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by Rajen Kumar

No Escaping Social Media

Running a magazine concentrating on issues of small and medium enterprises and managing with limited resources is a like living life on the edge. In this rush of meeting deadlines,...

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Apr 2012

EMRC, Brussels Associates with SME WORLD as its New Media Partner

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Technology

Application of ICT in Micro Finance Institutions

Dolly Bhasin
Nov 2009
Page 1 of 5
ICT applications in Microfinance have been least understood, as most ICT application vendors do not fully appreciate the context of why ICT is needed in the first place, in this space. So, before we embark on understanding the applications of ICT in Micro finance, let us first quickly recap what Micro finance is all about and what are the challenges in this sector and how can ICT help to overcome them. 
 
What is Micro Finance?
 
Contrary to the usual perception micro finance is not just micro loans; but encompasses many aspects: credit, savings, insurance, money transfer (i.e. remittances, payment systems) and micro-leasing products.
 
What is Micro Credit?
 
Micro Credit is defined by RBI as a “Provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards. Micro Credit Institutions are those which provide these facilities.”
 
Microcredit is based on a separate set of principles, which are distinguished from general financing or credit. It emphasizes building capacity of a micro-entrepreneur, employment generation, trust building and help to the micro-entrepreneur at start-up phase and during difficult times.
 
Microcredit is generally designed to spur entrepreneurship for the poor. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit.
 
Earlier. Thrift and Credit Cooperatives, Rural branches of Commercial Banks and Regional Rural Banks were the primary sources of institutional financing to provide micro credit. But, lately many Micro Financing Institutions (MFIs) have come up which serve micro credit to the poor, namely - Self-help groups (SHGs), NGOs, Non-banking financial companies (NBFC), VC/PE players, community based organisations (CBOs), web based initiatives, exclusive Micro finance funds, etc. 
 
Challenges: 
  • There is no centralized database on the number of microfinance institutions that operate in the country. Estimates have put it anywhere between 800 and 1,200. National Bank for Agriculture and Rural Development (NABARD) has a list of 446 MFI institutions on its website. New institutions are being set up at a rapid pace. These institutions look to exploit the market opportunities available for providing loans to small clients and achieve the double bottom line of financial sustainability and socially relevant engagement.
  • The interest rates applicable to loans given by banks to micro credit organizations or by the micro credit organizations to Self-Help Groups/ member-beneficiaries has been left to their discretion of banks or the MFIs. The rate of lending and payment mechanisms is thus not uniform and sometimes the cost of loan is much higher than traditional loans.  
  • The non-profit companies (section 25) receive funds in form of donations and sometimes the micro credit does not reach the real beneficiaries.
  • The common challenges range from availability of funds, increasing resource costs, higher risks, limitations on HR availability and also a passive policy environment. 
  • There are three kinds of costs the MFI has to cover when it makes microloans – main loan amount, interest on loan and transaction cost. The first two, the cost of the money that it lends and the cost of loan defaults, are proportional to the amount lent, whereas, the third type of cost, transaction costs, is not proportional to the amount lent. This causes the cost of actual loan to be quite high, in case of individual. 
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