Microcredit in India

• In common meaning Micro credit is "Loan of very small amount". It can be defined as provision of parsimony, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards. The institutions that provide Micro Credit are called Micro Credit Institutions .
• Micro Credit is provided to those individuals that lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit.
• This group of individuals includes artisans, tiny and small industries, grocers, vegetable vendors, rickshaw pullers, roadside retailers and the like. Other activities include farming, poultry, cattle rearing, piggery, fishery etc.
• Microcredit is a part of microfinance. The term Microfinance is used for the provision of a wider range of financial services to the very poor.

Origin of Microcredit:

• The innovative idea of Microcredit originated with the Grameen Bank in Bangladesh.
• The Grameen Bank is a microfinance organization and community development bank started in Bangladesh that makes small loans known as microcredit.
• In 1976 Professor Muhammad Yunus launched a research project to examine the possibility of designing a credit delivery system to provide banking services targeted to the rural poor.
• In October 1983, the Grameen Bank Project was transformed into an independent bank by government legislation.
• The organization and its founder, Muhammad Yunus, were jointly awarded the Nobel Peace Prize in 2006; the organisation's Low-cost Housing Programme won a World Habitat Award in 1998.
• Grameen Bank has successfully enabled extremely impoverished people to engage in self-employment projects that allow them to generate an income and, in many cases, begin to build wealth and exit poverty.
• Due to this success of microcredit, many in the traditional banking industry have begun to realize that these microcredit borrowers should more correctly be categorized as pre-bankable; thus, microcredit is increasingly gaining credibility in the mainstream finance industry, and many traditional large finance organizations are contemplating microcredit projects as a source of future growth, even though almost everyone in larger development organizations discounted the likelihood of success of microcredit when it was begun.
• The United Nations declared 2005 the International Year of Microcredit.

Microcredit in India:

• Before the nationalization of banks in India in 1969, co-operative banks were the main dispensers of small loans in the organized sector. Commercial banks were not easily accessible to small borrowers. Those were the days of security-oriented approach.
• Nobody could think of a loan, big or small, without a guarantor or mortgage of immovable property. Profit was the only motive of the banking.
• Nationalization changed the picture and the nationalized banks opened branches in the remotest corners of the country. They were to implement various government schemes like the Twenty Point Program, Antodaya Program, subsidized Differentiated Rate of Interest loan etc. which aimed at uplifting the poorest of the poor with the help of micro credit.
• Gradually there was establishment of Regional Rural Banks (RRBs), Deposit Insurance and Credit Guarantee Corporation (DICGC), National Bank for Rural and Agricultural Development (NABARD), Small Industrial Development Bank of India (SIDBI), Export Credit Guarantee Corporation (ECGC) and the latest Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE).
• The CGTMSE covers collateral-free credit up to Rs. 50 lakhs. These institutions play supportive roles to ensure uninterrupted flow of credit to small time borrowers.
• Under the present directive of the RBI, the priority sectors must get a minimum of 40% share of a commercial banks’ total lending. This includes 16% for the agriculture sector.

Some Issues :

• In spite of all these measures the performance of micro finance in India has neither been quite satisfactory quantitatively nor qualitatively.
• The money disbursed has not been adequate, nor has it yielded the desired results.
• Instead of being recycled, the major portions of loans have been lost as bad debt.

Rates Applicable :

1. The reform of the interest rate regime has constituted an integral part of the financial sector reforms initiated in our country in 1991.
2. In consonance with this reform process, interest rates applicable to loans given by banks to micro credit organizations or by the micro credit organizations to Self-Help Groups/member-beneficiaries has been left to their discretion.
3. The interest rate ceiling applicable to direct small loans given by banks to individual borrowers, however, continues to remain in force.

Lending Norms:

1. Banks have been given freedom by Reserve Bank of India to formulate their own lending norms keeping in view ground realities.
2. They have been asked to devise appropriate loan and savings products and the related terms and conditions including size of the loan, unit cost, unit size, maturity period, grace period, margins, etc.
3. Such credit covers not only consumption and production loans for various farm and non-farm activities of the poor but also include their other credit needs such as housing and shelter improvements.

Self-Help Group (SHG):

1. A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs belonging to homogenous social and economic background voluntarily, who come together to save small amounts regularly, to mutually agree to contribute to a common fund and to meet their emergency needs on mutual help basis.
2. The group members use collective wisdom and peer pressure to ensure proper end-use of credit and timely repayment thereof.

Microfinancing through SHGs:

1. SHG provides strength to an economically poor individual as part of a group. Financing through SHGs reduces transaction costs for both lenders and borrowers.
2. Lenders have to handle only a single SHG account instead of a large number of small-sized individual accounts, borrowers as part of a SHG cut down expenses on travel (to & from the branch and other places) for completing paper work and on the loss of workdays in canvassing for loans.

Role of NGOs:

1. NGO's undertake social intermediation like organizing SHGs of micro entrepreneurs.
2. They entrust them to banks for credit linkage or financial intermediation like borrowing bulk funds from banks for on-lending to SHGs.

SHG-bank linkage Programme:

1. With a view to facilitating smoother and more meaningful banking with the poor, A pilot project for purveying micro credit by linking Self-Help Groups (SHGs) with banks was launched by NABARD in 1991-92 .
2. The aim was to make it possible facilitating smoother and more meaningful banking with the poor.
3. RBI had then advised commercial banks to actively participate in this linkage programme. The scheme has since been extended to RRBs and co-operative banks.
4. Approximately 7.87 million very poor families brought within the fold of formal banking services as on March 31, 2002.
5. More than 90 per cent of the groups linked with banks are exclusive women groups.
6. Cumulative disbursement of bank loans to these SHGs stood at Rs. 1026.34 crores as on March 31, 2002 with an average loan of Rs. 22,240=00 per SHG and Rs. 1,316=00 per family.

Models of Linkages:There are several models of linkage:

1. Model I, viz. directly to SHGs without intervention/facilitation of any NGO now accounts for 16%,
2. Model II, viz. directly to SHGs with facilitation by NGOs and other formal agencies amounts to 75% .
3. Model III, viz. through NGO as facilitator and financing agency represents 09% of the total linkage.
4. An Intermediate Model that works on banking principles with focus on both savings and credit activities and where banking services are provided to the clients either directly or through SHGs;
5. There is also a Wholesale banking Model where the clients comprise NGOs, MFIs and SHG Federations. This Model involves a unique package of providing both loans and capacity building support to its partners.
6. There is an Individual Banking-based Model that has its clients as individuals or joint liability groups. While programme management and client appraisal in this Model may be a challenge, it is best suited to lending to enterprises.

SHG-bank linkage programme has surely emerged as the dominant micro finance dispensation model in India, other models too have evolved as significant micro finance purveying channels.

Foreign Investment in Microcredit:

1. Govt. of India vide their notification dated August 29, 2000 have included ‘Micro Credit/Rural Credit’ in the list of permitted non-banking financial company (NBFC) activities for being considered for Foreign Direct Investment (FDI)/Overseas Corporate Bodies (OCB)/Non-Resident Indians (NRI) investment to encourage foreign participation in micro credit projects.
2. This covers credit facility at micro level for providing finance to small producers and small micro enterprises in rural and urban areas.

Micro Finance Development Fund:

• A Rs. 100 Crore Micro Finance Development Fund was created in NABARD as per announcement of Union Finance Minister in his budget speech for the year 2000-01.
• The objective of this fund was to support the following activities:

1. giving training and exposure to self-help group (SHG) members, partner NGOs, banks and govt. agencies
2. providing start-up funds to micro finance institutions and meeting their initial operational deficits
3. meeting the cost of formation and nurturing of SHGs; (d) designing new delivery mechanisms
4. promoting research, action research, management information systems and dissemination of best practices in micro finance.

This Fund is thus expected to address institutional and delivery issues like institutional growth and transformation, governance, accessing new sources of funding, building institutional capacity and increasing volumes. RBI and NABARD have contributed Rs. 40 crore each to this Fund. The balance Rs. 20 crore were contributed by 11 public sector banks.

Legal FrameWork :

• Domestic Commercial Banks: Public Sector Banks; Private Sector Banks & Local Area Banks
  (i) RBI Act 1934/
  (ii) BR Act 1949
  (iii) SBI Act
  (iv) SBI Subsidiaries Act
  (v)Acquisition & Transfer of Undertakings Act 1970 & 1980
• Regional Rural Banks
  RRB Act 1976
  RBI Act 1934
  BR Act 1949
• Co-operative Banks
  Co-operative Societies Act
  BR Act 1949 (AACS)
  RBI Act 1934 (for sch. banks)
• Co-operative Societies
  (i) State legislation like MACS
• Registered NBFCs
  (i) RBI Act 1934
  (ii) Companies Act 1956
• Unregistered NBFCs
  (i) NBFCs carrying on the business of a FI prior to the coming into force of RBI Amendment Act 1997 whose application for CoR has not yet been rejected by the Bank
  (ii) Sec. 25 of Companies Act
• Other providers like Societies, Trusts, etc.
  (i) Societies Registration Act ’60
  (ii) Indian Trusts Act
  (iii) Chapter IIIC of RBI Act ’34
  (iv) State Moneylenders Act

With Inputs from RBI, Livemint, Chillbreeze.com, wikipedia