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The Development of Indian Microfinance and Enlightenment to China

Author: XuYingYing
Tutor: LiYanJun
School: Southwestern University of Finance and Economics
Course: Finance
Keywords: Microcredit Microfinance SHG-Bank Linkage Program Indian Microfinance Crisis
CLC: F832.4
Type: Master's thesis
Year: 2011
Downloads: 282
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Abstract


The origin of Grameen Bank can be traced back to 1976 when Professor Muhammad Yunus, Head of the Rural Economics Program at the University of Chittagong, launched an action research project to examine the possibility of designing a credit delivery system to provide banking services targeted at the rural poor. Thus the Grameen Bank Project (Grameen means "rural" or "village" in Bangla language) came into operation. October 13,2006 was the happiest day for Bangladesh. Announcement came on that day that Muhammad Yunus and Grameen Bank received the Nobel Peace Prize,2006.Microfinance has created opportunities for millions of people at the "Base of the pyramid"; people who live on meager pay for hard, usually unhealthy and often dangerous work; pay that flows erratically and unpredictably. So Microfinance has benefited from widespread international recognition as a development tool since 1990s.It was promoted by many national governments eager to bridge the financial inclusion gap, and it was elevated onto the agendas of the United Nations. The global microcredit summit organized in Washington DC in 1997, widely attended by representatives of 137 countries and nearly 3,000 delegates was, in a way, a watershed event. This was an event that was used by Grameen Bank to showcase its work of the past two decades. Grameen and microfinance were clearly being acknowledged as an effective methodology to reach small loans to the poor.With the widespread of microcredit to the whole word, there are also some new changes. Microcredit has transferred to microfinance, not only offer credit to the poor people, but also offer savings, insurance, etc. Non-government originations who work on microcredit were transferred to commercial institutions. Donors and socially oriented investors recognized the potential for social and financial returns and directed increasing funding toward microfinance. The global performance of the microfinance sector has been impressive with solid asset quality and stable return on assets. An increase in commercial funding to the sector has enabled microfinance to grow well beyond what could have been possible with just donor and government support-the primary source of funding a decade ago. This impressive growth means that millions more people are included in the formal financial system. However, a few countries are showing signs of stress, with regional or national-scale microfinance loan delinquency crisis emerging within 2007-2009.India has a population of 1.2 billion, with less than one quarter of adults having access to basic formal financial services. Financial inclusion initiatives are not new to India. Over the past century, a range of innovative approaches to expanding access to finance for poor people has been pursued. Early in the 20th century laws were passed to create cooperatives financial institutions to serve people living in rural areas. Following independence in 1947, much of India’s financial sector was nationalized. Part of the rationale was to ensure access to finance to a large number of Indians, especially those living in rural areas. As a further effort to reach rural areas, India established a specialized class of regional rural banks in the 1970s.And in the 1980s social entrepreneurs created the self-help group (SHG)-bank linkage program, whereby commercial banks were encouraged to lend funds to groups of 10 to 20 women.Indian SHGs were initially formed as a means to extend training and other nonfinancial services to rural areas; some also mobilized savings and made loans to members. But through the bank linkages program, the SHG model began to incorporate credit from the banks thus allowing for much larger lending volumes. Today there are 4.5 million SHGs receiving credit nationwide, with 58 million members. The SHG movement received considerable national policy support led by the National Bank for Agriculture and Rural Development (NABARD). The role of NABARD combined with priority sector lending policies stimulated the banking system to lend to SHGs. This approach became widely embraced and grew much larger in the 1990s. The Indian SHG model remains unique for its sheer size and reach to poor people, though with varied levels of sustainability. SHGs continue to offer a range of livelihoods and empowerment services that go well beyond financial services.By the 1990s economic reforms in India opened up space for the private sector to play a larger role in the banking system. Amid these reforms a new breed of private microfinance provider emerged:microfinance institutions (MFIS), which originally operated as nonprofits (societies and other ownerless legal forms), but soon transferred their operations into for-profit nonbank finance companies (NBFCs). The transformation from nonprofit to for-profit NBFCs was complicated, often leaving the nonprofits and other often newly formed entities (such as mutual benefit trusts for the benefits of clients) with unclear voting rights or influence was concentrated in the hands of the original founders.Andhra Predesh in southeast India is the fifth most populous of India’s 28 states, with 75 million inhabitants. Recent state governments in Andhra Predesh have undertaken a series of large-scale projects to fight poverty, so SHGs and MFIs have developed rapidly in Andhra Predesh. The crisis that erupted in Andhra Predesh in early October 2010 hit at the epicenter of microfinance in India and has implications there, across the country, and globally.From the end of 2005 to October 2006, under the promotion of the People’s Bank of China and China Banking Regulatory Commission(CB RC),the local governments of five pilot provinces, shanxi, Sichuan. Guizhou, Sanxi and Inner Mongolia, has taken the lead to establish 7 microfinance companies. These pilot microfinance companies are operating successfully, so in May,2008,CBRC and People’s Bank of China issued the "Guidance on Pilot Microfinance Companies" which planed to set up pilot microfinance companies like those built in the above five provinces throughout China.But Microfinance companies in China are having a difference from India and other countries; we have to learn the experience of India, and the lessons of India’s microfinance crisis.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Credit
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