Tactful Management Research Journal Vol. 2 | Issue. 10 | July 2014 ISSN :2319-7943

Impact Factor : 1.5326 (UIF) ORIGINAL ARTICLE

MICROFINANCE IN INDIA

Priyanka , Richa Verma and Meenu Assistant Professor , Ramjas College , Delhi University. Assistant Professor , Ramjas College , Delhi University. Delhi University. Abstract: The purpose of this study was to understand micro finance in India The main objective of this research paper is analysis to the Microfinance in India as a powerful tool for poverty alleviation. There are many societies, companies, trusts and bodies corporate and such other institutions which are engaged in providing micro finance services to the poor households as a complementary to the banking system. There are two broad approaches that characterize the microfinance sector in India—SHG–bank linkage (SBL) and Microfinance Institutions (MFIs). SBL is a larger model than MFIs in India, contrary to the global practices of other MFIs. Microfinance total loan growth is estimated to have risen by around 30% year on year in fiscal 2012/13 (April-March). The Central Government have felt that since these institutions lack a formal statutory framework for providing such micro finance services, The Micro Finance Institutions (Development and Regulation) Bill, 2012 has passed on 11 February, 2014to provide a statutory framework for the promotion, development, regulation and orderly growth of such Micro Finance Institutions (MFIs) and thereby facilitate financial inclusion.

KEYWORDS: Microfinance , banking system , global practices . OBJECTIVES OF THE STUDY To examine the current status of microfinance industry in India To highlight the measures taken by the Government of India and for promoting financial Inclusion To highlight the Micro finance institution (development and regulation) bill, 2012 Research Methodology This is a descriptive research paper based on secondary data. Data have been collected through books and various websites and publications of recent research papers available in different websites and magazines. Cf Books, Newspapers, Research Articles, Research Journals, E-Journals, RBI Report, Report of NABARD , The micro finance institution (development and regulation) bill, 2012etc. INTRODUCTION Microfinance in India – new dynamics India is today the world's third-largest economy (measured in terms of purchasing power) after the US and China. The economic potential of this country, which has more than 1.2 billion Inhabitants, is, however, far from being exhausted. This is because around half a billion Indians are still excluded from the formal financial sector. This enormous excess demand has driven the Please cite this Article as : Priyanka , Richa Verma and Meenu , “MICROFINANCE IN INDIA” : Tactful Management Research Journal (July ; 2014)

MICROFINANCE IN INDIA

powerful expansion of the local microfinance sector – at least until three years ago, when it was suddenly disrupted: In October 2010, the government of the state of Andhra Pradesh decided to prohibit the local microfinance business. This surprising move was ostensibly motivated by considerations relating to consumer protection. As a result, borrowers were urged by the government to refuse to repay their loans. The situation has since eased. The national microfinance sector has emerged from the crisis stronger than before. It now serves 25 million clients and has been growing by an impressive 30% to 50% per year – a rate that appears to be sustainable. The effective measures taken in the wake of the crisis contributed to this rapid recovery. The sector is now overseen by the Reserve Bank of India. In addition, well-functioning credit bureaus are providing greater transparency. Even the key market of India, which has hundreds of millions of vulnerable households, is expected to grow by around 30% – which is roughly the average for the whole region and represents a faster rate of growth than at any point since 2009 Furthermore, established MFIs appear to have successfully adapted their operations to the legally prescribed profit margin and interest rate limits. They have managed to enhance their operational efficiency by taking steps such as significantly expanding their client base and increasing the average loan volume granted per loan officer. The transformation of the business models of MFIs entails both opportunities and challenges: while group loans used to be the dominant microfinance product in India, individual loans are steadily growing in significance. This is because many microfinance clients have demonstrated their creditworthiness over several credit cycles and are now demanding more flexible conditions, as well as larger loans. In contrast to easily replicated group models, however, the extension of credit to individuals is dependent on effective review processes being carried out by experienced loan officers –a requirement that large, well-established MFIs are probably best able to meet. In the coming years, Through the Governor of RBI Rajan who is known to be a strong advocate of the development of the financial sector and of financial inclusion. Under his leadership, the issuing of bank licenses to MFIs should meet with support – thus promoting the growth and operational transformation of the sector. Throughout the India, number of MFIs is providing other products and services such as savings, health and housing loans, loans for water supply and sanitation, etc. Besides taking advantage of new opportunities, microfinance is well positioned to take further advantage of technological and market developments. Client based innovative financial products will induce greater responses in the market. Reserve Bank of India's vision for 2020 is to open nearly 600 million new customers' accounts and service them through a variety of channels by leveraging on IT. However, illiteracy and the low income savings and lack of bank branches in rural areas continue to be a roadblock to financial inclusion in many states and there is inadequate legal and financial structure. The picture has changed a lot due to several policy actions, such as providing support to the cooperative movement, nationalization of commercial banks, setting up of special financial institutions solely for rural finance such as NABARD, innovation of new financial products such as Kisan Credit card, etc., regularization of rural development programs like Bharat Nirman, etc., introduction of group lending facility such as bank-NGO-Self-help Group(SHG) linkage programs, and finally the upcoming microfinance innovation. Thus institutionalization of rural finance is now an important outcome, though not in full strength, but strongly emerging. The main objective of MFIs is to become an efficient financial institution that offers a broad range of adequate products and services to a large number of households and SMEs at affordable costs. According to the latest IMF forecasts, emerging and developing economies are likely to grow more than 5% next year (slightly more than in each of the previous two), with Sub-Saharan Africa and developing Asia leading the way. CONCEPT Micro Finance Services and Affordability (i) Micro-Credit:- 31. Clause 2(1) (h) of the Bill defines =micro credit facilities 'means any loan, advance, grant or any guarantee given or any other credit extended in cash or kind with or without security or guarantee. 32. Clause 2(1)(j) of the Bill defines -micro finance services' as any one or more of the following financial services provided by any MFI, namely:(A) Micro credit facilities involving such amount, not exceeding in aggregate five lakh rupees for each individual and for such special purposes, as may be specified by the Reserve Bank from time to time, such higher amount, not exceeding ten lakh rupees, as may be prescribed; (B) Collection of thrift; (C) Pension or insurance services; (D) Remittance of funds to individuals within India subject to prior approval of the Reserve Bank and such Tactful Management Research Journal | Volume 2 | Issue 10 | July 2014

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other terms and conditions, as may be prescribed by regulations; (E) Any other such services, as may be specified. NABARD and RBI define microfinance as the ''provision of thrift, credit and other financial services and products of very small amounts to the poor enabling them to raise their income levels and improve living standards'' (NABARD 2000; RBI 1999). There are two broad approaches that characterize the microfinance sector in India—SHG–bank linkage (SBL) and Microfinance Institutions (MFIs). SBL is a larger model than MFIs in India, contrary to the global practices of other MFIs. Establishment of Self-Help Groups (SHGs) Linkage Microfinance is seen as an important tool for poverty alleviation and over the years, microfinance institutions (MFIs) have placed themselves as fulfilling this developmental goal. The microfinance movement was initiated by NABARD in collaboration with Banks and Non-Government Organisations (NGOs) for unbanked population known as Self Help Group (SHG) – bank linkage program in 1992. The program was government initiated program with refinancing to banks from NABARD. SHG bank linkage program involved NGOs to form Self Help Group (SHGs) and train them. Each SHG typically consists of a group of women/men members interested in accessing financial services including savings, credit insurance etc. Post the training, NGOs provided SHGs access to funds by linking them to banks which provided financial services (including thrift, credit etc) to them directly. NGOs' role was to ensure financial discipline of the SHGs. Apart from this there were state government run SHG programmes. Thus microfinance in this phase was government driven. The microfinance sector started evolving with private sector participation leading to formation of microfinance institutions (MFIs). The MFIs accessed bulk funds from banks and did on-lending to the end borrowers (either SHG members or joint liability group1JLG members). From there on the microfinance activities were being implemented by the two channels including MFI model and SHG bank linkage model. The sector witnessed high growth rate during the period from 2006 to 2010 supported by funding availability and potential demand in the sector. The growth was mainly driven by the MFIs due to large scale availability of funding in terms of both debt and equity. The overall loan portfolio increased from Rs.13,950 crore as on March 31, 2007 to Rs.38,186 crore as on March 31, 2010 which included growth from SHG bank linkage and MFI model. However focus of the microfinance sector is mainly on micro-credit with other products still evolving including thrift, insurance and remittance. One of the most important events toward financial inclusion program by NABARD is to facilitate the development of bank–SHGs linkage. NABARD provides refinance support to banks at very low interest rates for financing SHGs. The bank promoted SHGs lending program has attained another important goal to bring rural women under institutional credit as most of the SHGs comprise women members. Hence, empowerment of rural women through economic empowerment was achieved with this innovation. The main problem with the SBL model is similar to that of the rural branches of commercial banks. It is primarily collateral based and very limited in its distribution. Loan to the SHG is issued mainly for productive purposes. The consumption needs of rural households are completely ignored in this model. Further, bank officials do not have sufficient interest to go beyond their routine job, so that the aggressive drive for financial inclusion is attained. These problems are overcome in the microfinance institutions model Women empowerment under SHGs The microfinance initiative in the private sector in India can be traced back to initiative undertaken by Swashrayi Mahila Sewa Sahakari Bank or Self-Employed Women's Association Bank or SEWA bank, which is one and only cooperative bank in India of its kind, operated and maintained by self-employed women , it is providing banking services to the poor women employed in the unorganized sector in Ahmadabad in Gujarat. This Bank was established at the initiative of 4000 self-employed women workers have successfully reached the 92 % loan repayment rate which is highest across all the financial intermediaries in India. SEWA bank has created a history in women empowerment through economic empowerment, not only in India but in the global perspective. Chandaben, an old clothes seller, is a founder member of SEWA bank. The bank was established in 1974 with 4,000 members each contributing Rs. 10 as share capital. It has 93,000 active depositors today. It has made poor women free from vicious circle moneylenders and traders and has empowered them to plan for their children's education, health, etc. Tactful Management Research Journal | Volume 2 | Issue 10 | July 2014

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Currently SEWA Bank has over 318,594 account holders with total working capital of Rs 1291.89 million(Mar?09) Women entrepreneurship is perceived as an important tool for empowerment, effectively increases women participation in intra-household decision making, and allows them to access information. The ownership and control over various assets enabling her to take decisions that makes a women entrepreneur more powerful.Regarding access to financial services, women depend largely on their own limited cash resources or, in some cases, loans from extended family members for investment capital. Smaller amounts of investment capital effectively limit women to a narrow range of low-return activities, which require minimal capital outlays, few tools and equipment, and rely on farm produce or inexpensive raw materials. In general, women need access to small loans (especially for working capital), innovative forms of collateral, frequent repayment schedules more appropriate to the cash flows of their enterprises, simpler application procedures, and improved access to saving accounts. Women owned businesses are one of the fastest growing sectors of microenterprises. Economic growth, stability, and equity can be achieved significantly through microenterprises (Sridhar Krishna 2007). Microfinance Institutions MFIs play an important role in bridging the gap between formal financial institutions and rural poor. Lending money to rural poor is costly activity which affects the financial sustainability of MFIs. In several countries, completions among MFIs have increased rapidly that led to lower interest rates, more efficiency, and introduction of new financial services. MFIs in India are heterogeneous in nature and only a few of them have managed to reach among poor with substantial volume of credit.. The top 10 MFIs have been able to reach 2 million poor customers. Interests charged by the MFIs are exorbitantly high, which vary from 20 to 30 % range. MFIs in India have non-profit motivation on one hand and profit maximization for long-term viability for credit disbursement on the other hand. Microfinance institutions in India can be broadly classified into three categories: (i) NGO MFIs (registered under the Societies registration Act 1860), (ii)Public trusts, Non-profit companies (iii) Cooperative MFIs (registered under the State Cooperative Societies Act), (iv) Non-banking finance companies (NBFCs) MFIs (incorporated under the Companies Act 1956), and (v) Local area banks (the only such MFI is Krishna Bhima Samruddhi Local area banks) Distribution of loan portfolio by the legal form

Legal form NBFC Trust Section 25 Cos Society Cooperatives Local area banks Total

No. of MFI 40 2 5 10 3 1 61

Source: MIX market. Easy availability of loans from banks, both public and private, helps Indian MFIs to grow at such lightning speed. Banks have to oblige the priority sector lending requirements set by the RBI, which promote banks to lend to MFIs for financial deepening in rural areas. India's prominent MFI are Bandhan, Share, Spandana, Basix, and SKS Microfinance. NGO MFIs are established on the basis of non-profit, while NBFC MFIs are set up on sound business model. India's largest NBFC MFI known as SKS Microfinance was listed in the stock exchanges recently to widen their capital base. MFIs are more aggressive and innovative to reach the rural poor than

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the formal banking system (NABARD2010–2011). They not only provide loan for productive purposes but also for consumption purposes. Several states, notably Andhra Pradesh and Orissa have imposed a number of restrictions on these MFIs. As a result, the volume of funds mobilized by these MFIs has reduced remarkably during the recent period. Loans from microfinance institutions (MFI) are made to groups of people rather than to individuals as a means of ensuring greater security to the microfinance institution through the option of 'peer pressure' among the group members. Although group lending is still prevalent at many microfinance institutions, lending to individuals has become more popular. Today, MFIs offer diversified loan products, including personal savings options, housing loans, insurance packages and social services including health, education, and care. The numerous financial products for the poor fall under the umbrella of microfinance. Table-1 Client outreach—borrowers with outstanding accounts (in millions) 2006-07

Banks-SHG 38 MFI 10 TOTAL 48

2007-08

47.1 14.1 61.2

2008-09

54 22.6 76.6

2009-10

2010-11

59.6 26.7 86.3

62.5 31.8 94.3

2011-12

GROWTH

56.6 26.8 83.4

% IN 2012 -9.5 -15.7 11.6

Figure-1 Comparison of SHG and MFI client outreach (Customers in millions) Source: SHG data from provisional data provided by NABARD and MFI data from Sa-Dhan. The Bharat Micro Finance Quick Report 2012 and Mix Market data. The total client outreach of MFIs was recorded at 26.6 million. The clients outreach recorded negative growth in this year. The growth rate in client outreach came down by 15.7 per cent in the year 2011–12 as compared to previous year (increase of 19.1%). MFIs are unable to service existing customers which causes not acquiring new customers. Both Banks-SHG (SBLP) and MFIs put together achieve outreach of 83.4 million clients during 2011–12, which was less by 11.6 per cent of their customer base in the previous year (Figure-1). The degree of deceleration was pronounced more among MFIs (–15.7 per cent) than SBLP (–9.5 per cent) (Table-1). 10 per cent reduction has been made in respect of the number of members of SHGs and a 35 per cent reduction in respect of customers of MFIs. Figure -2 Comparison of loan portfolio of SHGs and MFIs (` billion) Source: SHG data from provisional data provided by NABARD and MFI data from Sa-Dhan. The Bharat Micro Finance Quick Report 2012 and Mix Market data Outstanding SHG loans from banks depicted an increase of about 19 per cent, whereas the MFIs performance loans decreased 3 per cent against the previous year. Overall, the loans outstanding in the micro finance sector increased by about 9.7 per cent (Figure -2). In terms of absolute amounts, the increase was of the order of Rs. 51 billion. Table-3 Comparison of average loan size

SHG Member MFI Customer

2008

2009

2010

2011

2012

3606 4223

4129 5192

4572 6870

4893 6779

6420 7803

Extent of increase in 2012 1527 1024

Source: SHG data from provisional data provided by NABARD and MFI data from Sa-Dhan. The Bharat Micro Finance Quick report 2012 and Mix Market data Tactful Management Research Journal | Volume 2 | Issue 10 | July 2014

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The average loan size of SHGs increased to Rs.6,420 showing an increase of Rs.1,527 from the previous year . In the case of MFIs, the average loans per customer increased to Rs.7,803 registering 15 per cent more than the previous year with increase of Rs.1,024. This increase in average loan size is likely to prove to be beneficial to MFIs in the current context of margin and interest caps that are placed. During the current year, the average loan size would continue to increase in an effort to reduce operating costs and manage the margin. MICROFINANCE TO FINANCIAL INCLUSION Financial inclusion is the most important initiative of the Government of India, and the RBI is focusing on providing banking facilities to the poor even in unbanked areas. The financial inclusion survey conducted by the World Bank team in India between April and June 2011 revealed that India lags behind developed and many developing countries in bank account penetration, but is much closer to the global average when it comes to borrowing from formal institutions. In India, 35 per cent of people had formal accounts versus the global average of 50per cent and the average of 41 per cent in developing economies. The survey also points to the slow growth of mobile money in India, where only 4 per cent of adults in the Global Find ex sample reported having used a mobile phone in the past 12 months to pay bills or send and/receive money. With a view to achieving greater financial inclusion, the RBI has advised commercial banks to allocate at least 25 per cent of the total number of branches proposed to be opened during the year in unbanked rural centres.16 In order to further facilitate financial inclusion, interoperability was permitted at the retail outlets or Customer Service Points of BCs (i.e., at the point of customer interface), subject to certain conditions, provided the technology available with the bank, which has appointed the BC, supported interoperability. However, the BC or its retail outlet or sub-agent at the point of customer interface would continue to represent the bank, which has appointed the BC. The financial inclusion plan (FIPs) rolled out for three years from 2010 contained self-set targets in respect of opening of rural brick and mortar branches, deployment of business correspondents (BCs), coverage of unbanked villages through various modes, opening of no-frills accounts, Kisan Credit Cards (KCCs) and General Credit Cards (GCCs) to be issued etc. Once banks start leveraging BCs as their extended arms, regular banking products can be channelled through this model. The proposal for implementing social sector schemes through the banking system with the support of Unique Identification (UID) will improve the business case for BCs and increase clients' comfort. Microfinance, being a sector that serves a very large number of small clients distributed over a wider geographical area, could be a highly cost intensive proposition. The adoption of appropriate technological solutions both in hardware and software platforms has ensured so far that costs remain within the reasonable limits. In the BC space also, there is scope for improved technological solutions, but also for establishing interoperable systems and platforms Government of India has also recognised the role of MFI in financial inclusion. Inclusive growth is the objective of the Eleventh and Twelfth Five Year Plans. However, the Ministry of Finance, the nodal Ministry for achieving financial inclusion, is implementing the financial inclusion agenda without a National Policy on Financial Inclusion. Such National Policy was not formulated by the Ministry even after recommendation made in this regard by the Steering Committee of the Planning Commission way back in the year 2007. The financial inclusion has been pursued over the decade through number of policy and programmes, such as preparation of annual Financial Inclusion Plans (FIPs); introduction of BC/BF model and opening of bank accounts on target basis which are mostly dormant; various schemes / programmes at Central level such as Self Help Group-Bank Linkage Programme; Rashtriya Mahila Kosh (RMK); and at State level such as Kudumbashree Scheme in Kerala; Stree Nidhi Scheme in Andhra Pradesh etc. Financial inclusion has been recognized as a priority goal of the microfinance sector and efforts were made in this report to identify the critical areas of interventions for greater success of the initiatives in the future. Client based innovative financial products will induce greater responses in the market.Reserve Bank of India's vision for 2020 is to open nearly 600 million new customers' accounts and service them through a variety of channels by leveraging on IT. However, illiteracy and the low income savings and lack of bank branches in rural areas continue to be make obstacle to financial inclusion in many states and there is inadequate legal and financial structure. To achieve sustainable and equitable growth, the RBI has taken several initiatives to increase access to banking services, credit markets and financial education. These included the lead bank scheme of the commercial banks and the promotion of self-help groups (SHGs), a program promoted by NABARD and facilitated by the RBI's acceptance of unregistered groups of low income individuals as an entity for banking purposes. To strengthen the financial inclusion drive, RBI asked banks to cover all villages with a population of more than 2,000 with at least one banking outlet by March 2012. As much as 74,499 such Tactful Management Research Journal | Volume 2 | Issue 10 | July 2014

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villages were identified as unbanked, and were allocated to various banks, including regional rural banks (RRBs) for providing banking services by March 2012. In the Monetary Policy 2012–13, RBI has proposed that State Level Banker's Committees (SLBCs) prepare a roadmap for coverage of unbanked villages with a population below 2,000 for providing banking services in a time bound manner. The current round of initiatives for the promotion of financial inclusion includes: 1. Appointment of the Business Correspondent (BC)/Business Facilitator (BF) for outreach to low income families/individuals. 2. Introduction of the concept of no-frills accounts and encouraging banks to open such accounts for low income families. 3. Encouragement to RRBs/Cooperative banks to sell insurance and other financial products. 4. Creation of special funds for financial inclusion. 5. Revival of the cooperative credit structure involvingPACS, District Central Cooperative Banks(DCCBs) and State Cooperative Banks (SCBs). 6. Liberalization of KYC norms for small accounts and KCC/GCC Guidelines 7. Introduction of technology products and services such as prepaid cards, mobile banking. 8. Liberalization of branch expansion. 9. Promotion of financial literacy and strengthen consumer protection PRESENT STATUS OF MICROFINANCE Key characteristics of the microfinance business environment: Current focus of the microfinance sector is mainly on micro-credit with other products still evolving including thrift, insurance and remittance. However the potential demand for microfinance sector is huge, with The Global Findex Database (February 2013) by World Bank stating that in India only 35% of adults have formal account and 8% have borrowed from a formal financial institution (including microfinance institutions). It further states that this 8% coverage in India is higher than the other BRIC economies (7%) and one of the factors is relatively well developed microfinance industry in India. Going forward, MFIs are likely to expand their client base and reach out to more underserved areas of the country. The Reserve Bank of India (RBI, the central bank) regulates two types of institutions that engage in microfinance activities: banks and non-bank financial companies (NBFC)-MFIs. Following the crisis in Andhra Pradesh (AP) in 2011, the RBI has put in place regulatory changes that helped reassure market participants and instigated rapid growth in total loans in 2012. The RBI recognises that its role is not only to regulate, but also to develop microfinance and the political support of microfinance by the national government. The financing of Indian microfinance is dominated by commercial debt. MFIs have been paying for this heavy reliance on commercial bank funds. Somewhat counter-intuitively, total loan growth has been around 30% and there has been an equal rise in the equity flows funding NBFC MFIs. There has been a shift from a focus on quantity (rapid loan growth) to quality (more sustainable loan growth). Credit bureaus have started to make a difference in spotting clients with multiple loans. However,. they still constitute an imperfect tool to deal with the problem of over-indebtedness, because of the many informal sources of finance that are not covered by the credit bureaus. The regulatory framework provides for a dispute resolution system in the microfinance industry. There has been a vast improvement in client protection following the AP crisis and new regulations that resulted from the crisis. Key changes and impacts since last year: The good growth in the portfolio continues with increase in portfolio from Rs.7,741 crore as on March 31, 2013 to Rs.10,615 crore as on December 31, 2013 Microfinance total loan growth is estimated to have risen by around 30% year on year in fiscal 2012/13 (April-March). There is increasing evidence of the flow of bank funding returning to the microfinance industry (particularly outside AP). There has been a surge in equity funding and, at an estimated 1% of total loans; the portfolio at risk is small. This positive development is somewhat counterintuitive, because it comes only two years after a major crisis in AP, the country's biggest MF market, and a signify cant slowdown of the Indian economy. The RBI's overall regulatory approach has been flexible and pragmatic. Following the removal of a 26% Tactful Management Research Journal | Volume 2 | Issue 10 | July 2014

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interest-rate cap in August 2012, the RBI granted NBFC-MFIs further breathing space when it increased existing margin caps in May 2013 (fixing the margin cap for all NBFCs, irrespective of size, at 12% to March 31st 2014). However, with effect from April 1st 2014, margin caps may not exceed 10 % for large MFIs and 12% for the others. The margin caps remain controversial, with some investors saying that they unnecessarily curtail private equity flows into microfinance. The operating margin cap in the medium term is expected to put significant pressure on MFIs to reduce operational costs. The new 40% Priority Sector Guidelines for foreign banks with over 20 branches is expected to increase bank funding to MFIs over the near to medium term. Following an RBI announcement in February 2013, large NBFCs are now allowed to submit applications for banking licences. Large MFIs are able to apply, provided they have minimum capital of Rs5bn (US$90m) and at least 25% of their branches are in rural areas. . The proposed Microfinance Bill had been pending in parliament since 2007.But now, the Standing Committee on Finance, having been authorized by the Committee, present this Eighty-fourth Report on the Micro Finance Institutions (Development and Regulation) Bill, 2012. 2. The Micro Finance Institutions (Development and Regulation) Bill, 2012 introduced in Lok Sabha on 22 May, 2012.The Committee discussed the draft Report at their many sitting(s) and adopted the same at their sitting held on 11 February, 2014.Written views/memoranda were also received from various institutions/ associations / experts. The Committee, at their sitting heard the views of representatives of Sa-Dhan Foundation, SKS Micro Finance Ltd., Micro Finance Institutions Network (MFIN), International Network of Alternative Financial Institutions (INAFI), Micro-Credit Ratings International Limited (M-CRIL), Access Development Services, All India Democratic Women's Association (AIDWA), and Reserve Bank of India (RBI), National Bank for Agriculture and Rural Development (NABARD) and Small Industries Development Bank of India (SIDBI)and State Government of Andhra Pradesh and Ministry of Finance (Department of Financial Services). Post the AP ordinance in October 2010, there was regulatory uncertainty over the microfinance activities undertaken by the MFIs. To overcome or reduce uncertainty and bring MFI activities under single regulator and avoid multiple regulations, Government of India initiated Microfinance bill. The MFI bill aims to address the concerns and regulate the MFI sector and it is with the parliament. Indian microfinance has also been showing mild signs of recovery on account of improving regulatory environment and improvement in governance. The number of savings linked SHGs increased to about `7.96 million with the member base of 104 million. The provisional data available from NABARD for the year 2011–12 shows that the number of SHGs provided with bank loans was 4.36 million, which is about 9 per cent less than the previous year's performance. The financing of Indian microfinance is dominated by commercial debt. MFIs have been paying for this heavy reliance on commercial bank funds. Somewhat counter-intuitively, total loan growth has been around 30% and there has been an equal rise in the equity flows funding NBFC-MFIs. There has been a shift from a focus on quantity (rapid loan growth) to quality (more sustainable loan growth). The RBI recognises that its role is not only to regulate, but also to develop microfinance and the political support of microfinance by the national government. It should be noted that most institutions that are conducting microfinance activities in India are under the regulation of the RBI, (The micro finance institution (development and regulation) bill, 2012) Further, the initiatives are technology driven so as to make the financial services deliverable in a cost effective manner, tailor made by the market participants to best suit their requirements. RBI has encouraged the ICT model which would enable banks to overcome the barriers of geography and ensure efficient financial inclusion. The ICT based delivery model adopted should be technology-neutral to facilitate easy up-scaling and customization, as per individual requirements. Against this background, the major initiatives taken by RBI include the following:i. Encouraged the SHG-Bank Linkage Model, one of the largest micro finance models in the world, under which 4.79 million SHGs have been credit linked, covering 97 million poor households (till March 2012). ii. Mandated Commercial Banks including Regional Rural Banks to migrate to the Core Banking Platform. iii. Substantially liberalised the BC based service delivery model in phases. iv. Permitted domestic scheduled commercial banks to freely open branches in Tier 2 to Tier 6 centres. v. Mandated banks to open at least 25% of all new branches in unbanked rural centres. vi. Substantially relaxed the Know Your Customer (KYC) documentation requirements for opening bank accounts for small customers. Tactful Management Research Journal | Volume 2 | Issue 10 | July 2014

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vii. Encouraged Electronic Benefit Transfer for routing social security payments through the banking channel. viii. Pricing for banks totally freed; Interest rates on advances totally deregulated. ix. Separate programme for Urban Financial Inclusion initiated. THE MICRO FINANCE INSTITUTIONS (DEVELOPMENT AND REGULATION) BILL, 2012 Malegam Committee (2011) defined ? Micro Finance as follows:- ? Micro Finance is an economic development tool whose objective is to assist the poor to work with their way out of poverty. It covers a range of services which include, in addition to the provision of credit, many other services such as savings, insurance, money transfers, counselling, etc. The Bill, inter alia, provides for the following, namely:— (a) regulation of the MFIs providing micro finance services, such as micro credit facilities, thrift, pension or insurance services and remittance of funds; (b) constitution of the Micro Finance Development Council; State Micro Finance Council in each State or for two or more States; and a District Micro Finance Committee in each District for the promotion and development of MFIs; (c) Confer power upon the RBI to:(i) specify the maximum limit of the margin and annual percentage rate which can be charged by any MFI, sector-related benchmarks and performance standards pertaining to methods of operation, fair and reasonable methods of recovery of loan advanced by the MFIs; and (ii) Cause inspection of the accounts of the MFIs and take necessary action; (d) prohibit MFIs from carrying on the activities of micro finance services without registration with the RBI but allows the existing Non-Banking Finance Companies(NBFCs) registered under the Reserve Bank of India Act, 1934 to continue such services without registration; and (e) Prohibit MFIs to close or restructure their activities without the approval of the RBI MFIs are defined as organisations providing micro credit facilities up to Rs 5 lakh, thrift collection services, pension or insurance services, or remittance services. The Bill seeks to provide a statutory framework to regulate and develop the micro finance industry The Bill provides for the creation of councils and committees at central, state and district level to monitor the sector. It is asked to clarify the role left for the MFIs when the RBI is focused on bank-led financial inclusion and the Government mandates opening of bank accounts to avail Direct Benefit Transfer (DBT), RBI, NABARD, MFIN, INAFI and Expert responded in their post-evidence replies as follows:- Though, RBI is of the belief that sustainable financial inclusion is achievable through mainstream financial institutions i.e. banks, however, as banks are yet to fully penetrate to a large number of villages in the country, other intermediaries like MFIs, to that extent, will continue to play critical role in financial inclusion(RBI).It would be desirable to draw complementarity between SHGs and the presently pursued financial inclusion measures like BC to bring more effectiveness to such inclusive approaches(NABARD) The players in the Micro Finance sector can be classified as falling into three main Groups:a) The SHG-Bank linkage Model accounting for about 58% of the outstanding loan portfolio b) NBFCs accounting for about 34% of the outstanding loan portfolio c) Others including trusts, societies, etc., accounting for the balance 8% of the outstanding loan portfolio. Primary Agricultural Co-operative Societies(PACS) numbering 95,663, covering every village in the country, with a combined membership of over 13 crores and loans outstanding of over Rs. 64, 044 Crores as on 31.03.2009 have a much longer history and are under a different regulatory framework. Thrift and credit co-operatives are scattered across the country and there is no centralized information available about them. The Malegam Committee (2011) stated about the SHG-Bank Linkage Programme (SBLP), among other things, as under:- ? The Share of the SHG-Bank Linkage Programme (SBLP) in terms customers has dropped from 78.27 in 2008 to 70.72% in 2010. Even more significantly its share of outstanding loans has dropped from 73.71% to 59.78%. The share of SBLP in incremental loans has dropped from 64.96% to 40.96% and in actual terms is lower in 2010 than in 2008. The reasons for the increasing dominance of the MFI group vis-à-vis SBLP are, among other things: - (i) MFIs are said to be more aggressive; (ii) SHGs have longer repayment period and during that period if SHG members need loans, they approach MFIs; (iii) Tactful Management Research Journal | Volume 2 | Issue 10 | July 2014

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Banks use MFIs to meet priority sector targets. It is believed that banks find it easier to use MFIs to meet their priority sector targets. This is particularly true near the year end where banks invest in securitized paper issued by MFIs to meet targets The Chief Executive Officer, Society of Elimination of Rural Poverty, State Government of Andhra Pradesh added the following in his deposition before the Committee:- ? The entire MFIs basically comprised of three NBFCs, as has been mentioned - SKS, Spandana and Share Microfin. They account for 80 per cent of the loans of MFIs. What they have done is that they have not gone through any process of empowerment. They simply cashed on the hard work done by the Government…. What these MFIs have done, they have just come to the villages, picked up women from these SHGs. They have not formed any Joint Liability Groups. They just picked up these women from SHGs and started giving money RBI has been envisaged as the sole Regulator as MFI sector in the country to ensure uniformity in approach as also dispensation of micro finance directed at consumer protection and sustainable development. The role of State has been envisaged through State Micro Finance Council and District Micro Finance Committees to review orderly growth of micro finance in the State The Bill requires the RBI to create a grievance redressal mechanism under Clause 33 which deals with redressal of Grievances against MFIs which¸ inter alia, provides that the Reserve Bank shall formulate a scheme for redressal of grievances of beneficiaries of micro finance services against MFIs and may entrust the functions of redressal of such grievance redressal to any ombudsman established under any other scheme framed by the Reserve Bank for clients of banks, with powers to issue directions to MFIs. CONCLUSION Microfinance uses as a tool for eliminating poverty in India and other developing nations. Micro Finance Industry has the huge potential to grow in future, if this industry grows then one day we'll all see the new face of India, both in term of high living standard and happiness. After all, microfinance has the appeal of bringing financial power to the people who need it most and whose resourcefulness and ingenuity it will fuel. Nationalized banks have not encouraged loans for SHGs because of lack of creditworthiness, but these banks have excellent reach to SHGs so that they should come forward to exploit this business opportunity . SHG programme has indeed helped in the social and economic empowerment of rural poor, especially for women, time delivering essential and much-needed financial services at low transaction costs for both banks, poor borrowers and villagers . However, slow progress of graduation of SHG members, poor quality of group functioning, dropout of members from groups etc., have also been reported various study findings in different parts of the country, which need to be taken into account while designing the road map for the next phase of the SHG programme The microfinance institution (development and regulation) bill , 2012has passed to design interventions that increase the impact of microfinance on borrowers, lenders, company and other institutions. Further, bank officials do not have sufficient interest to go beyond their routine job, so that the aggressive drive for financial inclusion is attained. These problems are overcome in the microfinance institutions model. With more stable regulatory environment which provide steady availability of funds, improving profitability with comfortable asset quality & capital adequacy and relatively lesser impact of concentration risk. Financial inclusion has been recognized as a priority goal of the microfinance sector and efforts were made in this report to identify the critical areas of interventions for greater success of the initiatives in the future REFERENCES 1.Puhazhendhi, V. (2009)“Microfinance India –State of the sector Report 2012” SAGE publications India Pvt Ltd 2.Bhandari, Amit K., & Kundu, A.(2014). Microfinance, Risk-taking Behaviour and Rural Livelihood 3.Springer New Delhi Heidelberg New York Dordrecht London 4.http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=749 5.www.eiu.com/microscope2013 6.http://www.indiamicrofinance.com/microfinance-in-india-2014.html 7.http://www.prsindia.org/uploads/media/Micro%20Finance%20Institutions/SCR-%20Micro%20 finance%20bill.pdf 8.http://www.fgda.org/dati/ContentManager/files/Documenti_microfinanza/rA_Microfinance_Market_ Outlook_2014_EN.pdf

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