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    Chapter 3microfinance

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    Nel Gallo Bargo
    The Indian microfinance sector grew rapidly with little regulation prior to 2010, leading to over-indebtedness and repayment issues. This culminated in the 2010 Andhra Pradesh crisis where many borrowers defaulted. In response, the Reserve Bank of India formed a committee to recommend regulations addressing coercive collection practices and high interest rates. Major developments since then include allowing microfinance institutions to access external commercial borrowing and social venture capital funds, as well as partnership models where banks assume less risk while still incentivizing microfinance institutions.

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    Chapter 3microfinance

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    Nel Gallo Bargo
    26 views15 pages
    The Indian microfinance sector grew rapidly with little regulation prior to 2010, leading to over-indebtedness and repayment issues. This culminated in the 2010 Andhra Pradesh crisis where many borrowers defaulted. In response, the Reserve Bank of India formed a committee to recommend regulations addressing coercive collection practices and high interest rates. Major developments since then include allowing microfinance institutions to access external commercial borrowing and social venture capital funds, as well as partnership models where banks assume less risk while still incentivizing microfinance institutions.

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    The Indian microfinance sector grew rapidly with little regulation prior to 2010, leading to over-indebtedness and repayment issues. This culminated in the 2010 Andhra Pradesh crisis where many borrowers defaulted. In response, the Reserve Bank of India formed a committee to recommend regulations addressing coercive collection practices and high interest rates. Major developments since then include allowing microfinance institutions to access external commercial borrowing and social venture capital funds, as well as partnership models where banks assume less risk while still incentivizing microfinance institutions.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    26 views15 pages

    Chapter 3microfinance

    Uploaded by

    Nel Gallo Bargo
    The Indian microfinance sector grew rapidly with little regulation prior to 2010, leading to over-indebtedness and repayment issues. This culminated in the 2010 Andhra Pradesh crisis where many borrowers defaulted. In response, the Reserve Bank of India formed a committee to recommend regulations addressing coercive collection practices and high interest rates. Major developments since then include allowing microfinance institutions to access external commercial borrowing and social venture capital funds, as well as partnership models where banks assume less risk while still incentivizing microfinance institutions.

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    © All Rights Reserved
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    of 15

    CHAPTER 3

    Presented by : MARJOLYN PEARL SANICO


    ANGELYN GORO
    REALYN MAE GUZMAN
    SHARMENE KAYE DEMAYO
    CHAPTER 3: MICROFINANCE SECTOR IN INDIA

    The Indian microfinance sector witnessed tremendous growth over the last
    five years, during which institutions were subject to little regulation. Some
    microfinance institutions were subject to prudential requirements; however
    no regulation addressed lending practices, pricing, or operations. The
    combination of minimal regulation and rapid sector growth led to an
    environment where customers were increasingly dissatisfied with
    microfinance services, culminating in the Andhra Pradesh crisis in the fall
    of 2010. Leading up to the Andhra Pradesh crisis, microfinance institutions
    were experiencing a large influx of equity and debt investment.
    Due to low repayment rates, microfinance institutions, with exposure to
    Andhra Pradesh, suffered significant losses. Banks stopped lending to
    microfinance institutions all over India, for fear that a similar situation
    would occur elsewhere, resulting in a liquidity crunch for microfinance
    institutions, which are largely dependent on bank lending as a funding
    source. With the sector at a standstill, microfinance institutions,
    microfinance clients, banks, investors, and local governments were calling
    for new regulation to address the prominent issues of the sector.
    The Reserve Bank of India (RBI) responded by appointing an RBI sub-
    committee known as the Malegam Committee. This committee aimed to
    address the primary customer complaints that led to the crisis, including
    coercive collection practices, usurious interest rates, and selling practices
    that resulted in over-indebtedness The Malegam Committee released their
    recommended regulations in January 2011.
    According to the latest research done by the World Bank, India is home to
    almost one third of
    the world's poor (surviving on an equivalent of one dollar a day). Though
    many central govemment and state government poverty alleviation programs
    are currently active in India, microfinance plays a major contributor to
    financial inclusion. In the past few decades it has helped out remarkably in
    eradicating poverty
    About half of the Indian population still doesn't have a savings bank account
    and they are deprived of all banking services. Poor also need financial
    services to fulfill their needs like consumption, building of assets and
    protection against risk. Microfinance institutions serve as a supplement to
    banks and in some sense a better one too. These institutions not only offer
    micro credit but they also provide other financial services like savings,
    insurance, remittance and non-financial services like individual counseling,
    training and support to start own business and the most importantly in a
    convenient way.
    The borrower receives all these services at her/his door step and in most
    cases with a repayment schedule of borrower's convenience. But all this
    comes at a cost and the interest rates charged by these institutions are
    higher than commercial banks and vary widely from 10 to 30 percent. Some
    claim that the interest rates charged by some of these institutions are very
    high while others feel that considering the cost of capital and the cost
    incurred in giving the service, the high interest rates are justified.
    CHAPTER 3.1
    Major and relatively recent developments in the microfinance sector

    1. External Commercial Borrowing


    - The RBI has permitted specified Micro Finance Institutions (MFIs) to
    avail external commercial borrowings (ECB) upto USD 10 million per
    financial year under the automatic route for lending to self-help groups or
    for micro-credit or for bonafide micro finance activity including capacity
    building. The limit to avail ECB for Non-Government Organisations (NGOs)
    engaged in micro finance activities has also been increased up to USD 10
    million per financial year. All other ECB parameters such as minimum
    average maturity, all-in-cost ceilings, etc. would need to be complied with.
    2. Social Venture Capital Funds
    -Not only are the new private sector banks and the foreign banks competing
    with each other to fund microfinance institutions (MFIs), but now MFIs may
    have access to equity social venture capital funds, which had been surveying
    and accessing the Indian market till recently, and have now started
    investing.
    3.Partnership Model

    -The partnership model of financing MFIs, based on an analysis of


    traditional financing models and ICICI Bank's experience in India. The
    bank, therefore, pioneered a partnership model that attempted to separate
    MFI risk from portfolio risk, provide a mechanism for banks to incentivize
    partner MFIs and deal with the inability of MFIs to provide risk capital in
    large amounts.

    The model has the following key characteristics:


    a.) Loan contracts directly between bank and borrower;
    b.) Alignment of incentives with a first-loss guarantee structure;
    c.) Transfer of implicit capital from the bank to the MFI through an
    overdraft facility.

    The partnership model may prove critical in unleashing wholesale funds of


    Indian banks. It combines debt and mezzanine finance, enabling the MFI to
    increase outreach rapidly, while unlocking large amounts of wholesale funds
    available in the commercial banking sector in India.
    CHAPTER 3.2
    Banking Correspondent Model and Banking Facilitator

    i. Bank Partnership Model


    I. MFI as Agent
    -In this model, the MFI acts as an agent and it take Care of all relationships
    with borrower from first contact to final repayment.

    II. MFI as holder of loans

    -Here MFI holds the individual loans on its books for a while, before
    securitizing them and selling them to bank.
    ii. Banking Facilitators

    Banking facilitators / correspondents are intermediaries who carry out


    banking functions in villages or areas where it is not possible to open a
    branch. In January, 2006, RBI permitted banks to use services of NGOs,
    MFIs and other civil society organizations to act as intermediaries in
    providing financial and banking services to poor.
    CHAPTER 3.3
    Micro Finance Institutions (Development and Regulations) Bill 2011

    The Malegam Committee released their recommended regulations in


    January 2011. These recommendations were 'broadly accepted by RBI
    in May 2011, though specific regulation was only released regarding
    which institutions qualify for priority sector lending at this time.
    Additionally, an updated version of the Micro Finance Institutions
    (Development and Regulations) Bill 2011 is in Parliament, which aims
    to provide a regulatory structure for microfinance institutions operating
    as societies, trusts, and cooperatives.
    THANK
    YOU!

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