Sa-Dhan Newsletter Volume 3 Issue 2

Microfinance Regulation

MICROFINANCE DESIGN & DELIVERY ISSUES

Inaugural Address by Shri Vepa Kamesam, Deputy Governor, Reserve Bank of India at the

Annual Policy Forum on MicroFinance organized by Sa-Dhan at New Delhi on September 04, 2002

I

t gives me great pleasure to be here in your midst today

of formal banking services as on March 31,2002. More than

for this Annual policy forum on Micro finance, which seek

90 percent of the groups linked with banks are exclusive

to bring together policy makers and providers. Micro finance

women groups. Cumulative disbursement of micro finance in

interventions are being increasingly recognized the world

the form of bank loans to Self-Help Groups for gainful

over as an effective tool for Poverty alleviation that can raise

economic activity which includes setting up of micro

incomes, contribute to individual and household security and

enterprises stood at Rs.1026.34 crore as on March 31,2002.

change social relations for the better. In India too, micro

The SHG bank linkage programme is a hugely successful

finance is growing for various reasons: 1. The promise of

micro finance initiative which has proved that banking with

reaching the poor; 2. The promise of financial sustainability;

the poor is a viable proposition in as much as besides being

3. The potential to build on traditional systems; 4. The

cost effective to banks, the repayment rate in this respect is

contribution of micro finance to strengthening and expanding

also higher than 90 percent. RBI has supported this

existing formal financial products as a result of experimentation

programme throughout and banks have been allowed to

and innovation.

classify their credit under the programmes as advances to

weaker sections.

With the nationalization of major commercial banks in India

in 1969, branch banking in the rural areas acquired a new

In April 1999, RBI had set up a Micro Credit Special Cell

momentum and the outreach of the Commercial banking

which submitted its report in January 2000. Earlier the

system was considerably enlarged within a relatively short

National Bank for Agriculture & Rural Development (NABARD)

period. Indeed, the progress towards aligning the banking

appointed a Task Force on Supportive Policy and Regulatory

system's operations to the needs of our developing economy

Framework for Micro Finance in November 1998 whose

has been truly remarkable. Priority sector especially agriculture

report has also been presented. These two reports have

has all along been the most crucial sector in the Indian

guided the shaping of our policy initiatives in micro finance.

economy and has constituted one of the main streams of

Further, the last few Union Budgets have underscored the

interest of Reserve Bank of India. It cannot be otherwise in

promotion of micro enterprises set up by vulnerable sections

a country such as ours where agriculture and allied activities

of society especially I rural area. As an extension of the

account for Rs. 24. 30 percent of its GDP and provides

postliberlisation supportive policy environment, we have

employment to around 65per cent of the total work force. So,

issued comprehensive guidelines to banks in February 2000

whatever way one looks at it whether it is from the point of

for mainstreaming micro credit and enhancing the outreach

view of speeding up the process of income priority sectors

of micro credit provides.

and their development that we have to turn to. Thus from any

point of view it is essential that we put rural credit on the road

We have defined micro credit as the provision of thrift, credit

to sustained growth. Under priority sector too,it is absolutely

and other financial services and products of very small

essential to direct proper attention to the poorest of the poor

amount to the poor in rural, semi - urban and urban area for

in the matter of allocation of credit. Hence a target of 10

enabling them to raise their income levels and improve living

percent of net bank credit since bank prescribed for lending

standards. These guidelines afford banks considerable

to weaker sections. Thus while the strategies adopted since

operational freedom to prescribe their own lending norms,

bank nationalization in India have resulted in certain real gain,

including interest rates, keeping in view the ground realities

we still have a long way to go to realize fully our objective.

and devise appropriates loan and saving products in this

regards. Banks have now been allowed to formulate their own

Here we may do well to remember that banking sector

model(s) and choose any conduit/ intermediary for extending

reforms initiated in India since 1991 have inter alia brought

micro finance. The credit plans prepared by banks should

into focus the distributional objectives of monetary policy. No

accord priority to this sector. With a view to providing

wonder these reform measure have also necessitated changes

prompt and hassle free micro credit, banks have been advised

in structure, systems, procedure and work practices to enable

to simplify their lending procedures. While banks have been

our financial system to discharge successfully its expand

advised that micro credit should form an integral part

responsibilities. There has also been an increasing focus on

Of this corporate credit plan and should be reviewed every

micro finance institutions as a response to the perceived in

quarter at the highest level, a revised reporting system for

adequacies of existing agencies for providing productive

monitoring micro credit disbursals on a half yearly basis has

credit to those with little or no previous access to formal

been put in place.

credit facilities.

We have taken a review of how these guidelines have

As you are aware, a pilot project for purveying micro credit

impacted provision of micro-finance in the country. While the

by linking Self Help Groups (SHGs) with banks was launched

progress has been uneven, it is satisfying to note that some

by NABARD in 1991- 92 with a view to facilitating smoother

significant strides have been made in upscaling the purveying

and more meaningful banking with the poor. An estimated 7.8

of microFinance across the country. With a view to focus

million very poor families have been brought within the fold

greater attention on states which require to be sensitized

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