We had studied up to Microfinance Institutions (MFIs).✅
INNOVATION IN CREDIT DELIVERY SYSTEM
► SHGs: An Innovative Approach to Credit Delivery
• Microfinance and Capacity Building: Microfinance aims to provide access to financial services, but its true effectiveness lies in empowering people to utilize those services effectively. This involves not just providing financial capital but also enhancing their capabilities.
• SHG-Bank Linkage Program: This program recognizes the importance of capacity building alongside financial access. It provides savings, credit, and other financial services to the financially excluded poor through SHGs.
• What are SHGs?
• Small, informal groups of 10-20 individuals (or smaller in hilly/tribal areas) with similar social and economic backgrounds.
• Members come together voluntarily to promote savings and manage resources for their collective benefit.
• Savings are mobilized within the group and then lent to members for various needs.
► Characteristics of SHGs
• Size: Typically 10-20 members (smaller groups may be formed in certain areas). • Registration: Not mandatory to be registered.
• Family Representation: Only one member from a family can join.
• Gender: Groups consist of either men or women.
• Regular Meetings: Compulsory attendance at regular meetings fosters a sense of community and accountability.
• "Panchsutra" (Five Principles): SHGs follow five key principles:
• Regular meetings
• Regular savings
• Regular internal lending
• Regular repayment
• Transparent record-keeping
► SHGs and Credit Linkage
► To be eligible for credit linkage with banks, SHGs need to demonstrate: • Active Existence: The group should have been active for at least six months.
• Successful Operations: The group should have a track record of managing savings and internal lending.
• Democratic Functioning: All members should have an equal say in decision making.
• Proper Record-Keeping: Maintaining accurate accounts and records is essential.
• Genuine Purpose: The group should exist for mutual support and not just to access bank loans.
► Benefits of SHGs
• Financial Inclusion: SHGs bring banking services to those excluded from the formal financial system.
• Empowerment: They promote self-reliance and empower marginalized groups, particularly women.
• Social Cohesion: SHGs foster a sense of community and mutual support.
• Capacity Building: They provide opportunities for financial literacy and skill development.
• Reduced Risk for Banks: Group lending reduces the risk of default for banks.
► Joint Liability Groups (JLGs):
► NABARD's Initiative: The National Bank for Agriculture and Rural Development (NABARD) introduced the JLG scheme to help small/marginal farmers, tenant farmers, sharecroppers, and micro-entrepreneurs access credit.
► What are JLGs?
► Informal groups of 4-10 individuals who come together to avail bank loans based on mutual guarantee.
► Members typically engage in similar economic activities in the agriculture or allied sectors and live in the same vicinity.
► They offer a joint undertaking to the bank, essentially acting as guarantors for each other's loans.
► Members support each other in their occupational and social activities, fostering a sense of community and shared responsibility.
► Objectives of the JLG Scheme
• Increased Credit Flow: To provide loans to those who lack collateral, particularly small and marginal farmers and others in similar situations.
• Collateral Substitute: The group's joint liability acts as a substitute for traditional collateral, making it easier for members to access credit.
• Reduced Risk for Banks: Group lending and mutual guarantee minimize the risk of loan defaults for banks.
• Lower Transaction Costs: Group lending reduces the administrative costs associated with processing individual loan applications.
• Enhanced Productivity: Access to credit through JLGs enables members to invest in their farms or businesses, leading to increased productivity and income.
► Criteria for JLG Members
• Similar Socio-economic Background: Members should have similar economic standing and be like-minded.
• Trust and Familiarity: Members should reside in the same area, know each other well, and have mutual trust.
• No Default History: Individuals with a history of defaulting on loans from formal financial institutions are not eligible.
• Single Family Representation: Only one member from a family can join a JLG.
► Group Approach and Rationale
• Leadership: JLGs often have a leader who coordinates activities, maintains discipline, and acts as a liaison with the bank.
• Regular Meetings: Regular meetings foster communication, address issues, and strengthen group cohesion.
• Knowledge Sharing: JLGs can facilitate the sharing of information, technology, and market access among members.
• Collective Action: JLGs can undertake collective activities or support individual enterprises, depending on the needs and goals of the group.
► Benefits of JLGs
• Access to Credit: Enables those without collateral to access formal credit. • Reduced Risk: Mutual guarantee lowers the risk of default.
• Social Support: Provides a platform for peer support and collective action. • Financial Literacy: Promotes financial education and responsible borrowing.
• Community Development: Contributes to agricultural development and economic growth in rural areas.
► Conclusion
► JLGs offer an innovative and effective way to extend credit to those who are often excluded from traditional banking systems. By leveraging the power of group dynamics and social collateral, they promote financial inclusion and empower individuals and communities to improve their livelihoods.
PRESENT BANKING SCENARI0
► Bank Branches:
► As of May 2024, there were over 158,000 branches of Scheduled Commercial Banks in India. ► Business Correspondents (BCs):
• As of December 2023, there were approximately 1,592,598 banking outlets operating through BCs. ► Pradhan Mantri Jan Dhan Yojana (PMJDY)
► As of July 19, 2024, over 52.81 crore PMJDY accounts have been opened with a total deposit balance of Rs. 2,30,792 crore.55.6% of accounts belong to women.66.6% of accounts are in rural and semi urban areas. ► Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)
► Over 20.48 crore people have enrolled in PMJJBY
► Pradhan Mantri Suraksha Bima Yojana (PMSBY)
► Over 45.08 crore people have enrolled in PMSBY
► Atal Pension Yojana (APY)
► As of April 26, 2023, there were 5.2 crore enrollments under APY
ROLE OF TECHNOLOGY IN FINANCIAL INCLUSION
► Technology as a Game Changer:
• Reaching the Underserved: You correctly point out the challenge of "large numbers, low volumes." Technology like e-KYC, IMPS, AePS, and mobile banking overcomes geographical barriers and makes financial services accessible to those in remote areas.
• Cost Reduction: Technology solutions can significantly reduce the cost of delivering financial services, making them more affordable for low-income individuals.
• Increased Convenience: Mobile banking, for example, provides unparalleled convenience, allowing users to access services anytime, anywhere.
ROLE OF TECHNOLOGY IN FINANCIAL INCLUSION
► Key Initiatives:
• Core Banking Solutions (CBS): CBS has been foundational, enabling "Anywhere-Anytime Banking" and laying the groundwork for other innovations like ECS, NEFT, RTGS, and internet banking.
• Government Programs: The PM Jan-Dhan Yojana and Direct Benefit Transfer (DBT) have been instrumental in bringing millions into the formal financial system.
• JAM Trinity: The combination of Jan Dhan accounts, Aadhaar for biometric authentication, and mobile phones has created a powerful platform for financial inclusion.
ROLE OF TECHNOLOGY IN FINANCIAL INCLUSION
• Challenges: While the progress is commendable, challenges remain, such as digital literacy, cybersecurity concerns, and ensuring equitable access to technology.
• Role of Fintech: Fintech companies are playing an increasingly important role in developing innovative solutions for financial inclusion.
• Future Trends: Emerging technologies like artificial intelligence (AI) and blockchain have the potential to further revolutionize financial inclusion.
► Overall, technology is playing a transformative role in driving financial inclusion in India. By increasing access, reducing costs, and improving convenience, it is empowering millions and contributing to economic growth.
CHECK YOUR KNOWLEDGE
Q1. What is the primary goal of financial inclusion?
▪ a) Increasing the profits of financial institutions
▪ b) Providing access to financial services for all, especially the underserved c) Promoting economic growth only for the wealthy
▪ d) Reducing the role of government in the economy
Q2. What is a microfinance institution (MFI)?
► a) A large commercial bank
► b) An organization that provides small loans and other financial services to low-income individuals
► c) A government agency responsible for regulating the stock market ► d) A non-profit organization focused on environmental conservation
What is the primary role of a Business Correspondent (BC) in the BC-BF model? ► a) To act as an agent of a bank, providing basic financial services in underserved areas ► b) To regulate financial institutions and ensure compliance
► c) To provide complex investment advice to high-net-worth individuals ► d) To conduct research on financial inclusion policies
Q3. Who typically serves as a Business Facilitator (BF) in the BC-BF model?
► a) A government regulator
► b) A non-governmental organization (NGO), microfinance institution (MFI), or other community-based organization
► c) A large commercial bank
► d) An international financial institution
Q4.What is a key advantage of the BC-BF model for financial inclusion? ► a) It increases the cost of providing financial services
► b) It limits access to financial services in rural areas
► c) It extends the reach of financial services to remote and underserved areas ► d) It reduces the need for financial literacy programs
Q5. Which of the following is a typical service offered by a BC under the BC-BF model? a) A) Complex investment products
b) b) Opening basic savings accounts
c) c) Underwriting large loans
d) d) Providing international money transfers
Q6. How does the BC-BF model contribute to reducing financial exclusion? ► a) By restricting access to financial services
► b) By increasing the complexity of financial products
► c) By making financial services more accessible and affordable for underserved populations
► d) By focusing solely on urban areas
Q7. What is the role of technology in the BC-BF model?
► a) It hinders the effectiveness of BCs
► b) It can enable BCs to provide services more efficiently through mobile devices and point-of-sale (POS) terminals
► c) It is irrelevant to the BC-BF model
► d) It only benefits urban populations
Q8. What is a potential risk associated with the BC-BF model? ► a) Increased financial literacy among clients
► b) Fraud and misappropriation of funds if proper controls are not in place ► c) Reduced reliance on informal financial services
► d) Improved financial stability for low-income households
Q9. How can governments support the successful implementation of the BC-BF model?
► a) By hindering the participation of NGOs and MFIs
► b) By creating complex regulations that discourage BCs
► c) By providing a clear legal and regulatory framework for BC operations
► d) By neglecting the infrastructure needs of rural areas
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