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Difference Between Commercial Bank and Micro Finance Institution(MFIs)
I was reading The Indian Banker in the article "The Fourth Milestone" by the author" Mr R.K.Mukherjee",he has explained the major differences between the two with the help of a table which i would like to share with all of my friends .
Area
Commercial bank
Micro finance Institution
Focus
Profitability , Market Share , All segment of customer
A sustainable credit system for economically disadvantaged people.
Customer Acquisition
Banks mostly enroll customer through branches.
MFIs have stage-wise strategy-village meetings, formal groups, training of member of groups on financial management and then providing credit-line.
Products
Banks have a basket of retail product that cover savings, credit remittance etc. Credit from banks for BPL-like families is predominantly of INR 25,000 and above; other features are varied rate of interest and varied repayment period.
MFIs specialize in credit .The product is predominantly a graduated credit line with recovery by 50 week EMI.MFI credit is predominantly an average of INR 15,000 minimum of INR 3,000 to maximum of INR 50,000 (housing loan up to INR 1.25 lacs.)
Procedures
Banks have universally identical procedures as well as for internal management. The procedures are primarily multi-tired , record-oriented and resultantly , lengthy at times.
MFIs have a universally identical procedure for their customer for internal management. Features of the procedure are that these are short and simple for customer and for internal recording but are elaborate on verbal processes with customer
Customer Service Mode
Customer access branches.
MFIs access customer at the location of their inhabitation.
Source of Funds
Combination of owned and Borrowed Capital
MFIs operated on Borrowed fund
Cost of Capital
Average cost of Capital for Bank is 8 percent
Average cost of capital for MFIs is 14 %
Location of Operation
Banks have a formula to determine viability of a branch. This determines the availability of the bank in geographical location.
MFIs operate with families that do not have steady and small credit lines from banks. They do not operate on the basis of geographical location.
Cost of Operation
Banks have mechanism that cross subsidies operating cost of several sets of services and products.Branch viability and business per staff is the strategy area of focus. Cost-income ratio of Banks is about 42 %.
MFIs incur high costs on manpower. Business per staff cannot grow beyond a point because the quality of customer contact is the key to the high repayment rate in micro-credit.MFI operations on customer servicing mechanisms are reflected in cost-income ratio of MFIs that is around 62%
Risk Management
Banks have advanced risk management systems that are imposed as well as self deserved .The risk management system are based in data.
MFIs have completely different approach to risk management. This is through continuous contacts with the customer and by period re-training of customer and off-field staff. Performance incentives to customer and to field staff are another set of tools for risk management.
Mutual Interest
Banks are interested in MFIs because such credit lines enable banks to achieve the 'priority sector' obligation.
Ownership of MFIs lies with the development professionals and social investor who invest with social objectives.
Ownership
Banks in India 'owned' by government ( as shareholder and policy maker) , regulator and private investor.
Ownership of MFIs lies with the development professionals and social investors who invest in social objectives.
Nature of Institution
Financial Institution
Service Institution
Financial Goal
Profit maximization
Surplus to sustain
Posted By Mr. Sann Piseth
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