chapter 8 micro finance in india
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Microfinance = provision of financial services
to the poor
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Micro-creditGroup lending
Social/charitableactivity
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Range of financialservices
Group and individuallending
Profitable activity
What it often is What it really should be
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Risk management challenges dueto information asymmetryproblems
Accessibility (geographicaccessibility and easiness to dealwith)
No collateral, Low value and cash
intensive nature of the business
Staff training and motivation
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High transaction
costs
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Decision to take loan Loan usage loan repayment
Adverse selectionMoral hazard
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Dont know
Clients typeInterest ratereflects proba of default
Safer clients drop outNeed to increase interestrate
Providing credit canbecomeimpossible
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Can not observe what client is doing
Bad loan usage
Strategic unwillingness
To repay
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75% population lives in rural areas:geographical access difficult
Informal activities: need access at flexible
times Illiteracy: difficult to deal with traditional
services
Low value of transactions
Lack of collateral
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Lack of trained staff
Lack of motivated staff
Difficult to incentives staff
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Deccan, late 19th Century:peasant riots on account of coercive
alienation of land by moneylenders.
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Organization of cooperative societiesas alternative institutions for providingcrdit by british government
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Credit was viewed as essential part of fightagainst poverty which led to followingmeasures:
Expansion of the institutional structureDirected lending to disadvantaged borrowers
and sectors
Interest rates supported by subsidies
Institutional vehicles: cooperatives,commercial banks and Regional Rural Banks[RRBs].
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1950 & 1969: emphasis on the promoting ofcooperatives.
1969: nationalization of the major commercialbanks: beginning of commercial bank branch
expansion in the rural and semi-urban areas. 1976: Regional Rural Banks (RRB), low cost
institutions mandated to reach the poorest incredit-deficient areas
During this period, intervention of the RBI(Reserve Bank of India) was essential: specialcredit programmes for channeling subsidizedcredit to the rural sector (concept of prioritysector)
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Enhance the areas of commercial fredon
Increase their outreach to the poor
Stimulate additional flows to the sector.
Liberalising interest rates for cooperatives andRRBs,
Relaxing controls on where, for what purposeand for whom RFIs could lend, reworking the
sub-heads under the priority sector, Introducing prudential norms
Restructuring and recapitalising of RRBs.
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Defects in policy design,
Infirmities in implementation
Inability of the government of the day to desist
from resorting to measures such as loan waivers. High defaults
The banking system - was not able to internaliselending to the poor as a viable activity but only
as a social obligation More and more difficult for commercial bankers
to accept that lending to the poor could be aviable activity.
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Against rural population of 741.0 million, 500 millionpeople un-served
Population per branch: 22,793
Penetration of savings accounts is below 18% As against 104% in urban and semi-urban areas
Number of villages per branch: 19
High dependence on informal sources 36% of rural credit from informal sources Dependence even higher for lower income households: 78%
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Demand: Rs. 450 billion/y
60% in Southto cover all parts of India
Less than 2 million
Households reached500 million un-served poor
Disbursed: 39 billion
Need employment opportunities
Need protection
against all risks
Market constraints
Insurance under-delivered
Scaling up
Increaseimpact
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Bank SHG
NGO
Loan at9%
Noliability
Groupformation/linkage
SHG-Bank linkage model
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Lack of adequate quantities of risk capital
Lack of long-term finance to pay for creationof the necessary infrastructure and pre-
operative expense Lack of well trained staff in adequate
numbers at all levels
technology
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