Issues and Challenges of Micro Finance in India

Issues and Challenges of Micro Finance in IndiaMicro- pay refers to down(p) savings, recognition and insurance attends extended to socially and economically disadvantage segments of society. Indian context terms like Small and Marginal Farmers, economically weaker sections select been riding habitd to broadly define vitiated-finance customer. Large part of little finance activities is confined to course credit.Large size and population of around gravitational constant million, Indias GDP ranks among top 15 economies of conception.Around300 million people or more or less 60 million family lines be living below the poverty line. classify of dinky finance practitioners estimated the annualize credit usages of all slimy families some Rs45000crores of which rough 80 percent is met by informal sources. Credit on conjectural terms to poor butt end bring a signifi go offt reduction in poverty. About 60 million households below or scantily above the austerely defined poverty line and with more than 80 percent unable to addition credit at reasonable ramble. in that respect argon authentic issues and problems which fuddle prevented tinge of littlefinance to needy.MICRO FINANCE AND meagerness ALLEVIATIONMicro finance establishment have goed frontiers of mental hospitalal finance and have brought the poor, especially poor women into formal finance organization and enabled them to access credit and fight poverty. Some significant strides have do in upscalling the large quantities of microfinance, observed that microfinance had an asymmetric growth across kingdom with diverse rate of invade world carriage to member which are area of concern.The lack of access to credit for the poor is attri justable to hard-nosed difficulties arising from the discrepancy between the mode of ope symmetryn followed by fiscal institution and the economic characteristics and financing needs of low-income household. The income of numerous self-importance -employed households is not stable, careless(predicate) of it size. Large numbers of menial bestows are unavoidable to serve the poor, but lenders prefer dealing with large loanwords in small numbers to diminish administration bes. They in any geek look collateral with a clear backing which many low-income households do not have.To the extent that Microfinance Institution becomes financially viable, self sustaining and integral to the communities in which they operate, they have the potential to attract more resources and expand services to clients. Despite the success of microfinance institutions altogether about 2% of worlds well-nigh 500 million small entrepreneurs is estimated to have access to financial services. Microfinance institution can broaden their resource base by mobilizing savings, accessing capital markets, loan monetary resource and effective institutional development support. Saving facilities to tap small saving in a flexible manner.Microfinance instit ution are occupied in deposit taking in order to mobilize household saving, they became financial intermediaries. Consequently financial regulations become indispensable to undertake the operatency and financial soundness of institution and to protect the depositors. Excessive regulations that do not trade the nature of microfinance institution and their surgical mold can hamper their viability.In go through with(predicate) of small loan size, microfinance institution should be subjected to minimum capital emergency which is lower than the applicable to commercial banks. More stringent capital adequacy rate should be maintained because microfinance institution provide uncollateralized loan.Microfinance institution could alike serve as intermediaries between borrowers and formal financial area and on lend funds backed by public sector guarantee. avocation like NGOs can declare commercial banks ways of living micro entrepreneur at low terms and risk. There are many on- going researches on this line but context specific research is needed to identify the meet appropriate model.FORMAL AND INFORMAL SECTOR IN INDIAFORMAL SECTOR INSTITUTIONSThe formal sector banking institution in India have been serving only the needs of commercial sector and providing loans for middle and focal ratio income meetings. For housing the HFIs primarily because of the perceived risk of lending to this sector .Risks more often than not perceived by formal sector Financial Institution are credit risk, High transaction and services cost, Irregular flow of income collectible to seasonality, Lack of tangible proof of assessment of income, Absence of land incumbency of financing housing.Formal Financial Institution are concerned are Commercial banking concerns, Housing Finance Institution(HFI),NABARD, Rural Development Banks(RDB),Land Development Banks and concerted Banks(CBs).The government has taken several initiatives to strengthen the institution rural credit body. The rural branch ne dickensrk of commercial banks have been expanded and certain policy prescriptions imposed, in order to check into great flow of credit to agriculture and other(a) preferred sectors. The commercial banks are required to ensure that 40% of total credit is provided to priority sectors out of which 18% in the form of direct finance to agriculture and 25% to priority sector in favor of weaker sections besides maintaining a credit deposit ratio of 60% in rural and semi urban branches. Further IRDP introduction in 1979 ensure supply of credit and subsidies to weaker section beneficiaries.INFORMAL monetary SOURCESInformal financial sources largely include funds usable from family sources or local money lender. Local money lenders shake up exorbitant range, generally ranging from 36% to 60% interest due to their monopoly in the absences of any other source of credit for non-conventional needs.NGOs engaged in activities related to community mobilization for their s ocio-economic development have initiated saving and credit program for their target classs. familiarity based financial constitution (CBFS) can be categorized into two models. Group base financial intermediary and NGO linked financial intermediary.NGOs like SHARAN in Delhi, FEDERATION of THRIFT AND CREDIT ASSOCIATION (FICA) or SPARC have adopted first model where they initiate groups and provide necessary management support.SEWA pertain to second model.Experience of these informal intermediaries shows that although saving of group members, small in nature do not attract spirited returns, it is skill practiced due to security reasons. Most of loans are unsecured. in-person or group guarantees or other collaterals like jewellery is offered as security. There are some agencies which provide bulk funds to system through NGO. Organization engaged in micro finance activities in India whitethorn be categorized as wholesaler, NGOs supporting SHG and NGOs directly retail credit borrower s or group of borrower. Wholesalers allow for includes agencies like NABARD, Rashtriya Mahila Kosh, New Delhi and Womens world Banking,ASA in Trichy, RDO Layalam Bank in Manipur.TARGETING PROGRAMMES FOR LOW INCOME GROUPSGRAMEEN BANK IN BANGLADESHGrameen Bank lending system is simple but effective. To obtain loans, potential borrowers essential form a group of five gather once a week for loan come backment meetings and to start with learn the bond rules and 16 Decision, which they chant at start of their weekly session.There decision constitute code of conduct that members are encourage to follow in their free-and-easy life, e.g. production of fruits and vegetables in kitchen gardens, investment of improvement of housing and education for children, true(p) drinking water for health,etc.For this physical training are held at meeting.Key-unit in credit program is first necessary step to receive credit. initially loans are providing to individuals in group, there were under pressu re from other members to repay the loan. Credibility of group members and benefits in term of new loan will be stopped if any one default to repay and the group members are fined or expelled a member if they fail to attend the meeting. financial MODELING SELF-HELP GROUPSSHG-MGI SystemTypical SHG consist of 12 or 30 member. It is not only saving and loan association but serves as affinity group that provides platform for issues. SHG is system raises funds from individual and alike from MCI. MCI arise fund from three sources Capital, SHG saving and borrowing from outside and MCI have regulatory restriction on assets, liabilities and interest rates.Some of the principles underlying that were issued to implementingSHG use almost 60% for lending to their members and rest for depositing.Joint liability of members is to serves as substitute for physical collateral and saving are to come first. elicit rates on saving and credit for members are market rates to determine locally by participa ting institutions.All NGOs and SHGs will charge an interest margin to cover their costs.SHGs may levy an extra charge to interest rate of internal fund generation which will enduringness saving.MECHANISMS FOR CREDIT FUNDING LOW INCOME GROUP BENEFICIARIES BY HDFC .HDFC making sub-stained efforts to r each(prenominal) the lower income groups of society, especially the weaker section, thus enabling them to realize their dreams of possessing own house.HDFCs response to need for housing and living environment for poor both in rural and urban sectors materialized in collaboration with German Development Bank. It also ensures newly constructed houses are within the affordability of beneficiaries and promotes the usage of innovative low cost technologies and locally available material for constructing house. Purpose of implementation of low cost having projects, HDFC collaborate with Government and Non-Government.Security for loan is mortgage of property being financed. Construction wor k is regularly monitored by coordinating agencies and HDFC. The loan is disbursed depending upon the stages of construction.Microfinance operation experience poor repay their loans, saving and loan facilities. It also region to solving problem of inadequate housing. It has hot to contribute to this by create financial discipline and educating borrower about repayment requirements.CHALLENGES OF MICROFINANCEThe importance of microfinance in the process of poverty eradication is realized, it faces triple problems. Offering financial services to poor individual and in itself leads to disparate challenges. Challenges are divided into challenges faced by Micro Entrepreneurs and challenges faced by Microfinance Providers.Challenges Faced by Micro Entrepreneursunfitness to offer marketable collateral for loansThey are either small businesses or poor individual who have few assets and low income. These clients have cannot offer any collateral for loans. Due to this microfinance provider s may raise their interest rate or turn down hundreds of application.Poor institutional viability of micro enterprises. concern ideas with a lack of consideration of demand and cost render the micro venture unsustainable and microfinance may incorrectly get blame for it. For instance, In the case of micro crop farming granger often fail to bank bill for their personal consumption between the sowing and harvesting periods and realize they face shortage of more. Due to this they often end up using the micro loan for personal matter and problem arises when its time to pay back the loan, farmer are forced to take another loan.Knowledge regarding sources of microfinance is lack.Many micro entrepreneurs live in remote villages, so they have no access to microfinance service offered by MFIs.Misallocation or shortage of finance.Lack of fund, which can solve if MFIs build up their capital base by accessing various sources of funds without fund micro ventures, cannot grow.Inability to expl oit growth opportunities.Shortage of finance is a contributor to this problem, because lack of access to funds means micro entrepreneurs cannot inject money into their business to grow. They may have little randomness pertaining to their market such as customer needs and competitor strengths and weakness, this may outcome May critics.Lack of organizational resources and governance.They may have express skill, qualification and exposure to handling business. They need to be trained through capacity building initiative by MFIs many micro entrepreneurs may not grow because of this problem.Low bargain power.Micro entrepreneurs operates in agonistic markets, their individual bargaining power is diminished. There still isnt any hanging because micro entrepreneurs deal with MFIs on individual basis, which also erode their bargaining power.Most problems faced by micro entrepreneurs are caused by small size, improper skill, and location. When venture secures loan and begins to grow the se problems will eventually.Challenges faced by microfinance providers.The importance of microfinance in the process of process of poverty eradication is realized, it faces multiple problems. The challenges faced by microfinance providers areHigh risk of micro entrepreneurship and small business.Micro entrepreneur usually no collateral to offer microfinance providers, no alternate source of income. Micro entrepreneurs are considered high risk ventures and micro finance providers are forced to compensate for this by changing interest rate.High costs for Micro Lending.Small micro enterprises increase the transaction cost for MFIs, because they cannot process micro loan in bulk. In teaching conducted by Asian Development Bank, Microfinance providers change interest rate ranging from 30 to 70% per year.Fund shortage.There are plenty of financial options available for MFIs there is an emerging shortage of money. This is due to lack of awareness of funding source by MFI managers.Difficul ty in measuring the social motion of MFIs.Micro finance is delivering the economic returns its proponents promised but there are only a handful of tools available that measure the social return of microfinance. commixture of charity with business.If microfinance providers fail to protect themselves against loan delinquency, they will in effect, rank social at expenses of financial sustainability. Improper delinquency management is result of inadequate implementation of corporate governance principle. As result loses correspond over microfinance deals will lead to higher default rates.Lack of resolving for poor.Targeting of poor households by microfinance programs is common problem because MFIs fail to understand the various needs of micro entrepreneurs. MFI must spend time to develop microfinance tools for each micro entrepreneur.Lack of microfinance training for MFIs.Micro finance sector is different when compare to traditional financial sector, microfinance providers need spec ial training to ensure they avoid problem such as under-serving clients.Poor distribution system of MFIs and lack of information about microfinance investment opportunities.CONCLUSIONAll these problems can broadly fall into either financial or operational in nature, they should not be impossible to solve as microfinance sector escape towards its optimal performance level in next several years. Microfinance can contribute to solving the problem of inadequate housing and urban service as an integral part of poverty alleviation programs. Microfinance institutions have a lot of contribution to this by building financial discipline and educating borrowers about repayment requirements. Micro Finance have more opportunity if the assert Reduced direct involvement, increased outlays, Structuring of outlays and finding right outlets, Creating incentives and regulatory environment for implementation.