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Micro Finance: Issues & Recommendations

Micro Credit/finance is defined as provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards.The loans and credit extended are typically small (“micro”). They are provided in varying contexts, either to individuals or groups, ranging from personal micro-credit, to small enterprise support and rural finance.

The institutions that provide micro-finance and credit services are diverse, including non-governmental organizations (NGOs), credit unions, non-bank financial intermediaries, and commercial banks.

Reserve Bank had in October 2002 constituted four informal groups to further stimulate the process of constructive dialogue amongst the major players in the area of micro finance. The four groups studied issues relating to (i) Structure and Sustainability; (ii) Funding; (iii) Regulations; and (iv) Capacity Building. The recommendations of these groups are now being circulated by RBI for greater public debate.


1. The group on structure and sustainability has recommended creation of an autonomous and professionally-managed National Micro Finance Equity Fund with an initial subscription of Rs 200 crore. Contributions made by banks to the fund are be treated as weaker section lending under the priority sector. The corpus of the fund is to be raised to Rs 500 crore over two to three years.

2. The group on funding issues has suggested for the creation of a separate category of non-banking finance companies (NBFCs) for attending to microfinance business with entry capital requirement of Rs 25 lakh. The amount of deposits mobilised by any such MFI should not exceed Rs 5,000 per depositor and all such deposits may be covered by the guarantee of Deposit Insurance Credit Guarantee Corporation.

3. The group on capacity building said the RBI should facilitate establishing micro-finance funds for capacity building. Besides the subsidy funds of Swarnajayanti Gram Swarozgar Yojana (SGSY), funds shall be mobilised from Rural Infrastructure Development Fund (RIDF), National Bank for Agriculture and Rural Development (NABARD) and also part of the profits of commercial banks.

The group has recommended that the RBI should constitute a permanent working group on microfinance constituting members from formal financial institutions, government, apex development banks, non-government organisations (NGOs) and MFIs to monitor and review the progress on allocation of resources and undertaking of capacity building initiatives.

The RBI shall facilitate setting up of business incubation fund through SGSY programme for providing venture capital support.

4. According to the group on regulatory issues, NGOs/ federation of self help groups (SHGs) which have already undertaken onward lending to transform themselves into mutually aided co-operative Societies /NBFCs within two years if they intend to continue mobilisation of savings and lending activity.

If the NGOs intend to transform themselves into Section 25 companies, they should prepay the deposits collected and continue the lending activity only. RBI could permit 2-3 years as a transitional period to convert into either MACS or NBFCs.

The size of the loan to individual members of SHGs should not exceed Rs 50,000. The interest charged by NGO to be made public and method of fixation be transparent, it could cover the capacity building and management costs as well.

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