rural nirmaan

7/30/2019 Rural Nirmaan

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Estimates of household credit demand vary from a minimum of Rs. 2,000 to Rs. 6,000 in rural areas and Rs.9,000 in urban settings. SHG member households received an average of Rs. 1766 in credit. Hence, notonly did the bulk of demand remain unmet, but borrowers generally received smaller loans than they

required. Banks disbursed Rs. 97 billion in credit to the poor, while MFIs and NABARDs SHG Bank-Linkage program

disbursed Rs. 1.4 billion covering 20 percent of estimated demand. More recent data suggests that whilethe gap between supply and demand may be shrinking, it continues to exist.

In March 2003, outstanding loans of the SHG Bank-Linkage Program amounted to Rs. 10 billion while MFIsheld Rs. 2.4 billion in loans outstanding

Microfinance services remain predominantly in the form of credit and do not address the poors need forsaving and insurance services. Regulation prevents most MFIs from mobilizing savings, and insuranceschemes are limited.

In terms of scope, the microfinance sector in India is concentrated in the southern states of AndhraPradesh, Tamil Nadu, Karnataka, and Kerala, with Andhra Pradesh alone encompassing 50 to 70 percent ofmicrofinance activities.

Banks prompted by priority lending targets and more recently by profit motivation, are increasinglyinvesting in microfinance. To date, however, they have shown little or no interest in retail microfinance,and the predominant providers of microfinance services in India continue to be SHGs and MFIs.

In some cases has bought out their portfolio in lieu of opening microfinance retail branches directly.

Over the last forty years, the Reserve Bank of India (RBI) has encouraged a significant expansion of bank

branches in rural areas. Despite general support for microfinance, there appears to be a tension betweenpromotion of the sector and client protection. RBI has thus forbidden MFIs from taking public savings thatwould reduce their cost of capital.

Andhra Pradeshs (AP) Mutually Aided Cooperative Societies Act --- APs populist mandate, however,sometimes serves to undermine credit, as is exemplified by the decision that farmers need not repay theprinciple on a loan for the first six months, unless they are borrowing from a bank.

Role of NABARD: In addition to concessional refinancing for banks, NABARD provides its partners withpolicy guidance and capacity building support.


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The SIDBI Foundation for Micro Credit (SFMC) was

established in 1999 to promote the growth andsustainability of the microfinance sector by providing arange of financial and non-financial services to MFIs,including loan funds, grant support, equity, andinstitution building support.

Interest Rate: High


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Sustainability

Current Sources of Funds:Sa-Dhan (an association of Indian MFIs) reports that donor

funds account for only nine percent of funds among its members, with the majority offunds coming from the banking sector

SHGs vs. Grameen Methodology: the long run The cost of creating and sustaining new and high-quality SHGs can be as much as Rs.

10,000 (US$220) per group, though NABARD estimates it to be one-tenth as much.

Though banks generally lend to SHGs at interest rates between 12 and 12.5 percent,

one study finds the all-inclusive costs to rural banks of forming and lending to SHGs

translate into interest rates between 22 and 28 percent per year, even up to 48 percent.

To the extent this is the case, rural banks may be lending to SHGs at a loss, making long-term sustainability an issue.


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SHGs are too reliant on the whims of bank managers. SHGs tend to build

relationships with specific bank staff that do not normally have a development

role. SHG development within commercial or rural banks tends to occur to the

extent that a committed staff member is at a given bank at a given time.

lack of MFI capacity is the number one obstacle to scaling up outreach. There is aneed for staff training in accounting and management information systems (MIS),

financial management, personnel management, and business planning. Younger

MFIs typically require support (financial and technical) in building adequate MIS

systems.

Grameen-style MFIs have an average operational self-sufficiency of 109 percent,compared to 67 percent for SHGs.


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Regulatory Framework

Microfinance Act absence of a unified microfinance act uniting MFIs under a single regulating authority with a

standard set of guidelines, regulation of microfinance in India is somewhat disjointed.

MFIs are classified and governed according to the legal act under which they incorporated.

An estimated 80 percent or more of the 2,000 MFIs in India are registered as philanthropicsocieties and essentially unregulated.

Commercial Banks, Cooperative Banks, Regional Rural Banks, Non-Banking Financial

Companies (NBFCs), Credit Cooperatives, or Mutually Aided Cooperative Societies, and may bestrictly supervised by the Reserve Bank of India, NABARD, or state authorities

drafting a microfinance act : under way

A single regulating body could require standardized financial disclosure based on internationalbest practices. Ultimately this should make well-performing MFIs more visible to potentialinvestors or donors.

the rate at which they lend to MFIs or at which MFIs lend to clients is not regulated

Some in the industry support a rate cap in the interest of consumer protection, but mostprefer to allow MFIs the ability to set rates as they see fit, and allow competition to drive themdown.

Savings MFIs registered under the Societies Act face virtually no financial disclosure requirements.

They are prohibited from legally collecting savings, but it is widely acknowledged that manyMFIs mobilize deposits on behalf of their clients

Money collected :This money is deposited in group accounts for clients in a commercial bank,

while in other cases the money is collected into a trust which is invested in the MFI.


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gray area within the law which highlights the need for the poor toaccess savings services to keep their money in a safe, convenientplace; and the need for MFIs to lower their cost of capital.

Under Indian regulations MFIs wishing to collect savings typically

transform into NBFCs. NBFCs must be at least one year old before theycan collect deposits, and then only if they have received at least aninvestment grade credit rating.

There is a limit on the terms of deposits that NBFCs can accept: theinterest rate paid on deposits cannot be more than 11 percent and nodeposits for less than 12 months or more than 60 months can beaccepted

minimum capital requirement of Rs. 20 million (approx. US$440,000considerably higher than found in many other developing countries)and a lengthy application process, this is not an easy leap to make

RBI is thought to purposefully drag its feet on the applications so as tolimit the number of NBFCs it is required to oversee., India suffered anumber of NBFC failures in recent years

savings might be better approached through alternative models, suchas credit unions.

Regulations on Investment

Even without the ability to collect deposits some MFIs are finding itworthwhile to transform into NBFCs because it allows them to raiseequity.


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Raising equity :Minimum foreign investment in an NBFC is set at

US$500,000and must be matched by an equal amount ofdomestic equity as regulations prohibit majority foreign investment

RBI in 2002 outlawed even borrowing from abroadincluding fromdonor agencies. This limits MFIs access to capital at preferentialrates, a vital source of funds, and a potential source of quasi-equity,preventing them from leveraging more capital.

With domestic loan rates starting at over 8 percent, borrowingabroad, even at commercial rates, can be of benefit to MFIs.

MFIs also face restrictions on the receipt of foreign donations. Inorder to receive overseas grants they need permission from theMinistry of the Interior in accordance with the Foreign ContributionRegulation Act. it takes about two to three months to get a

temporary permit under this regulation and the NGO is required toreapply for it every year for three years until it is granted apermanent permit.


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Effectiveness of Kisan Credit Card,

National Agriculture Insurance Scheme Awareness on KCC: About 19 per cent of the sample KCC holders were not aware

ofthe modalities, usefulness/ benefits of KCC scheme. Farmers have been issued

KCC and sanctioned limits under KCC, but they were not aware of its positive

aspects, like, revolving cash credit facility (RCCF) involving any number of drawals

and repayments, credit limits for full year including ancillary activities related to

crop production and other NFS activities, sub limit for consumption purposes, etc.


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Coverage of New farmers

Every year certain percentage of new farmers were being brought to the KCC

fold articularly more prominent during doubling of credit programme (2004-

05 to 2006-07) as per the target prescribed by the controlling/head office of

the bank


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Adequacy of Credit : the study revealed that, as many as 900 sample KCC

holders, forming 48 percent of the total covered during field visit, felt that the

credit limits sanctioned to them under KCC were not adequate.

The study revealed that no agency including Co-op. bank had been strictly

following the scales of finance (SoF).


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Operational Flexibility : Majority of farmers (68%) had not gone for

frequent operations on the limit sanctioned to them under the card and

withdrew the sanctioned KCC limit at one go.

Further, 11per cent and 21 per cent KCC holders had operated the KCC

limit twice and more than twice, respectively. Credit Usage:

Hassle Free Card

Purchase of Inputs :useful in regards to reduced cost of accessing credit as

compared to the earlier system of crop delivery system

meeting credit requirements for crop cultivation for the whole year

Availability of credit whenever the credit is needed

flexibility in drawing cash/buying inputs from any supplier of choice

reduction in quantum of interest due to drawal flexibility/ repayment

reduction in cost of credit for availing the bank loan

insurance cover (NAIS/PAIS) at a very low premium rate


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Effectiveness of National Agriculture

Insurance Scheme The National Agricultural Insurance Scheme (NAIS) was introduced in the

country from the rabi season of 1999-2000.

It covers all food grains, oilseeds and annual horticultural / commercialcrops for which past yield data are available for an adequate number ofyears

The scheme is operating on the basis of both area approach, forwidespread calamities, and individual approach, for localized calamitiessuch as hailstorm, landslide, cyclone and floods.

Coverage of NAIS: Country Level: It covered 5.8 lakh farmers and 7.8 lakhhectares of cropped area. The number of farmers increased from 84.1lakhs in kharif 2000 to 129.3 lakhs by kharif 2006 and the area coveragereached 196.7 lakh hectares from 132.2 lakh hectares during this period

The average premium rate of Rs 3.03 indicates the dominance of riskycrops in the crop area insured during the kharif season.


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Reach and Impact of NBFC

A significant degree of fragmentation has been seen in the NBFC sector

which is inundated with a large number of small and weak entities

unable to withstand any adverse developments in their operating

environment due to their fragile financial position.

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