Micro Finance, like Venture Capital, is an unsecured loan but where the Venture Capital is basically given to small and medium enterprises and also to large-scale industries for commercializing, microfinance is extended to micro (very small) enterprises usually started by the poor women who do not have collateral, high education or business experience.
The objective is primarily to improve the quality of life of the poor and backward sections of the society or ngo registration.
(i) Foreign Funds
foreign funds for micro finance
Non-profit Organizations (NPOs) in the US like Unitus, Grameen Foundation-US (GF-US), Ashok (global) provide funds to Micro Finance Institutions (MFIs) in India. MFIs are selected by funding organizations by applying more than 6C quantitative and qualitative metrics. These US-based NPOs, apart from funds, provide assistance in improving the systems and procedures of the Micro Finance Institution to whom they finance These NPOs, in turn, get funds from high net worth individuals including those of Indian origin, US Corporations, and the US government. Overseas funding to MFIs has dropped from 31.4 percent to 25.8 percent of the total funding in 2004-05 because of regulatory restrictions imposed in September 2002 on non-government organizations accessing external commercial borrowings. Overseas funds had been available to MFIs at very low rates between 2 to 6 percent. RBI now allows MFIs to access ECBs.
(ii) Local funds:
local funds for micro finance
Micro Finance by the Local funds could be in the form of loans from banks and accumulated past reserves and surpluses of the organization. According to a CRISIL study, the share of traditional sources of funding like NABARD and overseas funds dropped from 63 percent to 59 percent and the MFI borrowings from banks are more than doubled from 13 percent to 28 percent in the year 2004-05. The removal of interest rate ceiling on microfinance loans and the treating bank credit to the sector as priority sector lending have contributed to the increase in bank’s funding.
A Micro Finance Institution can be a trust, registered society, cooperative society, company registered under Section 25 of Companies Act, 1956 (a not-for-profit company), NBFC or local area bank (LAB). The vast majority of Micro Finance Institutions in India are trusts and societies. Conversion into an NBFC or LAB gives a BMI greater credibility as it brings the Micro Finance Institution under the purview of Reserve Bank of India. Besides, being a corporate entity enables a Micro Finance Institution to access the capital markets for funds to scale up and not depend solely on bank lending, grants or donations. They are also allowed to raise savings from the member-borrowers.
