Intermediation &Regulation of MF

7/31/2019 Intermediation &Regulation of MF

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SUBMITTED BY:

Deepinder Kaur

M.com(Hons) Sem- 2nd

Roll No. 4

SUBMITTED TO:

Dr. Karamjit Singh


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Intermediaries:-

Not-for-profit institutions.

obtain capital in the form of low interest loans from

public & private commercial banks and national andinternational donors to form a lending pool.

serve as wholesalers who process large number of

small loans to lend them to poor clients who have

no access to formal banking. thus, often more efficient than a foundation or a

funder because of economies of scale.


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Microfinance intermediaries operate under theumbrella of financial system of a country .

financial intermediation is provided by MFIs.

financial intermediaries vary in their legal structure,

mission & methodology but share the commonpurpose of providing financial products & services to

poorer & more vulnerable bank clients.

they study about their competitors and what is their

effect on marketplace.Outreach of MFIs growing at the rate of 20%p.a.&

estimated to reach 75% of poor households with

loan outstanding of Rs.42000crores by 2012.


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Financial intermediation service

providers

Formal sector it includes banks i.e. public

and private commercial banks, postal saving

banks etc. and non-banking institutions.

Semi-formal sector- it consists of saving &

credit cooperatives, NGOs, registered SHGs

& development projects.

Non-formal sector- financial institutions

include saving associations , combined

saving & credit associations and financial

firms include non registered SHGs, money

lenders, traders and shopkeepers.


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Major role in financial and social intermediation-NGOs

non-profit organizations Registered as trusts or societies.

catalytic agents to organize poor into groups called

SHGs/JLGs.

get funds from donors in microfinance like SIDBI,

NABABRD, RMK , FWWB, commercial banks etc.

Face certain problems regarding legal structure, lack of

commercial orientation, lack of efficient organizationalstructure.


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Some of the intermediaries are as follows:-

1.GRAM-

promoting SHGs since 1990. SHGs were linked to banks.

3700 groups were federated into 20 MACs taking up

financial intermediation services.

staff of MACs was originally from NGOs .

2. SERP(Society for Elimination of Rural Poverty)

implemented Indira Kranthi Patham(IKP). promoted more than 30000 SHG federations

involved in financial intermediation & livelihood

promotion.


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3. CASHPOR Micro Credit-

started operations in 1996 through CASHPOR Financial

and Technical Services(CFTS).

to give access to financial products in the form of smallamounts of credit & services to poor rural women .

objective was to reduce poverty in eastern U.P.&

western Bihar .

Ist six branches were set up in July1997 to coversouthern part , which was the poorest district and the

next six branches opened in October1998 to cover rest

of the district.


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BANK TO

MICROFINANCECLIENTS

BANK TO

INTERMEDIARY TO

CLIENTSBANK TO PRIMARY

INTERMEDIARY TO

SECONDARY

INTERMEDI. TO

CLIENTS


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REGULATIONS AND SUPERVISION

Regulation of MFIs is the legal registration by the govt. toperform as a MFI.

regulation focuses on assessment of access adequacy which

covers the range of financial services provided, target groups

served, type of financial products and services provided andtheir demand by clients.

subject to regulations when it is mobilizing savings from

the clients.

Have to maintain compliance with the prudential regulatory

norms relating to operations and reporting systems.


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Why Regulation is necessary?

to protect the interests of small savers.to ensure proper terms of credit.

to ensure financial discipline to ensure proper institutional reporting system

and disclosures.


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NGOs-not-for-profit organisations.

provide microfinance products to poor who are organizedinto groups.

develop a habit of saving through SHGs, thus only

intermediate saving mobilization by linking them with

banks. if providing products on credit, then have to furnish

periodical statements &MFIs who receive loans from

banks have to comply with prudential norms in relation

to asset classification and income recognition .

no supervisory & regulatory framework for monitoring

NGOs engaged in deposit mobilization but must comply

with RBI norms.


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For the need of increasing outreach and commercial operations,

NGO should be transformed into a legal entity to satisfy RBI

norms and thus were transformed into MFIs like Spandana

Sphoorty Financial Limited( provides six lines of micro loans-General loans, Business loans, Microenterprise loans, Dairy

loans, Agri-family loans and farm equipment loans),

BANDHAN into BANDHAN Microfinance Ltd.,

SHARE(Society for Helping and Awakening Rural PoorThrough Education) into SHARE microfinance Ltd. etc.


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NON-BANKING FINANCIAL INSTITUTIONS/

NON-BANKING FINANCIAL COMPANIES

Registered under Companies Act, 1956. In 1997, it became mandatory to apply to RBI to obtain certificate of

registration, thus regulated by RBI .

RBI conducts both Online and offsite supervision of NBFCs through

scrutiny of quarterly/half yearly/annual statutory returns, balance

sheets, P&L a/c, auditors report etc.

CAMELS model is used for rating NBFCs.

NBFI is exempted from RBI registration if not

disbursing credit more than Rs. 50000 for

business enterprises & Rs. 25000 for poorhousehold & these are registered u/s25 of

Companies Act,1956 & are not allowed to

mobilize public savings. For eg. NIDHI

organization .


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MUTUALLY AIDED COOPERATIVE

SOCIETIES(MACs)

Regulated by Registrar of cooperative societies and Stategovernments..

have legal sanctions to work as MFIs. MACs are a form of Self-financing Cooperative Societies.

management is vested in BODs.

Mutually Aided Cooperative Societies(MACs) Acts are

enacted by concerned State Governments .

If it wishes to enter Banking, it will be subjected toprovisions of Banking Regulations Act.

States where MACs are functioning:- Andhra Pradesh,

Jharkhand, Bihar, J&K, M.P., Chhattisgarh, Orissa ,

Karnataka and Uttaranchal.


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MFIs AS BANKS

have to get registered under RBI.

regulated by RBI.

initial capital requirement for a bank to work asMFI is Rs 100-300crores.


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LOCAL AREA BANKS

governed by RBI Act,1934.

Under Act 1956, LABs are registered as public limitedcompanies.

Licensed and governed by Banking Regulation Act,

1949.

initial capital requirement of Rs.5crores to set up a LAB.

liquidity requirements and interest rate of LABs are governed

by provisions as applicable to RRBs.

norms regarding asset classification and provisioning of LABs

are applicable as like other banks.


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REGULATION OF MFIs


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THE MICRO FINANCE INSTITUTIONS

(DEVELOPMENT AND REGULATION) BILL, 2011

as on June5,2011

As micro finance sector lacks a formal statutory framework for

its financial activities, therefore to provide a formal statutory

framework for the promotion, development, regulation and

orderly growth of the micro finance sector and thereby tofacilitate universal access to integrated financial services for

the unbanked population,RBI had constituted a panel to look

into the sector and had adopted the recommendation of the

Malegam Committee to put a cap on interest rates charged

and the business margins of microlenders. & had asked the

Andhra Pradesh government to withdraw its rules to remove

regulatory ambiguity.

The federal government bill proposed to override all existing

laws and, if passed by the parliament, will remove the


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uncertainty caused by the rules imposed by Andhra Pradesh

state.

It envisioned a larger regulatory role for the central bank

& proposes that all microfinance companies to register withthe RBI.

The bill also proposed that microlenders should operate at business

margins as suggested by the RBI who would be having the power to

inspect the books of these companies at any time. All registered microfinance institutions would be required to create a

reserve fund and would transfer to it a specified percentage of money

as asked by the RBI.


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The Bill was finally passed by

Parliament which stated that

RBI will now directly regulate Microfinance

Regulatory Norms:-

RBI decided to bunch together the beleaguered microfinance

sector as a niche segment within the category of non-banking

financial companies (NBFC).

Under these guidelines issued on December 5,2011, the RBI

directed all existing microfinance institutions (MFIs) whocan meet its new regulatory norms to register as NBFC-MFIs

by April 2012. Those who do not meet the norms cannot,

henceforth, lend more than 10 percent of their total assets to

the sector.


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Conditions set for NBFC-MFIs include the

following:

must have minimum net owned funds of Rs 5crore (Rs 2crore if they operate in

the North-East).

capital adequacy ratio (CAR) -15 percent {measure of a banks capital weighed

against its risk assets (loans)}. cannot lend at more than 26 percent interest, and margins on borrowed funds

cannot exceed 12 percent. This means if MFIs can borrow cheapsay at 10

percent, the interest rate cap on lending is 22 percent, and not 26 percent.

As far as lending is concerned, not more than two MFIs can lend to the same

borrower while one borrower cannot be a member of two groups simultaneously.The frequency of repayment installments can be decided by the borrower.

should have higher cutoffs for lending in urban and semi-urban areas.

have to start provisioning for defaults, and loans that are not serviced for more

than 90 days should be classified as non-performing.


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Intermediation &Regulation of MF