Micro finance - A social legal concept

Micro Finance can be defined as financial services (such as savings, insurance, fund, credit etc) provided to poor and low income clients so as to help them raise their income, thereby improving their standard of living. Mohammed Yunus was awarded the Noble Prize for application of the concept of Micro Finance, with setting up of the Grameen Bank. Micro Finance services in India are provided by the financial Institutions like National Bank for Agriculture and Rural Development - NABARD, Small Industries Development Bank of India, and Rashtriya Mahila Kosh and Commercial Banks, Regional Rural Banks, Co-operative Banks, and Non Banking Financial Companies (NBFCs) etc. These institutions have come forward to curb the traditional shortcomings of the banks, which refused to serve the low income crowd, as they had very few assets to secure their loan. Presently, these institutions use various methods such as giving small loans to low income clients with little or no interest, or provide schemes for group lending, pre loan savings etc. Experts concentrate on commercial banking sectors, dealing with high capital transactions, thereby avoiding the idea of serving the low income clients; which subsequently leaves the lower income group to fend for itself. It is submitted that for the purpose of national economic development it’s not just the high transactional elements but also the lesser mortals whose interest need to be served. And for this a healthy financial system is a major ingredient. 

There is a difference between Micro Finance and Micro Credit. Micro Credit is a narrower concept as compared to Micro Financing. Micro Credit is a small amount of money, given as a loan by a bank or any legally registered institution, whereas, Micro Finance adsorbs multiple services such as loans, savings, insurance, transfer services, micro credit loans etc. Loans in case of Micro Financing are given either directly by the banks to the clients or by Self Help Groups working for Micro Finance institutions under supervision of NABARD. In order to establish themselves and get linked to the local banks self help groups need to save their capital for a minimum of six months and maintain the records and accounts efficiently. Competition between all the entities that provide Micro Finance services, helps to improves quality of both products and services, with prices lowered and moreover their approach gets more client based. There is a continuous inflow of money to such institutions, India leads in access to commercial funds by 75 percent. 

Microfinance comes as a blessing to the poor which helps them:

-         Increase their Income

-         Expand businesses

-         Protects them from external shocks

-         Self- empowerment and independent standing to women

-         Fights against poverty

-         Government uses it as a tool to solve socio-economic problems.

-         Accessible in areas where banks are not available.

Microfinance sometimes casts its shadow and is not advantageous at all the times. Firstly, for business purposes, Micro Credits serves better when a small amount of money is sufficient to fulfill the needs. Micro Finance Institutions provide long term credits only when the customer is ready and capable of repayment. Secondly, when money is required by the customer to improve his economic situation, Grants by Government are more effective in such cases as compared to Micro Financing as it doesn’t involve a major issue of repayment. Mohammed Yunus in one of his book states that, ‘microfinance institutions that charge more than 15% above their long-term operating costs should face penalties’. There are many other problems that obstructs the smooth running of Micro Finance institutions like inefficiencies within the institution,lack of new methodology and implementation, ambiguous donor subsidies etc.

Micro Financing can be profitable if it enters into a retail banking sector, as the business must be a profitable one so as to assure its sustainability. Micro Finance Institutions are trying efficiently to improve their methods and operations for effective control and management. After the success of Micro Finance Institutions, commercial banks have stepped down to provide beneficial services to its low income customers. Government also plays an important role in Micro Financing but the performance is generally tainted as politicians misuse the capital, for political purpose without being rational. Government helps in establishment of apex bodies, that channel funds to institutions dealing with Micro Finance and also drafts a regulatory framework for its proper working and administration.

Consultative Group to Assist the Poor summarized certain principles, which were endorsed at the G-8 Summit.

1.      A low income client needs multiple services and not only loans.

2.      Concept must fulfill the basic requirements e.g. Raise income, protection from external shocks etc.

3.      Micro Finance must pay for itself, as capital help from Government and a donor is uncertain.

4.      Micro Finance means establishment of permanent institutions.

5.      Micro Finance integrates various financial needs with the financial system of the country.

6.      Though Government cannot provide these services but can always enable the financial services system.

7.      Funds given by donors must be used and saved as a complementary source.

8.      Interest rates must be suitable.

9.      Need to improve efficiency of Micro Finance Institutions both financially and socially.

Concept of Micro Finance is still a strange specie for few, according to the World Bank report only 9% of poor families in India are covered under this approach. Efficiency in consonance with good governace is the essence of the Micro Finance. This is now a general view that there are less chances of a woman to default on loans taken by them as compared to man. In Bangladesh it’s the majority of the women who control the self help group and run the Micro Finance culture efficiently. Industry data from 2006 for 704 MFIs reaching 52 million borrowers includes MFIs using the [solidarity lending] methodology (99.3% female clients) and MFIs using individual lending (51% female clients). The delinquency rate for solidarity lending was 0.9% after 30 days (individual lending -3.1%), while 0.3% of loans were written off (individual lending –0.9%). A recent study of microenterpreneurs from Sri Lanka published by the World Bank found that the return on capital for male-owned businesses (half of the sample) averaged 11% while the the return for women-owned businesses was 0% or slightly negative.

To fill in the lacuna’s of Micro Finance Institutions, and practice enforceable control and supervision the need of legislation was felt. The Micro Financial Sector (Development and Regulation) Bill was introduced in 2007. The bill is pending before the Parliamentary Standing Committee on Finance. The Preamble of bill lays down its objectives as it states that, “to provide for promotion, development and orderly growth of the microfinance sector in the rural and urban areas for providing an enabling environment for ensuring universal access to integrated financial services especially to women and certain disadvantaged sections of the people, and thereby securing prosperity of such areas and regulation of the micro finance organizations not being regulated by any law for the time being in force and for matters connected therewith or incidental thereto”

Highlights of the bill are:

·         The Micro Financial Sector (Development and Regulation) Bill, 2007 seeks to promote the sector and regulate micro financial organizations.

·         National Bank for Agriculture and Rural Development shall regulate the micro financial sector.

·         Every Micro finance organization that accepts deposits needs to be registered with NABARD. Conditions for registration include (a) net owned funds of at least Rs 5 lakh; and (b) at least three years in existence as a Micro Finance organization or not, shall submit annual financial statements to NABARD.

·         Every Micro Finance organizations that accept deposits have to create a reserve fund by transferring a minimum of 15% of its net profit every year.

·         The central government may establish a Micro Finance Development Council to advise NABARD on policy implementation regarding the micro financial sector.

·         NABARD shall constitute a Micro Finance Development and Equity Fund to be utilized for the development of the sector.

There are certain shortcomings in The Micro Financial Sector (Development and Regulation) Bill, 2007 such as;

Ø      It weakens financial and social responsibility of banks.

Ø      It leaves non-banking financial companies and Section 25 of Companies Act, 1956 out of the purview of its regulatory framework.

Ø      It does not regulate or control the interest rate charged to the clients in Self Help Groups.

Ø      It gives license to Micro Finance Organizations to keep profit out of the women’s hard earned money.

Ø      NABARD should be implementing body for promoting credit functions of micro finance operations and should come under the overall supervision of the Micro Finance Development Council.

Ø      There must be representatives from the National Commission for Women, Rashtriya Mahila Kosh and the Ministry of Women and Child Development and Panchayati Raj.

 

Recently few initiatives have been taken in the field of Micro Finance Regulation:

1.      The NABARD task force- Task Force on Supportive Policy and Regulatory Framework for Microfinance was set up by NABARD. The main objective of this force was to bring operations of Micro Finance Institutions under standard regulatory framework, and to work on various critical issues like organizing Micro Finance programme, division of work between commercial banks and upcoming Micro Finance institutions. In the year 1999, task force made certain recommendations to RBI, and also for the first time definition for microfinance was accepted which goes as follows, “Microfinance is defined 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”.

2.      Other Working Groups on Regulatory Issues – In October, 2001 

                              seven working groups comprising government, NGOs and banking       

                              sector representatives were set up. Sa-Dhan the Micro Finance 

      Association of India, gave recommendation regarding how to make   

      legal framework in consonance with microfinance principles.

                        3.   Recent Regulatory Amendments for Micro Finance:  RBI in 1996  

                              issued instructions to the banks to treat the SHG-bank linkage model

                              as part of their mainstream lending. The RBI issued instructions on     

                              13^th January 2000 to the effect that if NBFCs are engaged in ‘micro-

                              financing activities, registered under Section 25 of the Companies

                              Act, 1956, and not accepting public deposits, they would be exempt  

                              from purview of Section 45-IA (registration and minimum net owned  

                              funds), 45-IB (maintenance of liquid assets) and 45-IC (transfer of

                              profits to reserve fund) of the RBI Act, 1934.

Therefore, Society has been benefited by the schemes introduced by Microfinance Institutions and Law Fraternity in hands with the Banking sector seeks to keep a check on individuals and organizations working for Micro Financing. The better performances of repayment through microfinance schemes have helped the banks and Micro Finance institutions to lend loans and other financial services to self help groups and individuals. The Micro Financial Sector (Development and Regulation) Bill, 2007, must integrate the financial services with women and other weaker sections of the society. It is a moot able point in India whether the concept of Micro Finance is well suited to the atmosphere of the nation, as political processes differ from country to country. It’s not one but multiple institutions that contribute to progress of Micro Finance concept. Though there are many amendments suggested for the bill under discussion, but implementation of these is a slower process. It has been rightly quoted by Natalie Portman, “Small loans can transform lives, especially the lives of women and children. The poor can become empowered instead of disenfranchised. Homes can be built, jobs can be created, businesses can be launched, and individuals can feel a sense of worth again”.

 

 

 

By:

  IVNEET WALIA

                                                                 ARMY INSTITUTE OF LAW

                                                                       MOHALI, PUNJAB