Financial Inclusion and MFI’s

Microfinance Institutions has gain its place in concept of financial inclusion. Eight members Committee on financial inclusion under chairmanship of C. Rangarajan was established and studied the various aspect of the financial inclusion give various recommendations for the inclusion of financially excluded segments of the society. Chapter VIII of the financial inclusion report is giving complete picture about important and role MFI’s in financial inclusion. Let us have quick look at what is financial Inclusion?
Financial Inclusion is the delivery of financial services at affordable cost to disadvantage segment of the society. The object of the financial inclusion is to extend the scope of activity of organized financial system to include within its amit people with law income. NSSO data indicates that 45.9 million farmer household in the country( 51.4%) out of total 89.3 million households do not access credit either from institutional or non-institutional sources. Only 27% of total household are indebted to formal sources( 1/3 are also borrow from informal sources. Financial exclusion is very high in North-Eastern region. Committee is in opinion that financial inclusion can be substantially enhanced by improving supply side or delivery system. It is estimated that there are 1000 NGO-MFI and 20 companies MFI in India. Company MFI’s are account for 80% of business. There are around 30,000 cooperative organization engaged in microfinance activities. The proposed microfinance bill defined microfinance services as “providing financial assistance to an individual or eligible client either directly or group mechanism for,
1. an amount not exceeding Rs. 50,000/- in aggregate per individual, for small and tiny enterprise, agriculture, allied activities.
2. an amount not exceeding Rs. 1,50,000/-in aggregate per individual for housing purposes.
Microfinance could play an important role in financial inclusion as they are having great rural touch, have greater understanding the of issues specific to rural poor and have grater accessibility to rural poor.
Following are some of the important recommendations of the committee.
1. There is need to recognize separate category of Micro-Finance-Non Banking Financial Companies(MF-NBFC), without any relaxation on startup capital and subject regulatory prescription applicable for NBFC. Such companies (MF-NBFC) could be defined as that provide Micro-insurance, thrift, credit, remittance and other financial services up to specified limit to poor in rural areas. To ensure that this provision used by NBFC, which are focused on providing microfinance to poor, it should be specified that at least 80% of their assets should be in form of microcredit upto Rs. 50,000/- for agriculture, allied, non-farm activities and in case of housing, loan upto Rs. 1,50,000/- per individual barrower given through direct or group mechanism.
2. MF-NBFC as BC
To enable poor to have access to saving services, MF-NBFC recognized as Business Correspondent of bank only for providing savings and remittance services.
3. Relaxation in FIPB guideline.
Current guidelines used by FIPB (Foreign Investment promotion board) require minimum $ 500000/ equity from foreign entity. NBFC’s are eligible to access such funds and leverage local capital market financing. MF-NBFC may able to attract to social investor with relatively modest means from whom such high level of investment beyond the reach. As MF-NBFC ‘s initial capital need not be very large, The committee is of view that minimum amount of foreign equity of MF-NBFC s may be reduced to level of $ 100000/-
4. MF-NBFCs as micro insurance agents.
5. Code of conduct.
A voluntary mutual code of conduct has been prepared by some MFIs covering Aspect s including Mission, governance, transparency, interest rates, handing of customer grievances, staff conduct, and recovery practices. After due consultation such code of conduct may be made mandatory for MFIs.

6. Micro Financial Sector( Development and Regulation) Bill 2007
This Bill introduced in parliament in March 2007. For improving the effectiveness of the bill committee made an certain recommendations. NBFC and section 25 companies are left out of the purviews of the bill. NBFC are currently regulated by RBI. And exempted from registration as NBFC if they do not take deposit. It is recommended that section 25 companies are brought under the preview of this bill. Cooperative societies register under ‘MACS Act’ promoted by few state government are eligible to mobilize the saving from their members. For mobilizing savings, these societies also need to register with NABARD under proposed bill. Hence there is conflict between proposed bill and ‘MACS Act’. Cooperative societies are providing credit and saving services to their members. Therefore Cooperative societies ate left out of the act.



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Amol
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