Microfinance Story of India

Aug, 23, 2019

Explained: What ails the existing microcredit model

News

  • Microcredit has gained much traction as a tool for ensuring the welfare of the most impoverished in society, and boosting development alongside.

What is Microcredit?

  • Microcredit refers to the granting of very small loans to impoverished borrowers, with the aim of enabling the borrowers to use that capital to become self-employed and strengthen their businesses.
  • Loans given as microcredit are often given to people who may lack collateral, credit history, or a steady source of income.
  • Microcredit agreements frequently do not require any sort of collateral, and sometimes may not even involve a written agreement, as many recipients of microcredit are often illiterate.
  • When borrowers demonstrate success in paying their loans on time, they become eligible for loans of even larger amounts, allowing them to finance expansion.

The idea behind

  • The core idea of microcredit is that a small loan will provide access to the larger economy to people who typically live outside the scope of the institutions on which the mainstream economy rests.
  • Such a loan is meant to enable them to commence with productive activities, and will give them the initial boost required to gain entry into an industry, after which production will be able to sustain itself, and the loan will gradually be repaid.

Part of Microfinance

  • Microcredit falls under the larger umbrella of microfinance, financial services for individuals who don’t have access to traditional services of this kind.
  • Microfinance activities usually target low-income individuals, with the goal of helping them to become self-sufficient. In this way, microfinance activities have an aim of poverty alleviation as well.
  • An example of a microcredit institution is the Grameen Bank in Bangladesh, founded in 1976 by Mohammed Yunus.
  • The Grameen Bank offers small loans to the impoverished without asking for collateral, and was the pioneering institution in the realm of microfinance.
  • The bank has 8.4 million followers, 97% of whom are women, and the bank has repayment success rates between 95 to 98 percent.

Microcredit institutions are failing in India

  • The article in Ideas for India cites a 2015 study that found “a lack of evidence of transformative effects of microfinance on the average borrower”.
  • Another study found that having access to microcredit made very little difference to changing the lifestyles of borrowers, based on six indicators: household business profits, business expenditures, business revenues, consumption, consumer durables spending, and spending on temptation goods.
  • These indicators only saw a 5% impact when microcredit was available.

Why?

  • The primary reason for the lackadaisical effects of microcredit is the stringent repayment schedule offered by most microcredit institutions.
  • Since most borrowers to whom microcredit is given have little to no credit history as a result of their exclusion from traditional systems of credit.
  • Hence institutions offering microcredit are unable to judge the risk associated with lending to certain borrowers, and cannot be sure what the risk of them defaulting will be.
  • To lower the risk of defaulting, microcredit lenders therefore resort to repayment schedules that demand an initial repayment that is almost immediate, to which borrowers must adhere.
  • The effect of this is that borrowers are unable to use the loans on investments that will take some time to be fully realized.
  • The borrowers instead are forced to use the loans they receive on short term investments that only boost production to an extent, and the overall growth of their incomes remains meager.

What are the other applications of microcredit?

  • Conventionally, microcredit has been used mainly for entrepreneurs to begin production and attain self-sufficiency.
  • Small microcredit loans can allow rural labourers –those who are employees, as opposed to entrepreneurs, who are employers– to migrate to urban areas to find work during the lean season, when there is no work to be found on farms.
  • Those who migrated temporarily during this season experienced increased spending in both food and non-food areas, and increased their calories consumed.
  • Microcredit can be used in situations where seasonal factors cause drops in income to overcome these “seasonal credit crunches” and avoid taking decisions which cause people long-term negative impacts.
  • They can also be used to dampen the effects of shocks like floods by providing people with a form of insurance that both increases production before the shock and provides a safety net after.

Conclusion

  • Microcredit has a vast range of applications for poverty alleviation and general development, but existing systems require reform in multiple areas to allow for unfettered benefits that last.
  • Furthermore, in areas were the application of microcredit is relatively new, microcredit systems must be carefully evaluated before they are put into place, so as to enable the greatest benefit from such institutions.
Mar, 06, 2019

PSBloansin59minutes.com emerges largest fintech lending platform

Note4Students

Mains Paper 3: Indian Economy | Planning, mobilization of resources, growth, development and employment

From UPSC perspective, the following things are important:

Prelims level: About the Portal

Mains level: Facilitating MSMEs in India


News

  • According to a report by global financial firm, Credit Suisse, the recently launched fintech portal, PSBloansin59minutes.com has, within three months, emerged as the largest online lending platform.

Portal “PSBLoansin59min”

  • It is one of its kind platforms in MSME segment which integrates advanced fintech to ensure seamless loan approval and management.
  • The loans are undertaken without human intervention till sanction and or disbursement stage.
  • A User Friendly Platform has been built where MSME borrower is not required to submit any physical document for in-principle approval.
  • The solution uses sophisticated algorithms to read and analyse data points from various sources such as IT returns, GST data, bank statements, MCA21 etc. in less than an hour while capturing the applicant’s basic details.
  • The system simplifies the decision making process for a loan officer as the final output provides a summary of credit, valuation and verification on a user-friendly dashboard in real time.

Key Features

  • Majority stake of SIDBI & big 5 PSBs- SBI, Bank of Baroda, PNB, Vijaya and Indian Bank.
  • A first for MSME borrowers-Connect with multiple banks without visiting the branch.
  • Only Platform in the market with a Banker Interface which covers the Branch Level integrations (with maker-checker-approver) in tune with current systems of PSBs.
  • Only Platform that enables Bankers to create Loan Products in line with the Scoring models & assessment methods within their approved credit policy.
  • Only Platform that has an integrated GST, ITR, Bank Statement Analyzer, Fraud Check and Bureau Check.
Feb, 23, 2019

Labour Bureau files MUDRA job report

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: PMMY

Mains level: Problem of Unemployment


News

  • The Labour Bureau has completed its survey on employment generated by the MUDRA loan scheme, giving the Centre a potential data tool to combat other reports showing a dismal scenario on jobs.

About MUDRA Scheme

  1. The Pradhan Mantri Mudra Yojana was introduced in April 2015 as an effort to extend affordable credit to micro and small enterprises.
  2. Loans up to Rs. 10 lakh are extended to these non-corporate, non-farm enterprises by the Micro Units Development and Refinance Agency (MUDRA) through last-mile financial institutions.
  3. So far, 15.56 crore loans worth a total of Rs. 7.23 lakh crore have been disbursed.
  4. In December 2017, faced with mounting criticism on the failure to create job opportunities, the Labour Ministry had asked the Labour Bureau to initiate the survey on jobs created through the MUDRA scheme.

NSSO survey

  1. The NSSO’s findings showed that unemployment hit a 45-year high of 6.1% in 2017-18.
  2. Central government ministers and officials have already attempted to use the MUDRA scheme’s performance to combat criticism based on the leaked NSSO job survey report.
  3. Some economists have advised caution in the interpretation of MUDRA data, especially as it relates to jobs.

Loan disbursal doesn’t ensure Job

  1. Every new loan certainly doesn’t imply creation of a new job.
  2. It is improbable that these loans are being given to those who were formerly unemployed.
  3. They are more likely being given to people who are moving to self employment from other jobs resulting in no new net job creation.
  4. Given that the average size of the loan disbursed under MUDRA is quite small, it is unlikely that the loan seekers are providing a job to anyone other than themselves.
Jan, 15, 2019

Banks to review MUDRA loan book

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: MUDRA scheme

Mains level: NPA Crisis


News

  • The Finance Ministry has asked the banks to review all loans sanctioned under the Pradhan Mantri Mudra Yojana, as the non-performing assets (NPA) have crossed Rs 11,000 crore within three years of the launch of the scheme.

Concerns over MUDRA

  1. The Mudra loan scheme has done very well.
  2. However, the rising NPAs under the scheme are a matter of concern.
  3. It is already three years and there is a need to review how the banks are sanctioning the loans.
  4. The RBI has already flagged its concerns regarding the bad loans to the government.

What went wrong?

  1. To push the scheme, there had been overemphasis on the banks to meet loan disbursal targets.
  2. In the race to meet the target, the credentials of loan-seekers were not being properly verified.
  3. In many instances, loans were being given without any collateral or security, making it difficult for banks to go after defaulters.

Critical Analysis of PMMY

  1. Critics of the scheme say that too many best practices in loan origination have been neglected while authorising and disbursing loans.
  2. Even if loans are sought by business owners genuinely seeking growth and bankers disburse them with an eye on economic development, ensuring repayment is still a challenge.
  3. First, these loans are unsecured a collateral that could protect the interests of the bank is not required, unless an asset that is purchased can itself serve as collateral.
  4. Secondly, the scheme is meant for those who need small amounts, but do not have access to such funds.
  5. But the very nature of the business of such borrowers is susceptible to volatility and annual cycles, not to mention the itinerant ways of some business owners, such as vegetable vendors.
  6. They may choose one location for their place of business on a day, and another elsewhere in their city the next day.
  7. Further, the public banking system may not be staffed for work this may entail.
  8. When it comes to collection, bank staff may choose to go after one loan with outstanding of ₹10 lakh, for example, rather than 10 loans of ₹1,00,000 each.

Back2Basics

Mudra Scheme

Pradhan Mantri Mudra Yojana: Funding the unfunded

Jan, 11, 2018

[pib] Schemes for Farmer’s Welfare

Note4Students

From UPSC perspective, the following things are important:

Prelims level: Kisan Credit Card (KCC) scheme

Mains level: Schemes for providing credit to farmers


News: 

  • Kisan Credit Card (KCC) scheme meets the financial requirements of farmers at various stages of farming.

Aim:

  • Providing adequate and timely credit support from the banking system under a single window with the flexible and simplified procedure to the farmers for their cultivation and other needs.
  • To meet the short-term credit requirements for cultivation of crops;
  • Post-harvest expenses;
  • Produce marketing loan;
  • Consumption requirements of farmer household;
  • Working capital for maintenance of farm assets and activities allied to agriculture;
  • Investment credit requirement for agriculture and allied activities.

Provisions

  •  The facility of ATM enabled RuPay Card, one-time documentation, built-in cost escalation in the limit and any number of drawals within the limit
  • The farmers eligible under the KCC scheme include small farmers, marginal farmers, sharecroppers, oral lessee and tenant farmers
  • The Self Help Groups (SHGs) or Joint Liability Groups (JLGs) are also eligible for availing benefits under the said scheme
Dec, 27, 2017

[pib] Udyami Mitra Portal

Note4Students

From UPSC perspective, the following things are important:

Prelims level: Udyami Mitra Portal

Mains level: Measures for easing procedures and capital requirements for businesses


News:

  • Small Industries Development Bank of India (SIDBI) has launched the ‘Udyami Mitra’ Portal (www.udyamimitra.in) to improve the accessibility of credit and handholding services to Micro, Small and Medium Enterprises (MSMEs)
  • Scheduled Commercial Banks (SCBs) have been advised to ensure a target of 7.5% of Adjusted Net Bank Credit (ANBC) for Micro Enterprises
  • Collateral security is not required for loans up to Rs. 10 lakh to MSE sector, which has simplified working capital requirement for MSEs
Sep, 17, 2016

Micro Finance encouraging income generation

  1. Source: The Bharat Microfinance Report 2016 by Sa-Dhan, the self-regulatory body for MFIs
  2. Analysis of the loan portfolio held by reporting MFIs for 2014-15 and 2015-16 shows that the proportion of income generation loan to non-income generation loan is 94:06
  3. Within the income-generating loans, largest proportion (39%) went to the animal husbandry sector
  4. It is followed by 29% to the trading & small business category
  5. Agriculture: Received 15% of the loans
  6. Background: In 2011, RBI (Reserve Bank of India) regulation stipulated that a minimum of 70 per cent of the MFI loans are to be deployed for income generating activities

Discuss: Microfinance institutions have been shifting their focus to urban areas from rural areas. What are the reasons and impacts of such a shift?

Sep, 17, 2016

MFIs see higher growth in urban India than rural: Report

  1. Source: The Bharat Microfinance Report 2016 by Sa-Dhan, the self-regulatory body for MFIs
  2. Over the last year, microfinance institutions (MFIs) have seen their business grow faster in urban (@ 27%) India than in rural (@ 14%)
  3. These loans are being put to increasingly productive uses with a higher proportion of them going towards income generation than before (@ 90% against 80% last year)
Sep, 10, 2016

Issues with microfinance sector

  1. Source: India Credit Rating Agency (ICRA)
  2. While the business opportunity is exciting, there is a need for establishing a credit culture in the new geographies and strengthening the credit appraisal processes
  3. The two operational credit bureaus have helped the sector maintain its asset quality
  4. Issues: Limited coverage of SHG bank linkage programme data, multiple identity cards being used by borrowers for availing loans from more than two MFIs and interlinking of retail credit
  5. Communal and political incidents in Madhya Pradesh, Uttar Pradesh, Bihar, Jharkhand and Karnataka did lead to some pressure on asset quality
  6. The sector remains vulnerable to asset quality shocks owing to the risks associated with unsecured lending business, political risks, and operational risks arising out of cash handling
  7. Largely on the bank of recognition as priority sector lending (PSL), the banking system’s credit to the NBFC-MFIs grew 60% in the last fiscal
Sep, 10, 2016

Growth prospects of microfinance sector

  1. Source: Indian Credit Rating Agency (ICRA)
  2. The country’s microfinance sector will grow nearly three-fold to reach up to Rs 4.3 trillion over the next three years on account of expansion into newer segments and enhanced average loan sizes
  3. The estimate includes micro credit across self-help groups, microfinance institutions and banks
  4. Basis: Improving income levels, inflation, higher eligibility of borrowers moving to higher loan cycles
  5. Indian microfinance institution (MFI) sector grew 40% in 2015-16 to Rs 1.4 trillion (including the Bandhan Bank) as against a 38% growth in the previous fiscal
Jan, 18, 2016

MUDRA not to regulate micro finance institutions: Govt

  1. The govt has said that the RBI would continue to regulate MFIs registered as NBFCs with the central bank.
  2. MUDRA Bank will regulate banks only for the purpose of MUDRA loaning.
  3. MUDRA Ltd currently operates as an NBFC registered with the RBI, but recently govt. approved conversion of MUDRA Ltd into MUDRA-SIDBI Bank.
  4. The proposed Bank will also oversee the Rs 3,000 crore Credit Guarantee Fund to facilitate the MUDRA scheme.
  5. The Fund will provide insurance against default on MUDRA loans to the maximum extent of 50%, thereby helping reduce risk taken by banks and financial institutions.
Jan, 07, 2016

Cabinet approves creation of a Credit Guarantee Fund for MUDRA loans

  1. The Union Cabinet has given its approval for the creation of a Credit Guarantee Fund for MUDRA loans.
  2. The Fund is expected to guarantee more than Rs 1,00,000 crore worth of loans to micro and small units, sanctioned under Pradhan Mantri Mudra Yojana
  3. The objective is to reduce the credit risk to Banks / NBFCs / MFIs / other financial intermediaries.
Nov, 20, 2015

Launch of Technology Acquisition and Development Fund under National Manufacturing Policy

  1. Technology Acquisition and Development Fund (TADF) under National Manufacturing Policy being implemented by Department of Industrial Policy & Promotion (DIPP).
  2. TADF is a new scheme to facilitate acquisition of Clean, Green & Energy Efficient Technologies.
  3. It is in form of Technology/ Patents/ Industrial Design available in market available in India or globally, by Micro, Small & Medium Enterprises (MSMEs).
  4. Scheme would facilitate acquisition of clean & green technologies by micro, small and medium units across the sectors and thus, bridge the technological gap at an affordable cost.
  5. Scheme is conceptualised to catalyse manufacturing growth in MSME sector to contribute to the national focus of “Make in India”.
Sep, 12, 2015

Utilising MSMEs as engines for growth

It is worth considering whether money lenders can be brought under regulation and an interest cap be imposed for lending to MSMEs, as is the case in Japan.

  1. Recent growth data for India reveals that there has been a significant slowdown in the industrial growth rate, especially manufacturing, in the first quarter, April-June, 2015.
  2. According to Annual Report (AR) of the RBI, gross capital formation has been declining over the years, especially households. The performance of the agriculture sector has also been slower due to uncertain rains.
  3. In context of continuing uncertainty in the agriculture sector because of substantial dependence on rain-fed irrigation, an alternative power pack, unutilised, is micro, small and medium enterprises (MSMEs).
  4. MSMEs are generally labour-intensive, they have the capability to create more jobs to cater to a young demographic country like India.
  5. Supply-side efforts is in action,but need is to generate demand-side requirement from the general public to set up MSMEs. Therefore, there is need to nurture entrepreneurs from a young age.
  6. If the country has to successfully launch the ‘Make in India’ programme, it needs to train young entrepreneurs, in addition to developing skills at skill development centres.

MSME’s main problem is finance

  1. Jan Dhan Yojana (JDY) could be used to direct financial resources to targeted MSMEs.
  2. In the case of Japan, the government has imposed a cap on interest rates on loans that a money lender extends to MSMEs.
  3. It is worth considering whether money lenders could be brought under regulation now, given technological progress, as achieved in the case of Japan, and an interest cap be imposed for lending to MSMEs.
  4. The role of financial education is very important for MSMEs in assessing appropriate start-up finance and in empowering them to use financial products and services to manage risks and other business needs.
  5. Skill development through training programms of bankers is also necessary for assessing MSMEs that can be bank-financed.
Jul, 14, 2015

[cd explains] Mudra Bank: Funding the Unfunded

 

Jun, 09, 2015

Microfinance industry is on the cusp of a great change

Apr, 09, 2015

MUDRA is breaking the myth

  1. The corporate houses and big industries employ only 12.5 million people as against 120 million by the MSME sector.
  2. The large industries have wide variety of facilities for credit, whereas MSME suffer from credit crunch.
  3. MUDRA will focus on 5.75 crore self-employed people who use funds of Rs 11 lakh crore.
  4. NSSO Report 2013: There are 57.7 million small business units, mostly individual proprietorship, which run manufacturing, trading or services activities.
  5. The small business units include small manufacturing units, shopkeepers, fruits, vegetable vendors, truck and taxi operators, food-service units, artisans, food processors, street vendors.

Apr, 05, 2015

New regime, old philosophy

  1. There is always a case for direct government intervention to solve any one of our many chronic problems, to justify the need for MUDRA bank.
  2. The govt. is trying to ensure equity through determined government action that previously drove the govt. to nationalise banks and bring priority sector lending.
  3. However, such ‘directed credit’ has not worked successfully in the past.
  4. The govt. control over banks had led to large-scale corruption and repeated recapitalisation through taxpayers’ money.
  5. MUDRA bank has been over-burdened with many conflicting objectives and too-many roles, viz. a lender, consultant, regulator, think tank and an agent of social change.
  6. This new bank has little accountability for taxpayers’ money, which has already wasted on numerous initiatives to “support” small businesses of various kinds.
Mar, 26, 2015

MUDRA Bank to be launched on April 8

  1. The Rs 20,000 crore MUDRA Bank aims to provide refinancing to small and medium enterprises, particularly those from SC & ST.
  2. MUDRA Bank – Micro Units Development and Refinance Agency.
  3. The idea is to refinance micro-finance institutions through Pradhan Mantri Mudra Yojana.
  4. This bank would be responsible for regulating and refinancing all MFIs which are in the business of lending to MSME.
Mar, 21, 2015

The fine print of Mudra Bank

  1. The bank will be financially challenged since inception, if it is funded through non-budgetary support.
  2. The funds for the bank would be sourced from shortfall in the achievements of the priority sector lending (PSL) targets.
  3. Currently, the shortfall in the PSL targets of the domestic scheduled commercial banks are deposited in Rural Infrastructure Development Fund (RIDF) and for foreign banks in Small Enterprises Development Fund.
  4. The fact of the matter is that banks have been surpassing the targets in all years, since 2002, except for the last three years.
  5. The shortfall lies only in agricultural loans, but it would be unfair to divert the target for agriculture from RIDF to micro units.
Mar, 15, 2015

A catalyst for India's 10% GDP growth

  1. Informal sector accounts for 90%of our non-agricultural workforce, 50% of the GDP & 40% of the non-farm GDP.
  2. Analysts point that the Indian GDP can be raised by almost 15% if the informal sector data is incorporated in the GDP series.
  3. The MUDRA bank will boost loans and cut borrowing costs for the cash-starved domestic small businesses.
  4. It is using micro finance, an economic development tool to assist the lower income groups to develop and grow their small businesses.
  5. This government is right to see the potential of this sector to drive up jobs and taxes.
  6. This will create a force multiplier on the economy and tax revenues by a successful formalisation of the informal sector.
Mar, 01, 2015

MUDRA Bank: All rolled in one

  1. It will provide funds and promote microfinance institutions (MFIs), which are in the business of lending to micro and small business entities engaged in manufacturing, trading and service activities.
  2. It will also act as a regulator for MFIs.
  3. The bank will lay down policy guidelines for micro enterprise financing business, registration, accreditation and rating of MFI entities.
  4. The agency will also articulate responsible financing practices to ward off over-indebtedness and ensure proper client protection principles and methods of recovery.
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