impact of nbfc in indian economy

STUDY OF IMPACT OF NON BANKING FINANCIAL COMPANY ON INDIAN

ECONOMY

Dissertation Submitted to the Padmashree Dr. D.Y. Patil University

In partial fulfilment of the requirements for the award of the

Degree of

MASTERS IN BUSINESS ADMINISTRATION

Submitted by

ARIJEET DUTTA

(Roll no: MBACORE015032)

Research Guide:

PROF. AMINA MOMIN

School of Management

Padmashree Dr. D.Y. Patil University

CBD Belapur, Navi Mumbai

January 2017

I Impact of NBFC on Indian economy

2

STUDY OF IMPACT OF

NON BANKING

FINANCIAL COMPANY

ON INDIAN ECONOMY


3

Declaration

I hereby declare that the dissertation "Study of Impact of NBFCs in Indian economy"

submitted for the MBA Degree at Padmashree Dr. D.Y. Patil University's Department

of Business Management is my original work and the dissertation has not formed the

basis for the award of any degree, associate ship, fellowship or any other similar titles.

Place: Mumbai Signature of Student

Date:


4

Certificate from the Faculty Guide

This is to certify that the dissertation entitled “Impact of non banking financial

company on Indian economy” is the bonafide research work carried out by Mr. Arijeet

Dutta student of MBA, at D.Y. Patil University’s School of Management during the

year 2015-2017 , in partial fulfilment of the requirements for the award of the Degree

of Master in Business Management and that the dissertation has not formed the basis

for the award previously of any degree, diploma, associate ship, fellowship or any

other similar title.

Ms. Amina Momin

Dr. R. Gopal,

Director,

School of Management,

D.Y. Patil University)

Place: Mumbai

Date:


5

ACKNOWLEDGEMENT

On the very outset of this report, I would like to extend my sincere & heartfelt

obligation towards all the personages who have helped me in this endeavour. Without

their active guidance, help, cooperation & encouragement, I would not have made

headway in the project.

I am ineffably indebted to Dr. R Gopal for conscientious guidance and encouragement

to accomplish this assignment.

I am extremely thankful and pay my gratitude to my faculty guide Ms. Amina Momin

for her valuable guidance and support on completion of this project in its presently.

I extend my gratitude to Padmashree Dr. D.Y Patil University, School Of

management for giving me this opportunity.

I also acknowledge with a deep sense of reverence, my gratitude towards my parents

and member of my family, who has always supported me morally as well as

economically.

At last but not least gratitude goes to all of my friends who directly or indirectly

helped me to complete this project report.

Any omission in this brief acknowledgement does not mean lack of gratitude.

Thanking You,

Arijeet Dutta


6

PREFACE

Alignment of the finance with the overall strategy of the company is a very big and

toughest challenge for the company.

FINANCE is an important part of any business and managing them is an important

task. Our institution has come forward with the opportunity to bridge the gap by imparting

modern scientific management principle underlying the concept of the future

prospective managers.

To the emphasis on practical aspect of management education the faculty of D.Y Patil

University, School Of management has with a modern system of practical training of

repute and following management technique to the student as integral part of MBA

programme.

Signature of the Student


7

Table of Content

Serial no. Topic Page no.

List of Table and Figures 9

1 List of Abbreviation 10

2 Executive Summary 11

3 Introduction 12

3.1 NBFC Definition 13

3.2 Microfinance Definition 14

3.3 Strategic policy initiatives 15

3.4 Activities in NBFC 15

3.5 Legal Regulations 16

3.6 Difference between Banks and NBFCs 17

3.7 Registration of NBFC with RBI 17

3.8 Different types of NBFCs registered with RBI 18

3.9 NBFCs not Registered with RBI 18

3.10 Requirement for Registration with RBI 19

4 Literature Review 20

5 Objectives of the study 22

6 Research Methodology 23

7 Hypothesis 25

8 NBFCs in India 26

9 Services provided by NBFCs 34

10 Functions of NBFCs 35

11 Principals of NBFCs 36

12 Challenges and Opportunity of NBFCs 38

13 Contribution of NBFCs as component of the Financial

Sector

39

14 Contribution of NBFCs in the economy of India 41


8

15 Banking Expansion 48

16 Microfinance Social Aspect 49

17 Major Initiative in Rural Credit 50

17.1 SEWA Co-operative Bank 50

17.2 Self Help Group 51

17.3 NABARD 51

17.4 Rashtriya Mahilla Kosh 51

17.5 SIDBI 52

17.6 SHG- Bank Linkage Programme 52

17.7 Microfinance Development and Equity Fund 52

18 Self Help Group 53

19 Micro Finance Model 58

20 Role, Function And working Mechanism of Financial

Institution

61

20.1 ICICI Bank 61

20.2 Bandhan Bank 65

20.3 Grameen Bank 67

20.4 SKS Microfinance 68

21 Marketing of Microfinance Product 70

22 Conclusion 72

23 Comparative Analysis of NBFCs offered to the poor 74

24 Success factor of NBFC in India 75

25 Issues in NBFC 79

26 Role of NBFCs in Economic Development - A critical

Analysis

84

27 Recommendation 87

28 Questionnaire 95

29 Interpretation of Respondents

98

30 References 103


9

List of Tables and Figures

Table 1 Distribution of Indebted Rural Households:

Agency wise

38

Figure 1 Percentage of Rural Household according to the

Distribution Agency

39

Table 2 Percentage distribution of debt among indebted

Rural Labour Households by source of debt

40

Figure 2 Percentage distribution of debt among indebted

Rural Labour Households by source of debt

41

Table 3 Relative share of Borrowing of Cultivator

Households(in per cent)

42

Table 4 Distribution based on Asset size of Rural

Households (in per cent)

43

Table 5 Comparative Analysis of NBFCs offered to the

poor

74

Table 6 Legal Forms of MFIs in India 58


10

1. List of Abbreviations

NABARD- National Bank for Agriculture and Rural Development.

MFIs- Micro Finance Institutions.

SHGs- Self Help Groups.

RRB- Regional Rural Bank.

DRDA- District Rural Development Authority.

SIDBI- Small Industries Development Bank of India.

RBI- Reserve Bank of India.

NBFCs- Non-Banking Financial Corporations.

LABs-Local Area Banks.

NGOs- Non-Governmental Organisations

FLDG- First Loss Default Guarantee.

ICT- Information and Communication Technology.

SGSY- Swarnajayanti Gram Swarozgar Yojana.

MFOs- Micro Finance Organisations.

IRDP- Integrated Rural Development Programme.

JLG- Joint Liability Group.

MFDEF- Microfinance Development & Equity Fund.

PACS- Primary Agricultural Cooperative societies.

RMK- Rashtriya Mahila Kosh.

RRB- Regional Rural Bank


11

2. Executive Summary

Microfinance means providing very poor families with very small loans (micro credit)

to help them engage in productive activities /small businesses. Over time,

microfinance has come to include a broader range of services (credit, savings,

insurance, etc.) as we have come to realize that the poor and the very poor who lack

access to traditional formal financial institutions require a variety of financial

products.

The Eleventh Five Year Plan aims at inclusive growth and faster reduction of poverty.

Micro Finance can contribute immensely to the financial inclusion of the poor without

which it will be difficult for them to come out of the vicious cycle of poverty. There is

a need to strengthen all the available channels of providing credit to the poor such as

SHG- Bank Linkage programmes, Micro Finance Institutions, Cooperative Banks,

State financial corporations, Regional Rural Banks and Primary Agricultural Credit

Societies. The strength of the micro finance industry lies in its informality and

flexibility which should be protected and encouraged.

Landlords, local shopkeepers, traders, suppliers and professional money lenders, and

relatives are the informal sources of micro-credit for the poor, both in rural and urban

areas.

The sector which is still in its infancy faces shortage of experienced

consultants/manpower/experts. There is a need to have good quality professionals,

trained in best practices in governance for effective corporate governance. A need-

based capacity building programme to meet the requirements of all categories of

Micro Finance Organisations (MFOs) is essential to bring about sustainability in the

sector. Some of the important areas where capacity building is needed are

transformation, best practices, interest rate management, delivery management,

managing growth, risk mitigation, product designing, market research etc. It is my

pleasure and privilege to thank to Ms. Amina Momin for her valuable contributions

without which it would not have been possible to prepare this report.


12

3. Introduction

Non Banking Financial Institutions is defined as any activity that includes the

provision of financial services such as credit, savings, and insurance to low

income individuals which fall just above the nationally defined poverty line, and

poor individuals which fall below that poverty line, with the goal of creating social

value. The creation of social value includes poverty alleviation and the broader impact

of improving livelihood opportunities through the provision of capital for micro

enterprise, and insurance and savings for risk mitigation and consumption smoothing.

A large variety of actors provide microfinance in India, using a range of microfinance

delivery methods. Since the founding of the Grameen Bank in Bangladesh, various

actors have endeavoured to provide access to financial services to the poor in creative

ways. Governments have piloted national programs, NGOs have undertaken the

activity of raising donor funds for on-lending, and some banks have partnered with

public organizations or made small inroads themselves in providing such services.

This has resulted in a rather broad definition of microfinance as any activity that

targets poor and low-income individuals for the provision of financial services. The

range of activities undertaken in microfinance include group lending, individual

lending, the provision of savings and insurance, capacity building, and agricultural

business development services. Whatever the form of activity however, the

overarching goal that unifies all actors in the provision of microfinance is the creation

of social value.

3.1 Non Banking financial Institution Definition

A Non-Banking Financial Company (NBFC) is a company registered under the

Companies Act, 1956 engaged in the business of loans and advances, acquisition of

shares/stocks/bonds/debentures/securities issued by Government or local authority or

other marketable securities of a like nature, leasing, hire-purchase, insurance business,

chit business but does not include any institution whose principal business is that of


13

agriculture activity, industrial activity, purchase or sale of any goods (other than

securities) or providing any services and sale/purchase/construction of immovable

property. A non-banking institution which is a company and has principal business of

receiving deposits under any scheme or arrangement in one lump sum or in

instalments by way of contributions or in any other manner, is also a non-banking

financial company (Residuary non-banking company).

3.2 Microfinance Definition

According to International Labour Organization (ILO), ―Microfinance is an

economic development approach that involves providing financial services through

institutions to low income clients‖.

In India, Microfinance has been defined by ―The National Microfinance Taskforce,

1999 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.

3.3 Strategic Policy Initiatives

Some of the most recent strategic policy initiatives in the area of Microfinance taken

by the government and regulatory bodies in India are:

Working group on credit to the poor through SHGs, NGO, NABARD

The National Microfinance Taskforce, 1999

Working group on Financial Flows to the Informal Sector (set up by PMO),

2002

Microfinance Development and Equity Fund, NABARD 2005

Working group on Financial NBFCs by Banks- RBI


14

3.4 Activities in Non Banking Financial Institution

Microcredit: It is a small amount of money loaned to a client by a bank or other

institution. Microcredit can be offered, often without collateral, to an individual or

through group lending.

Micro savings: These are deposit services that allow one to save small amounts of

money for future use. Often without minimum balance requirements, these savings

accounts allow households to save in order to meet unexpected expenses and plan for

future expenses.

Micro insurance: It is a system by which people, businesses and other organizations

make a payment to share risk. Access to insurance enables entrepreneurs to

concentrate more on developing their businesses while mitigating other risks affecting

property, health or the ability to work.

Remittances: These are transfer of funds from people in one place to people in

another, usually across borders to family and friends. Compared with other sources of

capital that can fluctuate depending on the political or economic climate, remittances

are a relatively steady source of funds.

List of some NBFCs who accept public deposit: Jaylakshmi Credit Company

Chinmay Finlease Ltd.

The Peerless General Finance & Investment Co. Ltd.

West Bengal Industrial Development Corporation Ltd.

Shriram City Union Finance ltd.

Deccan Finance Ltd.

Sundaram Finance Limited


15

Transcity Finance Limited

Bajaj Finance Ltd.

Mahindra and Mahindra Financial Service Ltd. And many more...

Legal Regulations Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under

the RBI Act of 1934, Banking Regulation Act, Regional Rural Banks Act, and the

Cooperative Societies Acts of the respective state governments for cooperative banks. NBFCs are registered under the Companies Act, 1956 and are governed under the RBI

Act. There is no specific law catering to NGOs although they can be registered under

the Societies Registration Act, 1860, the Indian Trust Act, 1882, or the relevant state

acts. There has been a strong reliance on self-regulation for NGO MFIs and as this

applies to NGO MFIs mobilizing deposits from clients who also borrow. This

tendency is a concern due to enforcement problems that tend to arise with self-

regulatory organizations. In January 2000, the RBI essentially created a new legal

form for providing microfinance services for NBFCs registered under the Companies

Act so that they are not subject to any capital or liquidity requirements if they do not

go into the deposit taking business. Absence of liquidity Requirements is concern to the safety of the sector


16

3.5 What is difference between banks & NBFCs?

A NBFC cannot accept demand deposits (demand deposits are funds deposited

at a depository institution that are payable on demand -- immediately or within

a very short period -- like your current or savings accounts.)

It is not a part of the payment and settlement system and as such cannot issue

cheques to its customers.

Deposit insurance facility of DICGC is not available for NBFC depositors

unlike in case of banks.

3.6 Every NBFC should be registered with RBI

In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC

should be registered with RBI to commence or carry on any business of non-banking

financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.

However, to obviate dual regulation, certain category of NBFCs which are regulated

by other regulators are exempted from the requirement of registration with RBI viz.

venture capital fund/merchant banking companies/stock broking companies registered

with SEBI, insurance company holding a valid certificate of registration issued by

IRDA, NIDHI companies as notified under Section 620A of the Companies Act,

1956, chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982

or housing finance companies regulated by National Housing Bank.


17

3.7 What are the different types of NBFCs registered with RBI? With effect from December 6, 2006 the above NBFCs registered with RBI have been

classified as:

Asset Finance Company (AFC) - AFC would be defined as any company

which is a financial institution carrying on as its principal business the

financing of physical assets supporting productive / economic activity, such as

automobiles, tractors, lathe machines, generator sets, earth moving and material

handling equipments, moving on own power and general purpose industrial

machines.

Investment Company (IC)

Loan Company (LC)

3.8 NBFCs not registered with RBI

Housing Finance Companies, Merchant Banking Companies, Stock Exchanges,

Companies engaged in the business of stock-broking/sub-broking, Venture Capital

Fund Companies, NIDHI Companies, Insurance companies and Chit Fund Companies

are NBFCs but they have been exempted from the requirement of registration under

Section 45-IA of the RBI Act, 1934 subject to certain conditions.

Housing Finance Companies are regulated by National Housing Bank,

Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-

brokers are regulated by Securities and Exchange Board of India,

Insurance companies are regulated by Insurance Regulatory and Development

Authority.

Chit Companies are regulated by the respective State Governments


18

NIDHI Companies are regulated by Ministry of Company Affairs, Government of

India.

3.9 What are the requirements for registration with RBI?

A company incorporated under the Companies Act, 1956 and desirous of commencing

business of non-banking financial institution as defined under Section 45 I(a) of the

RBI Act, 1934 should have a minimum net owned fund of Rs 25 lakh (raised to Rs 2

crore from April 21, 1999).

The company is required to submit its application for registration in the prescribed

format along with necessary documents for bank's consideration. The bank issues

certificate of registration after satisfying itself that the conditions as enumerated in

Section 45-IA of the RBI Act, 1934 are satisfied.

Where one can find a list of registered NBFCs and instructions issued to NBFCs?

The list of registered NBFCs is available on the web site of Reserve Bank of India

[Get Quote] and can be viewed at www.rbi.org.in. The instructions issued to NBFCs

from time to time are also hosted at the above site. Besides, instructions are also

issued through Official Gazette notifications. Press releases are also issued to draw

attention of the public/NBFCs.

Can all NBFCs accept deposits and what are the requirements for accepting public

deposits?

All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a

valid certificate of registration with authorisation to accept public deposits can

accept/hold public deposits. The NBFCs accepting public deposits should have

minimum stipulated net owned fund and comply with the directions issued by the

bank.

Is there any ceiling on acceptance of public deposits? What is the rate of interest and

period of deposit which NBFCs can accept?

Yes, there is ceiling on acceptance of public deposits. An NBFC maintaining required

NOF/CRAR and complying with the prudential norms can accept public deposits as

follows:


19

Category of NBFC.

Ceiling on public deposits.

AFCs maintaining CRAR of 15% without credit rating.

AFCs with CRAR of 12% and having minimum investment grade credit rating

1.5 times of NOF or Rs 10 crore whichever is less 4 times of NOF.

LC/IC with CRAR of 15% and having minimum investment grade credit rating

1.5 times of NOF.

Presently, the maximum rate of interest a NBFC can offer is 11%. The interest may be

paid or compounded at rests not shorter than monthly rests.

The NBFCs are allowed to accept/renew public deposits for a minimum period of 12

months and maximum period of 60 months. They cannot accept deposits repayable on

demand.

The RNBCs have different norms for acceptance of deposits which are explained

elsewhere in this booklet.


20

4. Literature Review

Jafor Ali Akhan (2010) writes on “Non-Banking Financial Companies (NBFCs) in

India”. The book discussed the financial system in India. It covers the financial

intermediaries including commercial banks, regional rural banks, cooperative banks

and Non-Banking Financial Companies in India. The book is good source in getting

information on businesses, classification, management of assets, risk coverage, etc of

the NBFCs in India..

Shailendra Bhushan Sharma and Lokesh Goel (2012) write on “Functioning

and Reforms in Non-Banking Financial Companies in India”. Non-Banking Financial

Companies do offer all sorts of banking services, such as loans and credit facilities,

retirement planning, money markets, underwriting and merger activities. These

companies play an important role in providing credit to the unorganized sector and to

the small borrowers at the local level. Hire purchase finance is by far the largest

activity of NBFCs. The rapid growth of NBFCs has led to a gradual blurring of

dividing lines between banks and NBFCs, with the exception of the exclusive

privilege that commercial banks exercise in the issuance of cheques. This paper

provides an exhaustive account of the functioning of and recent reforms pertaining to

NBFCs in India.

Subina Syal and Menka Goswami (2012) writes on “Financial Evaluation of

Non-Banking Financial Institutions: An Insight”in ‘Indian Journal of Applied

Research’. The Indian financial system consists of the various financial institutions,

financial instruments and the financial markets that facilitate and ensure effective

channelization of payment and credit of funds from the potential investors of the

economy. Non-banking financial institutions in India are one of the major

stakeholders of financial system and cater to the diversified needs by providing

specialized financial services like investment advisory, leasing, asset management,

etc. Non-banking financial sector in India has been a considerable growth in the recent

years. The aim of the present study is to analyze the financial performance and growth

of non-banking financial institutions in India in the last 5 years. The study is helpful


21

for the potential investors to get the knowledge about the financial performance of the

non-banking financial institutions and be helpful in taking effective long-term

investment decisions.

Taxmann’s (2013) published “Statutory Guide for Non-Banking Financial

Companies” is published by Taxmann’s Publications, New Delhi. The book listed the

laws relating to Non-Banking Financial Companies. The rules and laws governing the

kinds of businesses undertaken by different types of NBFCs are also discussed

Ravi Puliani and Mahesh Puliani (2014) writes a book entitled “Manual of Non-

Banking Financial Companies”. The book discussed the glossary of terms that are

used in banking operations and non-banking activities. The book covers the circulars

and directions issued by Reserve Bank of India from time to time to control, manage

and regulate the business of NBFCs.


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5. Objectives of the Study

To Study the concept of Non banking financial corporation.

To study what is difference between banks & NBFCs .

To Analysis the Issues in Microfinance.

To study the Role of NBFCS in the economic development.

To Analysis the Success Factors of NBFCs in India .

To Analysis the Challenges and Opportunities of NBFCs.

2. Research Methodology


23

6. Research Methodology

Meaning of Research

Research in common parlance refers to a search for knowledge. Once can also define

research as a scientific and systematic search for pertinent information on a specific

topic. In fact, research is an art of scientific investigation. The advanced learner’s

Dictionary of current English lays down the meaning of research as a “careful

investigation or inquiry especially through search for new facts in any branch of

knowledge”.

Redman and Mary define research as a “systematic effort to gain new knowledge”.

Some people consider research a s a movement, a movement from the known to the

unknown. It is actually a voyage of discovery. We all possess the vital instinct of

inquisitiveness makes us probe and attain full and fuller understanding of the

unknown. This inquisitiveness is the mother of all knowledge and the method, which

man employee for obtaining the knowledge of whatever the unknown, can be termed

as research. Research is an academic activity and as such the term should be used in a

technical sense.

Data collection method

The data will be collected using both primary data collection method as well as

secondary sources.

Primary data

Sample- 100 loan seekers persons applying to NBFC’s loan.

Sample population – persons seeking loans from NBFC from the area of Mumbai

and Navi Mumbai.

Sampling technique – random sample technique will be used to select loan

seekers.


24

Instrument for data collection –

Questionnaire will be used to collect data from Peron seeking loans.

Secondary Data

Books:

1. Non-Banking Financial Companies (NBFCs) in India by Jafor Ali Akhan

2. Regulation of Non-banking Financial Companies in India by Shail Shakya

3. Manual of Non-Banking Financial Companies” by Ravi Puliani

Newspaper:

Business Standard

Economic times

Magazines:

Investor’s Business Daily


25

7. Hypothesis

H0: Loan seekers are aware about the difference between a bank and a NBFC, rules

and regulation and the body governs the NBFC.

H1: Loan seekers are not aware about the difference between a bank and a NBFC,

rules and regulation and the body governs the NBFC.

H0: Loan seekers give preference to NBFC over Bank

H1: Loan seekers didn’t give preference to NBFC over Bank.

H0: Loan seekers from NBFS are aware about the education programme conducted by

the NBFC.

H1: Loan seekers from NBFS are not aware about the education programme

conducted by the NBFC

H0: Loan seekers from NBFC are aware about different types of financial products

available with NBFC.

H1: Loan seekers from NBFC are not aware about different types of financial products

available with NBFC

H1: People who deposit money to NBFC are aware about that the NBFC must get a

credit rating from minimum three Agencies.

H0: People who deposit money to NBFC are not aware about that the NBFC must get

a credit rating from minimum three Agencies


26

8. NBFCs in India

At present lending to the economically active poor both rural and urban is pegged at

around Rs 7000 crores in the Indian banks credit outstanding. As against this,

according to even the most conservative estimates, the total demand for credit

requirements for this part of Indian society is somewhere around Rs 2,00,000 crores.

Deprived of the basic banking facilities, the rural and semi urban Indian masses are

still relying on informal financing intermediaries like money lenders, family

members, friends etc.

Table 1: Distribution of Indebted Rural Households: Agency wise Credit Agency Percentage of Rural Households

Government 6.1

Co-operative Societies 21.6

Commercials Banks & RRBs 33.7

Insurance

0.7

Provident Fund 1.6

Other Institutional Sources 64.0

All institutional Agencies 4.0

Landlord 7.0

Agricultural moneylenders 10.5

Professional Moneylenders 5.5

Relatives and friends 9.0

Others 5.0

All Non Institutional Agencies 36.0

All Agencies 100.0

Source: Debt and Investment Survey


27

Government2% Co-operative Societies

7%Commercials Banks & RRBs

11%

Insurance 0%

Provident Fund1%

Other Institutional Sources

21%

All institutional Agencies

1%Landlord

2%

Agricultural moneylenders

3%

Professional Moneylenders

2%Relatives and friends

3%

Others2%

All Non Institutional Agencies

12%

All Agencies33%

Percentage of Rural Households

Seeing the figures from the above table, it is evident that the share of institutional

credit is much more now.


28

The above survey result shows that till 1991, institutional credit accounted for around

two-thirds of the credit requirement of rural households. This shows a comparatively

better penetration of the banking and financial institutions in rural India.

Table 2: Percentage distribution of debt among indebted Rural Labour

Households by source of debt

Serial No.

Sources of Debt Household

With Cultivated land

Without Cultivated land

All

1 Government 4.99 5.76 5.37

2 Co-operative societies 16.78 9.46 13.09

3 Banks 19.91 14.55 17.19

4 Employers 5.35 8.33 6.86

5 Money Lenders 28.12 35.23 31.7

6 Shop-Keepers 6.76 7.47 7.13

7 Relatives 14.58 15.68 15.14

8 Other Sources 3.51 3.52 3.52

Total 100 100 100

Source: Rural labour enquiry report on indebtedness among rural labour

households (55th Round of N.S.S.) 2010-2011


29

0

10

20

30

40

50

60

70

80

90

100

Go

vern

me

nt

Co

-op

erat

ive

soci

ties

Ban

ks

Emp

loye

rs

Mo

ney

Le

nd

ers

Sho

p-K

epee

rs

Re

lati

ves

Oth

er S

ou

rces

Tota

l

1 2 3 4 5 6 7 8

Sources of Debt

Household With Cultivated land

Household With Cultivated land

Household Without Cultivated land

Household Without Cultivated land

Household All

Percentage distribution of debt among indebted Rural

Labour Households by source of debt

The institutional sources could meet only 36% of the total credit requirement of the

rural labour households during 1999-2000 with only one percent increase over the

previous survey in 1998-99. Among the institutional sources of debt, the banks


30

continued to be the single largest source of debt meeting about 17 percent of the total

debt requirement of these households. In comparison to the previous enquiry, the

dependence on co-operative societies has increased considerably in 1999-2000.

During 2006-07 as much as 13% of the debt was raised from this source as against

8% in 2008-10. However, in the case of the banks and the government agencies it

decreased marginally from 18.88% and 8.27% to 17.19% and 5.37% respectively

during 2011-12 survey.

Table 3: Relative share of Borrowing of Cultivator Households (in per cent)

Sources of Credit 1915 1925 1950 1975 2000 2015

Non Institutional 85 80.6 77.5 70.2 55.9 30.2

Moneylenders 9.5 7.5 7 5.2 4.1 3.8

Institutional 3.3 4.6 3.8 1.8 3 6.2

Co-operatives

Societies

1.9 4.4 3.2 3.8 10.7 18.2

Commercial

Banks

0.3 2.9 15.5 19.0 26.3 40.8

Unspecified 0.8

Total 100 100 100 100 100 100

* All India Debt and Investment Survey, NSSO, 59th round, 2015 Source: All

India Debt and Investment Surveys


31

Relative share of Borrowing of Cultivator Households

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1915 1925 1950 1975 2000 2015

Unspecified

Commercial Banks

Co-operatives Societies

Institutional

Moneylenders

Non Institutional


32

At the same time the share of commercial banks in institutional credit has come

down by almost the same percentage points during this period. Though, the share of

cooperative societies is increasing continuously, the growth has flattened during the

last three decades.

Table 4: Distribution based on Asset size of Rural Households (in per cent)

Household Assets Institutional Agencies Non- Institutional Agency All

Less than 5 42 58 100

5-10 47 53 100

10-20 44 56 100

20-30 68 32 100

30-50 55 45 100

50-70 53 47 100

70-100 61 39 100

100-150 61 39 100

150-250 68 32 100

250 and above 81 19 100

All classes 66 34 100

Source: Debt and Investment Survey The households with a lower asset size were unable to find financing options from

formal credit disbursement sources. This was due to the requirement of physical

collateral by banking and financial institutions for disbursing credit. For households

with less than Rs 20,000 worth of physical assets, the most convenient source of

credit was non institutional agencies like landlords, moneylenders, relatives, friends,

etc.

Looking at the findings of the study commissioned by Asia technical Department of

the World Bank (1995), the purpose or the reason behind taking credit by the rural

poor was consumption credit, savings, production credit and insurance.


33

0

20

40

60

80

100

120

Non- Instituional Agency

Institutional Agencies

Consumption credit constituted two-thirds of the credit usage within which almost

three-fourths of the demand was for short periods to meeting emergent needs such as

illness and household expenses during the lean season. Almost entire demand for the

consumption credit was met by informal sources at high to exploitive interest rates

that varied from 30 to 90 per cent per annum. Almost 75 per cent of the production

credit (which accounted for about one-third of the total credit availed of by the rural

masses) was met by the formal sector, mainly banks and cooperatives

Distribution based on Asset size of Rural Households


34

9. Services Provided By NBFCs

So many services provide by NBFC. Providing loans; car financing; home financing,

personnel loans, taleemi loans.

PROVIDING LOANS: The important service is provided by Mf is given loan. These loans are provided from

some productive activities like; starting new business, expansion of business;

improving life etc.

CAR FINANCING: NBFC also assist those people who cannot pay total amount at once. So, these MFI

gave them car on instalments like UBL car financing scheme is too popular and too

many people taking advantage from this scheme.

HOME FINANCING: Pakistan is a poor country. Purchasing power of Pakistan is very low. So many people

are living on rent. They cannot have too many amounts to purchase homes. NBFC‘s

provide loans be considering their job stability and take security for it.

PERSONNEL LOANS: NBFC also obtain personnel loans. Those people who have permanent employment

and stable jobs. This credit facility depends on the income of an individual. TALEEMI LOANS: NBFC also provide financial aid to the students who cannot bare educational expenses

but want to study. NBFC assist them in return of some security and it would have to

pay after completing the education.


35

10. Functions of Non Banking Financial Institution

Small loans, typically for working capital;

Informal appraisal of borrowers and investments;

Access to repeat and larger loans based on debt capacity and repayment

performance;

Secure savings products.

To provide financing facilities, with or without collateral Security

To accept deposits

To encourage investments in such cottage industries and income generating

projects for poor persons as maybe prescribed;

To mobilize and provide financial and technical assistance and training to

micro enterprises

To invest in shares of anybody corporate, the objective of which is to provide

microfinance services to poor persons


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11. Principles of Non Banking Financial Institution

Poor people need a variety of financial services, not just loans. Like everyone else, the poor need a range of financial services that are convenient,

flexible, and affordable. Depending on circumstances, they want not only loans, but

also savings, insurance, and cash transfer services.

Microfinance is a powerful tool to fight poverty. When poor people have access to financial services, they can earn more, build their

assets, and cushion themselves against external shocks. Poor households use

microfinance to move from everyday survival to planning for the future: they invest in

better nutrition, housing, health, and education.

Microfinance is about building permanent local financial institutions. Finance for the poor requires sound domestic financial institutions that provide

services on a permanent basis. These institutions need to attract domestic savings,

recycle those savings into loans, and provide other services. As local institutions and

capital markets mature, there will be less dependence on funding from donors and

governments, including government development banks.

Micro credit is not the best tool for everyone or every situation. Destitute and hungry people with no income or means of repayment need other kinds

of support before they can make good use of loans. In many cases, other tools will

alleviate poverty better—for instance, small grants, employment and training

programs, or infrastructure improvements. Where possible, such services should be

coupled with building savings.


37

The role of government is to enable financial services, not to provide them directly. National governments should set policies that stimulate financial services for poor

people at the same time as protecting deposits. Governments need to maintain

macroeconomic stability, avoid interest rate caps, and refrain from distorting markets

with subsidized, high-default loan programs that cannot be sustained.

The key bottleneck is the shortage of strong institutions and managers.

Microfinance is a specialized field that combines banking with social goals. Skills and

systems need to be built at all levels: managers and information systems of

microfinance institutions, central banks that regulate microfinance, other government

agencies, and donors. Public and private investments in microfinance should focus on

building this capacity, not just moving money.


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12. Challenges and Opportunities of Non Banking Financial Institution:

The Government has indicated its willingness to speed up the pace of structural

reforms to meet the major challenges of

REDUCING POVERTY:

The basic motto of the government to eliminate the poverty and bring prosperity in

the country. MFI providing small loans and other credit facilities to the poor and

low-income groups; which are beginning positive changing like their standard of

living group and earning have increased

IMPROVING SOCIAL INDICATORS:

Inadequate access to productive resources and social services has resulted low

social indicators and low employment opportunities. This situation is compounded

in rural areas; where access is more difficult. So, by providing small loans and

credit facilities they can overcome this issue and can improve social indicators.

IMPROVING THE FISCAL AND BALANCE OF PAYMENTS POSITIONS:

Pakistan is a poor country whose balance of payment always in deficit, because of

low productivity, lack of resources and lack of productive men’s power. If MIF

provide loans new business can be established. And export of Pakistan can be

improved which create balance of payments.

RESTORING INVESTOR CONFIEDENCE:

Due to poor economy of Pakistan investors are hesitating to invest their money in

Pakistan but MFI‘s can boost up. Because provide loans to local people new

business will stable. Economy will go up and this situation may motivate to them

for investing their funds.


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13. Contribution of NBFCs as components of the financial sector

A broad picture of the role of NBFCs and the interconnectedness they have in the

financial sector can be gauged from the details given below:

General:

The total number of NBFCs as on March 31, 2014 are 12,029 of which deposit

taking NBFCs are 241 and non-deposit taking NBFCs with asset size of Rs.

100 crore and above are 465, non-deposit taking NBFCs with asset size

between Rs. 50 crore and Rs.100 crore are 314 and those with asset size less

than Rs. 50 crore are 11009. As on March 31, 2014, the average leverage ratio

(outside liabilities to owned fund) of the NBFCs-ND-SI stood at 2.94, return on

assets (net profit as a percentage of total assets) stood at 2.3%, Return on equity

(net profit as a percentage of equity) stood at 9.22 % and the gross NPA as a

percentage of total credit exposure (aggregate level) stood at 2.8%.

Asset Liability composition

Liabilities* of the NBFC sector:

Owned funds (23% of total liabilities), debentures (32%), bank borrowings (21%),

deposit (1%), and borrowings from Financial Institutions (1%), Inter-corporate

borrowings (2%), Commercial Paper (3%), other borrowings (12%), and current

liabilities & provisions (5%).

Assets* of the NBFC sector:

Loans & advances (73% of total assets), investments (16%), cash and bank balances

(3%), other current assets (7%) and other assets (1%). (The data pertains to only

reported deposit taking NBFCs and those non-deposit taking NBFCs with asset size

of Rs.100 crores and above. All figures are as on end March, 2014.)


40

Role of NBFCs in financial inclusion

Financial inclusion has been defined as the provision of affordable financial

services to those who have been left unattended or under-attended by formal

agencies of the financial system. These financial services include payments and

remittance facilities, savings, loan and insurance services. Micro finance has

been looked upon as an important means of financial inclusion in India.

Microfinance is not just provision of micro credit but also other services in

small quantities to the poor i.e. providing essential financial services to the poor

in an affordable way. Financial Inclusion also is aiming at the same by

providing the poor with not only deposit accounts or credit but also insurance

and remittance facility.

As articulated by the Committee on Comprehensive Financial Services for

Small Businesses and Low Income Households (Mor Committee) in its report,

on both Financial Inclusion (defined as the spread of financial institutions and

financial services across the country) and Financial Depth (defined as the

percentage of credit to GDP at various levels of the economy) the overall

situation remains very poor and, on a regional and sectoral basis, very uneven.

While the Reserve Banks model for financial inclusion is essentially bank-led,

we believe that non-bank entities do have space to partner banks in the

financial inclusion initiatives. We have enabled non-bank entities as Business

Correspondents of banks to achieve the larger goal of financial inclusion. Since

September 2010, MFIs that are bank-SHGs, Trusts, Societies or Section 25

companies have been permitted to become Banking Correspondents (BCs). At

the same time several non-bank entities on their own are part and parcel of this

greater goal, for e.g. NBFC-MFIs that form the significant part of the MFI

sector have deeper reach in the rural areas. NBFC-MFIs do not formally figure

in the bank led model of financial inclusion but they by their wider and deeper

reach can be catalysts in providing the necessary handhold to the poor

borrowers to gain access to essential financial services.

While the new banks that are being envisaged would definitely give fillip to the

countrys financial inclusion initiatives, juxtaposing the humungous task of

complete financial inclusion against it also brings to focus the need for


41

exploring alternative ways to achieve the goal. The Mor Committee has

observed that each of the channels, be they large National Banks, regional

cooperative banks, or Non-Banking Financial Companies (NBFCs) have a great

deal of continuing value to add by focusing on its own differentiated

capabilities and accomplish the national goals of financial inclusion by

partnering with others that bring complementary capabilities to bear on the

problem.

Role of NBFCs in capital market

Investment activity of NBFC sector comprises around 16% of their total assets.

These constitute mainly investments in capital market. There are specialized

NBFCs that are exclusively engaged in capital market investment i.e. trading in

securities. These NBFCs therefore help in giving liquidity to the capital market.

Further, NBFCs also lend to investors for investing in capital market.

Regulatory challenges in this regard might come in the form of probable

overheating of the market, which could be addressed through appropriate

regulatory measures including enhanced disclosures.

Role of NBFCs in factoring

Factoring as defined in the Factoring Regulation Act, 2011 involves acquisition

of receivables (by a Factor) thereby getting entitled to undivided interest on the

receivables or financing against the security interest over any receivables but

does not include credit facilities provided by a bank in its ordinary course of

business against security of receivables. Subsequent to the notification of the

Factoring Regulation Act by the Government, Reserve Bank formed a new

category of NBFCs called NBFC-Factors and issued directions to them. NBFC-

Factors are almost exclusively engaged in providing factoring service.

Factoring service which is perceived as complimentary to bank finance is

expected to enable the availability of much needed working capital finance for

the small and medium scale industries especially those that have good quality


42

receivables but may not be in a position to obtain enough bank finance due to

lack of collateral or credit profile. By having a continuous business relationship

with the Factor in place, small traders, industries and exporters get the

advantage of improving the cash flow and liquidity of their business as also

availing ancillary services like sales ledger accounting, collection of

receivables, credit protection etc. Factoring helps them to free their resources

and have a one stop arrangement for various business needs enabling smooth

running of their business.

The Reserve Bank has recently also taken the initiative of mooting a Trade

Receivables and Credit Exchange for financing of Micro, Small and Medium

Enterprises, which is under development stage. The exchange will bring

together the MSMEs, the Factors and the corporate buyers under one platform

whereby MSMEs bills against large companies can be accepted electronically

and auctioned so that MSMEs are paid promptly. The objective is to build a

suitable institutional infrastructure which will not only enable an efficient and

cost effective factoring / reverse factoring process to be put in place, but also

ensure sufficient liquidity is created for all stakeholders through an active

secondary market for the same.

Role of NBFCs in vehicle financing / second hand vehicle

financing

Talking about the niche sectors that NBFCs cater to, vehicle financing

especially second hand vehicles need special mention. Certain NBFCs that are

classified as Asset Finance Companies have gained expertise in this segment

and play a significant role in providing a livelihood to customers who are

drivers. From the Reserve Banks side, to encourage the productive activity that

these NBFCs are engaged in, we have accorded certain additional dispensations

to them in the form of enhanced bank credit, higher exposure norm ceiling and

provision of ECB under automatic route for leasing related to infrastructure.


43

Role of NBFCs in infrastructure financing

Infrastructure Finance Companies and Infrastructure Debt Funds are NBFCs

exclusively into financing the infrastructure sector. Some of these companies

have asset books running to lakhs of crores of rupees and are experts in long

term project financing. Recognising their significance, the Reserve Bank has

given special dispensations in the form of enhanced bank credit, higher

exposure norm ceiling and provision of ECB under automatic route for on-

lending to infrastructure sector. The asset liability pattern however, is a matter

of concern in the case of IFCs as these are lending long term against

comparatively shorter term liabilities.

The Regulatory Challenges

So, you may wonder, if the NBFCs are performing such a wonderful service to the

economy, by being partners in financial inclusion, providing niche financing in the

areas like infrastructure, factoring, asset financing, etc. what is the concern that the

Reserve Bank can have? Why have you indicated in the title for this oration

"Regulatory Challenges", you may ask me. Let me explain.

The need for regulating the financial institutions arise primarily because of the high

leverage with which they operate that can cause financial instability, the asset liability

mismatch which can pose serious risks to the investors and depositors, and their

capacity to engender havoc to the real sectors of the economy.

Traditionally, regulation of banks has assumed greater importance than that of their

non-banking counterparts. One reason, of course, is that protection of depositors has

been traditionally an important mandate of banking supervisors. Banks are at the

centre of payment and settlement systems and monetary policy transmission takes

place through them. Banks play a critical role in credit intermediation through

maturity transformation, i.e. acceptance of short term liabilities and converting them

into long term assets viz. loans and advances. Along with economic value, this

function also creates potential liquidity risk. Moreover, banks also operate on a

significantly higher leverage compared to any other type of organisations which could

amplify their vulnerability. For all these reasons, banks are subject to a detailed and a


44

rigorous regulatory framework.

Non-banks also have depositors; these depositors also need some assurance about the

safety of their funds. Non-banks also lend their resources as loans and advances, thus

carrying out credit intermediation through maturity transformation and thereby

creating liquidity risk. Further non-banks also operate on a significantly higher

leverage than an ordinary commercial institution. Thus, when non - bank financial

entities undertake bank-like functions, large risks are created which could potentially

be destabilizing for the entire system. Moreover, the global financial crisis

demonstrated many ways in which shadow banking can have an impact on the global

financial system, both directly and through its interconnectedness with the regular

banking system, prompting the move to overhaul the regulation of shadow banking

system. Like banks, a leveraged and maturity-transforming shadow banking system

can also be vulnerable to "runs" and generate contagion, thereby amplifying systemic

risk. Shadow banking can also heighten pro-cyclicality by accelerating credit supply

and asset price increases during upswings and exacerbating fall in asset prices during

downswings. These effects were powerfully revealed during the global financial crisis

in the form of dislocation of asset-backed commercial paper (ABCP) markets, the

failure of an originate-to-distribute model employing structured investment vehicles

(SIVs) and conduits, "runs" on MMFs and a sudden reappraisal of the terms on which

securities lending and repos were conducted.

Now you may say "Yes, we agree that the NBFCs need to be regulated. But, why are

you saying that there are challenges? Don't you have the law enabling you to regulate

them?"

Yes, we have the law. And it has evolved over the time.

The challenges today are as follows:

First, there are law related challenges

There are a number of companies that are registered as finance companies, but

are not regulated by the Reserve Bank,

There are unincorporated bodies who undertake financial activities and remain

unregulated,


45

There are incorporated companies and unincorporated entities illegally

accepting deposits,

There are entities who camouflage deposits in some other names and thus

illegally accepting deposits. The law as it stands today is inadequate to deal

with these issues.

In order to correct these and initiate action against violations, we need to bring in

suitable amendments to the statutory provisions. Reserve Bank is working with the

government for such improvements in the law.

Secondly, as the entities, especially the unincorporated ones, can sprung in any

nook and corner of the country and can operate with impunity unnoticed, but

endangering their customers interest, we need arrangements and structured for

effective market intelligence gathering. The Reserve Bank is restructuring its

organisational setup, especially in its regional offices, for gathering market

intelligence.

Thirdly, empowering law and gathering intelligence by themselves are not

sufficient. Enforcement of the law is a challenge. This is primarily because of

the various agencies involved in regulating the non-banking financial activities

of entities. Right from the central government ministries like finance and

corporate affairs, agencies like CBI and FIU-IND, regulatory agencies like the

Reserve Bank, SEBI, the Registrar of Companies, the state government

agencies like the police and others, all have to share information and coordinate

and cooperate to bring in an effective, timely and unified enforcement of the

law. The Reserve Bank's State Level Coordination Committees (SLCC) are

being strengthened and a National level Coordination Committee is also being

considered.

Fourthly, as was mentioned earlier, world over there is an increasing demand

that the shadow banks be brought under tighter regulations. G-20 has already

expressed it as a mission to be achieved by 2015. In our case, bringing them

under regulation is not the issue, as they already are. The challenge for us is

how differentially or how closely we should regulate the NBFCs? The demand

from the NBFC sector is that they should be subjected to light touch regulation.


46

As mentioned earlier, NBFCs were brought under regulatory ambit of the

Reserve Bank since 1963; we brought them under prudential regulatory

framework since 1997. Nevertheless, the NBFC sector came under pressure

during the 2008 crisis due to the funding inter-linkages among NBFCs, mutual

funds and commercial banks. NBFCs-ND-SI relied significantly on short term

funding sources such as debentures (largely non - convertible short term

debentures), and CPs, which constituted around 56.8 percent of the total

borrowings of NBFCs-ND-SI as on September 30, 2008. These funds were

used to finance assets which were reportedly largely a mix of long term assets,

including hire purchase and lease assets, long term investments, and investment

in real estate by few companies, and loans and advances.


47

14. Contribution of NBFCs in the Economy of India

Development of sectors like Transport & Infrastructure.

Substantial employment generation

Help & increase wealth creation.

Broad base economic development.

Irreplaceable supplement to bank credit in rural segments.

Major thrust on semi-urban, rural areas & first time buyers / users.

To finance economically weaker sections.

Huge contribution to the State exchequer.


48

15. Banking Expansion

Starting in the late 1960s, India was the home to one of the largest state interventions

in the rural credit market. This phase is known as the ―Social Banking phase.

It witnessed the nationalization of existing private commercial banks, massive

expansion of branch network in rural areas, mandatory directed credit to priority

sectors of the economy, subsidized rates of interest and creation of a new set of

regional rural banks (RRBs) at the district level and a specialized apex bank for

agriculture and rural development (NABARD) at the national level.

The Net State Domestic Product (NSDP) is a measure of the economic activity in the

state and comparing it with the utilization of bank credit or bank deposits indicates

how much economic activity is being financed by the banks and whether there exists

untapped potential for increasing deposits in that state.

E.g. In the year 2003-2004 the percentage of bank deposits to NSDP is pretty high at

around 75%-80% in Bihar and Jharkhand or these states are not as under banked as

thought to be.


49

16. Microfinance Social Aspects

Micro financing institutions significantly contributed to gender equality and women‘s

empowerment as well as pro poor development and civil society strengthening.

Contribution to women‘s ability to earn an income led to their economic

empowerment, increased well being of women and their families and wider social and

political empowerment.

Microfinance programs targeting women became a major plank of poverty alleviation

and gender strategies in the 1990s. Increasing evidence of the centrality of gender

equality to poverty reduction and women‘s higher credit repayment rates led to a

general consensus on the desirability of targeting women.

India to-day has an extensive banking infrastructure comprising over 30,000 rural and

semi-urban branches of commercial banks, over 14,000 branches of Regional Rural

banks (RRBs), around 12,000 branches of District Cooperative Credit Banks

(DCCBs) and 1,12,000 Primary Agricultural Credit Societies (PACS) at the village

level (around 66,000 PACS are stated to be functional; the remaining are dormant).

Availability of finance, moreover, tilts the employment scenario in favour of self-

employment vis-à-vis wage employment. An added dimension is the empowerment of

women with easier availability of micro-finance to them. Going by the estimates

provided earlier, the demand for production credit in the country today is equal to

Rs.17000 crore per annum whereas the total credit outstanding under micro-finance is

merely Rs.5000 crore. Thus, there is definitely a need to increase the flow of credit,

both for consumption and Production to the rural sector.


50

17. Major initiatives in Rural Credit

Government‘s initiative to reduce poverty by improving access to financial services to

poor started since independence. India’s overwhelming majority of poor is located in

rural areas and this motivated the government to give special attention to rural credit.

Following the report of All India Rural Credit Survey in mid 1950‘s, the State took

crucial steps in reviewing Cooperative structure including the partnership of State in

cooperatives. Also the policy initiative of ‗social banking‘ concept described as ―the

elevation of the entitlements of previously disadvantaged groups to formal credit even

if this may entail a weakening of the conventional banking practices led to the

nationalisation of commercial banks in 1969, adoption of direct lending programmes

to rural areas and development of credit institutions such as Regional Rural Banks

(RRBs). Government initiatives during the Fourth Plan focused on marginal farmers

and agricultural labourers bringing individual family as the basic borrowing unit.

Integrated sustainable income generating activity was promoted through subsidized

lending under Integrated Rural Development Programme (IRDP) and its subsequent

variations including the current self-employment programme known as Swaranjayanti

Gram Swarozgar Yojana (SGSY)

17.1 SEWA CO-OPERATIVE BANK (1974) The implementation of formal lending programmes towards the poor suffer from the

difficulties such as of exact targeting, screening problems of distinguishing good and

bad borrowers and usually lending agencies won‘t be able to ensure the productive

usage of loans. Also, the high transaction costs incurred in lending to the poor made

the formal lending agencies leave the poor un-banked.

The Indian cooperative credit structure meant to empower the poor was not very

successful as it was captured by a few powerful and because of excessive

governmental interference and regulation. The search for an alternative to the formal

banking sector and an effective financial system to cater to the needs of the poor,


51

especially the rural poor, continued. The origin of microfinance can be traced to the

establishment of the SEWA cooperative bank in 1974, to provide banking services to

the poor women employed in the unorganised sector in Ahmedabad in Gujarat.

17.2 Self Help Groups (SHGs) Government initiatives during seventies and the Fourth Five Year Plan focused on

small and marginal farmers and agricultural labourers. Integrated sustainable income

generation activity was promoted under Integrated Rural Development Programme.

Inadequacies inherent in running programs focussed on individual households called

for shift to a group based approach. The first step towards setting up self help groups

(SHGs) was taken by MYRADA and it built upon rural chit funds and informal

lending networks to evolve a credit management group.

17.3 National Bank for Agriculture and Rural Development

In 19991-92, NABARD launched the SHG-Bank Linkage Programme on a pilot basis

to finance SHGs across the country through the formal banking system. High

repayment rates by the SHGs encouraged the banks to finance SHGs.

17.4 Rashtriya Mahila Kosh (RMK),1993 The success of the concept of micro - credit through self help groups (SHGs) has

encouraged the Government of India to establish a National level Micro Credit

organization/Rashtriya Mahila Kosh (RMK) (National Credit Fund for Women) under

the Ministry of Women and Child Development in 1993, with an initial corpus of

Rs.31 crore. The objective was to help women organise income generating activities to

improve their socio economics status. RMK had disbursed cumulative loan of Rs 151

crore up to July 2012, benefiting 5.50 lakh women and the recovery rate is above 91%.

17.5 Small Industries Development Bank of India (SIDBI), 1994


52

In 1994, Small Industries Development Bank of India (SIDBI) launched a pilot

scheme to provide financial assistance by way of loans to NGO‘s for providing credit

to the poor households, especially women. A small amount of grant also accompanied

the loans so as to build capacity of the intermediates and end-users. The programme

did not achieve the desired objective. A large number of NGOs were not able to up

scale their lending operations because of difficulties like interest rate cap on lending,

security stipulations etc. SIDBI reoriented its Micro Finance Programme in 1999 by

addressing the weakness of the pilot scheme, with an objective to create a national

network of large and viable Micro Finance Institutions from the formal and informal

sector. The programme provides need based assistance by way of term loans to

partner institutions for meeting their on lending fund requirements. Its programme

took off slowly. The bank was able to improve its portfolio by 100% each year for the

last three years in a row. It had sanctioned Rs.320 crore financial assistance during

2006 as against Rs 189.73 crore during 2011.

17.6 SHG-Bank Linkage Programme (1996) In 1996, Reserve Bank of India included financing of SHGs as a main stream activity

of banks under the priority sector lending programmes. The SHG Bank linkage

programme covered over 24.3 million families by March 2005. Under the Bank-SHG

Linkage Programme 2.24 millionSHGs were linked, up to 31st March 2012, of which

90 percent are women‘s groups.

17.7 Microfinance Development and Equity Fund (MD & EF), 2001 Government of India, in 2001 re-designated the existing Micro Finance Development

Fund as Micro Finance Development and Equity Fund with the objective of

facilitating and supporting the orderly growth of the microfinance sector, by especially

assisting the women and vulnerable sections of the society and also by supporting

their capacity building. The size of the fund was also enhanced form the existing

Rs.100 crore to Rs.200 crore. The additional amount was to be contributed by Reserve

Bank of India, NABARD and the commercial banks in the proportion 40:20:20.


53

18. Self Help Groups (SHGs)

Self- help groups (SHGs) play today a major role in poverty alleviation in rural India.

A growing number of poor people (mostly women) in various parts of India are

members of SHGs and actively engage in savings and credit (S/C), as well as in other

activities (income generation, natural resources management, literacy, child care and

nutrition, etc.). The S/C focus in the SHG is the most prominent element and offers a

chance to create some control over capital, albeit in very small amounts. The SHG

system has proven to be very relevant and effective in offering women the possibility

to break gradually away from exploitation and isolation.

How self-help groups work

NABARD (1997) defines SHGs as "small, economically homogenous affinity groups

of rural poor, voluntarily formed to save and mutually contribute to a common fund to

be lent to its members as per the group members' decision".

Most SHGs in India have 10 to 25 members, who can be either only men, or only

women, or only youth, or a mix of these. As women's SHGs or sangha have been

promoted by a wide range of government and non- governmental agencies, they now

make up 90% of all SHGs.

The rules and regulations of SHGs vary according to the preferences of the members

and those facilitating their formation. A common characteristic of the groups is that

they meet regularly (typically once per week or once per fortnight) to collect the

savings from members, decide to which member to give a loan, discuss joint activities

(such as training, running of a communal business, etc.), and to mitigate any conflicts

that might arise. Most SHGs have an elected chairperson, a deputy, a treasurer, and

sometimes other office holders.

Most SHGs start without any external financial capital by saving regular contributions

by the members. These contributions can be very small (e.g. 10 Rs per week). After a

period of consistent savings (e.g. 6 months to one year) the SHGs start to give loans

from savings in the form of small internal loans for micro enterprise activities and


54

consumption. Only those SHGs that have utilized their own funds well are assisted

with external funds through linkages with banks and other financial intermediaries.

However, it is generally accepted that SHGs often do not include the poorest of the

poor, for reasons such as:

(a) Social factors (the poorest are often those who are socially marginalized because

of caste affiliation and those who are most skeptical of the potential benefits of

collective action).

(b) Economic factors (the poorest often do not have the financial resources to

contribute to the savings and pay membership fees; they are often the ones who

migrate during the lean season, thus making group membership difficult).

(c) Intrinsic biases of the implementing organizations (as the poorest of the poor

are the most difficult to reach and motivate, implementing agencies tend to leave them

out, preferring to focus on the next wealth category).

Sources of capital and links between SHGs and Banks SHGs can only fulfill a role in the rural economy if group members have access to

financial capital and markets for their products and services. While the groups initially

generate their own savings through thrift (whereby thrift implies savings created by

postponing almost necessary consumption, while savings imply the existence of

surplus wealth), their aim is often to link up with financial institutions in order to

obtain further loans for investments in rural enterprises. NGOs and banks are giving

loans to SHGs either as "matching loans" (whereas the loan amount is proportionate to

the group's savings) or as fixed amounts, depending on the group's record of

repayment, recommendations by group facilitators, collaterals provided, etc.


55

How SHGs save

Self-help groups mobilize savings from their members, and may then on-lend these

funds to one another, usually at apparently high rates of interest which reflect the

members‘ understanding of the high returns they can earn on the small sums invested

in their micro-enterprises, and the even higher cost of funds from money lenders. If

they do not wish to use the money, they may deposit it in a bank. If the members‘

need for funds exceeds the group‘s accumulated savings, they may borrow from a

bank or other organization, such as a micro-finance non-government organization, to

augment their own fund.

The system is very flexible. The group aggregates the small individual saving and

borrowing requirements of its members, and the bank needs only to maintain one

account for the group as a single entity. The banker must assess the competence and

integrity of the group as a micro-bank, but once he has done this he need not concern

himself with the individual loans made by the group to its members, or the uses to

which these loans are put. He can treat the group as a single customer, whose total

business and transactions are probably similar in amount to the average for his normal

customers, because they represent the combined banking business of some twenty

‗micro-customers‘. Any bank branch can have a small or a large number of such

accounts, without having to change its methods of operation.

Unlike many customers, demand from SHGs is not price-sensitive. Illiterate village

women are sometimes better bankers than some with more professional qualifications.

They know that rapid access to funds is more important than their cost, and they also

know, even though they might not be able to calculate the figures, that the typical

micro-enterprise earns well over 500% return on the small sum invested in it (Harper,

M, 1997, p. 15). The groups thus charge themselves high rates of interest; they are

happy to take advantage of the generous spread that the NABARD subsidized bank

lending rate of 12% allows them, but they are also willing to borrow from NGO/MFIs

which on-lend funds from SIDBI at 15%, or from ‗new generation‘ institutions such

as Basix Finance at 18.5% or 21%.


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SHGs-Bank Linkage Model

NABARD is presently operating three models of linkage of banks with SHGs and

NGOs:

Model – 1: In this model, the bank itself acts as a Self Help Group Promoting

Institution (SHPI). It takes initiatives in forming the groups, nurtures them over a

period of time and then provides credit to them after satisfying itself about their

maturity to absorb credit. About 16% of SHGs and 13% of loan amounts are using

this model (as of March 2002).

Model – 2: In this model, groups are formed by NGOs (in most of the cases) or by

government agencies. The groups are nurtured and trained by these agencies. The

bank then provides credit directly to the SHGs, after observing their operations and

maturity to absorb credit. While the bank provides loans to the groups directly, the

facilitating agencies continue their interactions with the SHGs. Most linkage

experiences begin with this model with NGOs playing a major role. This model has

also been popular and more acceptable to banks, as some of the difficult functions of

social dynamics are externalized. About 75% of SHGs and 78% of loan amounts are

using this model.

Model – 3: Due to various reasons, banks in some areas are not in a position to even

finance SHGs promoted and nurtured by other agencies. In such cases, the NGOs act

as both facilitators and microfinance intermediaries. First, they promote the groups,

nurture and train them and then approach banks for bulk loans for on-lending to the

SHGs. About 9% of SHGs and 13% of loan amounts are using this model.


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Life insurances for self-help group members The United India Insurance Company has designed two PLLIs (personal line life

insurances) for women in rural areas. The company will be targeting self-help groups,

of which there are around 200,000 in the country, with 15-20 women in a group. The

two policies are

(1) the Mother Teresa Women & Children Policy, with the aim of giving to the

woman in the event of accidental death of her husband and to support her minor

children in the event of her death, and

(2) The Unimicro Health Scheme, giving personal accident and hospitalization covers

besides cover for damage to dwelling due to fire and allied perils.

Source: http://www.hinduonnet.com/2002/12/05/stories/2002120501172100.htm


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19. Micro Finance Models

19.1 Micro Finance Institutions (MFIs): MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and

cooperatives. They are provided financial support from external donors and apex

institutions including the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for

micro-credit and NABARD and employ a variety of ways for credit delivery.

Since 2000, commercial banks including Regional Rural Banks have been providing

funds to MFIs for on lending to poor clients. Though initially, only a handful of NGOs

were ―into‖ financial intermediation using a variety of delivery methods, their

numbers have increased considerably today. While there is no published data on

private MFIs operating in the country, the number of MFIs is estimated to be around

800.

Table 6: Legal Forms of MFIs in India

Source: NABARD website

Types Of MFIs Estimated

Number* Legal Acts under which Registered

1. NOT FOR PROFIT MFIs

a.) NGO – MFIs

400 to 500 Societies RegistrationAct,1860or similar

Provincial Acts Indian Trust Act, 1882

b.) Non-profit

Companies

10 Section 25 of the Companies Act, 1956

2.MUTUAL BENEFIT

MFIs

a.) Mutually Aided

cooperative Societies

(MACS)

200 to 250 Mutually Aided Cooperative Act enacted

by the State Govt.

3. FOR PROFIT MFI

a.) NBFC- Non Banking

Financial Institution

6 Indian Companies Act, 1986 and Reserve

Bank of India, 1934

TOTAL 700-800


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19.2 Bank Partnership Model This model is an innovative way of financing MFIs. The bank is the lender and the

MFI acts as an agent for handling items of work relating to credit monitoring,

supervision and recovery. In other words, the MFI acts as an agent and takes care of

all relationships with the client, from first contact to final repayment. The model has

the potential to significantly increase the amount of funding that MFIs can leverage on

a relatively small equity base.

A sub - variation of this model is where the MFI, as an NBFC, holds the individual

loans on its books for a while before securitizing them and selling them to the bank.

Such refinancing through securitization enables the MFI enlarged funding access. If

the MFI fulfils the ―true sale‖ criteria, the exposure of the bank is treated as being to

the individual borrower and the prudential exposure norms do not then inhibit such

funding of MFIs by commercial banks through the securitization structure.

19.3 Banking Correspondents The proposal of ―banking correspondents‖ could take this model a step further

extending it to savings. It would allow MFIs to collect savings deposits from the poor

on behalf of the bank. It would use the ability of the MFI to get close to poor clients

while relying on the financial strength of the bank to safeguard the deposits. This

regulation evolved at a time when there were genuine fears that fly-by-night agents

purporting to act on behalf of banks in which the people have confidence could

mobilize savings of gullible public and then vanish with them. It remains to be seen

whether the mechanics of such relationships can be worked out in a way that

minimizes the risk of misuse.


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19.4 Service Company Model Under this model, the bank forms its own MFI, perhaps as an NBFC, and then works

hand in hand with that MFI to extend loans and other services. On paper, the model is

similar to the partnership model: the MFI originates the loans and the bank books

them. But in fact, this model has two very different and interesting operational

features:

(a) The MFI uses the branch network of the bank as its outlets to reach clients. This

allows the client to be reached at lower cost than in the case of a stand–alone MFI. In

case of banks which have large branch networks, it also allows rapid scale up. In the

partnership model, MFIs may contract with many banks in an arms length

relationship. In the service company model, the MFI works specifically for the bank

and develops an intensive operational cooperation between them to their mutual

advantage.

(b) The Partnership model uses both the financial and infrastructure strength of the

bank to create lower cost and faster growth. The Service Company Model has the

potential to take the burden of overseeing microfinance operations off the

management of the bank and put it in the hands of MFI managers who are focused on

microfinance to introduce additional products, such as individual loans for SHG

graduates, remittances and so on without disrupting bank operations and provide a

more advantageous cost structure for microfinance.


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20. Role, Functions and Working Mechanism of Financial Institutions

20.1 ICICI Bank ICICI‘s microfinance portfolio has been increasing at an impressive speed. From

10,000 microfinance clients in 2001, ICICI Bank is now (2005) lending to 1.2 million

clients through its partner microfinance institutions, and its outstanding portfolio has

increased from Rs. 0.20 billion (US$4.5 million) to Rs. 9.98 billion (US$227 million).

A few years ago, these clients had never been served by a formal lending institution.

There is an increasing shift in the microfinance sector from grant-giving to investment

in the form of debt or equity, and ICICI believes grant money should be limited to the

creation of facilitative infrastructure. ―We need to stop sending government and

funding agencies the signal that microfinance is not a commercially viable system‖,

says Nachiket Mor, Executive Director of ICICI Bank.

As a result of banks entering the game, the sector has changed rapidly. ―There is no

dearth of funds today, as banks are looking into MFIs favorably, unlike a few years

ago‖, says Padmaja Reddy, the CEO of one of ICICI Bank‘s major MFI partners,

Spandana.

Partnership Models A model of microfinance has emerged in recent years in which a microfinance

institution (MFI) borrows from banks and on-lends to clients; few MFIs have been

able to grow beyond a certain point. Under this model, MFIs are unable to provide

risk capital in large quantities, which limits the advances from banks. In addition, the

risk is being entirely borne by the MFI, which limits its risk-taking.


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The MFI as Collection Agent To address these constraints, ICICI Bank initiated a partnership model in 2002 in

which the MFI acts as a collection agent instead of a financial intermediary. This

model is unique in that it combines debt as mezzanine finance to the MFI (Mezzanine

finance combines debt and equity financing: it is debt that can be converted by the

lender into equity in the event of a default. This source of financing is advantageous for MFIs because it is treated like equity in

the balance-sheet and enables it to raise money without additional equity, which is an

expensive financing source.).The loans are contracted directly between the bank and

the borrower, so that the risk for the MFI is separated from the risk inherent in the

portfolio. This model is therefore likely to have very high leveraging capacity, as the

MFI has an assured source of funds for expanding and deepening credit. ICICI chose

this model because it expands the retail operations of the bank by leveraging

comparative advantages of MFIs, while avoiding costs associated with entering the

market directly.

Securitization Another way to enter into partnership with MFIs is to securitize microfinance

portfolios. In 2004, the largest ever securitization deal in microfinance was signed

between ICICI Bank and SHARE Microfin Ltd, a large MFI operating in rural areas

of the state of Andra Pradesh. Technical assistance and the collateral deposit of

US$325,000 (93% of the guarantee required by ICICI) were supplied by Grameen

Foundation USA. Under this agreement, ICICI purchased a part of SHARE‘s

microfinance portfolio against a consideration calculated by computing the Net

Present Value of receivables amounting to Rs. 215 million (US$4.9 million) at an

agreed discount rate. The interest paid by SHARE is almost 4% less than the rate paid

in commercial loans. Partial credit provision was provided by SHARE in the form of a

guarantee amounting to 8% of the receivables under the portfolio, by way of a lien on

fixed deposit. This deal frees up equity capital, allowing SHARE to scale up its

lending. On the other hand, it allows ICICI Bank to reach new markets. And by

trading this high quality asset in capital markets, the bank can hedge its own risks.


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Beyond Microcredit Microfinance does not only mean microcredit, and ICICI does not limit itself to

lending. ICICI‘s Social Initiative Group, along with the World Bank and ICICI

Lombard, the insurance company set up by ICICI and Canada Lombard, have

developed India‘s first index-based insurance product. This insurance policy

compensates the insured against the likelihood of diminished agricultural output/yield

resulting from a shortfall in the anticipated normal rainfall within the district, subject

to a maximum of the sum insured. The insurance policy is linked to a rainfall index.

Technology One of the main challenges to the growth of the microfinance sector is accessibility.

The Indian context, in which 70% of the population lives in rural areas, requires new,

inventive channels of delivery. The use of technologies such as kiosks and smart cards

will considerably reduce transaction costs while improving access. The ICICI Bank

technology team is developing a series of innovative products that can help reduce

transaction costs considerably. For example, it is piloting the usage of smart cards

with Sewa Bank in Ahmedabad. To maximize the benefits of these innovations, the

development of a high quality shared banking technology platform which can be used

by MFIs as well as by cooperatives banks and regional rural banks is needed. ICICI is

strongly encouraging such an effort to take place. Wipro and Infosys, I-Flex,

3iInfotech, some of the best Indian information technology companies specialized in

financial services, and others, are in the process of developing exactly such a platform.

At a recent technology workshop at the Institute for Financial Management Research

in Chennai, the ICICI Bank Alternate Channels Team presented the benefits of

investing in a common technology platform similar to those used in mainstream

banking to some of the most promising MFIs.


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The Centre for Microfinance Research ICICI bank has created the Centre for Microfinance Research (CMFR) at the Institute

for Financial Management Research (IFMR) in Chennai. Through research, research-

based advocacy, high level training and strategy building, it aims to systematically

establish the links between increased access to financial services and the participation

of poor people in the larger economy. The CMFR Research Unit supports initiatives

aimed at understanding and analyzing the following issues: impact of access to

financial services; contract and product designs; constraints to household productivity;

combination of microfinance and other development interventions; evidence of credit

constraints; costs and profitability of microfinance organizations; impact of MFI

policies and strategies; people‘s behavior and psychology with respect to financial

services; economics of micro-enterprises; and the effect of regulations.

Finally, the CMFR recognizes that while MFIs aim to meet the credit needs of poor

households, there are other missing markets and constraints facing households, such

as healthcare, infrastructure, and gaps in knowledge. These have implications in terms

of the scale and profitability of client enterprises and efficiency of household budget

allocation, which in turn impacts household well-being. The CMFR Microfinance

Strategy Unit will address these issues through a series of workshops which will bring

together MFI practitioners and sectoral experts (in energy, water, roads, health, etc).

The latter will bring to the table knowledge of best practices in their specific areas,

and each consultation workshop will result in long-term collaboration between with

MFIs for implementing specific pilots


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20.2 Bandhan Bandhan is working towards the twin objective of poverty alleviation and women

empowerment. It started as a Capacity Building Institution (CBI) in November 2000

under the leadership of Mr. Chandra Shekhar Ghosh. During such time, it was giving

capacity building support to local microfinance institutions working in West Bengal.

Bandhan opened its first microfinance branch at Bagnan in Howrah district of West

Bengal in July 2002. Bandhan started with 2 branches in the year 2002-03 only in the

state of West Bengal and today it has grown as strong as 412 branches across 6 states

of the country! The organization had recorded a growth rate of 500% in the year 2003-

04 and 611% in the year 2004-05. Till date, it has disbursed a total of Rs. 587 crores

among almost 7 lakh poor women. Loan outstanding stands at Rs. 221 crores. The

repayment rate is recorded at 99.99%. Bandhan has staff strength of more than 2130

employees.

Operational Methodology Bandhan follows a group formation, individual lending approach. A group of 10-25

members are formed. The clients have to attend the group meetings for 2 successive

weeks. 2 weeks hence, they are entitled to receive loans. The loans are disbursed

individually and directly to the members.

Economic and Social Background of Clients

Landless and asset less women

Family of 5 members with monthly income less than Rs. 2,500 in rural

and Rs. 3,500 in urban

Those who do not own more than 50 decimal (1/2acre) of land or capital

of its equivalent value


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Loan Size The first loan is between Rs. 1,000 – Rs. 7,000 for the rural areas and between Rs.

1,000 – Rs. 10,000 for the urban areas. After the repayment, they are entitled to

receive a subsequent loan which is Rs 1,000 - 5,000 more than the previous loan.

Service Charge Bandhan charges a service charge of 12.50% flat on loan amount. Bandhan initially

charged 17.50%. However from 1st July 2005, it has slashed down its lending rate to

15.00%. Then it was further reduced to 12.50% in May 2006. The reason is obvious.

As overall productivity increased, operational costs decreased. Bandhan, being a non

profit organization wanted the benefit of low costs to ultimately trickle down to the

poor.

Monitoring System The various features of the monitoring system are:

A 3 tier monitoring system – Region, Division and Head Office

Easy reporting system with a prescribed checklist format

Accountability at all levels post monitoring phase

Cross- checking at all the levels

The management team of Bandhan spends 90.00% of time at the field

Liability structure for Loans When a member wants to join Bandhan, she at first has to get inducted into a group.

After she gets inducted into the group, the entire group proposes her name for a loan

in the Resolution Book. Two members of the group along with the member‘s husband

have to sign as guarantors in her loan application form. If she fails to pay her weekly

installment, the group inserts peer pressure on her. The sole purpose of the above

structure is simply to create peer pressure.


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20.3 Grameen Bank

The Grameen Model which was pioneered by Prof Muhammed Yunus of Grameen

Bank is perhaps the most well known, admired and practised model in the world. The

model involves the following elements.

Homogeneous affinity group of five

Eight groups form a Centre

Centre meets every week

Regular savings by all members

Loan proposals approved at Centre meeting

Loan disbursed directly to individuals

All loans repaid in 50 instalments

The Grameen model follows a fairly regimented routine. It is very cost intensive as it

involves building capacity of the groups and the customers passing a test before the

lending could start. The group members tend to be selected or at least strongly vetted

by the bank. One of the reasons for the high cost is that staff members can conduct

only two meetings a day and thus are occupied for only a few hours, usually early

morning or late in the evening. They were used additionally for accounting work, but

that can now be done more cost effectively using computers. The model is also rather

meeting intensive which is fine as long as the members have no alternative use for

their time but can be a problem as members go up the income ladder.

The greatness of the Grameen model is in the simplicity of design of products and

delivery. The process of delivery is scalable and the model could be replicated widely.

The focus on the poorest, which is a value attribute of Grameen, has also made the

model a favourite among the donor community.

However, the Grameen model works only under certain assumptions. As all the loans

are only for enterprise promotion, it assumes that all the poor want to be self-

employed. The repayment of loans starts the week after the loan is disbursed – the


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inherent assumption being that the borrowers can service their loan from the ex-ante

income.

20.4 SKS Microfinance Many companies say they protect the interests of their customers. Very few actually

sit in dirt with them, using stones, flowers, sticks, and chalk powder to figure out if

they will be able to repay a $20 loan at $1 a month. With this approach, this company

has created its own loyal gang of over 2 million customers. Its borrowers include agricultural laborers, mom-and-pop entrepreneurs, street

vendors, home based artisans, and small scale producers, each living on less than $2 a

day. It works on a model that would allow micro-finance institutions to scale up

quickly so that they would never have to turn poor person away.

Its model is based on 3 principles-

1. Adopt a profit-oriented approach in order to access commercial

capital- Starting with the pitch that there is a high entrepreneurial spirit

amongst the poor to raise the funds, SKS converted itself to for-profit status as

soon as it got break even and got philanthropist Ravi Reddy to be a founding

investor. Then it secured money from parties such as Unitus, a Seattle based

NGO that helps promote micro-finance; SIDBI; and technology entrepreneur

Vinod Khosla. Later, it was able to attract multimillion dollar lines of credit

from Citibank, ABN Amro, and others.

2. Standardize products, training, and other processes in order to

boost capacity-They collect standard repayments in round numbers of 25 or

30 rupees. Internally, they have factory style training models. They enroll

about 500 loan officers every month. They participate in theory classes on

Saturdays and practice what they have learned in the field during the week.

They have shortened the training time for a loan officer to 2 months though the

average time taken by other industry players is 4-6 months.


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3. Use Technology to reduce costs and limit errors- It could not find

the software that suited its requirements, so it they built their own simple and

user friendly applications

that a computer-illiterate loan officer with a 12th grade education can easily

understand. The system is also internet enabled. Given that electricity is

unreliable in many areas they have installed car batteries or gas powered

generators as back-ups in many areas.

Scaling up Customer Loyalty

Instead of asking illiterate villagers to describe their seasonal pattern of cash flows,

they encourage them to use colored chalk powder and flowers to map out the

village on the ground and tell where the poorest people lived, what kind of

financial products they needed, which areas were lorded over by which loan

sharks, etc. They set people‘s tiny weekly repayments as low as $1 per week and

health and whole life insurance premiums to be $10 a year and 25 cents per week

respectively. They also offer interest free emergency loans. The salaries of loan

officers are not tied to repayment rates and they journey on mopeds to borrowers‘

villages and schedule loan meetings as early as 7.00 A.M. Deep customer loyalty

ultimately results in a repayment rate of 99.5%.

Leveraging the SKS brand Its payoff comes from high volumes. They are growing at 200% annually, adding

50 branches and 1,60,000 new customers a month. They are also using their deep

distribution channels for selling soap, clothes, consumer electronics and other

packaged goods.


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21. Marketing of Microfinance Products

1. Contract Farming and Credit Bundling Banks and financial institutions have been partners in contract farming schemes, set

up to enhance credit. Basically, this is a doable model. Under such an arrangement,

crop loans can be extended under tie-up arrangements with corporate for production

of high quality produce with stable marketing arrangements provided – and only,

provided – the price setting mechanism for the farmer is appropriate and fair.

2. Agri Service Centre – Rabo India

Rabo India Finance Pvt Ltd. has established agri-service centres in rural areas in

cooperation with a number of agri-input and farm services companies. The services

provided are similar to those in contract farming, but with additional flexibility and a

wider range of products including inventory finance. Besides providing storage

facilities, each centre rents out farm machinery, provides agricultural inputs and

information to farmers, arranges credit, sells other services and provides a forum for

farmers to market their products.

3. Non Traditional Markets Similarly, Mother Dairy Foods Processing, a wholly owned subsidiary of National

Dairy Development Board (NDDB) has established auction markets for horticulture

producers in Bangalore. The operations and maintenance of the market is done by

NDDB. The project, with an outlay of Rs.15 lakh, covers 200 horticultural farmers

associations with 50,000 grower members for wholesale marketing. Their produce is

planned with production and supply assurance and provides both growers and buyers

a common platform to negotiate better rates.


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4 Apni Mandi

Another innovation is that of The Punjab Mandi Board, which has experimented with

a farmers‘ market‘ to provide small farmers located in proximity to urban areas, direct

access to consumers by elimination of middlemen. This experiment known as "Apni

Mandi" belongs to both farmers and consumers, who mutually help each other. Under

this arrangement a sum of Rs. 5.2 lakh is spent for providing plastic crates to 1000

farmers. Each farmer gets 5 crates at a subsidized rate. At the mandi site, the Board

provides basic infrastructure facilities. At the farm level, extension services of different agencies are pooled in. These include

inputs subsidies, better quality seeds and loans from Banks. Apni Mandi scheme

provides self-employment to producers and has eliminated social inhibitions among

them regarding the retail sale of their produce.


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22. Conclusion

To conclude, I may say that the challenge therefore for the NBFC sector is to grow

in a prudential manner while not stopping altogether on financial innovations. The

key lies in having in place adequate risk management systems and procedures

before entering into risky areas. As for the regulator, it is the constant endeavour of

Reserve Bank to enable prudential growth of the sector, keeping in view the

multiple objectives of financial stability, consumer and depositor protection, and

need for more players in the financial market, addressing regulatory arbitrage

concerns while not forgetting the uniqueness of NBFC sector. The Bank presently

is in the process of reviewing the regulatory framework for NBFCs in the context

of recent developments including the Nachiket Mor Committee and others.

NBFCs are gaining momentum in last few decades with wide variety of products

and services. NBFCs collect public funds and provide loan able funds. There has

been significant increase in such companies since 1990s. They are playing a vital

role in the development financial system of our country. The banking sector is

financing only 40 per cent to the trading sector and rest is coming from the NBFC

and private money lenders. At the same line 50 per cent of the credit requirement

of the manufacturing is provided by NBFCs. 65 per cent of the private construction

activities was also financed by NBFCs. Now they are also financing second hand

vehicles. NBFCs can play a significant role in channelizing the remittance from

abroad to states such as Gujarat and Kerala.

NBFCs in India have become prominent in a wide range of activities like hire

purchase finance, equipment lease finance, loans, investments, and so on. NBFCs

have greater reach and flexibility in tapping resources. In desperate times, NBFCs

could survive owing to their aggressive character and customized services. NBFCs

are doing more fee-based business than fund based. They are focusing now on

retailing sector-housing finance, personal loans, and marketing of insurance. Many

of the NBFCs have ventured into the domain of mutual funds and insurance.

NBFCs undertake both life and general insurance business as joint venture

participants in insurance companies. The strong NBFCs have successfully emerged

as ‘Financial Institutions’ in short span of time and are in the process of converting


73

themselves into ‘Financial Super Market’. The NBFCs are taking initiatives to

establish a self-regulatory organization (SRO). At present, NBFCs are represented

by the Association of Leasing and Financial Services (ALFS), Federation of India

Hire Purchase Association (FIHPA) and Equipment Leasing Association of India

(ELA). The Reserve Bank wants these three industry bodies to come together

under one roof. The Reserve Bank has emphasis on formation of SRO Particularly

for the benefit of smaller NBFCs. Thus to conclude in the view of above NBFCs

play a important role in economic development The basic idea of micro financing

is simple- if poor are provided access to financial services, including credit, they

may very well be able to start a expand a micro enterprise that will allow them to

break out of poverty. In totality, its focus is on eradication of poverty form grass

level, women upliftment, creating small and medium enterprises and therefore

takes care of development of any economy from within

Comparing two microfinance models in the research area reveals that the level of

indebtedness to moneylenders is higher in the case of clients of MFI model. Such

cases illustrate the difficulties MFI clients‘ face when they have unproductive

financial requirements or they are compelled to ensure prompt and regular loan

repayments through further borrowing from even money lenders. This makes

poverty worse in the short run, and makes it harder to escape from poverty-and

indeed can be source of poverty-and indeed can be source of poverty and

inequality ―traps.


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23. Comparative Analysis of NBFC Services offered to the poor


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24. Success Factors of NBFC in India

Over the last ten years, successful experiences in providing finance to small

entrepreneur and producers demonstrate that poor people, when given access to

responsive and timely financial services at market rates, repay their loans and use the

proceeds to increase their income and assets. This is not surprising since the only

realistic alternative for them is to borrow from informal market at an interest much

higher than market rates. Community banks, NGOs and grass root savings and credit

groups around the world have shown that these microenterprise loans can be

profitable for borrowers and for the lenders, making microfinance one of the most

effective poverty reducing strategies.

A. For NGOs

1. The field of development itself expands and shifts emphasis with the pull of

ideas, and NGOs perhaps more readily adopt new ideas, especially if the

resources required are small, entry and exit are easy, tasks are (perceived to

be) simple and people‘s acceptance is high – all characteristics (real or

presumed) of microfinance.

2. Canvassing by various actors, including the National Bank for Agriculture and

Rural Development (NABARD), Small Industries Development Bank of India

(SIDBI),

Friends of Women‘s World Banking (FWWB), Rashtriya Mahila Kosh

(RMK), Council for Advancement of People‘s Action and Rural Technologies

(CAPART),

Rashtriya Gramin Vikas Nidhi (RGVN), various donor funded programmes

especially by the International Fund for Agricultural Development (IFAD),

United Nations Development Programme (UNDP), World Bank and

Department for International Development, UK (DFID)], and lately

commercial banks, has greatly added to the idea pull. Induced by the

worldwide focus on microfinance, donor NGOs too have been funding

microfinance projects. One might call it the supply push.


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3. All kinds of things from khadi spinning to Nadep compost to balwadis do not

produce such concrete results and sustained interest among beneficiaries as

microfinance. Most NGO-led microfinance is with poor women, for whom

access to small loans to meet dire emergencies is a valued outcome. Thus,

quick and high ‗customer satisfaction‘ is the USP that has attracted NGOs to

this trade.

4. The idea appears simple to implement. The most common route followed by

NGOs is promotion of SHGs. It is implicitly assumed that no ‗technical

skill‘ is involved.

Besides, external resources are not needed as SHGs begin with their own

savings. Those NGOs that have access to revolving funds from donors do not

have to worry about financial performance any way. The chickens will

eventually come home to roost but in the first flush, it seems all so easy.

5. For many NGOs the idea of ‗organising‘– forming a samuha – has inherent

appeal. Groups connote empowerment and organising women is a double

bonus.

6. Finally, to many NGOs, microfinance is a way to financial sustainability.

Especially for the medium-to-large NGOs that are able to access bulk funds

for on-lending, for example from SIDBI, the interest rate spread could be an

attractive source of revenue than an uncertain, highly competitive and

increasingly difficult-to-raise donor funding.


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B. For Financial Institutions and banks

Microfinance has been attractive to the lending agencies because of demonstrated

sustainability and of low costs of operation. Institutions like SIDBI and NABARD

are hardnosed bankers and would not work with the idea if they did not see a long

term engagement – which only comes out of sustainability (that is economic

attractiveness).

On the supply side, it is also true that it has all the trappings of a business enterprise,

its output is tangible and it is easily understood by the mainstream. This also seems

to sound nice to the government, which in the post liberalisation era is trying to

explain the logic of every rupee spent. That is the reason why microfinance has

attracted mainstream institutions like no other developmental project.

Perhaps the most important factor that got banks involved is what one might call the

policy push. Given that most of our banks are in the public sector, public policy does have some

influence on what they will or will not do. In this case, policy was followed by

diligent, if meandering, promotional work by NABARD. The policy change about a

decade ago by RBI to allow banks to lend to SHGs was initially followed by a seven-

page memo by NABARD to all bank chairmen, and later by sensitisation and training

programmes for bank staff across the country. Several hundred such programmes

were conducted by NGOs alone, each involving 15 to 20 bank staff, all paid for by

NABARD. The policy push was sweetened by the NABARD refinance scheme that

offers much more favourable terms (100% refinance, wider spread) than for other

rural lending by banks. NABARD also did some system setting work and banks lately

have been given targets. The canvassing, training, refinance and close follow up by

NABARD has resulted in widespread bank involvement.

Moreover, for banks the operating cost of microfinance is perhaps much less than for

pure MFIs. The banks already have a vast network of branches. To the extent that an


78

NGO has already promoted SHGs and the SHG portfolio is performing better than the

rest of the rural (if not the entire) portfolio, microfinance via SHGs in the worst case

would represent marginal addition to cost and would often reduce marginal cost

through better capacity utilisation. In the process the bank also earns brownie points

with policy makers and meets its priority sector targets.

It does not take much analysis to figure out that the market for financial services for

the 50-60 million poor households of India, coupled with about the same number who

are technically above the poverty line but are severely under-served by the financial

sector, is a very large one. Moreover, as in any emerging market, though the

perceived risks are higher, the spreads are much greater. The traditional commercial

markets of corporates, business, trade, and now even housing and consumer finance

are being sought by all the banks, leading to price competition and wafer thin spreads.

Further, bank-groups are motivated by a number of cross-selling opportunities in the

market, for deposits, insurance, remittances and eventually mutual funds. Since the

larger banks are offering all these services now through their group companies, it

becomes imperative for them to expand their distribution channels as far and deep as possible, in the hope of

capturing the entire financial services business of a household. Finally, both Agri-input and processing companies such as EID Parry, fast-moving

consumer goods (FMCG) companies such as Hindustan Levers, and consumer durable

companies such as Philips have realised the potential of this big market and are

actively using SHGs as entry points. Some amount of free-riding is taking place here

by companies, for they are using channels which were built at a significant cost to

NGOs, funding agencies and/or the government.

On the whole, the economic attractiveness of microfinance as a business is getting

established and this is a sure step towards mainstreaming. We know that

mainstreaming is a mixed blessing, and one tends to exchange scale at the cost of

objectives. So it needs to be watched careful.


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25. Issues in NBFCs

Sustainability

The first challenge relates to sustainability. MFI model is comparatively costlier in

terms of delivery of financial services. An analysis of 36 leading MFIs by Jindal &

Sharma shows that 89% MFIs sample were subsidy dependent and only 9 were

able to cover more than 80% of their costs. This is partly explained by the fact that

while the cost of supervision of credit is high, the loan volumes and loan size is

low. It has also been commented that MFIs pass on the higher cost of credit to

their clients who are ‗interest insensitive‘ for small loans but may not be so as

loan sizes increase. It is, therefore, necessary for MFIs to develop strategies for

increasing the range and volume of their financial services.

Lack of Capital

The second area of concern for MFIs, which are on the growth path, is that they

face a paucity of owned funds. This is a critical constraint in their being able to

scale up. Many of the MFIs are socially oriented institutions and do not have

adequate access to financial capital. As a result they have high debt equity ratios.

Presently, there is no reliable mechanism in the country for meeting the equity

requirements of MFIs.

The IPO issue by Mexico based ‗Compartamos‘ was not accepted by purists as

they thought it defied the mission of an MFI. The IPO also brought forth the issue

of valuation of an MFI.

The book value multiple is currently the dominant valuation methodology in

microfinance investments. In the case of start up MFIs, using a book value

multiple does not do justice to the underlying value of the business. Typically,

start ups are loss making and hence the book value continually reduces over time

until they hit break even point. A book value multiplier to value start ups would


80

decrease the value as the organization uses up capital to build its business, thus

accentuating the negative rather than the positive.

Financial service delivery

Another challenge faced by MFIs is the inability to access supply chain. This

challenge can be overcome by exploring synergies between microfinance institutions

with expertise in credit delivery and community mobilization and businesses

operating with production supply chains such as agriculture. The latter players who

bring with them an understanding of similar client segments, ability to create

microenterprise opportunities and willingness to nurture them, would be keen on

directing microfinance to such opportunities. This enables MFIs to increase their

client base at no additional costs.

Those businesses that procure from rural India such as agriculture and dairy often

identify finance as a constraint to value creation. Such businesses may find

complementarities between an MFI‘s skills in management of credit processes and

their own strengths in supply chain management.

ITC Limited, with its strong supply chain logistics, rural presence and an

innovative transaction platform, the echoupal, has started exploring synergies with

financial service providers including MFIs through pilots with vegetable endors

and farmers. Similarly, large FIs such as Spandana foresee a larger role for

themselves in the rural economy ably supported by value creating partnerships

with players such as Mahindra and Western Union Money Transfer.

ITC has initiated a pilot project called ‗pushcarts scheme‘ along with BASIX (a

microfinance organization in Hyderabad). Under this pilot, it works with twenty

women head load vendors selling vegetables of around 10- 15 kgs per day. BASIX

extends working capital loans of Rs.10,000/- , capacity building and business

development support to the women. ITC provides support through supply chain

innovations by:


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1. Making the Choupal Fresh stores available to the vendors, this avoids the

hassle of bargaining and unreliability at the traditional mandis (local vegetable

markets). The women are able to replenish the stock from the stores as many

times in the day as required. This has positive implications for quality of the

produce sold to the end consumer.

2. Continuously experimenting to increase efficiency, augmenting incomes and

reducing energy usage across the value chain. For instance, it has forged a

partnership with National Institute of Design (NID), a pioneer in the field of

design education and research, to design user-friendly pushcarts that can reduce

the physical burden.

3. Taking lessons from the pharmaceutical and telecom sector to identify

technologies that can save energy and ensure temperature control in push carts

in order to maintain quality of the vegetables throughout the day. The model

augments the incomes of the vendors from around Rs.30-40 per day to an

average of Rs.150 per day. From an environmental point of view, push carts are

much more energy efficient as opposed to fixed format retail outlets.

HR Issues

Recruitment and retention is the major challenge faced by MFIs as they strive to

reach more clients and expand their geographical scope. Attracting the right talent

proves difficult because candidates must have, as a prerequisite, a mindset that fits

with the organization‘s mission.

Many mainstream commercial banks are now entering microfinance, who are

poaching staff from MFIs and MFIs are unable to retain them for other job

opportunities.


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85% of the poorest clients served by microfinance are women. However, women

make up less than half of all microfinance staff members, and fill even fewer of

the senior management roles. The challenge in most countries stems from cultural

notions of women‘s roles, for example, while women are single there might be a

greater willingness on the part of women‘s families to let them work as front line

staff, but as soon as they marry and certainly once they start having children, it

becomes unacceptable. Long distances and long hours away from the family are

difficult for women to accommodate and for their families to understand.

Micro insurance

First big issue in the micro insurance sector is developing products that really

respond to the needs of clients and in a way that is commercially viable.

Secondly, there is strong need to enhance delivery channels. These delivery

channels have been relatively weak so far. Micro insurance companies offer

minimal products and do not want to go forward and offer complex products that

may respond better. Micro insurance needs a delivery channel that has easy access

to the low-income market, and preferably one that has been engaged in financial

transactions so that they have controls for managing cash and the ability to track

different individuals.

Thirdly, there is a need for market education. People either have no information

about

Micro insurance or they have a negative attitude towards it. We have to counter

that. We have to somehow get people - without having to sit down at a table - to

understand what insurance is, and why it benefits them. That will help to

demystify micro insurance so that when agents come, people are willing to engage

with them.


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Adverse selection and moral hazard

The joint liability mechanism has been relied upon to overcome the twin issues of

adverse selection and moral hazard. The group lending models are contingent on

the availability of skilled resources for group promotion and entail a gestation

period of six months to one year. However, there is not sufficient understanding of

the drivers of default and credit risk at the level of the individual. This has

constrained the development of individual models of micro finance. The group

model was an innovation to overcome the specific issue of the quality of the

portfolio, given the inability of the poor to offer collateral. However, from the

perspective of scaling up micro financial services, it is important to proactively

discover models that will enable direct finance to individuals.


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26. Role of NBFCS in the economic development: A critical analysis

A robust banking and financial sector is critical for activating the economy and

facilitating higher economic growth. Financial intermediaries like NBFCs have a

definite and very important role in the financial sector, particularly in a developing

economy like ours. They are a vital link in the system.

After the proliferation phase of 1980s and early 90s, the NBFCs witnessed

consolidation and now the number of NBFCs eligible to accept deposits is around

600, down from 40000 in early 1990s. The number of asset financing NBFCs would

be even lower, around 350, the rest are investment and loan companies. Almost 90%

of the asset financing NBFCs are engaged in financing transportation equipments and

the balance are in financing equipments for infrastructure projects. Therefore, the role

of non-banking sector in both manufacturing and services sector is significant and

they play the role of an intermediary by facilitating the flow of credit to end

consumers particularly in transportation, SMEs and other unorganized sectors.

The role of NBFCs in creation of productive national assets can hardly be

undermined. This is more than evident from the fact that most of the developed

economies in the world have relied heavily on lease finance route in their

developmental process, e.g., lease penetration for asset creation in the US is as high as

30% as against 3-4% in India. A conducive and enabling environment has been

created for the NBFC industry globally, which has helped it grow and become an

essential part of the financial sector for accelerated economic growth of the countries.

This is not the case in our country. It is, therefore, obvious that the development

process of the Indian economy shall have to include NBFCs as one of its major

constituents with a very significant role to play.

NBFCs, as an entity, play a very useful role in channelizing funds towards acquisition

of commercial vehicles and consequently, aid in the development of the road transport

industry. Needless to mention, the road transport sector accounts for nearly 70% of

goods movement and 80% of passenger movement across the length and breadth of


85

the country and the role of NBFCs in the growth and development of this sector has

been historically acknowledged by several committees set up by the Government and

RBI, over the years. In fact, RBI’s latest report titled “Report on trends on progress of

banking in India 2002-2003″ observes

NBFCs play a crucial and prominent role in the rural and social sectors of the

economy by providing finance for the acquisition of trucks, buses and tractors, which

operate mainly in rural and semi-urban India. In fact, our exposure to the rural / social

sectors is direct and pronounced, since financing for acquisition of vehicles provides a

spin-off benefit by creating jobs and opportunities in the rural parts of our country.

With the economic revival pegged to the development of the rural and suburban

economies, NBFCs’ role in deposit mobilisation and credit extension can hardly be

over-emphasized. Given India’s large unorganized markets, there is a huge demand

for unsecured credit in areas where banks do not have adequate reach. NBFCs fill this

gap. Specialising in funding sectors where there is a credit gap, the core strengths of

NBFCs lie in their strong customer relationships, excellent understanding of regional

dynamics, well-developed collection systems, and personalised services. These

institutions play a crucial role in extending credit to the countryside, thus preventing

the concentration of credit risk in banks. In urban areas too, NBFCs focus on

segments neglected by banks-non-salaried individuals, traders, transporters and stock

brokers. These institutions are also instrumental in generating substantial employment

in these regions. The report of the Standing Committee of Parliament on Finance on

The Financial Companies Regulation Bill, 2000, which was tabled in the Lok Sabha,

acknowledges, in more than one place, the laudable role played by NBFCs

Further, higher level of customer orientation, fewer pre and post sanction

requirements and simple and speedy tailor made services assured them a loyal

clientele notwithstanding higher costs. Besides, the higher rate of return offered by

NBFCs have drawn a large number of small savers to them. Thus they work like quasi

banks and provide fund to the sectors where a credit gap exists. NBFCs have become

an accepted and integral part of the Indian financial system in view of their

complementary as well as competitive role.”

In the past decade, NBFCs have played an important role in the expansion of the

consumer durables, housing and transport sectors. The industry is now witnessing a

paradigm shift, as competition is eating into the retail finance space, which has been


86

traditionally dominated by NBFCs. As the traditional boundaries between different

financial intermediaries blur, market participants are merging to increase their size

and reach, while distributing risk over the large base in an attempt to survive.

According to the latest available numbers, registered NBFCs declined from more than

13,000 in 2013 to 12,809 in June 2010. The number of deposit-taking NBFCs also

decreased to 364 in 2008 from over 450 in 2007


87

27. Recommendations

Access to Credit The poor people‘s access to credit may be significantly improved through all the

channels of SHG-Bank linkage programme, MFIs, Cooperative Banks, State Financial

Corporations, RRB s and PACS. Some MFIs (i.e. Grameen Bank model/LABS,

NBFCs) have been doing very well in selected states with dynamic markets and

dynamic individuals. Beyond these jurisdictions, their outreach is non-existent. Any

significant up scaling of micro-finance at the all India level will have to depend,

therefore, on the large network of banks, the bank-SHG linkage programme and the

MFIs. In addition, the post office network in the country may also be used to deliver

banking services, especially in remote rural areas. The post offices may be further

encouraged to work as ―business facilitator‖ and as ―banking correspondent‖ in

accordance with RBI guidelines. The NABARD may consider setting up a

Committee, consisting of various private and public sector banks, the Ministry of

Rural Development, Small Industries Development Organisation (SIDO) of Ministry

of Small Scale Industries (SSI), Rashtriya Mahila Kosh (RMK) of The Ministry of

Women and Child Development, Department of Posts, SIDBI, MFIs and the NGOs in

the micro finance sector to evolve an effective strategy to implement the Business

Facilitators and Correspondents Model. Such a strategy should also take into account

special target groups such as the SCs/STs and the minorities through their respective

National Finance Corporations. The Eleventh Plan may target to extend micro-finance

to at least 80 percent of the BPL households.


88

Formation of Consortiums by Banks

Both public and private sector banks have the expertise in financial intermediation. All

the banks should come together and formulate a strategy at the national level to cover

all regions of the country and to address the needs of the MFOs. The different banks

may form consortiums‘ to leverage each other‘s advantages and work out suitable

strategies to address the needs of micro-finance at the national level. Relevant

‗Guidelines on Micro-Finance‘ both for the MFI model and the Bank-SHG linkage

model, may be prepared by NABARD for the field level officers. Some incentives

may also be introduced to encourage lending to the poor. Internal monitoring may also

be further strengthened to check exploitation of the poor by unscrupulous elements.

Uniform Legal Framework

To facilitate the expansion of micro credit, the Centre should prepare a model Bill on

Money Lending and circulate it among the State Governments requesting them to

enact similar state legislations. The Reserve Bank has constituted a ‗Technical Group

for Review of Legislations on Money-lending‘. The group is already drafting a model

Bill which is expected to be completed by June 30. This draft bill can be used as an

input for preparing model bill by the Central Government.


89

National Policy on Micro Finance

At present, both Government and the private agencies involved in micro finance have

devised their own individual strategies in furtherance of their goals. Absence of

comprehensive national level policy has hindered the orderly growth of the sector.

There is an urgent need for a concerted effort on the part of the various agencies and

the services providers involved in the sector to come together to evolve a coordinated

strategy for a faster and smoother growth of the sector. The proposed bill on micro

finance may address some of the issues. The ‗regulator‘ proposed in the ‗Bill‘ may

have to come out with a detailed strategy on issues like coordination among various

agencies, accounting and auditing, transparency, good governance, consumer

protection, micro insurance, statistics & research, rate of interest, subsidies etc.,

keeping in mind the fact that the strength of the micro-finance industry lies in its

informality and flexibility.

Uneven Geographical Growth

One of the major reasons for the uneven growth of the sector is the absence of

conducive socio-economic and political set-up. NABARD introduced special

incentives in the north, north-eastern and western states. The Ministry of Rural

Development, Ministry of Small Scale Industries, NABARD and SIDBI may devise

further need based incentive schemes for a faster and even growth of the sector in all

parts of the country in consultation with Ministry of Finance and RBI. SIDBI has also

taken positive steps to reach the underserved states through the portfolio risk fund

scheme of the ministry of SSI and through its own special efforts.


90

Mobilisation of Savings by MFIs

The absence of savings, apart from SHGs and MFI cooperatives, has unfortunately

been one of the features of Indian Micro finance and it prevents providing financial

service to the poor. The Indian MFIs survive on borrowed funds, unlike other

countries where savings fund a large share of lending. The regulatory environment

only allows cooperatives to collect savings. The MFIs may be allowed to mobilise

savings at least from their members under a regulatory framework monitored by the

NABARD. The proposed Microfinance Bill is expected to address this issue.

Cost Covering Interest Rates

There is a need to create awareness of the need to charge cost-recovering interest

rates. The rate of interest charged by the MFIs depends upon the cost of funds, cost of

delivery and payment, cost of purchasing bad debts and cost of margins. For economic

viability and sustainable growth, the MFIs need to charge interest rate covering these

costs. Various studies conducted on this aspect indicate that MFIs normally charge 21-

24 % interest rate for their sustenance. Innovative techniques must be identified to

reduce the cost and the interest rate. The cost of delivery and collection of payment,

which forms a major component of cost, can be reduced substantially by using the

proposed Common Service Centres, which can be shared by other agencies also. The

sector should make all attempts to reduce the rate of interest by means of efficiency

enhancing innovations with the aid of technology.

Credit-Linked Subsidy

The policy of providing credit-linked subsidy to SHGs and individuals may be

revisited. There are SHGs which are borrowing from banks on a continuous basis

without claiming subsidies. A comprehensive study may be commissioned to study

the incidence and effects of

subsidy as part of the 11th Plan and to work out modalities and long term strategies to

use the subsidies more productively and effectively.


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Role of Technology

The network of internet enabled Information and Communication Technology (ICT)

access points termed as Common Service Centres (CSC), 100000 in number across the

country being implemented by the Department of Information Technology (DIT),

Ministry of Communications and Information Technology, Government of India also

may be utilized for improving the reach and spread of various Micro-Finance and

Poverty Alleviation Schemes in rural areas in the country. Further, the DIT may

coordinate with NABARD, Ministry of Rural Development, Sa-Dhan and PRADAN

to integrate the ‗Computer Munshi System‘ of accounting into the ICT enabled CSCs.

ATMs and Gramteller (rural ATM)

may be located in the Post Offices. The Common Service Centres being developed by

the Department of Information Technology may also be linked to Post Offices to

synergise the technology induction with experience of Posts to handle financial

products. The proposed multi-purpose unique ID based smart card system can also be

utilised for effective delivery of micro-credit.

NABARD, SIDBI, Ministry of Rural Development and Sa-Dhan,

which is already working to evolve a standard book keeping procedure along with the

Institute of Chartered Accountants of India, may come together to evolve a

standardized, simplified and book keeping procedure for all forms micro finance

organisations, which would not only understand the health of the micro finance

organisation but also help in accurate and timely disclosure of financial statements and

annual reports. Further, the ‗Computer Munshi System‘ developed by PRADAN and

which appears to have been adopted successfully for maintenance of accounts may

also be integrated into the overall strategy of simplifying the accounting procedure.

Maintaining Standard Accounting System

The guidelines/best practices for SHG-Bank linkages and microfinance may be issued

by NABARD, covering auditing and monitoring mechanisms. RBI may conduct

evaluation studies as and when required.


92

Extension Services

Need for extension services in the different economic activities of crop husbandry,

animal husbandry, agro & rural industries is being widely recognised for guidance and

counselling of SHGs/individuals, to help them choose useful activities and acquire the

required skills. These extension services may not always be provided in-house through

the line departments of the State Government; rather they may be provided by the

private sector (eg. NGOs/MFIs) adopting the PPP model reinforced by viability gap

funding. The line departments may, nevertheless, continue to function as apex

institutions determining the objectives and terms of contract for the private sector

participation.

Micro Insurance

Micro insurance should be perceived as a key service in the financial needs package

of the people and in conjunction with micro savings and micro credit could go a long

way in keeping the vulnerable segment away from the poverty trap and could be an

integral component of financial inclusion.

The Insurance Regulatory and Development Authority (IRDA) has notified Micro

Insurance Regulations in November, 2005 with focus on the direction, design and

delivery of the products including tie up with life and non life insurance players for

integration of product to address various risks, introduction of a standalone Micro

Insurance delivery channel consisting of NGO, SHG and MFIs., enlarging the service

activities entrusted to micro insurance agent, issue of Policy documents in simple

vernacular language etc.

The IRDA may continue to give adequate priority to the micro insurance sector with

focus on removing the constraints and further developing the sectoMicro insurance is

increasingly offered by MFIs acting as agents of the insurance companies. Life

insurance is common among MFI members and some of the members are also availing

asset insurance, mainly loan financed assets. Insurance is less widespread under the

SHG model. MFIs and other civil society organizations are beginning to offer health

insurance, which is of greatest relevance for poverty alleviation.NABARD may


93

consider coordinating with various insurance companies, SIDBI, Ministry of Rural

Development, Ministry of SSI, NGOs and their associations to bring out flexible

micro insurance schemes, covering not only loan financed assets but also life, health,

crop, animal husbandry, etc .

Capacity Building

Some financial institutions, particularly SIDBI, are tying up with capacity building

providers to provide assistance to the microfinance institutions. A need-based capacity

building programme to meet the requirements of all categories of MFOs is essential to

bring about sustainability in the sector. Some of the important areas of capacity

building are transformation, best practices, interest rate management, delivery

management, managing growth, risk mitigation, product designing etc. Additional

infrastructure for capacity building may be created on PPP basis with appropriate

government assistance.

Formalities to access the credit are required to be simplified

to enable semi literate and illiterate customers to access credit. The delivery

mechanism also needs to be simplified to provide easy access to both credit and

working capital. Activities suitable for women may be identified taking into

consideration their traditional skills. A variety of enterprises may be offered to the

women to select the best suited for them. Constant feedback on the market would also

enable the women entrepreneurs to improve the product designs and marketing.

Transparency

The borrower needs to be protected from practises like lending without regard for the

borrowers ability to repay, deceptive rate of interest and abusive collection techniques.

Borrowers /consumer protection laws may be designed to take care of abusive lending

and collection practices by defining them and by making provision for effective

complaint redressal mechanisms. The consumer protection laws must also provide for


94

transparent discloser of interest rate, cost and other terms of lending. The consumer

laws must also educate the consumer on good money management practices for

earning, spending, saving, borrowing and investing.

Availability of Information/Statistics

With a view to developing a detailed data base of the micro-finance sector, it may be

desirable to conduct periodic surveys of all the micro-finance organisations in the

country and their operations. The survey can be conducted jointly by the NSSO and

the state governments.


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28. Questionnaire

Sample size - 75

Name…………………………… Sex………… E-mail id………………………

1. From where do you come to know about NBFC? News

Friends

Magazine

2. Do NBFCs have any banking license Yes

No

May be

3. Is there any difference between Banks and NBFCs Yes

No

May be

4. Why do you prefer NBFC over banks? Low rate of interest

Loans without collateral

Faster processing system

All of the above

5. Do NBFCs accept public deposit Yes

No

May be

6. What motivates you to choose NBFC while applying for a loan? Faster processing System

Low interest rate than banks

Access to loans with poor credit history

All of the above


96

7. Where do you find the list of registered NBFCs RBI site

NSE site

Others

8. NBFCs are registered under which act Companies act,1956

SEBI Act, 1992

RBI act, 1934

9. Do you think NBFC contributes in Indian economy, how? Help and increase wealth creation.

Broad base economic development.

To finance economically weaker section of the society.

All of the above

10. Do NBFC offer interest on loans relatively lower rate of interest for women?

Yes

No

Don’t know

11. Do you know NBFC offer any kind of market education for those people who do not know about financial products?

Yes

No

Don’t know

12. Can NBFCs Extend loans without any collateral?

Yes

No

Don’t know


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13. If you are depositing money to NBFC, do you think that NBFC should have a credit rating from any agency? If yes then, how many agencies (minimum) they had to obtain a credit rating?

No

Minimum 1

Minimum 2

Minimum 3


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29. Interpretation of Respondent

Gender ratio of respondents

1. From where do you come to know about NBFC?

2. Do NBFCs have any banking license

16%

79%

5% Yes

No

Maybe

67%

33%

men

women

This shows most of the

respondent i.e. 46% are aware

about the NBFC through News

channels. As NBFCs are gaining

more importance which is

showcased by the news channel,

rest 39% through friends and

15% through relatives.

This shows that the sample size

which has taken for the

consideration consists 67% of men

and 33% of women. This also

indicates that the women are less

active in obtaining loans

irrespective of the reason.

46%

39%

15%

News

Many of the respondent are aware

about NBFC don’t hold a banking

license. However 16% respondent

agree that NBFC holds a banking

License. As NBFCs do not hold a

banking license.


99

17%

23%

17%

43%

Low rate ofinterest

Loans withoutcollateral

Fasterprocessingsystem

All of theabove

58%

16%

26%

Yes

No

3. Is there any difference between Banks and NBFCs

4. Why do you prefer NBFC over banks? 5. Do NBFCs accept public deposit?

79%

16%

5%Yes

No

Maybe

Many of the respondents know the

difference between a bank and a

NBFC. A bank and a NBFC have

several difference like accepting

deposit, rules and regulations and

many more. However 16% finds no

difference between a bank and a

NBFC.

NBFC offers low rate of interest in

loans, extend the loan without any

collateral, faster processing system

than banks and many more features.

About 43% of the respondents choose

all the above option which is

absolutely right. Rest 17% low rate of

interest, 25% loan without collateral

and 17% faster processing system.

All NBFCs are not eligible for

accepting public deposit, only those

NBFCs are allowed to accept public

deposit which has a valid

registration for accepting public

deposit. In this most of the

respondent goes with yes, while

some goes with maybe and no.


100

67%

10%

23%

Companies Act,1956

SEBI Act, 1992

RBI Act,1934

6. What motivates you to choose NBFC while applying for a loan?

7. Where do you find the list of registered NBFCs

8. NBFCs are registered under which act

59%

29%

12%

RBI Site

NSE Site

Others

This shows most of the respondent

are aware about the act under

which NBFS are registered i.e.;

Companies act, 1956 However

some respondent also goes with

SEBI Act and rest are with RBI

Act1934,. As NBFCs are registered

under Companies Act, 1956

20%

17%

30%

33%

Faster processingSystem

Low interest ratethan banks

Access to loanswith poor credithistory

All of the above

NBFCs offers faster processing

system, low interest rate, access to

those with poor credit history and

many more. 33% of the respondent

knows all the features of NBFC.

While rest know some of them.

One can get the list of registered

NBFCs only in RBI website only

and nowhere else. In this question

major respondent know the location

while others don’t.


101

9. Do you think NBFC contributes in Indian Economy

10. Do NBFC offer interest on loans relatively lower rate of interest for women?

11. Do you know NBFC offer any kind of market education for those people who do not know about financial products?

75%

25%

Yes

No

are aware as NBFC doesn’t have

any kind of banking license some

respondent says yes while some are

confused.

14%

9%

32%

45%

Help andincreasewealthcreation.

Broad baseeconomicdevelopment.

To financeeconomicallyweakersection of thesociety.

All of theabove

NBFC contributes in Indian

economy by wealth creation,

economic development, to help

the weaker section of the society,

help in increasing the growth

rate, help in increasing per capita

income and many more. In this

45% of respondent agree with all

of the above option.

NBFC offers lower rate of interest

for women for women

empowerment as compared to

others. 70% of the respondents

know about this scheme while 30%

don’t.

75%

25%

Yes

No

NBFC conduct market education

for those people who do not

know about financial products

and taught them about various

financial products. 75% of the

respondent knows about this

special feature.


102

9%

29%

33%

29%

No

Minimum 1

Minimum 2

Minimum 3

12. Can NBFCs Extend loans without any collateral

13. If you are depositing money to NBFC, do you think that NBFC should have a credit rating from any agency? If yes then, how many agencies (minimum) they had to obtain a credit rating?

79%

16%

5%Yes

No

Maybe

NBFCs one of the main feature is

that extend the loan without any

collateral. Most of the respondent

79%knows about this while 16%

don’t know. Rest 5% Never

extended their loan amount.

NBFCs have to obtain credit

rating from minimum 3

agencies.29% of respondent says

a minimum 3, 33% says

minimum 2, 29% says minimum

1 and rest 9% says no.


103

30. References

Serial

no.

Book Name Author Name Year of

publication

1

Microfinance Development Strategy for

India

Anil K Khandelwal 2007

2 Inclusive Financial Systems Nachiket Mor 2007

3 Business Basics at the Base of the

Pyramid

Vikram Akula 2008

4 The Changing Face of Microfinance in

India

Raven Smith 2010

5 Microfinance in India R Srinivasan and M

S Sriram

2010

6 Microfinance in India: Sectoral Issues

and Challenges

Shri Y.S. P Thorat 2010

7 Microfinance and its Future Directions Dr. C Rangarajan 2008

8 Microfinance Institutions in India Piyush Tiwari 2011

impact of nbfc in indian economy

Economy & Finance