Microfinance And Its Delivery Models

4.1 Introduction

The most important finding in the last two decades in the world of finance did not come from the world of the rich or the relatively well off. More important than the hedge fund or the liquid yield option note was the finding that the poor can save, can borrow, and will certainly repay loans. This is the world of microfinance.

Definition

Microfinance may be defined as "provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards"

For several decades, many economies including the Indian, experimented with subsidized credit for the poor. But the only tangible outcome perhaps was the increase in Non-Performing Assets (NPA). Then came the realization that the core issue for the poor was access to credit rather than the cost of credit. In fact one of the contributions of the microfinance can possibly be the 'end of interest rate debate'.

Microfinance has proved time and again that it is access and not interest rates that are a constraint for the poor. Another discovery followed, that the poor can and will save, and can indeed use a wide range of financial services such as remittances facilities and insurance products. The most well-known and cited international example of a micro credit institution is the Grameen Bank in Bangladesh. But there are numerous others. Even during the Asian financial crisis, Bank Rayat Indonesia not only survived but also thrived; as did BancoSol in Bolivia.

Delivery Models of Microfinance

Individual Banking Based Model

This is a formal banking model where individual clients are provided financial services. The group formation costs are not incurred. Group peer pressure is absent and therefore programmes management and client appraisal poses specific challenges. While the individual banking model is suited for lending to enterprises the group approach is best suited to lending to pre-micro enterprises and micro enterprises. Individual Banking Based Models entail the provision by MFIs of financial services to individual clients. The model is increasingly popular for microfinance particularly through cooperatives. In the case of cooperatives, all borrowers are members of the organization either directly, or

indirectly by being members of primary cooperatives or associations that are members of the apex society. Creditworthiness and loan security are a function of cooperative membership within which member savings and peer pressure are assumed to be a key factor. Though the magnitude and timing of savings and loans are largely unrelated, a special effort is made to mobilize savings from members. There are now a large number of 'new generation' cooperative credit societies in India devoted specifically to providing financial services to the poor. Most of these are in Andhra Pradesh that was the first to enact a law permitting mutually aided - as opposed to traditional government-assisted - cooperative societies. Loaning to borrowers outside cooperative fold is practiced by the commercial banks. In such cases, effectiveness of credit delivery is enhanced through introduction of credit cards like KCC, SCC, and LCC etc. Alongside the borrowers are provided insurance cover both life and non-life.

Wholesale Banking Models

This model seeks to assist many NGOs working on non-financial development issues like health, literacy, eco-restorations etc, but have now taken to microfinance as an add-on programme. The model has the features of promptness, non-bureaucratic lending procedures and unique package of providing both loans and capacity building support to its partners.

Intermediate Model

Banking services are provided to clients either directly or through SHGs. Mahila cooperative SEWA bank, Sanghamithra Rural Financial Services, Basix Group are some of the micro financial institutions successfully adopting this model in different parts of the country.

Joint Liability Group (JLG)

This is yet another supplementary credit delivery model intended to facilitate smoother flow of quality credit with the establishment of Joint Liability Group (JLG) covering a group of borrowers. JLG is an assembly of 5 -10 member clients as a group. The JLG members offer an undertaking to the bank or financial institution that enables them to jointly receive such amounts as deemed eligible by the institution for pursuing any individual or joint activities, found suitable by the group. The main purpose of JLG is to facilitate mutual loan guaranteeing and execution of joint liability agreement making them severally and jointly liable for payment of interest and repayment of loan obtained form banks. The members of JGL normally live in the same neighborhood or village and are from the identical socio-economic background and environment. The may be mostly engaged in the same production activities and are expected to know and trust each other well. In essence, the model also serves to provide hassle-free credit for the client and ensure quality and risk free portfolio for the lender.

Self Help Groups

From our childhood days, we hear saying like "Self help is the best help", "unity is strength" and "United we stand, divided we fall". We have also heard the story of the bird caught in the net. They could not have escaped if they had tried individually. But whey they flew together in a "group", they escaped. This is the crux of microfinance. The concept of SHG tries to show this to the poor people. The SHG shows us how unity is strength. They show us how to self help could be the best help. Thus it is useful if one can encourage and help the poor people to form SHGs. The next most important question what would arise is to identify the means of making this concept of SHG to work. There are some simple rules what are required for SHGs to function. They include the following:

�� Common agreement on when to meet

�� Decision on time and place of meetings

�� Agreed penalties for non-attendance

�� Agreement on amount of saving

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