Banking and Finance Unit 6

BANKING AND FINANCE
UNIT 6
Concept of Microfinance
Microfinance is a financial service designed to provide small loans, savings, insurance, and
other basic financial products to low-income individuals or small businesses who lack
access to traditional banking and credit services. It aims to empower economically
disadvantaged sections of society, particularly in rural and underserved areas, by enabling
them to participate in economic activities and improve their livelihoods.
Key Features of Microfinance

1. Small Loan Amounts:
o Loans are typically small and designed to meet the needs of low-income
borrowers, such as funding small businesses or meeting basic needs.
2. Collateral-Free Lending:
o Borrowers are not required to provide collateral, making it accessible to
individuals without significant assets.
3. Group Lending Mechanism:
o Often involves self-help groups (SHGs) or joint liability groups (JLGs),
where a group of borrowers collectively guarantees the loan repayment.
4. Focus on Women:
o A significant proportion of microfinance borrowers are women, as they are
seen as more likely to use loans for productive purposes and repay them
responsibly.
5. Accessible and Flexible:
o Designed to serve individuals in rural or remote areas with flexible repayment
schedules.
6. Comprehensive Services:
o Includes savings accounts, insurance, and financial literacy programs
alongside loans.
7. High Interest Rates:
o Interest rates are often higher than those in traditional banking due to the high
operational costs and risks associated with small, unsecured loans.
Objectives of Microfinance
1. Poverty Alleviation:
o Help individuals escape poverty by enabling them to start or expand small
businesses.
2. Financial Inclusion:
o Extend financial services to unbanked or underserved populations.
3. Economic Empowerment:
o Enhance the economic status of marginalized groups, particularly women.
4. Self-Sufficiency:
o Encourage self-employment and entrepreneurship.
5. Community Development:
o Foster collective growth through group-based financial mechanisms.
Types of Microfinance Services

1. Microloans:
o Small loans for starting or expanding microenterprises.
2. Microsavings:
o Savings accounts with no or low minimum balance requirements.
3. Microinsurance:
o Affordable insurance products for health, life, and property protection.
4. Financial Literacy:
o Training programs to improve understanding of budgeting, saving, and
business management.
Microfinance Institutions (MFIs)

Key Players
1. Non-Governmental Organizations (NGOs):

o Many NGOs focus on microfinance as part of their development agenda.
2. Microfinance Banks:
o Specialized financial institutions offering microfinance services.
3. Self-Help Groups (SHGs):
o Community-based groups where members save and borrow collectively.
4. Non-Banking Financial Companies (NBFC-MFIs):
o For-profit entities regulated by the Reserve Bank of India (RBI) to provide
microfinance services.
Role of Microfinance in India

1. Empowering Women:
o Around 90% of microfinance loans in India are provided to women, promoting
gender equality.
2. Financial Inclusion:
o Extends banking services to rural and underserved areas, contributing to the
Indian government’s financial inclusion agenda.
3. Poverty Reduction:
o Helps economically disadvantaged individuals generate income through
microenterprises.
4. Support for Agriculture:
o Provides credit for small-scale farmers to invest in seeds, equipment, and other
necessities.
Challenges of Microfinance
1. High Interest Rates:
o Microfinance loans often come with high interest due to the risk and
operational costs involved.
2. Over-Indebtedness:
o Borrowers may take multiple loans, leading to repayment issues and financial
distress.
3. Regulatory Oversight:
o Balancing financial inclusion with the need for stricter regulation to prevent
exploitation.
4. Operational Risks:
o High transaction costs, low-profit margins, and challenges in monitoring loan
utilization.
5. Dependency Syndrome:
o Some borrowers rely solely on microfinance loans without building
sustainable income sources.
Regulation of Microfinance in India

1. Reserve Bank of India (RBI):
o Regulates NBFC-MFIs under its guidelines to ensure transparency and ethical
practices.
2. Self-Regulatory Organizations (SROs):
o Institutions like Sa-Dhan and Microfinance Institutions Network (MFIN)
oversee industry practices and promote best practices.
3. Code of Conduct:
o Emphasizes fair lending practices, transparency in interest rates, and ethical
collection practices.
Micro Credit
Definition:
Microcredit refers to the provision of small loans to individuals or groups, especially in rural
or underprivileged areas, to help them engage in productive activities or start
microenterprises.
Key Features:
1. Small Loan Amounts: Targeted at low-income individuals, typically for business or

personal development.
2. Collateral-Free: Loans are often unsecured to make them accessible.
3. Target Audience: Rural poor, women, and small-scale entrepreneurs.
4. Repayment: Typically repaid in small, periodic installments.
5. Purpose: Encourages self-employment and boosts local economic development.
Institutions Involved:
 Microfinance Institutions (MFIs).

 Self-Help Groups (SHGs).
 Non-Banking Financial Companies (NBFCs).
 Cooperative Banks.
Self-Help Groups (SHGs)
Definition:
Self-Help Groups (SHGs) are small voluntary associations, usually comprising 10-20
members, that pool their resources to provide financial support and credit to members for
productive and personal purposes.
Key Features:
1. Community-Based: Members come from similar socio-economic backgrounds.

2. Savings and Credit: Members regularly save a fixed amount, and the pooled
resources are used to provide loans.
3. Government and Bank Support:
o Linked with formal banking systems under schemes like NABARD's SHG-Bank
Linkage Programme.
4. Women-Centric: Most SHGs focus on empowering women by promoting
entrepreneurship.
5. Joint Liability: Loans are repaid collectively, fostering accountability among
members.
Benefits:
1. Financial independence for members.

2. Access to credit for the unbanked.
3. Social empowerment, especially for women.
4. Skill development and entrepreneurship.
Rural Credit and Finance
Definition:
Rural credit refers to the credit provided to individuals and enterprises in rural areas to
support agricultural activities, small businesses, and rural development initiatives.
Sources of Rural Credit:
1. Institutional Sources:
o Commercial Banks.
o Regional Rural Banks (RRBs).
o Cooperative Banks.
o NABARD (National Bank for Agriculture and Rural Development).
2. Non-Institutional Sources:
o Moneylenders.
o Traders and commission agents.
o SHGs and MFIs.
Types of Rural Credit:
1. Short-Term Credit: For seasonal agricultural needs (e.g., seeds, fertilizers).

2. Medium-Term Credit: For activities like purchasing equipment or livestock.
3. Long-Term Credit: For infrastructural investments (e.g., irrigation systems, tractors).
Government Initiatives:
1. Kisan Credit Card (KCC):

o Provides farmers with affordable and timely credit for agricultural needs.
2. Interest Subvention Schemes:
o Reduce the interest burden on farmers.
Financial Inclusion
Definition:
Financial inclusion refers to ensuring access to affordable financial services such as banking,
credit, insurance, and pensions for all sections of society, particularly marginalized and low-
income groups.
Key Features:
1. Access: Making financial services accessible to the unbanked population.

2. Affordability: Ensuring low-cost services.
3. Technology: Leveraging digital platforms like mobile banking and UPI for widespread
reach.
Key Government Initiatives:
1. Pradhan Mantri Jan Dhan Yojana (PMJDY):

o Universal access to banking services with zero-balance accounts.
2. Digital Payments:
o Promoting platforms like UPI and mobile wallets.
3. Direct Benefit Transfers (DBT):
o Subsidies and welfare benefits directly credited to beneficiaries' bank
accounts.
Benefits:
1. Reduces poverty by providing access to credit and savings.

2. Promotes economic participation and growth.
3. Reduces reliance on informal and exploitative sources of credit.
Small Finance Banks (SFBs)
Definition:
Small Finance Banks (SFBs) are niche banks established to cater to underserved segments
such as small businesses, marginal farmers, and unorganized workers, promoting financial
inclusion.
Key Features:
1. Target Audience:
o Low-income individuals, small and medium enterprises (SMEs), and farmers.
2. Services Offered:
o Savings and current accounts.
o Small loans and microloans.
o Insurance and investment services.
3. Regulatory Framework:
o Governed by the Reserve Bank of India (RBI).
o Must comply with priority sector lending norms (75% of adjusted net bank
credit to be allocated to priority sectors).
4. Minimum Capital Requirement:
o ₹200 crore at the time of starting operations.
Examples of SFBs in India:
1. AU Small Finance Bank.

2. Ujjivan Small Finance Bank.
3. Equitas Small Finance Bank.
4. Jana Small Finance Bank.
Benefits:
1. Bridges the gap between formal and informal financial sectors.

2. Focus on financial inclusion.
3. Provides affordable credit to underserved populations.

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BANKING AND FINANCE

Key Features of Microfinance

Types of Microfinance Services

Microfinance Institutions (MFIs)

1. Non-Governmental Organizations (NGOs):

Role of Microfinance in India

Regulation of Microfinance in India

1. Small Loan Amounts: Targeted at low-income individuals, typically for business or

 Microfinance Institutions (MFIs).

Self-Help Groups (SHGs)

1. Community-Based: Members come from similar socio-economic backgrounds.

1. Financial independence for members.

Rural Credit and Finance

Sources of Rural Credit:

Types of Rural Credit:

1. Short-Term Credit: For seasonal agricultural needs (e.g., seeds, fertilizers).

1. Kisan Credit Card (KCC):

1. Access: Making financial services accessible to the unbanked population.

Key Government Initiatives:

1. Pradhan Mantri Jan Dhan Yojana (PMJDY):

1. Reduces poverty by providing access to credit and savings.

Small Finance Banks (SFBs)

1. AU Small Finance Bank.

1. Bridges the gap between formal and informal financial sectors.

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