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Microfinance
- The modern use of the expression "microfinancing" has roots in the 1970s when organizations, such as Grameen Bank of Bangladesh with the microfinance pioneer Muhammad Yunus, were starting and shaping the modern industry of microfinancing. Another pioneer in this sector is Akhtar Hameed Khan.
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- Some principles that summarize it are:
- Poor people need not just loans but also savings, insurance and money transfer services.
- Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks.
- Microfinance means building permanent local institutions.
- Microfinance also means integrating the financial needs of poor people into a country's mainstream financial system.
- "The key bottleneck is the shortage of strong institutions and managers." Donors should focus on capacity building.
- Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit.
- Microfinance institutions should measure and disclose their performance – both financially and socially.
- Microfinance is considered as a tool for socio-economic development,and can be clearly distinguished from charity.
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- Common areas of impact considered by microfinance organizations operating in developing countries include:
- Increase of personal income
- Empowerment of women
- Improvement in nutrition
- Increased education of the borrower’s children
- Access to clean water
- Increased access to medicine
- There are currently a few social interventions that have been combined with micro financing to increase awareness of HIV/AIDS.
- Such interventions like the "Intervention with Microfinance for AIDS and Gender Equity" (IMAGE) which incorporates microfinancing with "The Sisters-for-Life" program a participatory program that educates on different gender roles, gender-based violence, and HIV/AIDS infections to strengthen the communication skills and leadership of women
- Most criticisms of microfinance have actually been criticisms of microcredit, delivered in the absence of other microfinance services such as savings, remittances, payments and insurance.
- there also has been much criticism of the high interest rates charged to borrowers.
- The role of donors has also been questioned. The Consultative Group to Assist the Poor (CGAP) recently commented that "a large proportion of the money they spend is not effective, either because it gets hung up in unsuccessful and often complicated funding mechanisms (for example, a government apex facility), or it goes to partners that are not held accountable for performance.
- Other criticism was raised by the IPO (Initial Public Offering) of a Mexican MFI Banco Compartamos in 2007. As the company put its shares on Mexican Stock Exchange it was able to generate very high profits that were achieved by rising interest rates on their micro-loans that at some point reached 86% per year.
- In July 2010 India's biggest MFI, SKS Microfinance also went public.
- Microcredit has been blamed for many suicides in India: aggressive lending by microcredit companies in Andhra Pradesh is said to have resulted in over 80 deaths in 2010.
Non-banking financial company
- Non-bank financial companies (NBFCs) are financial institutions that provide banking services (such as loans and credit facilities, private education funding, retirement planning, trading in money markets, underwriting stocks and shares, TFCs and other obligations) without meeting the legal definition of a bank, i.e. one that does not hold a banking license.
- These institutions also provide wealth management such as managing portfolios of stocks and shares, discounting services e.g. discounting of instruments and advice on merger and acquisition activities.
- The number of non-banking financial companies has expanded greatly in the last several years as venture capital companies, retail and industrial companies have entered the lending business.
- They are typically not allowed to take deposits from the general public and have to find other means of funding their operations such as issuing debt instruments.
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- Depending upon their nature of activities, non- banking finance companies can be classified into the following categories:
- Development finance institutions
- Leasing companies
- Investment companies
- Modaraba companies
- House finance companies
- Venture capital companies
- Discount & guarantee houses
- Corporate development companies
NBFC-Microfinance Institutions
- In a notification sent to all NBFCs, Reserve Bank of India communicated that based on the recommendations of the Malegam Committee Report, it has decided to introduce a new category of NBFCs - "Non Banking Financial Company-Micro Finance Institutions".
- NBFC-MFI should:
- sets a minimum Net Owned Fund requirement of Rs. 5 crore for an NBFC, but those located in the North eastern region should have a minimum NoF of Rs. 2 crore for purposes of registration.
- shall maintain an aggregate margin cap of not more than 12%.
- Interest on individual loans will not exceed 26% per annum
- Processing charges need not be included in the margin cap or the interest cap.
- NBFC-MFIs shall recover only the actual cost of insurance for group, or livestock, life, health for borrower and spouse.
- Under the new regulation, NBFC-MFIs can lend to individual borrowers who are not member of Joint Liability Group (JLG)/Self Help Group (SHG) or to borrowers that are members of JLG/SHG.
- However a borrower cannot be a member of more than one SHG/JLG and not more than two NBFC-MFIs should lend to the same borrower.
- The regulation clarifies that there shall be only three components in the pricing of the loan viz., the interest charge, the processing charge and the insurance premium (which includes the administrative charges).
