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KEY TRENDS

• 36% of the rural households are found to be outside the fold of institutional credit*
• The total annual requirement of credit for the rural poor families would be at least Rs.15,000 crores on the basis of a maximum need of Rs.2000/- per family*
• Financial services to the poor are provided mainly by the 33,000 rural and 14,000 suburban branches of the major banks and RRBs (regional rural banks) and by the 94,000 cooperative outlets**
• Self-help groups are the most common form of microcredit delivery in India.  These informal savings and credit associations cover an estimated 3.5 to 4 million clients.  They often regroup into federations#  
• On an average, there is one Primary Agricultural Credit Societies (PACS) for every 6 villages; these societies have a total membership of more than 120 million rural people making it one of the largest rural financial systems in the world##
• As a separate group, 87% of marginal farmers and 70% of small farmers have no formal credit while 70% of marginal farmers and 45% of small farmers do not have deposit or savings accounts with a formal financial institution*#
• The Government of India’s main poverty alleviation programme, the Integrated Rural Development Programme (IRDP), is “the world’s largest microfinance programme”***
• The Micro Financial Sector (Development and Regulation) Bill, 2007 has two broad objectives: (a) to promote and regulate the micro finance sector; and (b) to permit MFOs to collect deposits from eligible clients****

* Emergence of MFIs and the growth of Microfinance Sector in India, prepared by Sa-Dhan
** Macro Environment and Legal and Regulatory Framework, India, March 2002, prepared by Sa-Dhan
# Macro Environment and Legal and Regulatory Framework, India, March 2002, which has been prepared by Sa-Dhan
## Vaidyanathan Committee of 2004 (for the revival of the cooperative credit system)- http://www.nabard.org/pdf/report_financial/Chap_VI.pdf
*# Micro-credit Rating International Limited, 
http://www.m-cril.com/pdf/M-CRIL-Review-of-Rural-Banking-in-India--Working-Paper-1.pdf
*** Best Practices followed by Leading Indian MFIs, prepared by M-Cril
**** PRS Legislative Research, Centre for Policy Research, Chanakyapuri, New Delhi
 

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According to Emergence of MFIs and the growth of Microfinance Sector in India, which has been prepared by Sa-Dhan,

http://sa-dhan.net/Adls/Microfinance/Reports/EmergenceofMFIs.doc

Various types of microfinance institutions

According to Macro Environment and Legal and Regulatory Framework, India, March 2002, which has been prepared by Sa-Dhan,
http://sa-dhan.net/Adls/Microfinance/Reports/MacroEnvironmentandLegal.doc:

• Financial services to the poor are provided mainly by the 33,000 rural and 14,000 suburban branches of the major banks and RRBs and by the 94,000 cooperative outlets—either bank branches or village level societies.

• Self-help groups are the most common form of microcredit delivery in India.  These informal savings and credit associations cover an estimated 3.5 to 4 million clients.  They often regroup into federations.  

• Over the past 20-25 years, with pioneer efforts such as SEWA Bank and then with the arrival of significant numbers of NGOs, other institutions have stepped into the market. Urban cooperative banks, non-bank finance companies and so-called “Section 25” non-profit companies also provide financial services to the poor. In addition, local area banks were created in 1996 under Guidelines issued by the RBI, with jurisdiction over 2-3 contiguous districts, in order to provide competition in rural banking.

According to Best Practices followed by Leading Indian MFIs, which has been prepared by M-Cril, http://sa-dhan.net/Adls/Microfinance/BP/BestPractices.pdf:

• The Government of India’s main poverty alleviation programme, the Integrated Rural Development Programme (IRDP), is “the world’s largest microfinance programme”. It involved the commercial banks in giving loans of less than Rs 15,000 to poor people and, in nearly 20 years, resulted in financial assistance of Rs 250 billion to 55 million families

• The problem with the IRDP was that its design incorporated a substantial element of subsidy (25–50% of each family’s project cost) and this resulted in extensive malpractices and misutilisation of funds.

• Initially, many NGO microfinance institutions (MFIs) were funded by donor support in the form of revolving funds and operating grants. In recent years,6 development finance institutions such as NABARD, SIDBI and micro-finance promotion organisations such as the Rashtriya Mahila Kosh (RMK – the National Women’s Fund) have also started to provide bulk loans to MFIs.

Why micro-credit?

According to the Vaidyanathan Committee of 2004 (for the revival of the cooperative credit system)- http://www.nabard.org/pdf/report_financial/Chap_VI.pdf:

 Of high relevance for financial inclusion of lower income people is especially the Short-term Rural Cooperative Credit Structure (STCCS) providing mainly short and medium-term credit besides other financial services.

 At present (March 2005), the three tier STCCS consists, according to statistics of the National Federation of State Cooperative Banks (NAFSCOB), of nearly 1.09 lakh Primary Agricultural Credit Societies (PACS), 368 District Central Cooperative Banks (DCCB) with 12,858 branches and 30 State Cooperative Banks (SCB) with 953 branches or a total of 122,590 service outlets.

 On an average, there is one PACS for every 6 villages; these societies have a total membership of more than 120 million rural people making it one of the largest rural financial systems in the world.

 The total membership of PACS as on 31 March 2005 aggregated to 1,274 lakh, of which, the borrowing members at 451 lakh constituted around 35%.

 The total as well as borrowing members of PACS declined during 2004-05. Deposits and borrowings of PACS increased by 5 and 17%, respectively, as on 31 March 2005 over the previous year. The loans issued increased by 12% during 2004-05 as compared to an increase of 3.3% during 2003-04, over the previous year.

 As per the data available with NAFSCOB, small and marginal farmers constitute nearly 70% of total membership of PACS at the national level, while SCs / STs constitute 34%. Wide regional variations are observed – while Western and Southern Regions have a greater proportion of SFs as members, Eastern and Central Regions have nearly half of their members belonging to SC / ST category.

 The average membership per PACS (all India) is 1,171 persons. Southern Region has the highest average at 2,986 persons, while Western has the lowest at 441 persons. The average borrowing membership per PACS (all-India) is 414 persons. While the Southern Region has the highest average at 944 persons, North-Eastern Region has only 91 borrowing members, on an average.

 The gap between the average membership and the average borrowing membership can be presumed as the credit potential available. Viewed thus, there is a huge potential for extending credit outreach by the cooperatives.

 Though the network of commercial banks and RRBs has spread rapidly and they now have nearly 50,000 branches, their reach in the countryside both in terms of the number of clients and accessibility to the small and marginal farmers and other poorer segments is far less than that of cooperatives.

 In terms of number of agricultural credit accounts, the STCCS has 50% more accounts than the commercialbanks and RRBs put together. Directly or indirectly, it covers nearly half of India’s total population.

 Despite the phenomenal outreach and volume of operations, the health of a very large proportion of these rural credit cooperatives has deteriorated significantly.

 The institutions are beset with problems like low resource base, high dependence on external sources of funding, excessive Governmental control, dual control, huge accumulated losses, imbalances, poor business diversification, low recovery, etc.

 Around half of the PACS, a fourth of the intermediate tier, viz., the DCCBs, and under a sixth of the State-level apex institutions, viz., the SCBs are loss-making. The accumulated losses of the system aggregate over Rs. 9,100 crore. Non-performing assets (NPA), as a percentage of loans outstanding at the level of SCBs and DCCBs, at the end of March 2006 were around 16% and 20% respectively.

 These institutions do not, therefore, inspire confidence among their existing and potential members, depositors, borrowers and lenders. Thus, there is a need to find ways for strengthening the cooperative movement and making it a well-managed and vibrant medium toserve the credit needs of rural India, especially the small and marginal farmers

Performance of the Regional Rural Banks (RRBs)

According to Micro-credit Rating International Limited, 
http://www.m-cril.com/pdf/M-CRIL-Review-of-Rural-Banking-in-India--Working-Paper-1.pdf

 Reforms to the Indian financial sector over the past 15 years have resulted in significant growth and availability of financial services. Yet substantial proportions of the population continue to be deprived of financial services

 Rural Financial Access Survey (RFAS) of the World Bank in 2003 found that 59% of rural households in Uttar Pradesh and Andhra Pradesh do not have deposit or savings accounts with the formal financial sector and 79% do not have access to credit from a formal source.

 As a separate group, 87% of marginal farmers and 70% of small farmers have no formal credit while 70% of marginal farmers and 45% of small farmers do not have deposit or savings accounts with a formal financial institution.

 Within the Indian financial sector, the role of the rural banks is important but not apparently pre-eminent. RRBs and DCBs (taken together) accounted for 32% of the nearly 87,000 bank branches in India at the end of March 2007.

 Within the Indian financial sector, the role of the rural banks is important but not apparently pre-eminent. The contribution of the commercial banks to the rural/semi-urban banking network is far higher (at 38% of the total) than the 28% contribution of rural banks to the total of 87,000 bank branches in India.

 Despite the apparent importance of commercial banks even in the rural areas however they are neither able nor willing to serve the poorest sections of the population. By comparison, in the credit categories of direct relevance to financial inclusion, RRBs hold 26.2% of agricultural credit accounts and as many as 55.0% of all artisan/tiny industry loan accounts. This amounts to much lower proportions of overall credit available under these categories – just 10.9% and 11.0% respectively – since RRB loan sizes average just Rs. 25,000 and Rs. 13,000 for these two categories, much smaller than those offered by the commercial banks.

 Yet, it is precisely this fact that shows the importance of the rural banks for otherwise financially excluded sections of the population. Low income families have a much lower absolute and proportionate need for credit than better off sections of the population that are, in any case, better able to access the commercial banks.

 Data for cooperatives is not available but with an estimated 130 million members, the average loan outstanding with cooperatives amounts to just over Rs9,000 per member, emphasising their suitability to the needs of low income families. Taken together, the rural banks record a credit-deposit ratio of 81.7% in March 2007, somewhat higher than the average of 76.1% for the entire banking system.

 Rural banks have, for a number of years, been regarded as the step-child of the banking system in India. It is not surprising, therefore, that both the cooperative credit system and RRBs have encountered serious financial difficulties and were virtually crippled in the early 1990s, needing a substantial injection of capital at that time. The performance of such banks in recent years has been somewhat better though. Thus, 85% of the RRBs and around 75% of cooperative banks are now profitable on a year-on-year basis. While all the RRBs taken together now regularly register a profit, the DCCB performance is erratic with significant numbers slipping into losses before recovering from one year to the next. In March 2003, as many as 144 out of 367 DCBs were reported to have completely eroded their net worth and to have eroded Rs3,100 crore worth of deposits as well.

 Recognising that the financial and political cost of liquidating the cooperative credit institutions would be far higher than the cost of restructuring the potentially viable ones, the Government of India requested the support of the Asian Development Bank, the World Bank and other development partners. Agreement was reached first with the Asian Development Bank and KfW, the German development bank. The support agreed was-

• Asian Development Bank: $1 billion loan from the Asian Development Bank “to support policy and institutional in the cooperative credit structure” expected over a period of four years (2007-10). The ADB support was to finance this programme of comprehensive cooperative credit society reform in five states –Andhra Pradesh, Maharashtra, Madhya Pradesh, Gujarat and Rajasthan.

• World Bank: $600 million over a period of five years (2008-2012) for central government grant support to the cooperative institutions in five of the participating states – Gujarat, Haryana, Orissa, Uttar Pradesh and Uttaranchal.

• KfW: Support of €140 million from KfW was agreed concurrently with the ADB. This included an amount of €10 million earmarked for technical assistance. KfW’s assistance was synchronized with the ADB.

Current status

In India rates average 30 per cent a year, though some lenders charge more than 45 percent. Microcredit is quickly spreading in India, but the loans don't always lead to businesses; in some cases they are even used to pay off previous debts.

o 200,000  -- People getting loans in 1996.
o 17.5 million  -- People getting loans in 2006.
o $4 million  -- Value of loans granted in 1996.
o $1.3 billion  -- Value of loans granted in 2006.
o $75  -- Size of average loan.

Figures for year ending Mar. 31, 2006

Source: Micro-Credit Ratings International; http://www.rediff.com/money/2006/nov/10spec.htm

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According to the Reserve Bank of India (RBI), 

http://www.rbi.org.in/scripts/FAQView.aspx?Id=7

1. What is Micro Credit?

Micro Credit is defined as provision of thrift, 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. Micro Credit Institutions are those which provide these facilities.

2. What are the interest rates applicable?

The reform of the interest rate regime has constituted an integral part of the financial sector reforms initiated in our country in 1991. 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. The interest rate ceiling applicable to direct small loans given by banks to individual borrowers, however, continues to remain in force.

3. What are the terms & conditions for accessing microcredit?

Banks have been given freedom to formulate their own lending norms keeping in view ground realities. 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. 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.

4. What is a Self-Help Group (SHG)?

A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs having homogenous social and economic background voluntarily, coming 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. The group members use collective wisdom and peer pressure to ensure proper end-use of credit and timely repayment thereof. In fact, peer pressure has been recognized as an effective substitute for collaterals.

5. What are the advantages of financing through SHGs?

An economically poor individual gain strength as part of a group. Besides, financing through SHGs reduces transaction costs for both lenders and borrowers. While 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.

6. What role does a Non-Governmental Organisation (NGO) play in provision of Micro Credit?

A Non-Governmental Organisation (NGO) is a voluntary organization established to undertake social intermediation like organizing SHGs of micro entrepreneurs and entrusting them to banks for credit linkage or financial intermediation like borrowing bulk funds from banks for on-lending to SHGs.

7. What are the latest Micro Credit disbursement indicators?

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 with a view to facilitating smoother and more meaningful banking with the poor. 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. The number of SHGs linked to banks aggregated 4,61,478 as on March 31, 2002. This translates into an estimated 7.87 million very poor families brought within the fold of formal banking services as on March 31, 2002. More than 90 per cent of the groups linked with banks are exclusive women groups. 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. As regards model-wise linkage, while Model I, viz. directly to SHGs without intervention/facilitation of any NGO now accounts for 16%, Model II, viz. directly to SHGs with facilitation by NGOs and other formal agencies amounts to 75% and Model III, viz. through NGO as facilitator and financing agency represents 09% of the total linkage. While 488 districts in all the states/UTs have been covered under this programme, 444 banks including 44 commercial banks (including 17 in the private sector), 191 RRBs and 209 co-operative banks along with 2,155 NGOs are now associated with the SHG-bank linkage programme.

While the 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.

The other successful models that have emerged are:

• 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;
• 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; and
• Further, 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.

Keeping these validated models for delivery of credit to the poor and the unorganized sector in view, RBI is moving towards a systems perspective for providing effective policy support not only because a number of different institutions, viz. banks, MFIs, NGOs & SHGs are involved, but also because these institutions have very different institutional goals. With this in view, a series of initiatives is being planned in the coming months for putting in place a more vibrant micro finance dispensation environment in the country where complementary and competitive models of micro finance delivery would be encouraged to co-exist.

8. Is Foreign Investment allowed in Micro Credit projects?

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. This covers credit facility at micro level for providing finance to small producers and small micro enterprises in rural and urban areas.

9. What is the Micro Finance Development Fund?

There is an urgent need for micro credit providers to shift from a minimalist approach – that is offering only financial intermediation – to an integrated approach to poverty alleviation taking a more holistic view of the client including provision of enterprise development services like marketing infrastructure, introduction of technology and design development. In this context, the setting up of the Micro Finance Development Fund marks an important step. Pursuant to the announcement of Union Finance Minister in his budget speech for the year 2000-01, this Rs. 100 crore Fund has been created in NABARD to support broadly the following activities: (a) giving training and exposure to self-help group (SHG) members, partner NGOs, banks and govt. agencies; (b) providing start-up funds to micro finance institutions and meeting their initial operational deficits; (c) meeting the cost of formation and nurturing of SHGs; (d) designing new delivery mechanisms; and (e) 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.

According to PRS Legislative Research, Centre for Policy Research, Chanakyapuri, New Delhi:

• The Micro Financial Sector (Development and Regulation) Bill, 2007 has two broad objectives: (a) to promote and regulate the micro finance sector; and (b) to permit MFOs to collect deposits from eligible clients.

• Micro finance is defined as the provision of thrift (savings), credit and other financial services and products of very small amounts to the poor for enabling them to raise their income levels and improve living standards. In India, micro finance is provided by apex development financial institutions (such as National Bank for Agriculture and Rural Development - NABARD, Small Industries Development Bank of India, and Rashtriya Mahila Kosh), and commercial banks, regional rural banks, co-operative banks, non-banking financial companies (NBFCs) and various not-for-profit entities.