Microfinance in India

India has always been a very agrarian focused culture, with approximately 450 million people are currently in need of funds. Micromanage encompasses many different types of services such as credit, savings, Insurance, remittance and pensions. Micromanage Initiatives primarily focus on microcircuit services because rural towns are heavily reliant on credit for a wide range of needs for example engage In economic activity, consumption needs, mitigate Income shocks, Increase savings and improve self-empowerment. In many micromanage areas, women comprise most of the groups because they are seen as more reliable with funds.

Indian's micromanage evolution can be broken down into 4 distinct phases. Indian's micromanage movement started in 1903 through its credit cooperative movement. Before this movement, the poor often relied on the village's money lender whenever they needed access to cash. Money lenders were notorious for high interest rates; they would charge approximately 3%-8% per month on loans. Although money lenders would prey on farmer, they had no other choice to use them because they could not get access to banks. Farmers' earnings were directly related to how well their crops fared.

High Interest rates coupled with possible years of famine made repayment Impossible caused agrarians to riot. In 1904, the Co-operative Society Act extended credit to Indian villages under government sponsorship as an alternative to traditional money lenders. Cooperatives were the only option to most rural areas because of its spatial spread and penetration in remote areas. During this phase commercial banks did not venture into rural areas because they were in the private sector and had no incentive to extend their outreach to rural areas. However they became unreliable because of NAP inefficiencies and they lacked revisionism's.

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Credit cooperatives had trouble distributing funds due to frozen assets from overdue repayments. Therefore rural areas stopped using credit cooperatives and opted for high interest money lenders. The next phase of Indian's micromanage evolution was the Nationalization of Social Banking. In 1969, former Prime Minister Nadir Ghanaian nationalized 14 major sector banks In part of her political policy to eradicate poverty. After the nationalization of banks, regional rural banks (Orbs) were created in order to strengthen the rural banking structure and reach more people.

These banks offered a hybrid service of the previous cooperative banks with a more localized approach. Approximately a decade after, the government sponsored the Integrated Rural Development Program (ARID) to deliver RSI. 15000 to the poor. Indian's Integrated Rural Development Program (ARID) is a great example of inefficient subsidized credit. This program was set up in order to address the need to allocate funds according to social targets, meaning that 30% of the fund was allocated to socially excluded groups (defined using the caste system) and 30% towards women.

Between 1979 and 1989, there was a huge period f ARID growth due to a huge subsidy budget of $6 billion. But despite the huge fund, the scheme did not generate a good Institutional performance. ARID repayment rates fell below and only of borrowers took out a second loan after the first loan was repaid; which is particularly troubling given it is perceived that repeating rate fell to Just 31%, and therefore the ARID failed its key purpose: being a reliable and meaningful lender to the poor.

According to the Rural Finance Program at the Ohio State University, the main mistake government-led development banks (such as he ARID) made, was to view offering credit as the same as offering seeds. Ohio argues that credit should be thought of as a fungible tool of financial intermediation, and as not as a specific input into a production process. They claimed that credit could not Just be directed towards any particular section of society; and when this was linked with cheap credit policies, this caused havoc in rural financial markets.

This outcome was due to the inadequate accounting of incentive effects and politics associated with subsidies. It is argued that subsidizing banks created inefficient monopolies and removed market tests. Some have even gone on to say that the households involved would have been better off without the subsidies. Firstly subsidized banks pushed out the informal money lenders, a source of credit the poor heavily rely on. Secondly, the use of subsidized credit means that the interest rate, a rationing mechanism, is driven down below market rates, breaking down the rationing mechanism.

This meant that credit was no longer allocated to the most productive projects, and was often distributed on the basis of political and social desires. Thirdly, with subsidized lending, bankers incentives to collect savings posits were almost eradicated due to the constant flow of capital from the government, so poor households were left with unattractive and inefficient ways to save. During this phase, a trade union of self-employed women workers in Gujarat established a Self-Employed Women's Association (SEWS) bank in 1974.

Approximately 4000 members contributed RSI. 10 to register as a co-operative bank to provide banking services to poor women. This successful bank was one of the first initiatives to introduce micromanage. The third phase of Indian's micromanage evolution is the introduction of SSH bank engage program and the growth of MONGO- Miff. The National Bank for Agricultural and Rural Banking (ONBOARD) was established in 1982 to focus primarily on agricultural and rural development. In 1992, ONBOARD pioneered the first self help group.

These informal groups of women promote savings among members and used these resources for meeting their credit needs. A breakdown of this model is that in every meeting, the members would put aside a certain amount for deposit. These deposits are then recorded and through accumulation they become a way for members to lend to each other. Although the interest rates in this model are higher than what banks offer, the SSH groups reap the benefits because the repayment goes directly into the group's savings. This means that the group's loaning capabilities increases the more its members regularly save.

In this model, there is no formal banking institution that provides loans. The primary goal of this model is for all members to begin their own saving initiatives. Later this model evolved to become part of Self Help Group Bank Linkage program (Kbps); after analyzing a SSH for 6 to 8 months, banks would pair up with groups to extend the credit of the group. After another period of 6 to 8 months, banks would offer a larger credit line; the maximum a group could borrow was four times their current savings account. Currently Kbps account for 58% of current loans outstanding.

Micromanage Institutions (Miff), Non These type of institutions are similar to Bangladesh Grahame Model. In 1976 Unhandsomely created the Grahame Bank Model as a project to assist poor families by offering credit. Grahame means Mileage" in Bengali. This type of banking was used to show that the poor people of Bangladesh are indeed bankable and able to pay back loans without promising collateral. The model success is based on the fact that there is no need for collateral however through group peer pressure, 96% of all loans are repaid.

By offering lower interest rates than the Government of Bangladesh and weekly repayment schedules, the Grahame model has been very successful. This model has been very successful in Bangladesh and has become a formal banking structure in 1983. India modified this banking structure and Joint Liability Groups Loss) became the dominant model used in Micromanage institutions (Miff). This model is similar to Bangladesh Grahame Model but it introduces an important concept, Joint liability. In this model, there is usually 4 to 10 members who are self selected.

Due to self selection, most of Joint liability groups are homogeneous groups. Whenever the group decides to take out a loan, all members must sign a Joint liability contract; this ensures that if one member fails to repay the loans, the other members are liable for it. This type of collateral is called social collateral because members often use peer pressure to make sure that all members repay their loans. This type of group is intended to Just be credit groups and regular savings by embers are not required. The group only exists because individual members are legally bound to one another.

Miff prefer this model to provide credit to tenant farmers because the groups are easy to make and there are less restrictions regarding the utilization of the loan. During this phase, Miff experienced a boom because Nags coupled themselves with Miff to attract commercial investment. Indian's current phase of micromanage encompasses the centralization of micromanage. Throughout its history, micromanage has gone through an intense transformation to provide microcircuit for a wide range of services. Currently India uses a hybrid of the above models in its Miff.

However Miff are being criticized for its high interest rates. Many borrowers only apply for loans between 5000-20000 rupees; the small value incurs high fixed costs for Miff. To avoid losing money, Miff often charge higher interest rates. Four key reasons why Miff charge high rates include: the cost of funds, Miff operating expenses, loan losses, and profits needed to expand their capital base and fund expected future growth. The costs that are associated with microcosms are the cost of the money to loan, cost of loan defaults ND transaction and operating costs.

However it is important to note that there is approximately 450 million people untouched by any micromanage services. These people are often referred to as "unbreakable" because they rely on family members or moneylenders for financial services. During 2005-2010, India experienced a boom in micromanage with state, Andorra Pradesh, leading the reform. However it was soon realized that Miff were using unethical practices to collect payments from borrowers. These practices escalated to cause many borrowers to commit suicide, little of borrowing and accept high interest rates to avoid Miff.

The state government of Andorra Pradesh responded by enacting the Andorra Pradesh Micromanage Institutions (regulation of money lending) Act in 2010. The act made it they didn't have to pay back the loans and the government would protect them. This led the repayment rate to plummet from 99% to a mere 10%. The act was trying to protect the borrower and punish Miff for charging exorbitant interest rates and causing over borrowing. Critics of the act state that She were also part of the crisis ND that they were not negatively affected by the act as Miff were.

They state that government backed She were also part of over borrowing and the act limits Miff business and successfully reduces competition between both micromanage institutions. The act negatively affected Miff profitability, loan recovery and their overall operations. The result of the crisis left many Miff at negative worth, this in return limits their accessibility to garner fresh funds and their overall ability to reach the rural poor. According to the norms, banks are not allowed to lend to banks that have negative worth.

The crisis left micromanage companies like SHARE Microfilm, Ashman Microfilm, Spandex Sporty Financial, Trident Microfilm, and Future Financial Services unable to disburse fresh loans to clients. Banks also lost trust in Miff and there has been a serious liquidity crunch. Increased costs of borrowing coupled with the inability to access new funds further strained the profitability of Miff. Len conclusion, the enactment of the Andorra Pradesh Act stifled the access of basic financial services to the poorest of India citizens. The current goal for Indian's micromanage sector is poverty alleviation through uncial inclusion and inclusive growth.

The 2010 Andorra Pradesh Crisis highlighted a few issues of Indian's micromanage sector. The crisis was due to high interest rates and multiple memberships and borrowing. Other issues include inadequate outreach and coverage, lack of regulation, limited product innovation, rising Naps and recovery issues, ratings of Miff and data availability. Proposed Micromanage Bill of 2012 After the 2010 Andorra Pradesh Crisis, the government was very worried over the state of Miff and proposed a bill to the development and regulation of Miff.

The bill allows the central government to be the sole regulator and supervisor of Miff by creating the Micro Finance Development Council to oversee the development of Miff. Specifically the bill wants all Miff that are Non Banking Financial Companies (NBS) to be regulated by RIB while Miff that aren't companies would be regulated by the respective state governments because they will be able to take a more localized approach and be better equipped to serve them. The bill would also require Miff to provide an annual balance sheet, profit and loss account for audit to RIB at the end of ACH fiscal year.

RIB would also have the authority to set the maximum annual interest charged and maximum limit on the margins Miff are allowed to make. RIB becoming the prime regulator for Miff increases uniformity and stability. However critics of the bill rather have a whole entire new body to regulate the micromanage sector such as Micromanage Regulatory and Development Authority. Key issues that still need to addressed: relating to margin, interest rate cap, allowing collection of thrift by Miff, enabling Miff to render other services than credit like pensions, insurance, etc. Ceiling limit on credit, and regulation. Critics don't want a cap on interest rates or margins because they believe that it negatively affects the entire private micromanage sector. Specifically price controls only benefits a few while The bill lacks specific provisions, which would provide and facilitate financial inclusion at an affordable cost to poor and weaker sections. The bill doesn't address what led to the AP Crisis: multiple credit lending, over-indebtedness, multiple memberships and coercive measures adopted by Miff.

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