Micro-finance (MF) is a small-scale financial intermediation, inclusive of savings, credit, insurance, business services and technical support provided to the needy borrower. The thrust of the MF initiative is to channelize production and consumption credit in multiple doses based on the absorption capacity of the prospective borrower. The presumption here is that the borrowers possess basic financial literacy and requisite capacity to operate their self-determined economic ventures profitably.
Evolution of Micro-Finance
The formal existence of MF was found in 1972. A charity based model (interest free loans where repayment was based on peer pressure) of MF was evolved in Ireland. Later on, in Germany, a thrift-based model was developed with establishment of saving funds. Bangladesh Grameen model is based on the principle of trust and creditworthiness of poor with both, obligatory and voluntary saving schemes. The Foundation for Development Cooperation (FDC) of Australia evolved a research project, The Banking with the Poor (BWTP) network to link between microfinance institutions with formal financial institutions.
Micro Finance and Indian Economy
There are four important MF models prevalent in India.
MF has become a movement in India. Simultaneously it has become a unique tool of empowerment and capability enhancement.
Firstly, it has added millions of people to the banking system by developing the habit of thrift and saving.
Secondly, it helps in poverty alleviation.
Thirdly, it encourages group and individual activities which provide livelihood on a regular basis.
Fourthly, through MF, financial inclusion is possible with the common effort of Bank, NGO’s, Micro-Finance Institutions and other institutions.
Fifthly, it empowers women by making women not only economically, but socially and politically as well.
In the Micro Finance Institutions (Development And Regulation) Bill, 2012 which lapsed and could not be converted into an Act, micro finance was defined to include
(a) micro credit facilities given for such special purposes, as may be specified by the RBI from time to time and involving such amount, not exceeding in aggregate Rs. 5 lakh for each individual and for such higher amount, not exceeding 10 lakh rupees, as may be prescribed; micro credit may means any loan, advance, grant or any guarantee given or any other credit extended in cash or kind with or without security or guarantee;
(b) collection of thrift;
(c) micro pension or insurance services;
(d) remittance of funds to individuals within India subject to prior approval of the Reserve Bank etc.
(e) and any other services as may be specified by RBI.
As of now micro finance institutions are regulated like a Non-Banking Financial Institution by RBI. The FAQ of RBI may be seen here. Further, new institutions like payments bank, small finance bank, local area bank etc. have been launched. Rashtriya Mahila Kosh (RMK) established in 1993 as a national level autonomous organization under the aegis of the Ministry of Women and Child Development extends micro-finance to the poorest and asset-less women entrepreneurs through Intermediatroy Organisations like NGOs for income generating activities @ 6% simple interest, who in turn can extend the loan to Self Help Group (SHG) beneficiaries upto 14% simple rate of interest.
In the Union Budget 2015-16, government sponsored micro insurance and pension were launched for the disadvantaged sections of the society.
• Pradhan Mantri Suraksha Bima Yojna (PMSBY) to cover accidental death risk of Rs.2 Lakh for a premium of just Rs. 12 per year (i.e. Rs 1/month as premium). It will cover all the savings account holders of the age group 18 to 70 for accidental disability or death.Public sector general insurance companies or other general insurance companies that are willing to offer insurance coverage to individuals on similar terms would offer and administer this scheme. The scheme is delivered through banks including regional rural banks as well as cooperative banks.
• Atal Pension Yojana to provide a defined pension, depending on the contribution and the period of contribution. Government to contribute 50% of the beneficiaries’ premium limited to Rs.1,000 each year, for five years, in the new accounts opened before 31st December 2015.It focuses on the unorganized sector where nearly 400 million employees representing more than 80 per cent of all employees are engaged. Atal Pension Yojana would provide a fixed minimum pension Rs.1000 to Rs.5000 per month starting from the age of 60. The amount of pension will depend on the monthly contribution by the employee and the age at which the employee subscribes to the insurance. In any case, the individual will have to subscribe under Atal Pension Yojana for a minimum of 20 years. The most significant part of this Scheme is co-contribution by government of Rs.1000/- per annum or 50% of the total contribution whichever is lower, for the first 5 years if one joins the scheme before the end of the first year of its launch, that is 31 December, 2015.
• Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) to cover both natural and accidental death risk of Rs. 2 lakh at premium of Rs. 330 per year for the age group of 18-50 (less than Rs. 1/day). i.e. it will cover all the savings account holders of the age group 18-50 for death due to any cause.This scheme is offered through LIC of India or other Life Insurance companies that are willing to offer life insurance on similar terms.
The schemes were launched in simultaneous functions held at 115 venues across the country on 9 May 2015.
Sa-Dhan has been recognised by RBI as the Self Regulatory Organisation for the Microfinance Sector in February 2015.At present, Sa-Dhan has the membership base of 242 institutions (56 NBFCs, 113 Societies & Trusts, 13 Cooperatives, and 31 SHPIs) also including Banks, Rating agencies and Capacity Building agencies, representing all legal forms and operating models. Also see Micro-finance Institutions Network (MFIN) for data relating to micro finance.
- Status of Micro-Finance in India 2009-10, NABARD, http://www.nabard.org/pdf/Status%20of%20Micro%20Finance%202009-10%20Eng.pdf