2. Microfinance – An Overview

2.1 Introduction

Traditionally, for the low-income and lesser privileged individuals/groups in the society, bank loans and other forms of financial assistances have been hard to come by for fear of defaults and bad debts. It is in this backdrop that microfinance is emerging as a new business opportunity for financial institutions, which promises to help the underprivileged become financially stable, at the same time ensuring that financial institutions continue to make profits.

Microfinance is the process of providing financial services such as loans, savings, etc. at a micro level or small scale to individuals with little or no income.

A microfinance loan passes through various stages or events from the moment it is given till the time it is repaid. The process begins with a loan application form in which the borrower is asked to furnish their details and the kind of facility requested. The bank’s loans or credit department appraises the application and takes a decision whether the applicant is eligible for the loan asked and whether loan can be extended to that customer. The bank will apply its own parameters in arriving at this decision. Assuming that the loan is sanctioned the bank gives a commitment and stipulates terms and conditions governing the same. The bank may levy a processing charge at this stage. The loan amount is then disbursed and credited to the settlement account of the borrower who draws the amount, uses it for the purpose for which it was taken. Interest accrues on the account which has to be serviced by the borrower besides repaying the principal amount as per the repayment schedule. If the loan is not repaid or there is a delay the loan asset’s status is changed to reflect its deterioration. On the other hand if the microfinance account is conducted well it will close on the date the last instalment is due and paid.

The Micro Finance (MF) module in Oracle FLEXCUBE captures and maintains the parameters with respect to the life cycle of the microfinance loan outlined above and this is detailed in the subsequent sections.

The Micro Finance module of Oracle FLEXCUBE is designed to cater to the lending needs of banks and other financial institutions. It comprises of a two-step process namely,

The MF Module is also capacitated to interface with the Core Module of Oracle FLEXCUBE for Accounting, Messaging and MIS related operations.

This section contains the following topics:

A brief explanation about the two stages and the various sub-stages are given below.

2.1.1 Loan Origination or Application Processing

This stage consists of the following two sub-stages.

Application Entry

During the application entry stage, the loan application is received from the applicant (s)/customers. The following information of the customers is captured as part of application processing:

The applications will be identified by a unique application number and based on the details furnished in the application and verifications performed thereafter; the loan may be approved or rejected.

Microfinance Account Processing

The application moves to an account processing stage when the applicant becomes a customer of your bank. The customer’s record will now be available in the bank’s customer database. A Microfinance account is created which will be used to service the customer. Microfinance account creation involves capturing the details of the final loan application into the features of the Loan. Microfinance Accounts in Oracle FLEXCUBE will be created under Account Templates called ‘Products’. The system resolves the product category and product on the basis of the application details.

The Microfinance Account thus created, reports to the Asset GL of the bank. Disbursements will debit the microfinance account and hence a loan with outstanding balances will be in debit. Payments are credited to the microfinance account. At the end of complete re-payment, the account becomes zero balanced and is closed.

On sanction, a microfinance account will be created under a specific microfinance account product.

Hence, its features would default from the account product. The Microfinance account so created will be used for further servicing such as disbursements. The microfinance account balance will represent the outstanding Principal that was advanced to the Customer. Interests will be calculated on this balance based on the schedule and pricing setup. The Account processing stage involves the following:

2.1.2 Interface with other Modules

The MF Module interfaces with the following sub-systems/Modules of Oracle FLEXCUBE