Content

SR. Page
NO. No.
1 Introduction
2 Definition
3 Origin
4 Concept
5 Silent features of micro finance
programme
5 Why it is require in India
6 Principles of micro fiancé
7 Current scale of micro fiancé
8 Micro finance institution in india
9 Present sinarion
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Introduction

Microfinance is an economic development approach that

involves providing financial services
through institutions to low income clients”.
he poor stay poor, not because they are lazy but
because they have no access to capital."
The dictionary meaning of ‘finance’ is
management of money. Themanagement of money denotes
acquiring & using money. Micro Finance is buzzing word,
usedwhen financing for micro entrepreneurs. Concept of micro
finance is emerged in need of meetingspecial goal to empower
under-privileged class of society, women, and poor,
downtrodden bynatural reasons or men made; caste, creed,
religion or otherwise. The principles of Micro Financeare
founded on the philosophy of cooperation and its central
values of equality, equity andmutual self-help. At the heart of
these principles are the concept of human development and
thebrotherhood of man expressed through people working
together to achieve a better life forthemselves and their
children.
Traditionally micro finance was
focused on providing a very
standardizedcredit product. The poor,
just like anyone else, (in fact need
like thirst) need a diverse range
offinancial instruments to be able to
build assets, stabilize consumption
and protect themselvesagainst risks.
Thus, we see a broadening of the
concept of micro finance--- our
current challengeis to find efficient
and reliable ways of providing a
richer menu of micro finance
products. MicroFinance is not merely
extending credit, but extending
credit to those who require most for
theirand family’s survival. It cannot
be measured in term of quantity, but
due weightage to qualitymeasurement.
How credit availed is used to survive
and grow with limited means.
In India, Microfinance has been defined by “The National
Microfinance Taskforce, 1999” as “provision of thrift, credit
and other financial services and
products of very small amounts to the poor in rural, semi-
urban or urban areas for enabling
them to raise their income levels and improve living
standards
Who are the clients of micro finance?
The typical micro finance clients are low-income
persons that do not haveaccess to formal financial institutions.
Micro finance clients are typically self-employed,
oftenhousehold-based entrepreneurs. In rural areas, they are
usually small farmers and others who areengaged in small
income-generating activities such as food processing and petty
trade. In urbanareas, micro finance activities are more diverse
and include shopkeepers, service providers,artisans, street
vendors, etc. Micro finance clients are poor and vulnerable
non-poor who have arelatively unstable source of income.
Access to conventional formal financial institutions, for many
reasons, is
inversely related to income: the poorer you are, the less likely
that you have access. On the other
hand, the chances are that, the poorer you are, the more
expensive or onerous informal financialarrangements.
Moreover, informal arrangements may not suitably meet
certain financial serviceneeds or may exclude you anyway.
Individuals in this excluded and under-served marketsegment
are the clients of micro finance.
As we broaden the notion of the types of services
micro finance encompasses, thepotential market of micro
finance clients also expands. It depends on local conditions
andpolitical climate, activeness of cooperatives, SHG & NGOs
and support mechanism. Forinstance, micro credit might have
a far more limited market scope than say a more
diversifiedrange of financial services, which includes various
types of savings products, payment andremittance services,
and various insurance products. For example, many very poor
farmers maynot really wish to borrow, but rather, would like a
safer place to save the proceeds from theirharvest as these are
consumed over several months by the requirements of daily
living. Centralgovernment in India has established a strong &
extensive link between NABARD (NationalBank for Agriculture
& Rural Development), State Cooperative Bank, District
CooperativeBanks, Primary Agriculture & Marketing Societies at
national, state, district and village level.
The Need in India
•
India is said to be the home of one third of the world’s poor;
official estimates range from
26 to 50 percent of the more than one billion population.
•
About 87 percent of the poorest households do not have access
to credit.
•
The demand for microcredit has been estimated at up to $30
billion; the supply is less
than $2.2 billion combined by all involved in the sector.
Due to the sheer size of the population living in poverty, India
is strategically significant in theglobal efforts to alleviate
poverty and to achieve the Millennium Development Goal of
halvingthe world’s poverty by 2015. Microfinance has been
present in India in one form or another sincethe 1970s and is
now widely accepted as an effective poverty alleviation
strategy. Over the lastfive years, the microfinance industry has
achieved significant growth in part due to theparticipation of
commercial banks. Despite this growth, the poverty situation in
India continuesto be challenging.

Microfinance is the provision of financial services to low-

income clients or solidarity lending groups including consumers
and the self-employed, who traditionally lack access
to banking and related services.

Microfinance typically refers to microcredit, savings, insurance,

money transfers, and other financial products targeted at poor
and low-income people.

Micro finance is defined as the financial service for poor and low
income group people.

Microcredit refers to very small loans for unsalaried borrowers

with little or no collateral, provided by legally registered
institutions.
Traditionally, banks have not provided financial services, such as
loans, to clients with little or no cash income. Banks incur
substantial costs to manage a client account, regardless of how
small the sums of money involved. For example, although the
total gross revenue from delivering one hundred loans worth
$1,000 each will not differ greatly from the revenue that results
from delivering one loan of $100,000, it takes nearly a hundred
times as much work and cost to manage a hundred loans as it
does to manage one. The fixed cost of processing loans of any
size is considerable as assessment of potential borrowers, their
repayment prospects and security; administration of outstanding
loans, collecting from delinquent borrowers, etc., has to be done
in all cases. There is a break-even point in providing loans or
deposits below which banks lose money on eachtransaction they
make. Poor people usually fall below that breakeven point. A
similar equation resists efforts to deliver other financial services
to poor people.
In addition, most poor people have few assets that can be secured
by a bank as collateral. As documented extensively by Hernando
de Soto and others, even if they happen to own land in
the developing world, they may not have effective title to it.[2] This
means that the bank will have little recourse
against defaulting borrowers.
Seen from a broader perspective, the development of a healthy
national financial system has long been viewed as a catalyst for
the broader goal of national economic development(see for
example Alexander Gerschenkron, Paul Rosenstein-Rodan, Joseph
Schumpeter, Anne Krueger ). However, the efforts of national
planners and experts to develop financial services for most people
have often failed in developing countries, for reasons summarized
well by Adams, Graham & Von Pischke in their classic analysis
'Undermining Rural Development with Cheap Credit'.[3]
Because of these difficulties, when poor people borrow they often
rely on relatives or a local moneylender, whose interest rates can
be very high. An analysis of 28 studies of informal moneylending
rates in 14 countries in Asia, Latin America and Africa concluded
that 76% of moneylender rates exceed 10% per month, including
22% that exceeded 100% per month. Moneylenders usually
charge higher rates to poorer borrowers than to less poor ones.
[4]
While moneylenders are often demonized and accused of usury,
their services are convenient and fast, and they can be very
flexible when borrowers run into problems. Hopes of quickly
putting them out of business have proven unrealistic, even in
places where microfinance institutions are active.[citation needed]
Over the past centuries practical visionaries, from
the Franciscan monks who founded the community-
oriented pawnshops of the 15th century, to the founders of
the Europeancredit union movement in the 19th century (such
as Friedrich Wilhelm Raiffeisen) and the founders of
the microcredit movement in the 1970s (such as Muhammad
Yunus) have tested practices and built institutions designed to
bring the kinds of opportunities and risk-management tools that
financial services can provide to the doorsteps of poor people.
[5]
While the success of the Grameen Bank (which now serves over
7 million poor Bangladeshi women) has inspired the world, it has
proved difficult to replicate this success. In nations with lower
population densities, meeting the operating costs of a retail
branch by serving nearby customers has proven considerably
more challenging. Hans Dieter Seibel, board member of the
European Microfinance Platform, is in favour of the group model.
This particular model (used by many Microfinance institutions)
makes financial sense, he says, because it reduces transaction
costs. Microfinance programmes also need to be based on local
funds. Local Roots
Although much progress has been made, the problem has not
been solved yet, and the overwhelming majority of people who
earn less than $1 a day, especially in the rural areas, continue to
have no practical access to formal sector finance. Microfinance
has been growing rapidly with $25 billion currently at work in
microfinance loans.[6] It is estimated that the industry needs $250
billion to get capital to all the poor people who need it.[6] The
industry has been growing rapidly, and concerns have arisen that
the rate of capital flowing into microfinance is a potential risk
unless managed well.[7]

Current scale of microfinance operations

No systematic effort to map the distribution of microfinance has
yet been undertaken. A useful recent benchmark was established
by an analysis of 'alternative financial institutions' in the
developing world in 2004.[18] The authors counted approximately
665 million client accounts at over 3,000 institutions that are
serving people who are poorer than those served by the
commercial banks. Of these accounts, 120 million were with
institutions normally understood to practice microfinance.
Reflecting the diverse historical roots of the movement, however,
they also included postal savings banks (318 million accounts),
state agricultural and development banks (172 million accounts),
financialcooperatives and credit unions (35 million accounts) and
specialized rural banks (19 million accounts).
Regionally the highest concentration of these accounts was
in India (188 million accounts representing 18% of the total
national population). The lowest concentrations were inLatin
American and the Caribbean (14 million accounts representing 3%
of the total population) and Africa (27 million accounts
representing 4% of the total population, with the highest rate of
penetration in West Africa, and the highest growth rate in Eastern
and Southern Africa [19] ). Considering that most bank clients in the
developed world need several active accounts to keep their affairs
in order, these figures indicate that the task the microfinance
movement has set for itself is still very far from finished.
By type of service "savings accounts in alternative finance
institutions outnumber loans by about four to one. This is a
worldwide pattern that does not vary much by region."[20]
An important source of detailed data on selected microfinance
institutions is the MicroBanking Bulletin, which is published
by Microfinance Information Exchange. At the end of 2009 it was
tracking 1,084 MFIs that were serving 74 million borrowers ($38
billion in outstanding loans) and 67 million savers ($23 billion in
deposits).[21]
As yet there are no studies that indicate the scale or distribution
of 'informal' microfinance organizations like ROSCA's and informal
associations that help people manage costs like weddings,
funerals and sickness. Numerous case studies have been
published however, indicating that these organizations, which are
generally designed and managed by poor people themselves with
little outside help, operate in most countries in the developing
world.[22]
Help can come in the form of more and better qualified staff, thus
higher education is needed for microfinance institutions. This has
begun in some universities, as Oliver Schmidt describes. Mind the
management gap
[edit]"Inclusive financial systems"
The microcredit era that began in the 1970s has lost its
momentum, to be replaced by a 'financial systems' approach.
While microcredit achieved a great deal, especially in urban and
near-urban areas and with entrepreneurial families, its progress in
delivering financial services in less densely populated rural areas
has been slow.
The new financial systems approach pragmatically acknowledges
the richness of centuries of microfinance history and the immense
diversity of institutions serving poor people in developing world
today. It is also rooted in an increasing awareness of diversity of
the financial service needs of the world’s poorest people, and the
diverse settings in which they live and work.
Brigit Helms in her book 'Access for All: Building Inclusive
Financial Systems', distinguishes between four general categories
of microfinance providers, and argues for a pro-active strategy of
engagement with all of them to help them achieve the goals of
the microfinance movement.[23]
Informal financial service providers
These include moneylenders, pawnbrokers, savings
collectors, money-guards, ROSCAs, ASCAs and input supply
shops. Because they know each other well and live in the
same community, they understand each other’s financial
circumstances and can offer very flexible, convenient and
fast services. These services can also be costly and the
choice of financial products limited and very short-term.
Informal services that involve savings are also risky; many
people lose their money.
Member-owned organizations
These include self-help groups, credit unions, and a variety of
hybrid organizations like 'financial service associations'
and CVECAs. Like their informal cousins, they are generally
small and local, which means they have access to good
knowledge about each others' financial circumstances and
can offer convenience and flexibility. Since they are
managed by poor people, their costs of operation are low.
However, these providers may have little financial skill and
can run into trouble when the economy turns down or their
operations become too complex. Unless they are effectively
regulated and supervised, they can be 'captured' by one or
two influential leaders, and the members can lose their
money.
NGOs
The Microcredit Summit Campaign counted 3,316 of these
MFIs and NGOs lending to about 133 million clients by the
end of 2006.[24] Led by Grameen
Bank and BRAC inBangladesh, Prodem in Bolivia, and FINCA
International, headquartered in Washington, DC, these NGOs
have spread around the developing world in the past three
decades; others, like the Gamelan Council, address larger
 regions. They have proven very innovative, pioneering
banking techniques like solidarity lending, village
banking and mobile banking that have overcome barriers to
serving poor populations. However, with boards that don’t
necessarily represent either their capital or their customers,
their governance structures can be fragile, and they can
become overly dependent on external donors.
Formal financial institutions
In addition to commercial banks, these include state banks,
agricultural development banks, savings banks, rural banks
and non-bank financial institutions. They are regulated and
supervised, offer a wider range of financial services, and
control a branch network that can extend across the country
and internationally. However, they have proved reluctant to
adopt social missions, and due to their high costs of
operation, often can't deliver services to poor or remote
populations. The increasing use of alternative data in credit
scoring, such as trade credit is increasing commercial banks'
interest in microfinance.[25]
With appropriate regulation and supervision, each of
these institutional types can bring leverage to
solving the microfinance problem. For example,
efforts are being made to link self-help groups to
commercial banks, to network member-owned
organizations together to achieve economies of
scale and scope, and to support efforts by
commercial banks to 'down-scale' by integrating
mobile banking and e-payment technologies into
their extensive branch networks.

Principles of micro finance

Poor people borrow from informal moneylenders and save with

informal collectors. They receive loans and grants from charities.
They buy insurance from state-owned companies. They receive
funds transfers through formal or informal remittance networks. It
is not easy to distinguish microfinance from similar activities. It
could be claimed that a government that orders state banks to
open deposit accounts for poor consumers, or a moneylender that
engages in usury, or a charity that runs a heifer pool are engaged
in microfinance. Ensuring financial services to poor people is best
done by expanding the number of financial institutions available
to them, as well as by strengthening the capacity of those
institutions. In recent years there has also been increasing
emphasis on expanding the diversity of institutions, since different
institutions serve different needs.
Some principles that summarize a century and a half of
development practice were encapsulated in 2004 by Consultative
Group to Assist the Poor (CGAP) and endorsed by theGroup of
Eight leaders at the G8 Summit on June 10, 2004:[5]

1. Poor people need not just loans but also

savings, insurance and money transfer services.
2. Microfinance must be useful to poor households:
helping them raise income, build up assets and/or cushion
themselves against external shocks.
3. "Microfinance can pay for itself."[8] Subsidies from
donors and government are scarce and uncertain, and so to
reach large numbers of poor people, microfinance must pay
for itself.
4. Microfinance means building permanent local
institutions.
5. Microfinance also means integrating the financial needs
of poor people into a country's mainstream financial system.
6. "The job of government is to enable financial services,
not to provide them."[9]
7. "Donor funds should complement private capital, not
compete with it."[9]
 8. "The key bottleneck is the shortage of strong
institutions and managers."[9] Donors should focus on
capacity building.
9. Interest rate ceilings hurt poor people by preventing
microfinance institutions from covering their costs, which
chokes off the supply of credit.
10. Microfinance institutions should measure and disclose
their performance – both financially and socially.

Microfinance is considered as a tool for socio-economic

development,and can be clearly distinguished from charity.
Families who are destitute, or so poor they are unlikely to be able
to generate the cash flow required to repay a loan, should be
recipients of charity. Others are best served by financial
institutions.
Salient features of Micro- Finance Programme

Under the Scheme of Micro-Finance Programme, the

following activities would be undertaken.

a. Arranging Fixed Deposits for MFIs/NGOs:

The SIDBI is already running a Micro-Credit Programme

with a network of capacity assessed rated MFIs/NGOs.
The scheme of Micro-Finance Programme has been tied-
up with SIDBI by way of contributing towards security
deposits required from the MFIs/NGOs to get loans from
SIDBI as per details given under:

i. The Government of India will provide funds for

Micro-Finance Programme to SIDBI, which shall be
called ‘Portfolio Risk Fund’ (PRF). This fund would
be used for security deposit requirement of the
loan amount from the MFIs/NGOs and to meet the
cost of interest loss. At present, SIDBI takes fixed
deposit equal to 10% of the loan amount. The
share of MFIs/NGOs would be 2.5% of the loan
amount (i.e. 25% of security deposit) and balance
7.5% (i.e. 75% of security deposit) would be
adjusted from the funds provided by the
Government of India. The MFIs/NGOs may avail the
loan from the SIDBI for further on lending on the
support of the security deposit.

ii. The Government would provide the needed fund in

four years of the Xth Plan and release the fund on
half-yearly basis based on demands for security
deposit. By contributing an amount of Rs.6 crore
during the Xth Plan under Micro-Finance
 Programme, SIDBI can provide loan of Rs.80.00
crore to MFIs/NGOs. This would benefit
approximately 1.60 lakhs beneficiaries, assuming
an average loan of Rs. 5,000/- per beneficiary.

iii. The SIDBI will pay interest to the Govt. on the fixed
deposit made available by the Government at the
same rate as allowed to NGOs. Other terms and
conditions will be fixed mutually by SIDBI and GOI.

iv. The recovery of loan/interests will be the sole

responsibility of the SIDBI. In case of non recovery
of loan, SIDBI would first adjust fixed deposit and
interest accrued thereon for 2.5% security deposit
of the loan pledged by the MFIs / NGOs and
thereafter adjust 7.5% security deposit of the loan
amount provided by the Government of India and
the interest accrued thereon with the approval of
Committee of Govt. of India.

v. After full recovery of loan from the MFIs/NGOs, the

7.5% security deposit of the loan amount provided
by Govt. of India and interest accrued thereon
would be rotated further as a security deposit for
MFIs/NGOs with the approval of Committee of the
Govt. of India or the same will be returned to the
Govt. of India.

vi. As SIDBI is already running the Micro-Credit

Programme, they will monitor the scheme. They
would also provide the monthly/ quarterly progress
report along with details of beneficiaries, utilization
 of funds provided by Government of India and loan
sanctioned/ utilized by the beneficiaries.

vii. The activities covered under the scheme are

manufacturing, service sector and non-farming
activities.

b. Training and Studies on Micro-Finance

Programme: The Government of India would help
SIDBI in meeting the training needs of NGOs, SHGs,
intermediaries and entrepreneurs and also in enhancing
awareness about the programme. This task would be
performed through National Level Entrepreneurship
Development Institutes (EDIs) and Small Industries
Service Institutes (SISIs). The Research Studies would
also be arranged through reputed agencies.

c. Institution Building for ‘Intermediaries ’ for

identification of viable projects : The Government
of India would help in institution building through
identification and development of ‘intermediary
organization’, which would help the NGOs/SHGs in
identification of product, preparation of project report,
working out forward and backward linkages and in
fixing marketing/ technology tie-ups. The SISIs would
help in the identification of such intermediaries in
different areas.

3. Budgetary Provision for the Scheme during 10th Plan

The Budgetary provision for the scheme in the Tenth Five

Year Plan is Rs. 7 crore and the provision in the current
financial year 2003-04 is Rs. 0.25 crore. The entire amout of
 Rs. 0.25 crore is to be provided to SIDBI as ‘Portfolio Risk
Fund’ (PRF) during the year 2003-04. Under the scheme,
allocation of an amount of Rs. 1 crore is for studies, training,
awareness, etc. and amount of Rs. 6 crore is for contribution
to SIDBI as ‘Portfolio Risk Fund’ (PRF). Savings if any, under
any activity would be utilized on other activity of the scheme
so that the budget allocated may be fully utilized.

4. Administrative Arrangement

A Committee under the Chairmanship of Additional Secretary

& Development Commissioner (MSME) is to be constituted.
Other members of the Committee would be Additional
Development Commissioner & EA, Director (IFW), Chairman-
cum- Managing Director (SIDBI) and Director (EA). Any other
member can be co-opted by the Committee, if required. The
Committee would review the progress made under the
scheme, approve the adjustment of security provided by the
Government of India and interest accrued thereon in case of
non-recovery of loan by SIDBI, approve further rotation of
funds provided by the Government of India and other related
matters.

Microfinance Institutions in India

CRISIL List of Top 50 Microfinance Institutions in India by
Loan Amount Outstanding for 2009
1. SKS Microfinance Ltd (SKSMPL)

2 Spandana Sphoorty Financial Ltd (SSFL)

3 Share Microfin Limited (SML)

4 Asmitha Microfin Ltd (AML)

5 Shri Kshetra Dharmasthala Rural Development Project(SKDRDP)

6 Bhartiya Samruddhi Finance Limited (BSFL)

7 Bandhan Society
8 Cashpor Micro Credit (CMC)

9 Grama Vidiyal Micro Finance Pvt Ltd (GVMFL)

10 Grameen FinancialServices Pvt Ltd (GFSPL)

11 Madura Micro Finance Ltd (MMFL)

12 BSS Microfinance Bangalore Pvt Ltd (BMPL)

13 Equitas Micro Finance India P Ltd (Equitas)

14 Bandhan Financial Services Pvt Ltd (BFSPL)

15 Sarvodaya Nano Finance Ltd (SNFL)

16 BWDA Finance Limited (BFL)

17 Ujjivan FinancialServices Pvt Ltd (UFSPL)

18 Future Financial Services ChittoorLtd (FFSL)

19 ESAF Microfinance & Investments Pvt. Ltd (EMFIL)

20 S.M.I.L.E Microfinance Limited

21 SWAWS Credit Corporation India Pvt Ltd (SCCI)

22 Sanghamithra Rural Financial Services (SRFS)

23 Saadhana Microfin

24 Gram Utthan Kendrapara,

25 Rashtriya Seva Samithi (RASS)

26 Sahara Utsarga Welfare Society (SUWS)

27 Sonata Finance Pvt Ltd (Sonata)

28 Rashtriya Gramin Vikas Nidhi

29 Arohan Financial Services Ltd (AFSL)

30 Janalakshmi Financial Services Pvt Ltd (JFSPL)

31 Annapurna Financial Services Pvt Ltd

32 Hand in Hand (HiH)

33 Payakaraopeta Women’s Mutually Aided Co-operative Thrift

and Credit Society (PWMACTS)

34 Aadarsha Welfare Society(AWS)

35 Adhikar

36 Village Financial Services Pvt Ltd (VFSPL)

37 Sahara Uttarayan
38 RORES Micro Entrepreneur Development Trust(RMEDT)

39 Centre for Rural Social Action (CReSA)

40 Indur Intideepam Federation Ltd (IIMF)

41 Welfare Organisation for Multipurpose Mass Awareness

Network (WOMAN)

42 Pragathi Mutually Aided Cooperative Credit and Marketing

Federation Ltd(PMACS)

43 Indian Association for Savings and Credit(IASC)

44 Sewa Mutually Aided Cooperative Thrift Societies Federation

Ltd (Sewa)

45 Initiatives for Development Bangalore, Foundation (IDF)

46 Gandhi Smaraka Grama Seva Kendram (GSGSK)

47 Swayamshree Micro Credit Services (SMCS)

48 ASOMI

49 Janodaya Trust

50 Community Development Centre (CDC)

Here are just a few of the benefits of microfinance India.

• It isn't a hand out-As mentioned earlier, microfinance isn't about

just giving out money to the poor. On the contrary, these are
small loans that are paid back with interest. Of course, many
people are skeptical when it comes to giving the poor financial
loans. However, they are surprised to learn that of the over 100
million microfinance loans that have been given out, 97% of them
have been repaid. That's why you can't consider microfinance a
hand out, but rather, it's a hand up.

• It allows the poor to receive a loan--Traditionally, the poor have

been unable to receive loans. That's because they don't have
anything to offer as collateral. As a result, they get stuck in a
vicious cycle of poverty, living and working in poor, rural areas.
Should adversity strike, they simply don't have the means to
combat it. Microfinance allows the poor to get the loans they need
to save, invest, and create a sustainable lifestyle of financial
independence and growth. These loans are used productively by
the poor to create their own businesses, grow their assets, and
get out of poverty once and for all.

• It empowers women-Many efforts of the microfinance industry

are aimed at empowering women to create their own businesses.
From microfinance India to microfinance in other developing
countries, small loans are given to those women who live on less
than $1 per day. By giving these poor women loans, the
microfinance industry not only helps them pull themselves out of
poverty, but it also promotes gender equality throughout the
world.

• It creates long-term financial independence-The most important

benefit of microfinance in India is that it helps create long-term
financial independence in these poverty-stricken areas. See, it's
one thing to send money, clothes, and other goods to the poor.
It's a great gesture, but the results of this traditional style of
charity are short-lived. Microfinance loans help create sustained
impact by educating recipients on how to create their own
businesses and how to properly manage and grow their money.

Microfinance in India and several other countries received a major

boost recently thanks to Lingerie Miami. Created by Renata Black,
Lingerie Miami is a philanthropic brand that raises money for
microfinance institutions through the use of fashion shows. The
concept has been very successful, and it's spreading to New York
and other major cities throughout the world.
Micro Finance Scheme

The people in North East India are predominantly in the farming

sector. For trading and production purposes, small borrowers still
depend on the local moneylenders whose interest rates are
normally very high. It becomes rather heavy on the borrowers
who are poor, illiterate and do not understand the intricacies
involved in formal lending. Therefore, they do not approach banks
despite their needs.

With the help of Non Government Organisation (NGOs), individuals

can be organised under Self Help Groups (SHGs) for the purpose
of on-lending from financial institutions. Also, linkages can be
established for networking with these SHGs with the formal
banking sector.

Despite the vast expansion of the formal credit system in the

country, it has not been able to cover adequately the need of
small loan requirement of the rural poor. The banks have not been
involved much in lending of this kind as it encompasses high risk
& high transaction cost and too many small borrowers. Faced with
such constraints, the unreached small borrowers can be helped by
NEDFi through the provision of small loan through intermediaries.
It will lead to creation of informal savings and help in inculcating
the habit of borrowing and repaying.
The Proposal:

The approach would focus on identifying micro finance institute

(MFI) as long tern partners and providing credit support for their
micro credit initiatives. The MFIs may be well-organised Non
Government Organisation (NGO) with good networks or other
micro finance organisations. The MFIs would be selected on the
basis of their credibility, track record, professional expertise and
management practices, credit rating, field visits etc.

Operational Strategy:

The approach to assistance under NMFS will be different from that

of conventional lending under other programs of NEDFi in as much
lending decisions under NMFS will be governed by the track
record, capabilities of reach of MFIs rather than the security
offered and promoter’s stake.

Operational Modalities:

The operational modalities of the NMFS will be as follows:

Eligible Borrower

Well managed NGOs/VAs/Cooperative Societies, Village Councils

that::

• are in existence for at least 3 years

• have experience in developing SHG
• have good track record
• have proper system of book keeping
• adequate financial management ability
• well-organised SHGs engaged in income generating
activities.

Terms:

• Minimum amount that can be given to a SHG is Rs 20

thousand and maximum up to Rs. 4 lakh.
 • NEDFi would lend the amount at Prime Lending Rate (PLR) +
0.5 % (administrative charge).
• NGOs to lend it to the SHGs/individuals at a rate determined
by them after discussing with NEDFi. In no case more than
4% above NEDFi’s PLR.
• Repayment period by the NGO would depend on the projects.
Maximum period is 5 years including a reasonable
moratorium period. The repayment period by the ultimate
borrower will be 1-3 years.
• Some feasibility study of the projects sent by the SHGs
should be done by the NGOs before being accepted by
NEDFi. The individual projects would be prepared by the
NGOs with details.
• NEDFi would help SHGs, NGOs in identifying activities and in
conducting seminars, trainings, workshops etc.
• Before application, the NGO will submit information related
to operation in the application format. Click here for the
format.
• After information submitted to NEDFi, NGO will apply as per
NEDFi application format.
• NGO's to please use checklist.

Activities to be financed:

• Income generation through agriculture (including farm

implements).
• Other farming activities mainly : Piggery, Poultry, Fishery,
Dairy etc.
• Micro industries.
• Service Sector including transportation etc.

Ultimate Target Group :

• Farmers - Petty Traders

• Women - Youth
• Capacity Building of NGOs

Documentation:

• Loan Agreement.
 • Deed of Hypothecation.
• Promissory Note.
• Resolution of executive body accepting the terms and
conditions for availing the loan.

Security:

• Hypothecation of all the movable assets of the NGO.

• Promissory note from the NGO.