Tuesday, May 4, 2010

Micro Finance and Developments



SKS Microfinance


Micro Credit Ratings International Ltd.

Microfinance is flourishing in India year after year.  In a vast country like ours, with a vast rural predominance, credit continues to be in scarcity inspite of the banking system striving to reach the villages for over four decades.  Lead Bank Scheme was introduced in 1969 and is being pursued by RBI, NABARD and Governments at Centre and States.  Co-existence of public, private, regional rural, cooperative and local area banks endeavouring to go rural has not met the rural needs of assured banking system.  Financial Inclusion is being vigorously adopted by almost all the banks for last four-five years; and Micro Finance has emerged as a necessary substitute in the rural India. Banks are linking up with  Non-Governmental Organisations (NGOs)  and Post Offices in this process. Primary Agricultural Societies (PACs) are to be used as Business Correspondents (BCs) by banks. On the other hand, suicides are continued to be committed by the farming community, particularly in states like Maharashtra, Karnatka, Andhra Pradesh, etc for reasons unknown. 

Micro Finance Institutions (MFIs) commenced their activity a few decades back more as social entrepreneurs to provide financial support to the rural poor and women.  Today, they are very much organised; they have emerged as a full-fledged industry with about 30 large players being registered as Non-Banking Finance Companies (NBFCs).  Recently, they have come together to form the Microfinance Institutions Network (MFIN), an association that will work as Self Regulatory Organisation (SRO) to will towards the development of the industry.  In India, we already have AMBI, AMFI, FIDC, etc as SROs for different financial outfits.  Once MFIN stabilises and be able to oversee the MFIs in the country, a very systematic level-playing field would emerge and the complaint that MFIs charge a very high rate of interest (approx 30% pa) can be tackled.  It is understood that MFIN would be able to cover only 80% of the MFIs and those microfinance companies who function as a trust and do not have profit as their motive are not covered.  We have to wait and watch the progress.

Another noteworthy development is that Credit Information Bureau of India Ltd (CIBIL) has signed an agreement with the 31 registered MFIs in India to start a Microfinance Credit Information Bureau.  This will help prevent Non Performing Assets (NPAs) in the micro finance segment and will also improve credit penetration and quality.  The microfinance sector is estimated at around 120 million households which translates into a credit demand of Rs. 1.2 lakh-crores; but issues such as multiiple lending and overexposure remain a concern. 

It may be worth mentioning here that the facility of credit rating and credit scoring is also available for MFI sector.  M-CRIL is already in place and steadily bringing in standards in the sector.  Researchers at ICRIER have already worked and suggested on  an Index for Financial Inclusion about two years ago.  Now, it is learnt that from June 2010 onwards, the Finance Ministry will be harnessing an index to assess financial inclusion on a quarterly basis.  This is a welcome development.  The new index would help integrate a large section of the population with the formal financial markets.  This would also help the Government and RBI to take timely and area specific measures and policies to drive Financial Inclusion better.

Yet another development is that the Nandan Nilekani's project on Unique Identification Number (UINs) would also help the banks substantially to open accounts in rural India.  Such a facility would ease the problem of Know Your Customer (KYC) compliance by banks. One more interesting development after banks introducing biometric ATMs in recent years is that Indian banks have proposed the installation of micro ATMs in rural India which are cost-effective.  So, the issue of affordability is also being taken care of. 

CRISIL prepared a report last year on India's top 50 Micro Finance Institutions. Here is a link: http://www.scribd.com/doc/20998565/Top-50-Microfinance-Institutions-in-India-by-CRISIL

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