CHAPTER 1 – INTRODUCTION
Developing countries in the world there are very less financial structure where many people are not able to carry out business or certain activities because they do not have proper funds or support which are actually required. In order to resolve such issues, the concept of micro financing was introduced which became increasingly important to such people who were lacking behind because of such support. The concept of microfinance was found during the time the world was suffering from the collapse of the Bretton Woods systems as well as the oil crisis. The idea regarding microfinance was first found in Bangladesh during the 1970s. Well-known economist Muhammad Yunus returned from the United States to Bangladesh which is his home country after receiving his Ph.D. degree from Vanderbilt University in the year 1969. Looking at the poverty throughout the region, he got an idea for implementing the economic approach which will loan small amounts to women so that they can start their businesses for improving the economy. He established in the year 1983 the Grameen Bank having the belief that credit is fundamental right of humans.
The program of Grameen Banks microfinance had become a model all over the world. The difference between loans and microfinance loans was that in microfinance loans it does not have any collateral. That is the reason many of such loans are paid back through group guarantees and joint liabilities. In India, the micro finance industry began in the 1970s with the beginning of Self Help Groups (SHG) for allowing Indians in providing such loan tools which was never been previously provided. The form of microfinance can be credited to the Shri Mahila Sewa Bank, which created the first microfinance institution in the year 1974.This project will help to understand the microfinance crisis which was faced in the year 2010 in the state of Andhra Pradesh and the impact of such crisis where it was a great loss to the economy and many people even did suicide because they were not able to repay the loan. Also the recommendation of Malegam Committee for proper regulation of microfinance to the Reserve Bank of India was brought forward out of which many were approved and was brought into effect. The research will thereby conclude by giving certain suggestions as per required.
To objective is to study about the microfinance crisis which happened in the state of Andhra Pradesh in the year 2010. It also needs to be understood the reasons for which such event took place and how much were people affected by the loss. Further to understand the regulations framed and brought by the Reserve Bank of India as well as the recommendations given by Malegam Committee.
To study about the concept of microfinance and how much it has been effective to various people. To understand the crisis in detail that effected because of weak regulations as well as multiple lending. Payment and Settlement System Act which is been made to provide for the regulation of the Payment system in India. To understand the initiatives taken for bringing back the economy back normal as well the recommendations which was given by Malegam Committee to Reserve Bank of India relating to micro finance.
1.4 STATEMENT OF PROBLEM
Microfinance is an economic development tool to assist the poor to work by lending fund so that they get support to start business. The government of Andhra Pradesh made a significant work for financial inclusion by way of Self-Help Groups (SHG) as well as various other programs. Failure with such programmes gave rise to Microfinance institutions. The crisis brought serious issues with the regulations of Microfinance and also the factors which lead to crisis brought changes in bringing regulations for a systematic microfinance. Reserve Bank of India has made various initiatives in bringing regulations and also for proper flows of micro credit loans. But there are various things which should be thought for improving the microfinance facilities as well the regulations so that such crisis could be prevented.
Whether the microfinance crisis could be avoided? Whether there was any flaw in the regulations?
1.6 RESEARCH METHODOLOGY
The research is a doctrinal study of the Crisis of micro finance in Andhra Pradesh in the year 2010. Also to know about the regulations of Reserve Bank with respect to Micro finance made with the recommendations of Malegam Committee. The project is based from various readings, observation from different authors, journal as well as research articles and analysing statutory provisions. The Library-based research method will be followed for deriving the Hypothesis. The search will be conducted on the basis of primary sources such as statutes and secondary sources such as books, online articles available freely as well as on legal databases. The project is based on pure theoretical research.
1.7 REVIEW OF LITERATURE
The Author gives us a fair background on the evolution of the concept Micro finance. Further, he gave a brief of how the idea for microfinance was brought by the famed economist Muhammad Yunus. The Author sheds the light on the functioning of microfinance in India and when it began in India. Also the issues faced in Microfinance are discussed. The Author provides us in detail about the Andhra Pradesh Crisis and the reasons for which such crisis happened.
The Author explains about the Grameen Bank which was set up in Bangladesh by the economist Muhammad Yunus, which by way of small loans gives to women for supporting them from starting any type of work. The working of Grameen Bank was quite different because during lending funds the bank does not used to take any such collateral. The Author also gives us the when such finance started in India. Further, by giving a brief case study on Andhra Pradesh crisis. The Author also shed the light on the developments in the Microfinance sector after such crisis.
I have divided my project into 5 chapters. The first chapter deals with the introduction under which I have written the background of the Microfinance from where it was introduced and the how much it is useful to the poor people as well as when this concept came in India along with hypothesis, objectives and literature review. Chapter two deals with the microfinance in India and also about the two groups is added i.e. Self Help Groups and Joint Liability Group. Further, Non-Banking Financial Company Micro Finance Institutions (NBFC-MFI) their role towards micro finance is discussed. Chapter 3 explains in brief about the microfinance crisis in the state of Andhra Pradesh starting with the origin when such issue started and all the various event which happened during that time by Micro Finance Institutions, poor people as well as the state government. Chapter 4 deals with the regulations which are made by the Reserve Bank of India after the crisis occurred. Further, recommendations was also been taken from the Malegam committee which is been accepted by RBI which helps to give a different regulatory framework to NBFC-MFI. Finally, in Chapter 5 I have given suggestion about what can be done to improve micro financing in India which will help many poor people as well as with proper regulations it will also benefit the NBFC-MFI and ended my research project with conclusion.
CHAPTER 2 – MICROFINANCE IN INDIA
The concept of microfinance had a rapid growth widely from the time it started in Bangladesh. The well-known economist Muhammad Yunus contributed by developing such an idea for implementing economic approach to loan small amounts of money to women. Also the establishment of Grameen Bank was a big success to provide to the poor people loans from escaping the poverty on the terms which is suitable to them. There are two types of groups i.e. Joint Liability Group (JLG) and Self Help Group (SHG). In the year 1970 the microfinance industry began with the commencement of Self Help Group (SHG) for allowing Indian in providing loans which was not previously provided.
2.2 MICROFINANCE IN INDIA
Firstly, it is important to know about the importance and its meaning of the two groups i.e. Joint Liability Group (JLG) and Self Help Group (SHG) –
a. Joint Liability Group (JLG) – It is made up of team of borrowers which are selected instead of institution by determining the group. Mainly, those who borrow loans does not have any collateral which is normally required for loan. Therefore many loans are designed for paying back through joint liabilities. This lets the loan to be paid on time as well as each member of joint liability group is considered trustworthy. If by any chance any member of the group is unable to pay their loan portion, then other members takes the responsibility for paying the remaining sum. Such type of loan permits more people to be involved in loan without having too costly of burden.
b. Self Help Group (SHG) – It comprises of group of people who are in the economic background and who save money in one fund. This fund can be paired with microfinance companies for providing support.
The difference between JLG and SHG are –
In India, the first microfinance institutions were created by Shri Mahila Sewa Bank in the year 1974. Its goal was to help the women who are unorganised workers. With the issues in the unorganised sector there seem a severe urgency for microfinance. Further in the year 1984 National Bank for Rural and Agricultural Development (NABARD) started promoting SHGs as well as microfinance companies. Micro finance started to gain more attraction. There was a huge flow when various private organisations started to begin lending to microfinance companies during the time of liberalisation in 1991.
The Reserve Bank of India found Micro finance institutions within the important sector and measured as a tool for battling oppression. In the year 2006 many Microfinance institutions were affected due to government interventions who were putting allegations of high interest rates. The Non-Banking Finance Companies Micro financial institutions (NBFC-MFIs) became qualified because of establishment of The Microfinance Institutions Network in the year 2009. After the Andhra Pradesh crisis in the year 2010, Bandhan Bank was given banking license by the Reserve Bank of India and it became the largest microfinance organisation in India.
The microfinance loans are largely supplied by well-defined institutions which is categorised as Non-Banking Financial Companies (NBFC-MFIs). Such NBFCs attempts to be fully inclusive for a citizen who does not have requirements for loan. It plays an important role in development of transport, infrastructure, wealth opportunities and also financially supports to economic weaker section of the society. Further there are microfinance programs which are offered by banks which cooperate with Self Help Groups and generating funds through NABARD. Such Self Help Group- Bank Linkage Program (SBLP) accounts large portion in various microfinance initiatives and focuses on outreach and its impact. Through this it can be concluded that Microfinance institutions have contributed very much in the Indian economy and the role and functioning of it proves that many are been benefited by such loans and there is certain growth in the economy. Except the crisis which India faced in the state of Andhra Pradesh which is also known as Microfinance crisis of Andhra Pradesh in the year 2010.
CHAPTER 3 – MICROFINANCE CRISIS IN ANDHRA PRADESH
Andhra Pradesh is a part of South India, and also includes Kerala, Karnataka as well as Tamil Nadu and also the union territories of Lakshadweep and Pondicherry. Microfinance is originated and grown rapidly mostly in South India out of which Andhra Pradesh is the main state. This can be proved by the financial results of both models in that region. At the end of March 2013, the saving balance average of Self Help Groups was highest for South India, which is USD 294 for Karnataka which is trailed by Andhra Pradesh. The loans which were given to SHGs were also the highest and the maximum number is in Andhra Pradesh. Small Industries Development Bank of India (SIDBI) which is one of the largest financers of Micro finance institutions in India and the annual portfolio had increased rapidly from 2005 to 2009. In November 2002, commercial banks were allowed treating unsecured loans and advances to Self Help Groups equally with secured advances by the Reserve Bank of India. It permitted further in lending to such microfinance operations through intermediaries for being part of priority sector lending. The state government promoted the Self Help Group model and made sure that people are familiar with the microfinance. Further an important initiative which was taken by state government was a World Bank initiated program which is known as Velugu in the starting and now it is known as Indira Kranthi Pratham, for promoting Self Help Groups. No action of state government escapes the speculations that government was targeting its political interests more than citizens. The government made itself a competitor by entering into microfinance space in an industry which was also a controller.
3.2 ORIGINATION OF CRISIS
The signs of trouble in Andhra Pradesh with respect to microfinance started in the year 2006. In the district of Krishna there occurred an event where the state government had shut down 50 branches of 2 large Micro finance institutions which is Share and Spandana and such event was termed as ‘Krishna Crisis’. The organisations used to charge higher interest rates from clients as alleged by the government as well as following abusive practices for recovering amount and used to steal clients from the Self Help Group government led program and this were the reasons which led them to shut the organisation. When this shut down happened it affected recovering and lending cycles which had a limited impact. Private Micro finance institutions grouped together for having more bargaining power for proper lending and recovery. Sa-dhan was set up in the year 1999 as an industry association for microfinance institutions for developing a proper code of conduct during the time of Krishna crisis. Many micro finance institutions promised to adopt such code by reducing the interest rates. Microfinance Institutions Network (MFIN) in the year 2009 was established for Non-Banking Financial Company Micro Finance Institutions (NBFC MFIs). Sa-dhan was not able to function good because of the external observers of the industry and its efficiency was under question during the starting period of crisis.
3.3 EVENTS OCCURRED IN 2010
The microfinance in India during the decade of 2000 was in a great position before the troubles occurred. The promoter of SKS Finance, Vikram Akula during the face of microfinance enjoyed great recognition. It was the first organisation in reaching the Indian Capital Market through Initial Public Offering in the year July 2010. The events turn rapidly, where SKS Finance initially a non-profit organisation and was not expected to take such IPO route. The shares were oversubscribed as well the prices rose speedily. Looking at the situation, there were signs of good financing to the poor and it seemed that the best time for microfinance had started.
There was a bubble like growth in the market which was highlighted by the dissenters. Many Micro Finance Institutions moved from non-profit bodies to profit organisations. Andhra Pradesh government established its own independent body known as the Society for Elimination of Rural Poverty (SERP). Such body was responsible for making series of projects called Indira Kranthi Pantham (IKP) for promoting Self Help Groups in every district of Andhra Pradesh. It is important to understand that as there was well established infrastructure in Andhra Pradesh, Many Micro Finance Institutions did not require for educating borrowers like in other states. Andhra Pradesh introduced microfinance industry for Micro Finance Institutions for cutting costs by 25 to 30% for making more maintainable. Members of Self Help Groups were able to use peer pressure for controlling group performance by way of joint liability. There was oversupply in microcredit and it pointed towards saturation by the critics in Andhra Pradesh. The reason for oversupply is affected by clients poaching by various organisations for multiple lending to consumers as well as to meet their targets. Intermediary agents of various private Micro Finance Institutions made reports of abusive practices and began to make news before any such action was taken, initially in vernacular press and afterwards national media. There were around 70 suicides which were alleged to be connected to the people who were not able to repay Micro Finance Institutions and such is determined by agrarian trends which are mostly affected and take such steps. State government mentioned such suicides are because of overruling to protect citizens from various immoral practices of private Micro Finance Institutions.
The Andhra Pradesh Micro Finance Institutions Ordinance (Regulation of Money Lending) 2010 was circulated with effect from 15th October, 2010 for oversupply and coercive practices for recovery. Such ordinance as well as Andhra Pradesh Micro Finance Act needs registration of all institutions which are functioning in the state of Andhra Pradesh. The loans should be without any collateral and also there should be former permission for granting further loans to Self Help Groups or members where such group has already an outstanding loan amount from bank and repayment should be made in monthly instalments at the selected offices of Andhra Pradesh government. There should a standard form of contract as well as the borrower has to be given his statement of account as well as acknowledgements for the payments which is received from him. Recovery of interest shall not be more than the principal amount. Micro Finance Institutions shall not arrange any agents for recovery nor will use any other wrong methods of recovery and anybody violates is liable for punishment.
Immediately after such ordinance, recovery and lending came to a hold. Various politicians were motivating people for not paying back to Micro Finance Institutions. This lead to two serious effects i.e. it badly affected the collections for Micro Finance Institutions (The collection rate in Andhra Pradesh fell from 99% to 20% ) and clients who were not repaying became disqualified for any future loans. Liquidity of Micro Finance Institutions reduced significantly because interest rates were curbed and state discouraged for repayment. Credit which used to be received by Commercial banks also stopped due to probable losses.
During this stage, it can be known that this crisis occurred due to various reasons. Firstly, a number of people due to not able to repay loan killed themselves. Micro Finance Institutions played a very important role for driving people to desperation through focusing on efficiency and also losing vision of microfinance as a pro-poor approach. Secondly, the ordinance reduced confidence from Micro Finance Institutions which brought various questions of disclosure to commercial banks. The ordinance also decreased the legality of Micro Finance Institutions in the eyes of investors as well as clients. Thirdly, state government must have supported citizens in short term but it affected their interests in the long term because they turn into non-viable clients. Such decline with respect to financial resources brought several people back towards the moneylenders. Finally, these events acted as a promoter for the Reserve Bank of India for developing regulations as well as policy reforms.
CHAPTER 4 – RESERVE BANK OF INDIA REGULATIONS AFTER CRISIS
With respect to the failure that circled the microfinance industry, the Reserve Bank of India started to regulate all Micro Finance Institutions. The intention was also to remove government intervention from all micro finance organisations, with the aim to avoid such similar crisis similar to the Andhra Pradesh crisis. The Reserve Bank of India created separate category of Non-Banking Financial Company known as “NBFC-MFIs” which needs to register with RBI for continuing their microfinance functioning. Further, accepting the recommendations by the Malegam Committee (2011) brought NBFC-MFI under different regulatory framework, through directions. The elements mentioned in the directions are as follows –
1. A Non-Banking Financial Company Micro Finance Institutions is a non-deposit other than Section 25 of the Indian Companies Act, 1956) which fulfils-
i. The minimum net owned funds should be Rs. 5 crore (Whereas if any NBFC-MFIs which are registered in North East Region of country minimum net owned funds shall be Rs. 2 crore).
ii. The net assets should not be less than 85% and shall be in the nature of “Qualifying Assets”.
2. NBFC-MFIs have to maintain a capital adequacy ratio consisting of Tier I as well as Tier II capital not less than 15% of its risk weighted assets. The Tier II capital total shall not exceed 100% of Tier I Capital.
3. A borrower can be a member of only one group i.e. Self Help Group/ Joint Liability Group. He can borrow funds from NBFC-MFIs either as a member of any of such groups or by his individual capacity. Further, a borrower cannot borrow from more than 2 Micro Finance Institutions.
4. Lending Micro Finance Institutions shall have to ensure compliance among others conditions relating to –
a. Annual Income of households shall be Rs. 1,00,000 for rural and Rs. 1,60,000 for semi-urban and urban households).
b. Net indebtedness shall not exceed Rs. 1,00,000.
c. The loan tenure cannot be less than 24 months, for amount of loan in excess of Rs. 15,000 without any penalty.
d. Average amount of loans, for income generation, shall not be less than 50% of total loans by MFIs and such loans repayable weekly or monthly instalments will be the choice of borrower.
e. All NBFC-MFIs should be a member of atleast one Credit Information Company (CIC).
5. The Credit Pricing of interest rates charged by NBFC-MFI to borrowers will be lower of –
a. The cost of funds means margin as well as interest cost is mark of maximum 10% for big NBFC-MFI and 12% for others. The processing charges shall not be more than 1% of gross loan amount and such charges is not required to be included in margin cap.
b. A customer is required to know that there are only three components in loan pricing i.e. processing charge, insurance premium and interest charge.
c. The interest charged is calculated under reducing balance basis.
6. a. The borrower need not keep any security deposit or any collateral with NBFC-MFI.
b. He should ensure about receiving a loan card from NBFC-MFI which reflects interest charged, other terms and conditions, information which identifies the borrower and the important thing is acknowledgment by the NBFC-MFI towards the instalments received by them and should be in vernacular language.
c. NBFC-MFI does not charge any penalty on delayed payment.
d. It is compulsory for all the NBFC-MFIs to display in all offices and on website, the rate of interest being charged.
e. There should be some period of moratorium between grant and the due date of first instalment.
7. NBFC-MFIs should make sure that a code of conduct as well as systems is in place for recruitment, supervision and training of field staff, guidelines to be incorporating on Fair Practices. Further, recovery must be made at a central designated place.
8. Every NBFC-MFI shall have to be a member of atleast one Self-Regulatory Organisation (SRO) recognised by the Reserve Bank and have to comply with code of conduct which is prescribed by the Self-Regulatory Organisation.
9. Responsibility for compliance to all regulations which is prescribed for MFIs lies primarily with NBFC-MFIs. Banks which are lending to NBFC-MFIs needs to ensure their policies are aligned to regulatory framework.
CHAPTER 5 – SUGGESTION & CONCLUSION
As an instrument for poverty microfinance shall not be stopped. Even though there was a lot of criticism it has proven as a very useful tool for reducing poverty because it helped millions of poor people in the world for getting basic financial services. Nevertheless, because of such crisis in India the Micro Finance Institutions should be improved and regulated as there is a rapid growth of microfinance in India in past years which includes both the increase in number of institutions as well as their operations.
With respect to India’s previous banking sector which is regulated by the Reserve Bank of India are mainly state owned until such issue which was without clear regulation which Micro Finance Institutions because this sector was never a risk in financial system. Thus, Regulations is a must for not protecting firstly the financial system, but for the poor people from wrong practices of some bad Micro Finance Institutions. The Andhra Pradesh ordinance which was made by the government for regulating the microfinance industry and restricting them should be avoided. The fear that the ordinance will destroy such sector or damage it, seems to have come true. Also, Indian Micro Finance Institutions should be regulated on national level and not only on state level.
The Reserve Bank of India by setting up an expert committee i.e. Malegam Committee in the year 2011 it presented recommendations on reforming the Indian private Micro Finance Institutions by protecting the borrowers. The regulations which were made brought various regulations and also the limitations necessary during lending or recovering the loan. The legislation created NBFC-MFI which falls under new regulatory framework. Such institutions should improve code of conduct and develop ethical practices such as commitment for more transparency, prevent wrong collection practices as well as managing over-indebtedness. By establishing credit bureau it allows Micro Finance Institutions in tracking borrowers total indebtedness and their credit history. If the borrowers information will be shared in transparent way between different Microfinance institutions, than such risks will be gradually reduced. Than it can be also possible for the Micro Finance institutions to have a difference between high and low risk borrowers by comparing their repayment histories. Most poor people before thinking of taking any micro credit should start with insurance and savings services firstly. Microfinance institutions are in a better positioned than other banks for meeting the needs of the poor. Bandhan Bank the well-known bank for microfinance has also over the years developed and helped various poor people all over India. Further the regulations, the targets for fulfilling the needs of the poor population as well as by giving them a proper livelihood or supporting them by providing financial services the bank has been a boon to the poor people. In India, many more things needs to be done for going beyond micro credits as well as focus on other important pillars of insurance, microfinance, savings.
The study mainly aimed on giving a brief history of Indian Microfinance, the crisis of 2010 and the regulations of the Reserve Bank of India. Microfinance uses proved as an important part for poverty alleviation. In initial beginning, the industry has grown rapidly by creating a wide network of micro finance organisations which impacted millions of poverty- stricken individuals. This movement mainly focused on efforts on women empowerment by using microloans for social change. Still micro finance in India faced various issues which must be overcome for becoming the poverty alleviation tool. Severe impacts on borrowers by Micro Finance Institutions practices loose credit extension, increasing interest rates as well as poor loan design should be addressed. Therefore, it is important to follow market trends as well as update method of loans accordingly.
The Reserve Bank of India had initially made regulations about the micro credit method in the year 2007 which states about the Self Help Group Linkage Programme, the lending norms, opening of savings account, documentation required, the engaging of NBFC in micro finance activities, etc. Further after such crisis faced in the state of Andhra Pradesh the regulations have also impacted more in this sector for having a smooth functioning. The important rule of RBI which is the limit where micro lenders cannot offer loan to borrower beyond Rs. 1,25,000.
Even though there is a progress in Microfinance sector, the recent issue in Assam is also affecting and due to which issues has been raised. In December 2020, the state assembly passed Assam Microfinance Bill, to prevent exploitation of borrowers by lenders who are not following regulations. Because of various politicians promises for waiver of loan many borrowers stated that if government is deciding to waive off loan then there is no need for any borrower to pay. Various residents of Santapur village in Lakhimpur district refused to repay the loan because of various such reasons.
The necessary requirements which is needed for proper micro financing should be adapted and before lending loan the various suggestions as well the proper regulations by the Reserve Bank of India should be consider so that there will be efficiency in the micro finance sector. If Micro Finance Institutions began to think on profits before their members or borrowers, the entire movement will start effecting. If institutions are structured properly proper financial relief would be possible. The microfinance in India with regards to well-being of people, its practices for promoting economic as well as social changes will continue in having permanent effect.
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