Investment in Micro Finance: Regulatory Environment and its Implications for choice of Legal Form by Microfinance Institutions in India

Abstract

INVESTMENT IN MICROFINANCE by Richa Ishita More than subsidies poor need access to credit. Absence offormal employment make them non 'bankable'. This forces them to borrowfrom local moneylenders at exhorbitant interest rates. Many innovative institutional mechanisms have been developed across the world to enhance credit to poor even in the absence offormal mortgage. The present paper discusses conceptual framework of a micro finance institution in India. The successes and failures ofvarious micro finance institutions around the world have been evaluated and lessons learnt have been incorporated in a model micro finance institutional mechanismfor India. The concept of micro finance can be best describe by the title of F.A.J. Bouman's book, "Small, Short and Unsecured"-micro finance is the provision ofvery sma;llioans that are repaid within short periods oftime and is essentially used by low income individuals and households who have few asserts thatcan be used as collateral. Over the period micro finance has emerged as an effective approach for economic development intended to benefit the low income groups. As mentioned above the term refers to provision of financial seruices to the low-income clients, including selfemployed persons. Microfinance refers to small-scale financial seruices primarily credit and saving provided to people who farm orfish or herd; who from renting operate small enterprises or micro-enterprise where goods are produced, recycled, repaired, or sold; who provide seruices; who work for wages or commissions; who gain income from renting out small amounts ofland, vehicles, draft animals, or machinery and tools; and to other individuals and groups at the local levels ofdeveloping countries, both rural and urban. Many such households have multiple sources ofincome. So we see that microfinance activities normally also involves the following activities: a) Small loans, typically for working capital b) Informal appraisal ofborrowers and investments c) Collateral substitutes, such as group guarantees or compulsory savings d) Access to repeat and larger loans, based on repayment performance e) Streamlined loan disbursement and monitoring f) Secure saving products In addition to financial intermediation, many micro finance organisation provide social intermediation services such as group formation, development of self confidence and training infinancialliteracy and management capabilities amongst members ofa group. Thus microfinance engulfs financial as well as social intermediation. Microfinance is notjust banking but an all rounded toolfor social development. Sources ofData The present paper is essentially based on empirical as well as doctrinal studies. The sources ofdata are both primary and secondary, primary sources have been collected by the researcher during her visit to the NABARD offices in Patna and Ranchi and her telephonic conversations with NABARD Mumbai and secondary sources are from book, articles and other available data both available on paper and online. Limitations Though the topic has open scope for research the scope ofthe paper has been restricted to studying the Regulatory Environment and Its Implications for Choice ofLegal Form by Microfinance Institutions in India and thus the impact of investment structures for micro finance institutions. Hypothesis The paper proceeds on the hypothesis that: .:. There has been a decisive shift in the behaviour of the players in the Indian market in the last ten years in the context of the Regulatory Environment and Microfinance Institutions in India. This is mainly because of the remarkable changes in Indian market. .:. Investment potential in the micro finance institutions has not been utilised to the full maximum extent as the legal and the regulatory structure for the same in India is not developed to the maximum potential.