What is microfinance.

Microfinance took birth in late 1970s to help the poorest of the poor. Microfinance helps the poor to nurture their entrepreneurship skills. As a result,they can improve their standard of living and can become self sustaining to lead their life. Now the microfinance has become a buzzword in almost all the developing countries.Microfinance refers to finances in small amount to poor,especially women in rural area and supporting them to start their own enterprise in their own villages. The finance is provided with very reasonable rate of interest and flexible repayment facilities. It relates to the provision of thrift,credit and other financial services and products of very small amount to poor for enabling them to raise their income levels and improving their standards. Microfinance enables the poor to overcome the barriers which they face in assessing finance from formal finance providers.

The Objective of microfinance

Reduction of poverty to the bare minimum by financing for the development of skills of the rural folks. Providing employment opportunity to the poorest of the poor. Cultivating the habit of savings from the little earning. Providing credit at the affordable rate of interest. Disbursing the credit amount at short notice. Eliminating the collateral security for providing credit. Eliminating the informal money lenders from the credit link. Encouraging the rural folks,especially women entrepreneurs. Providing better living to the rural folks. Ultimately providing better social status to the rural households.

Functions of Microfinance
Small loans i.e. working capital Informal appraisal of borrowers Group guarantees in place of formal collateral Systematic loan disbursement

SHGs
It involves formation of self help groups and joint liability groups,where people come together to save and borrow in collectives,usually with shared liability. This mechanism replaces the need for physical collateral(assets) with social collateral (Human capital) and makes people reinforce each others strengths creating a support mechanisms around each member.

SHG Model
Forming small,cohesive and participative groups of the poor Encouraging them to pool their savings Using polled savings to make loans to members MODEL I- SHGs formed and financed by banks MODEL II -SHGs formed by NGOs but directly financed by banks MODEL III-SHGs financed by banks using NGOs as financial intermediaries

The relationship between Commercial Microfinance and Social Benefits.

The success of microfinance as a development activity that is commercially sustainable has been attributed to three reasons. Firstly ,it creates a system of empowerment and selfreliance by requiring that the money is paid back. Secondly,it brings loan recipients into the formal financial sector by insuring that there is no dependence on grant or free money built into the system. Lastly ,it builds the capacity of borrowers to eventually access the regular financial market by offering them access finance without compromising on the cost of finance.

Difficulties in assessing social benefits

Measuring the benefits of microfinance involves several difficulties. However ,there are some parameters,which could serve as proxies for measuring social enhancement in the community.The short comings is that Firstly,the social benefits of microfinance are complex to study because they do not arise directly from the provision of financial services. Secondly,the qualification and measurement these benefit is difficult because they are too broad to be captured in entirely Lastly the softer aspect of the impact of microfinance are extremely difficult to capture.due to Respect Self esteem Self worth Difficult to quantify and measure

SHGs and MFIs

Guidelines Should have compact plot of land of 5 to 10 acres having irrigation facilities Should have artisan groups having skills to perform Should have internet facilities at village level to access technology Should have well defined roles to play as MFIs Should be empowered to develop skills,to cover risks of farmers and artisans due to unforeseen reasons Should be able to conceive,promote and manage infrastructure projects in rural areas to help farmers to market their products Should be able to give sports services like supply of capital,crop inputs and transport facilities

System for lending

Banks shall lend fund as assessed for projects prepared by the SHG and also for anticipated consumption needs of the group of farmers . Bank shall assess the risk that farmers and artisans have taken and to what extent that can be provided for through subsidy of the government and contribution to be made by the bank and the SHG. Bank shall examine the possibility of providing loans to the farmers and artisans on profit sharing basis as charging interest on such loans (high or low) have not yielded very healthy effect on farmers and artisans. Bank may join hands with insurance companies to cover the risk in farming and business run by the group of farmers and artisans. Bank shall have to develop new methodology to increase their rural reach.