, training and support to start own business and the most importantly in a convenient way. The borrower receives all these services at her/his door step and in most cases with a repayment schedule of borrower’s convenience. But all this comes at a cost and the interest rates charged by these institutions are higher than commercial banks and vary widely from 10 to 30 percent. Some claim that the interest rates charged by some of these institutions are very high while others feel that considering the cost of capital and the cost incurred in giving the service, the high interest rates are justified
Channels of Micro finance
In India microfinance operates through two channels:
1. SHG – Bank Linkage Programme (SBLP)
2. Micro Finance Institutions (MFIs)
SHG – Bank Linkage Programme
This is the bank-led microfinance channel which was initiated by NABARD in 1992. Under the SHG model the members, usually women in villages are encouraged to form groups of around 10-15. The members contribute their savings in the group periodically and from these savings small loans are provided to the members. In the later period these SHGs are provided with bank loans generally for income generation purpose. The group’s members meet periodically when the new savings come in, recovery of past loans are made from the members and also new loans are disbursed. This model has been very much successful in the past and with time it is becoming more popular. The SHGs are self-sustaining and once the group becomes stable it starts working on its own with some support from NGOs and institutions like NABARD and SIDBI
Micro Finance Institutions
Those institutions which have microfinance as their main operation are known as micro finance institutions. A number of organizations with varied size and legal forms offer microfinance service. These institutions lend through the concept of Joint Liability Group (JLG). A JLG is an informal group comprising of 5 to 10 individual members who come together for the purpose of availing bank loans either individually or through the group mechanism against a mutual guarantee. The reason for existence of separate institutions i.e. MFIs for offering microfinance are as follows:

  • High transaction cost – generally micro credits fall below the break-even point of providing loans by banks

  • Absence of collaterals – the poor usually are not in a state to offer collaterals to secure the credit

  • Loans are generally taken for very short duration periods

  • Higher frequency of repayment of installments and higher rate of Default