Agro Money

Micro credit is the extension of small loans to entrepreneurs too poor to qualify for traditional bank loans. In developing countries especially, micro credit enables very poor people to engage in self-employment projects that generate income. Though the micro credit financing has got its root from the development of Grameen Bank in Bangladesh in 1976s, and now it has been expanded globally, not only in terms of covering a larger number of clients but also with increasing number of microfinance institutions that come forward to carry out these services for the poor. In order to give further fillip to micro-finance movement, the RBI has enabled Non-Governmental Organisations (NGOs) engaged in micro-finance activities to access external commercial borrowings (ECBs) up to US $ 5 million during a financial year for permitted end-use, under automatic route, as an additional channel of resource mobilisation. RBI is moving towards a systems perspective for providing effective policy support not only because a number of different institutions, viz. banks, MFIs, NGOs & SHGs are involved, but also because these institutions have very different institutional goals.

NGO

A Non-Governmental Organisation (NGO) is a voluntary organization established to undertake social intermediation like organizing SHGs of micro entrepreneurs and entrusting them to banks for credit linkage or financial intermediation like borrowing bulk funds from banks for on-lending to SHGs. The microfinance sector has emerged from the efforts of Non-Governmental Organisations (NGOs), and as a response to the failure of existing structures to deliver financial services to the poor. The efforts by NGOs have emerged from grassroots and represent diversity.

SHG

A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs having homogenous social and economic background voluntarily, coming together to save small amounts regularly, to mutually agree to contribute to a common fund and to meet their emergency needs on mutual help basis. The group members use collective wisdom and peer pressure to ensure proper end-use of credit and timely repayment thereof. In fact, peer pressure has been recognized as an effective substitute for collaterals.


MFIs

Most MFIs in the country are promoted by NGOs or entrepreneurs with an NGO background. Usually the microfinance starts as a division of the NGO and grows large enough to warrant a spin off into a separate organization. However, organizations incorporated as Trusts, Public Societies and not-for-profit companies are not designed to undertake commercial activities of borrowing and lending. The intent of these forms of incorporation was to receive individual or bulk donations and carry out charitable activities. A legislation governing charitable activity is inappropriate for microfinance. We also know from experience that people with commercial capital are unlikely to invest in microfinance business. The skills required for running a microfinance business comes from social mobilisation - present in the developmental arena. Similarly, it is unlikely that MFIs will grow to large commercial banks. Though there are counter-examples for this in other parts of the world - such as Bancosol in
Bolivia and the BRAC Bank in Bangladesh, these experiments are few and far between. By identifying the limitations of growth of MFIs and the source of capital we are able to advocate a regulatory framework for carrying out microfinance. We need to be sure that the framework thus provided is not vulnerable to misuse by the other players who are likely to come in the garb of providing microfinance.

NBFC

Non-banking finance companies (NBFCs) have played an important role in the Indian financial system. Traditionally they have been the vehicle for financing individuals and corporates who had some difficulty in obtaining bank funding. Earlier, commercial banks tended to stay away from retail and small-to-medium sized corporates and the NBFCs saw opportunity in this void and built dominant positions in automobile financing, commercial vehicle financing, IPO funding and corporate leasing. Consequently, many NBFCs set up large countrywide distribution networks - often as large as those of consumer companies.