MICRO FINANCE INSTITUTIONS::
Microfinance or Micro Credit 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.
Since the latter half of 2010 Micro Finance Institutions (MFIs) have come under the
scanner of public and journalistic scrutiny, particularly in Andhra Pradesh, due to a
variety of reasons.
RBI constituted a Sub-Committee of the Central Board of Directors of RBI headed by
Shri Y. H. Malegam, commonly known as Malegam Committee, to study Issues and
Concerns in the MFI Sector in October 2010. The committee has now presented its
report.
A microfinance institution (MFI) is an organization
that provides financial services to the poor. This
very broad definition includes a wide range of
providers that vary in their legal structure,
mission, and methodology. However, all share
the common characteristic of providing financial
services to clients who are poorer and more
vulnerable than traditional bank clients.
Alternatively, MFIs are institutions devoted
exclusively to microfinance.
Microfinance
Microfinance or Micro Credit 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. Formally,
microfinance service has been defined in the
Microfinance Services Regulation Bill as
providing financial assistance to an individual or
an eligible client, either directly or through a group
mechanism for:
i. an amount, not exceeding rupees fifty
thousand in aggregate per individual, for small
and tiny enterprise, agriculture, allied activities
(including for consumption purposes of such
individual) or
ii. an amount not exceeding rupees one lac
fifty thousand in aggregate per individual for
housing purposes, or
iii. such other amounts, for any of the
purposes mentioned at items (i) and (ii) above
or other purposes, as may be prescribed.
Categorization of MFIs
MFIs can be categorized as formal, semi-formal
or informal.
Formal MFIs are defined as those that are
subject not only to general laws but also to
specific banking regulation and supervision
(development banks, savings and postal banks,
commercial banks, and non-bank financial
intermediaries). Formal providers may also be
any registered legal organizations offering any
kind of financial services.
Semiformal MFIs are registered entities subject
to general and commercial laws but are not
usually under bank regulation and supervision
(financial NGOs, credit unions and
cooperatives).
Informal MFIs are non-registered groups such
as rotating savings and credit associations and
self-help groups.
Ownership structures
MFIs can be government-owned, like the rural
credit cooperatives in China; member-owned,
like the credit unions in West Africa; socially
minded shareholders, like many transformed
NGOs in Latin America; and profit-maximizing
shareholders, like the microfinance banks in
Eastern Europe. The types of services offered
are limited by what is allowed by the legal
structure of the provider: non-regulated
institutions are not generally allowed to provide
savings or insurance.
Role
MFIs could play a significant role in facilitating
inclusion, as they are uniquely positioned in
reaching out to the rural poor. Many of them
operate in a limited geographical area, have a
greater understanding of the issues specific to
the rural poor, enjoy greater acceptability
amongst the rural poor and have flexibility in
operations providing a level of comfort to their
clientele.
Current Issues
Since the latter half of 2010 Micro Finance
Institutions (MFIs) have come under the scanner
of public and journalistic scrutiny, particularly in
Andhra Pradesh, due to a variety of reasons
ranging from the issue of corporate governance
in one of the leading MFIs to rural suicides
purportedly caused by strong arm recovery
tactics of MFIs.
Following reports of rural distress apparently
caused by the ‘avarice’ of MFIs, the Andhra
Pradesh govt. sought clarification from the RBI
on regulation of MFIs, specially regarding cap
on interest rate. The RBI took the stance that it
could regulate only the activities of MFIs
registered with it as non-banking finance
companies. Although these cover over 80% of
microfinance business, in terms of numbers
they comprise a small percentage of the total
numbers of MFIs in the country. Subsequently,
RBI constituted s Sub-Committee of the Central
Board of Directors of RBI headed by Shri Y. H.
Malegam, commonly known as Malegam
Committee, to study Issues and Concerns in
the MFI Sector in October 2010. The committee
has now presented its report.
Malegam Committee Report
The Sub-committee has made a number of
recommendations to mitigate the problems of
multiple-lending, over borrowing, ghost
borrowers and coercive methods of recovery.
These include :
1. A borrower can be a member of only one
Self-Help Group (SHG) or a Joint Liability
Group (JLG)
2. Not more than two MFIs can lend to a single
borrower
3. There should be a minimum period of
moratorium between the disbursement of
loan and the commencement of recovery
4. The tenure of the loan must vary with its
amount
5. A Credit Information Bureau has to be
established
6. The primary responsibility for avoidance of
coercive methods of recovery must lie with
the MFI and its management
7. RBI must prepare a draft Customer
Protection Code to be adopted by all MFIs
8. There must be grievance redressal
procedures and establishment of
ombudsmen
9. All MFIs must observe a specified Code of
Corporate Governance
For monitoring compliance with regulations, the
Sub-Committee has proposed a four-pillar
approach with the responsibility being shared
by MFIs, industry associations, banks and RBI.
Microfinance finance::::
Meaning of Section 25 companies..
What is this category of company ??
A “Section 25” company is registered under Section 25 of the Companies Act, 1956. This section provides an alternative to those who want to promote charity without creating a Trust or a Society for the purpose. It allows the formation of a company, which will exist as a legal entity in its own right, separate from the person promoting it. The crucial bit, however, is that any company under this section must necessarily re-invest any and all income towards promoting the said object or charity. In essence, unlike a regular company, where owners and shareholders can make profits or receive dividends, no money gets out of a Section 25 company.
A Section 25 company is often preferred because it is easier to start — being exempt from statutory requirements of minimum paid-up capital. They are much easier to run than Trusts and Societies, as board meetings require a smaller quorum and requirements for calling such meetings are less rigid. It is easier to increase the number of directors, it is easier for people donating money to join or leave or transfer shares to others, and such a company is obliged to fulfill far less stringent book-keeping and auditing requirements as against a regular company. Lastly, a Section 25 company enjoys significant tax benefits. Depending on how it is registered under the Income-Tax Act, companies could benefit from income-tax exemptions, or from the provision wherein people donating money to these companies receive income deductions in their income-tax liability. Such companies are also exempt from stamp duty payments. Section 25 is preferred by several businessmen because they are conversant with the company structure, while benefits from several exemptions make it easy for philanthropy.
Microfinance or Micro Credit 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.
Since the latter half of 2010 Micro Finance Institutions (MFIs) have come under the
scanner of public and journalistic scrutiny, particularly in Andhra Pradesh, due to a
variety of reasons.
RBI constituted a Sub-Committee of the Central Board of Directors of RBI headed by
Shri Y. H. Malegam, commonly known as Malegam Committee, to study Issues and
Concerns in the MFI Sector in October 2010. The committee has now presented its
report.
A microfinance institution (MFI) is an organization
that provides financial services to the poor. This
very broad definition includes a wide range of
providers that vary in their legal structure,
mission, and methodology. However, all share
the common characteristic of providing financial
services to clients who are poorer and more
vulnerable than traditional bank clients.
Alternatively, MFIs are institutions devoted
exclusively to microfinance.
Microfinance
Microfinance or Micro Credit 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. Formally,
microfinance service has been defined in the
Microfinance Services Regulation Bill as
providing financial assistance to an individual or
an eligible client, either directly or through a group
mechanism for:
i. an amount, not exceeding rupees fifty
thousand in aggregate per individual, for small
and tiny enterprise, agriculture, allied activities
(including for consumption purposes of such
individual) or
ii. an amount not exceeding rupees one lac
fifty thousand in aggregate per individual for
housing purposes, or
iii. such other amounts, for any of the
purposes mentioned at items (i) and (ii) above
or other purposes, as may be prescribed.
Categorization of MFIs
MFIs can be categorized as formal, semi-formal
or informal.
Formal MFIs are defined as those that are
subject not only to general laws but also to
specific banking regulation and supervision
(development banks, savings and postal banks,
commercial banks, and non-bank financial
intermediaries). Formal providers may also be
any registered legal organizations offering any
kind of financial services.
Semiformal MFIs are registered entities subject
to general and commercial laws but are not
usually under bank regulation and supervision
(financial NGOs, credit unions and
cooperatives).
Informal MFIs are non-registered groups such
as rotating savings and credit associations and
self-help groups.
Ownership structures
MFIs can be government-owned, like the rural
credit cooperatives in China; member-owned,
like the credit unions in West Africa; socially
minded shareholders, like many transformed
NGOs in Latin America; and profit-maximizing
shareholders, like the microfinance banks in
Eastern Europe. The types of services offered
are limited by what is allowed by the legal
structure of the provider: non-regulated
institutions are not generally allowed to provide
savings or insurance.
Role
MFIs could play a significant role in facilitating
inclusion, as they are uniquely positioned in
reaching out to the rural poor. Many of them
operate in a limited geographical area, have a
greater understanding of the issues specific to
the rural poor, enjoy greater acceptability
amongst the rural poor and have flexibility in
operations providing a level of comfort to their
clientele.
Current Issues
Since the latter half of 2010 Micro Finance
Institutions (MFIs) have come under the scanner
of public and journalistic scrutiny, particularly in
Andhra Pradesh, due to a variety of reasons
ranging from the issue of corporate governance
in one of the leading MFIs to rural suicides
purportedly caused by strong arm recovery
tactics of MFIs.
Following reports of rural distress apparently
caused by the ‘avarice’ of MFIs, the Andhra
Pradesh govt. sought clarification from the RBI
on regulation of MFIs, specially regarding cap
on interest rate. The RBI took the stance that it
could regulate only the activities of MFIs
registered with it as non-banking finance
companies. Although these cover over 80% of
microfinance business, in terms of numbers
they comprise a small percentage of the total
numbers of MFIs in the country. Subsequently,
RBI constituted s Sub-Committee of the Central
Board of Directors of RBI headed by Shri Y. H.
Malegam, commonly known as Malegam
Committee, to study Issues and Concerns in
the MFI Sector in October 2010. The committee
has now presented its report.
Malegam Committee Report
The Sub-committee has made a number of
recommendations to mitigate the problems of
multiple-lending, over borrowing, ghost
borrowers and coercive methods of recovery.
These include :
1. A borrower can be a member of only one
Self-Help Group (SHG) or a Joint Liability
Group (JLG)
2. Not more than two MFIs can lend to a single
borrower
3. There should be a minimum period of
moratorium between the disbursement of
loan and the commencement of recovery
4. The tenure of the loan must vary with its
amount
5. A Credit Information Bureau has to be
established
6. The primary responsibility for avoidance of
coercive methods of recovery must lie with
the MFI and its management
7. RBI must prepare a draft Customer
Protection Code to be adopted by all MFIs
8. There must be grievance redressal
procedures and establishment of
ombudsmen
9. All MFIs must observe a specified Code of
Corporate Governance
For monitoring compliance with regulations, the
Sub-Committee has proposed a four-pillar
approach with the responsibility being shared
by MFIs, industry associations, banks and RBI.
Microfinance finance::::
Meaning of Section 25 companies..
What is this category of company ??
A “Section 25” company is registered under Section 25 of the Companies Act, 1956. This section provides an alternative to those who want to promote charity without creating a Trust or a Society for the purpose. It allows the formation of a company, which will exist as a legal entity in its own right, separate from the person promoting it. The crucial bit, however, is that any company under this section must necessarily re-invest any and all income towards promoting the said object or charity. In essence, unlike a regular company, where owners and shareholders can make profits or receive dividends, no money gets out of a Section 25 company.
A Section 25 company is often preferred because it is easier to start — being exempt from statutory requirements of minimum paid-up capital. They are much easier to run than Trusts and Societies, as board meetings require a smaller quorum and requirements for calling such meetings are less rigid. It is easier to increase the number of directors, it is easier for people donating money to join or leave or transfer shares to others, and such a company is obliged to fulfill far less stringent book-keeping and auditing requirements as against a regular company. Lastly, a Section 25 company enjoys significant tax benefits. Depending on how it is registered under the Income-Tax Act, companies could benefit from income-tax exemptions, or from the provision wherein people donating money to these companies receive income deductions in their income-tax liability. Such companies are also exempt from stamp duty payments. Section 25 is preferred by several businessmen because they are conversant with the company structure, while benefits from several exemptions make it easy for philanthropy.
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