final law ppt (2)
TRANSCRIPT
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Legal & Regulatory
Aspects of MicroFinance in India
&Need for a Regulator
Group 5
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Introduction to Micro
Finance What is Micro Finance?
History of Micro Finance
Why Micro Finance?
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Demand for Credit in India
Four segments of Population needing Credit
Small and Medium Income Farmers who live barely
above Poverty Line
Small Marginal farmers including Artisans, DomesticServants, Weavers , Vendors
Landless farmers working on seasonal basis, Labourers ,Miners , Forest Labourers
Women working in all of the above 3 sectors
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Gaps in System
India home to almost 1/3rdof the worlds poor
Central government & state government povertyalleviation programs currently active in India
About 1/2 of the Indian population-no savings bankaccount, deprived of banking services.
Lack of services to fulfil their financial needs
E.g. building of assets and protection against risk.
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Salient Features of Micro
Finance Borrowers are from the low income group
Loans are of small amountmicro loans
Short duration loans
Loans are offered without collaterals
High frequency of repayment
Loans are generally taken for income generationpurpose
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Microfinance trend in India
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Microfinance trend in India
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Commercial Banks
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Other Banks
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Microfinance
MFI SHG JLG
Types Of Microfinance
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Micro Finance Institutions
in India
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Micro Finance Institutions
Department of Full-Service Banks
Advantage of Regulation
Unified Regulation System
Legal forms of MFI in India
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Self-Help Groups
SGHs is a small group of rural poor, who voluntarilycome forward to form a group for improvement ofsocial and economic status of the members.
Homogenous group of about 15 to 20 members
Regular savings are done by the members
The capital collected is used for lending
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Conditions required for
membership of SGHs Members should be between the age group of 21-60
years.
From one family only one person can become amember of an SHG.
The group normally consist of either only men orwomen.
Members should be homogenous i.e. should havesame social and financial background.
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Joint liability group(JLG)
Joint Liability Group (JLG) is a group of individuals coming
together to borrow from the financial institution.
Informal group comprising 4-10 individuals.
For the purpose of availing bank loan against mutual
guarantee.
JLG members to engage in similar type of economic
activities either in Farm & Non farm sector.
Simple management with little or no financial administration
within the group.
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Joint liability group(JLG)
One person in that group is appointed as leader ofthe group.
Each person is responsible for the loan taken by anymember of the group.
If any one person in the group defaults then other
group members will have to pay for that.
On defaulting, the member will not be able to takeloan in future.
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Financing to JLG(Region wise)
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Financing to JLG(Region wise)
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JLGSHG Difference
FACTORS JLG SHG
Group size 4-10 members 05-20 membersper SHG
Type of
members
Exclusively of Farmers, Oral
Lessees, Share croppers,
artisans, entrepreneurs
Only very poor
members
Savings A Credit Group - Savings
optional
Savings-cum-
Credit Groups
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JLG-SHG Difference
Loans Either Singly or Jointly by JLG by
financing bank
Only to SHG by
financing bank
Maximum
loan amount
Restricted to Rs.50,000/- per Individual
(both under Model A or B)
No such upper limit
since linked to total
savings etc. Of group
SB A/c JLG members to be encouraged to open
INDIVIDUAL No Frill Accounts
Group Bank A/c of SHG
Others To serve as a conduit for technology
transfer, facilitate access to market
information, carry out activities like soil
testing, training, health camps to its
members
May attempt, no such
bar.
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Channels in Micro Finance
SHG-Bank Linkage Program (SBLP)
Bank-led
NABARD, 1992 Women encouraged to form groups
Members contribute savings
Provide bank loan for income generationpurpose
Members meet periodically
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SHG Banking Linkage
Programme
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Channels in Micro Finance
Micro Finance institutions (MFI)
Lend through the concept of Joint Liability Group (JLG)
5-10 members
Avail loan either individually or through group
Mutual Guarantee
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MFIs Types
Investor Pool of FundsIntermediary
BankMicro-
entrepreneur
Non-Profit Mutual Benefit For Profit
Public Trust SocietiesSection 25Companies
Self-Help Groups &Federation
Co-operativeSocieties
Non-BankingFinancial
Corporation
Trusts
Public trusts are established in accordance with the respective Stateregulations Private trusts are established under the Indian Trusts Act 18--
Process of registration is not hindered by the lack of initial capitalThey enjoy tax benefits as they are exempt for taxation if they areregistered under C of the Income Tax ActIn order to accept foreign grants the institution needs to be registered under the
FCRA
Micro FinanceInstitution
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Client Outreach Comparison
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Comparison SHG-MFI
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Reasons for existence ofseparate institutions:
High Transaction Cost
Absence of Collateral
Loan for Short duration
Higher frequency of repayment, higher rate ofdefault
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Models in Micro Finance
DeliveryModel
Self HelpGroup
FederatedSelf-helpGroup
GrameenBank
Co-operative
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Self-Help Group
Evolved in the NGO sector.
Almost 90% of the SHGs in India have femalemembers.
Small group of 20 persons formed democratically &elects its own members.
Essential Features:- members belonging to same socialstrata & sharing common ideology.
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Self-Help Group
Pool their savings and then use it amongthemselves.
The rules and norms pertaining to finance orother matters are made by the group.
NGO supporting the group links them to banksfor more financial assistance.
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Federated Self-Help Groups
Federation of SHGs bring together several SHGs.
More than 1000 members.
Three tier structure:-
SHG(Basic Unit)
Cluster(Middle Tier)
Apex Body
(Topmost Unit)
2 SHG members meetregularly
10-15 members, they
form the link betweenthee SHGs & NGO
Examples of Federated SHG:-PRADAN, Chaitanya and SEWA.
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Grameen Bank Model
Significant Features:-
Low transaction costs.
Repayment of loans in small and short interval.
Quick loan sanctions.
Loans are provided for all purposes like housingloans, sanitation loans, supplementary loans etc.
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Co-operative Model
Owned by the members who use its services.
Members can be from different sections of samecommunities like agriculture, retail, wholesaleetc.
The organization which has been vastlysuccessful in co-operative form in India is
Sahavikasa or Co-operative DevelopmentFoundation (CDF).
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CDFs
Found in 1975 by group of individuals.
It relies on the well known Credit Union modelinvolving a savings first strategy.
Legislation In Andhra Pradesh known asMutually- Aided Societies Act (MACS).
The act helps the CDF to register the thrift groupspromoted by CDF under it.
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Working of Micro Finance
Institutions
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Types of Financial Institutions
Types ofFinancial
Institutions
Formal Banks
Informal/Non-Banks
Companies of Apex Development FinancialInstitutions, Commercial Banks, Regional ruralBanks, & Co-operatives Banks providingmicro finance services in addition to theirgeneral banking activities
Informal institutions that undertake microfinance services as a part of their main
activity
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Hierarchy of MFI
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Working of Micro Finance
Institutions
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Working of Micro Finance
Institutions Little or no collateral
High default risk
Individuals divided in groups of 5
Field officer appointed
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Working Method
Choosing a village
Introduce mission, methodology and services offered
Interested women gather (age 18-59 years)
Groups of 5
5 day training program
Meet weekly in village centre
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Environment Analysis
Internal
High transaction cost
Lack of access tofunding
Loan collection method
Fraud
External Increased competition
Uneven population
Challenges before the
MFI
Quality of SHG
Deserving poor are stillnot reached
Micro finance outreach
in 7 poorest states ofIndia
Low depth of outreach
Unregulatedmicrofinance institutions
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Challenges
Financial illiteracy Inability to generate
sufficient funds
Dropouts andMigration of group
members
Multiple Lending andOver-Indebtedness.
Cluster formation
fight to grabestablished market.
Client Retention
Loan default Low Outreach
High Interest Rate
Negligence of urban
poor Low education level
Language barrier
Late payments
Geographic factors
Debt managements
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FDI in Micro finance
Acceptance of Foreign Contribution
Foreign Direct Investment
FIPB
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LEGAL ASPECTS
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THE MICRO FINANCE
INSTITUTIONS(DEVELOPMENT AND
REGULATION) BILL, 2012
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Definition
To provide for development and regulation of the microfinance institutions for the purpose of facilitating accessto credit, thrift and other micro finance services to therural and urban poor and certain disadvantaged sectionsof the people and promoting financial inclusion throughsuch institutions and for matters connected therewith orincidental thereto.
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Other Definition
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"Micro credit facilities" means any loan, advance, grant or
any guarantee given or any other credit extended in cash orkind with or without security or guarantee
"Micro finance institution" means,
(A) a society registered under the Societies Registration Act,
1860; or
(B) a company registered under section 3 of the Companies Act,
1956; or
(C) a trust established under any law for the time being in force;
or
(D) a body corporate; or
(E) any other organization, as may be specified by the Reserve
Bank
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"Micro finance services" means any one or more of the followingfinancial services provided by any micro finance institution, namely:
(A) micro credit facilities involving such amount, not exceeding inaggregate five lakh rupees for each individual and for such specialpurposes, as may be specified by the Reserve Bank from time to time,such higher amount, not exceeding ten lakh rupees, as may beprescribed;
(B) collection of thrift;(C) pension or insurance services;
(D) remittance of funds to individuals within India subject to priorapproval of the Reserve Bank and such other terms and conditions, asmay be specified by regulations;
(E) any other such services, as may be specified,
In such a manner as may be prescribed
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"Thrift" means money collected in any formother than in the form of current account ordemand deposits, by a micro financeinstitution from members of self-help groupsor any other group of individuals, by
whatever name called, who are availingmicro finance services provided by suchmicro finance institution in accordance withthe regulations made by the Reserve Bank in
this behalf.
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Provisions & Features of the
Draft Bill To entrust to the National Bank the regulatory,
supervisory, promotional and developmental role
RBIonly seeks to regulate & Develop the MFO
Set up MFDC
To lay down Policies & Procedures for registration& cancellations
Defines the Functions of Regulator, Auditors,
Ombudsman & Penalty provisions
Set up institution of MFDEF
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Role Expectations from
Regulator Promote growth of MF services
Formulate Policies, evolve sector benchmarks &performance standards,
Undertake registrations, procedures & cancellations
On-site & off-site Surveillance
Exercise Penal Powers
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Legal Structure
NGO-MFIs, Cooperatives & Section 25Companies
NBFCs
NBFC-MFIs
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Li it ti f C t L l
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Limitations of Current Legal
Structure
Recognizing MFI Players prior to 2010
Priority Sector Lending
Register as NBFC-MFI:
75% of loan portfolio originated from income-generatingactivities
85% of total assets as Qualifying asset
Margin Cap of 12%
Interest Cap of 26%
Accepting deposits
Financing Restrictions
Deposit Mobilization
Access to Capital
Qualifying Asset
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Qualifying Asset
Borrowers household annual income does not exceed Rs. 60,000 or
household annual income does not exceed Rs. 60,000 or Rs. 120,000
(rural and urban areas respectively)
Maximum loan size - Rs. 35,000 (first cycle) and Rs. 50,000 (subsequent
cycles)
Maximum borrower total indebtedness - Rs. 50,000
Minimum tenure - 24 months when loan exceeds Rs. 15,000
No prepayment penalties
Repayable by weekly, fortnightly or monthly instalments, at borrowers
choice
No collateral
Li it ti f C t L l
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Limitations of Current LegalStructure
Policy Initiatives
Pricing of Products
Fair lending practices
MFI Self Regulation
State level Regulation
Over-indebtedness
Documentation & Transparency
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Limitations of Current Legal
Structure
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Need For A Regulator
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Need for a Regulator
Microfinance Institutions (MFIs) in Indianeed a Regulator like NABARD or RBI
Reserve Bank of India regulates only thosemicrofinance institutions which are registeredwith it as non-banking finance companies
SEBI can monitor them, only if they get listed
NABARD, presently has no such role
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Malegam Committee
ReportOctober 2010
Study the issues and concerns inmicrofinance sector
Chairmanship of Shri Y H Malegam
Recommendations
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Recommendations
NBFC-MFI will hold not less than 90% of its total assets in
the form of qualifying assets
Limits of an annual family income of Rs.50,000 and anindividual ceiling on loans to a single borrower ofRs.25,000
Not less than 75% of the loans given by the MFI should beforincome-generating purposes
Restriction on the other services to be provided by the
MFI MFI can levy only three charges, namely,
(a) Processing fee
(b) Interest and
(c) Insurance charge.
Problems Of Multiple-lending, over
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borrowing, ghost borrowers andcoercive methods of recovery
Borrower can be a member of only one Self-Help Group (SHG) or aJoint Liability Group (JLG)
Not more than two MFIs can lend to a single borrower
There should be a minimum period of moratorium between thedisbursement of loan and the commencement of recovery
The tenure of the loan must vary with its amount
A Credit Information Bureau has to be established
The primary responsibility for avoidance of coercive methods ofrecovery must lie with the MFI and its management
R l f RBI i P ti MFI
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Role of RBI in Promoting MFI
Establishing financial literacy/credit counselling centres.
Technology adoptions.
Establishing Financial Inclusion Fund (FIF) and Financial InclusionTechnology Fund (FITF).
Establishing Microfinance Development and Equity Fund (MFDEF)
R l f NABARD i P ti MFI
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Role of NABARD in Promoting MFI
Support NGOs, RRBs, DCCBs, FarmersClubs and Individual Rural Volunteers(IRVs)
Role of a facilitator
Research and Development (R & D)Fund was set up
Why NABARD should be
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Why NABARD should be
Regulator
Conceived by the Committee to Review Arrangements forInstitutional credit for Agriculture and Rural Development(CRAFICARD)
Various Committees had assessed the supervisory role ofNABARD
NABARDs supervisory services
Its pioneering role in financing, promotion and developmentof MF
All India presence
Regulatory Targets in the MFI
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Regulatory Targets in the MFI
Business
That of a credit provider
Distributor of other financial products
Agency that promotes awareness about financial services
Obligations:
Truth and transparency
Adherence to fair collection practices
Ensuring that the consumer is aware of all the alternatives
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Current Scenario
N ti l R l Li lih d Mi i
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National Rural Livelihood Mission
Earlier known as IRDP(Integrated Rural DevelopmentProgramme)
NRLM was started by Shri Atal Bihari Vajpayee In 1999
Objective of NRLM was to provide Self Employment andOrganisation for the Poor
Swarnajayanti Grameen Swarojgar Yojana was initiated for
converting poor people into Clusters i.e., Self-Help Groups
Aim of SGSY was to provide credit to poor and forpromoting Enterprenuerial Skills
NRLM K F t
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NRLM Key Features
Goal: Poverty elimination in rural areas through building andnurturing institutions of the poor, with a focus on women SHGs andtheir federations
Target: Reaching 70 million rural poor households in the next 10years
Coverage: Phased coverage of villages in the country over aperiod of 10 years
NRLM Key Features
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NRLM Key Features
Comprehensive livelihoods promotion
Overcoming shocksFood security credit, health risk fund, etc
Strengthening existing livelihoodsAgriculture, livestock, NTFP,fishery, weaving, etc
Skilling and placing youth from rural poor households
Micro-enterprise development: EDP trainings, skilling,apprenticeship and handholding
Risk management: Life, health, assets and livelihoods risks
MICRO INSURANCE
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MICRO-INSURANCE
Microfinance Institutions with
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Microfinance Institutions with
Health Programmes
NRLM Outreach
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NRLM Outreach
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NRLM Outreach(Cont)
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SHG Banking Linkage
Programme
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SHG Saving Account
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SHG Saving Account
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Savings Growth in SHGs
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SHG Dropout
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MFI Response to New RBIRegulation
RBI guidelines are not clear
Financial firms are cautious
Uniform policy will be difficult for small MFIs
Difficult for new start up to meet the demands
Accountability of NBFCs loan s difficult
Restrictions on margins and interest rates are too stringent
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Village Financial ServicesLtd.
The institution focuses its services in West Bengal andBihar, reaching 2,22,357 clients
Clients are limited to women, a maximum monthlyincome of Rs. 4000 in rural areas and Rs. 5000 in urbanareas
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Concerns
That repayment has dropped from 99% to 96-97%
Borrowers delaying their repayment
Extensive waiting periods
Larger MFIs have additional funding sources but , smaller regionalMFIs are experiencing the impact
Funding cost were increased to 14-15% from 10-11%
Increase in loan tenure will delay the payment
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Arohan Financial ServicesPvt. Ltd.
Arohan Financial Services Pvt. Ltd. is a NFBC operatingin 23 districts across West Bengal, Assam, and Bihar.
The institution has been in service since 2006, currentlyserving 2,14,059 clients.
Arohan uses a joint lending group model, and it hasRs. 9 crore in outstanding loans as of March 2012.
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Concerns
Lack of regulation on interest rate caps
Banks do not feel compelled to lend to MFIs becausethey are not a big ticket
Borrowers dont understand. Who is RBI? What isregulation? They are losing confidence.
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Trident Microfinance
Trident Microfinance is a NBFC, operating in AndhraPradesh, Madhya Pradesh, and Uttar Pradesh since2007
Trident utilizes a joint lending group operational modelto serve 2, 54000 clients
As of the end of March 2012, the NBFC had Rs. 150
crore in outstanding loans
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Concern
Trident had 109 branches, which has since beenreduced to 84 due to regulatory closure.
The representative reported that the 26% interest ratecap is not encouraging.
12% margin cap proposed by RBI is unreasonable
Indebtedness cannot exceed Rs. 50,000
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Highlights of the Budget
2012-2013
Proposed to provide 200 crore to enlarge the corpusto 300 crore of 'Women's SHG's Development Fund
To encourage micro enterprises, a credit linked subsidyprogramme namely Prime Minister's Employment
Objective of promoting market access of Micro andSmall Enterprises
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Highlights of the Budget
2013-2014
Benefits or preferences enjoyed by MSME to continueup to three years after they grow out of this category
Refinancing Capacity
Fund provided by India Microfinance equity fund
Set up tool rooms, technology development centres
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Case Study
Andhra Pradesh crisis(Krishna district)
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( )
Mi Fi C t
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Micro Finance Controversy
Andhra Pradesh
COMPLAIN:
Some Borrowers of the private MFIs in AP lodgedcomplain against their alleged usurious interest rate
and forced loan recovery practices.
ACTION:
Government side and Private MFIs in AP
The Andhra Pradesh Microfinance Institutions(Regulation of Money Lending) Act, 2010
Mi Fi C t
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Micro Finance Controversy
Andhra Pradesh
ANALYSIS: Three allegations
1. Do private sector MFIs charge usurious interestrates?
2. Do MFIs (need to) employ coercive collectionpractices?
3. Are MFI clients being pushed to commit suicides
CONCLUSION
RESULT
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Mi Fi C t
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Micro Finance Controversy
SKS
IPOJuly, 2010
Motive- stock sale will help fuel the companys rapid growth,
Impact- Forced SKS to increase interest rates, avoid riskier loans &enact policies contrary to the spirit of microfinance
Critic-
offering big money people an opportunity to make money out of
poor people
Everyone at SKS made money
SKS should operate where there are no SHGs
Mi Fi C t
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Micro Finance Controversy
SKS
Crises-
1. Suffered loss of 1300 crore in AP
2. Shifted the registered office to Mumbai
The good part-
1. Helped SKS to expand and give more loans
2. Serves more than 90000 villages
3. Employs more than 21000 people
IPO good or bad- a fascinating debate
Gl b l T d I
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Global Trend In
Microfinance
N b f A ti D it
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Number of Active Depositors
(in Millions)
N b f A ti
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Number of Active
Borrowers(In Millions)
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Brazil Micro Finance
Bra il Microfinance
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Brazil Microfinance
Supply of Financial Services
Banking in Brazil for Lower IncomeEarners:
Consumer Credit
Credit Cards
Store Credit
Supplier Credit
Agiotas (Loan Sharks)
Brazil MF Today
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Brazil MF Today
Institutions associated with internationalmicrofinance networks
Civil society organisations
Government initiatives
Private Banks
Brazil MF Criticism
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Brazil MF Criticism
Low penetration rate
Hyperinflation period
Government-subsidized credit programs
Lack of framework to support a full andeffective microfinance system
Crowding out by the public sector
Way forward
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Way forward
What should financial regulation do?
Consumer protection regulation formicro-credit
Consumer protection regulation forfinancial distribution
Conclusion
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Conclusion
Frontline institutions
Not seen success like counterparts inLatin America, Europe & Bangladesh
Blind Adoption Difficult to regulate
Controversies
Criticised for interest rates
Consumer protection, micro-prudentialregulations & systematic risk
At present, focused on lending
Group 5
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Group 5
Nihar Manjrekar PG12093 Milind Kudal PG12095
Pooja Malde PG12096
Rohan Patel PG12097
Rushabh Desai PG12098
Sargam Mehta PG12099
Alisha Khimavat PG12106
Nikon Bhatt PG12110
Malay Shah PG12111
Keshav Kriplani PG12120
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109/109