Tuesday, 15 October 2019

Microfinance , Banking Fundamentals to Know for Students.

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Traditionally, low-income people around the world in the rural and urban area used to borrow and save with individuals and groups outside the formal financial system. The Concept     of” Microfinance “got the attention  of the world around 1970 when Mohammed Younus, founder of Grameen Bank of  Bangladesh took the initiative to provide small loans to poor people without any security. In 2006, Mohammed Younus got the Nobel Peace Prize for his successful efforts to change his vision of reducing poverty into actual reality. In India, Microfinance evolved from the informal finance in the eighteenth century in the form of micro-lending by chit fund companies, local money lenders, merchant bankers and traders. After Nationalization of banks in 1969, the government initiated the Microfinance movement through branch expansion in rural areas, mandating priority sector lending and lending through various village development schemes like Integrated Rural Development Programme (IRDP), National Rural Employment Programme (NREP), etc. But somehow these formal mainstream banking programmes were way beyond the reach of the poor people due to conditionality attached to loans. At the beginning of the 1980s, the need for alternate policies and procedures to meet the financial requirements of the poor was recommended by NABARD. At that time-poor people were resorting to the unorganised sector for their borrowing needs, as the existing system were not flexible to accommodate their needs.
Thus, Microfinance in the banking sector was introduced to safeguard the interests of poor people from the exploitation of local moneylenders. “Microfinance is the provision of thrift, credit and other financial services and products of very small amounts to the poor for enabling them to raise their income levels and improve their living standards.  Financial services include loans, deposits, payments transfer, insurance, etc. In 1992, NABARD (National bank for agriculture and rural development) started a pilot project of the self-help group (SHG)-Bank linkage Program (SBLP), which was very successful and gave a tremendous boost to the Microfinance movement. In India, Microfinance are offered by Small  Industries Bank of India(SIDBI), National Bank for Agricultural and Rural Development(NABARD), Non-Banking Financial Companies(NBFC’s), Rashtriya Mahila Kosh, Regional Rural Banks, Commercial Banks and Co-Operatives  Banks. The delivery models in India are 1. SBLP (Self-help group-bank linkage programme):
 The model I: SHGs promoted, guided and financed by banks.
 Model II: SHGs promoted by NGOs/ Government agencies and financed by banks.
 Model III: SHGs promoted by NGOs and financed by banks using NGOs/formal agencies as financial intermediaries.
2. Microfinance Institution Approach:
i. Bank Partnership model
ii. Banking correspondents
Formal credit institutions rarely lend to the poor. That is why it is necessary for special institutional arrangements to be made to extend credit to the poor who do not have security to offer. Microfinance provides small loans and savings facilities to the people who have been excluded financially. Thus in this way, it is a key strategy for reducing poverty. Microfinance is the financial service that is provided to low-income clients or solidarity lending groups which include consumers and self-employed people as they lack access to banking and related services. Microfinance goes beyond providing microcredit to the poor. It is an economic development tool which helps the poor to overcome poverty. Microfinance provides a wide range of services like credit, savings, insurance and remittance and also non-financial services like training, counselling etc.
The salient features of Microfinance is as follows:
I.           The borrowers belong to the low-income group.
II. The loans provided are of small amounts, they are microloans.
III. The loans are of short duration.
IV. The loans are provided without any collateral.
V.      There is a high frequency of repayment of loans.
 The loans are borrowed for the purpose of income generation. Microcredit can be referred to as ‘programmes that provide credit for self-employment and other financial and business services to varied persons’. It thus refers to a wide range of financial services like savings, insurance and remittances.

1. State whether the following statements are true or false.

a. Formal credit institutions always lend money to the poor.
b. Microfinance is a key strategy for reducing poverty.
c. Microfinance does not provide small loans and savings facilities to the peopled. Microfinance provides small loans and saving facilities.
e. Loans are provided in Microfinance with collateral.

1.a. False b. True c. False d. true e. false

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