Financial Management Fundamentals

Introduction to Financial Management

Definition of Financial Management

• Financial management is the process of planning, organizing, and controlling financial resources to achieve business objectives.
• It involves making decisions about investing, financing, and managing cash flows to maximize shareholder value.

Objectives of Financial Management

• Maximize shareholder wealth
• Ensure liquidity and solvency
• Optimize resource allocation
• Minimize risk

Functions of Financial Management

• Investment decisions: selecting investment opportunities to generate returns
• Financing decisions: determining the best sources of funding for investments
• Dividend decisions: deciding how much to distribute to shareholders
• Cash management: managing cash flows to ensure liquidity

Importance of Financial Management

• Helps achieve business objectives
• Ensures efficient use of resources
• Minimizes risk and maximizes returns
• Enhances shareholder value

Key Concepts

• Time value of money: the concept that a dollar today is worth more than a dollar in the future
• Risk and return: the relationship between the potential return on an investment and its level of risk
• Opportunity cost: the value of the next best alternative forgone when a decision is made

Financial Management Overview

• Financial management is a crucial process that involves planning, organizing, and controlling financial resources to achieve business objectives.

Objectives of Financial Management

• The primary goal is to maximize shareholder wealth.
• Ensuring liquidity and solvency is also a critical objective.
• Optimizing resource allocation and minimizing risk are additional key objectives.

Functions of Financial Management

Investment Decisions

• Selecting investment opportunities that generate returns.
• Involves evaluating potential investments and choosing the best options.

Financing Decisions

• Determining the best sources of funding for investments.
• May involve debt, equity, or a combination of both.

Dividend Decisions

• Deciding how much to distribute to shareholders.
• Affects the amount of retained earnings and the firm's cash flow.

Cash Management

• Managing cash flows to ensure liquidity.
• Involves managing cash inflows, outflows, and inventory.

Importance of Financial Management

• Enables businesses to achieve their objectives.
• Ensures efficient use of resources.
• Minimizes risk and maximizes returns.
• Enhances shareholder value.

Key Concepts

Time Value of Money

• A dollar today is worth more than a dollar in the future.
• Takes into account the concept of interest and opportunity cost.

Risk and Return

• The potential return on an investment is directly related to its level of risk.
• Higher returns are associated with higher risk investments.

Opportunity Cost

• The value of the next best alternative forgone when a decision is made.
• Represents the trade-off between different options.

Background of the Study

• Women are the backbone of the Indian economy, but they are not much empowered, despite having equal rights in the Indian Constitution.
• In ancient Vedic times, women in India were equal to men in every sphere, but with the passage of time, they lost their position and were relegated to a lower position.
• According to the UN World Population Prospectus 2022, the population of females in the world is estimated at 4,039,671,184 or 4.04 billion.
• In India, as per the Census 2011, around 586.46 million (48.46%) of the population constitutes women.
• Despite having a large population, women's contribution to the development of society is often ignored.
• Women are responsible for managing their families, raising children, and participating in various social and cultural activities, which limits their access to education, healthcare, and financial independence.

Definition of Microfinance

• Microfinance refers to the provision of small amounts of money to the poorest to the poor for their betterment of life and improving their standard of living.
• It provides financial aid to the underprivileged, enabling them to boost their earnings and improve their lifestyle.
• Microfinance is a platform for providing services like saving, loan, insurance, etc. to the poor people.
• The Reserve Bank of India defines Micro Finance Institutions as non-deposit taking non-banking financial companies that fulfill certain conditions.

Empowerment

• Empowerment means the process of becoming stronger and more confident, especially in controlling one's life and claiming one's rights.
• Empowerment is a development process of making a weak person confident, powerful, and encouraged in their lives by generating one's efficacy, self-confidence, and control over resources.
• Empowerment includes independent thinking and action, exercise of choice, fulfillment of potential, and strengthening to overcome challenges.
• The concept of empowerment was firstly brought in the year 1985 in the International Women's Conference held at Nairobi.

Women Empowerment

• Women empowerment refers to the process of giving women authority and rights to take their own decisions without any hindrances.
• Independence creates women powerful and confident in their lives.
• In ancient times, women's condition was invulnerable, but with the passage of time, their status gets deprived in the society.
• Women empowerment is necessary to bring women into the mainstream of development.

Indian Scenario of Microfinance

• Microfinance is an effective tool for the upliftment of the status of rural populations in India.
• The microfinance initiative was introduced in India in 1947 through the Self-Employed Women's Association (SEWA) in Gujarat.
• Microfinance operates in four channels in India, including joint liability groups, self-help groups, the Grameen Bank model, and the rural cooperatives.
• The SEWA Bank was established as a cooperative bank under the dual control of the Reserve Bank of India and the State Government.### Historical Background of Microfinance in India
• 1982: NABARD (National Bank for Agriculture and Rural Development) was established.
• 1984: NABARD identified Self-Help Groups (SHGs) as an effective tool for poverty alleviation.
• 1992: NABARD launched the Self-Help Group-Bank Linkage Program (SHG-BLP) to formalize the SHG movement.
• 2000: Microfinance institutions began to commercialize and grow, with many players entering the market.
• 2007: The Microfinance Bill was introduced to regulate and support microfinance activities, but it was not enacted into law.

Phases of Microfinance Development

• Growth and Expansion Phase (2000-2010): Microfinance institutions expanded, and private sector players entered the market.
• Crisis Phase (2010): The microfinance sector faced a crisis in Andhra Pradesh, with many poor borrowers committing suicide due to high interest rates and aggressive loan recovery practices.
• Consolidation and Digital Transformation Phase (2011-2020): The Reserve Bank of India introduced comprehensive guidelines for NBFC-MFIs, and digital innovations were adopted to facilitate financial services.
• New Adoptions Phase (2020-present): The microfinance sector has continued to evolve, with a focus on digital solutions, financial inclusion, and women's empowerment.

Relevance of Microfinance in the 21st Century

• Microfinance has emerged as a crucial instrument for fostering financial inclusion and alleviating poverty in India.
• Approximately 65% of India's population resides in rural areas, where access to traditional financial services remains limited.
• Microfinance institutions have expanded their reach, serving around 140 million low-income clients globally by 2020.
• Microfinance has played a pivotal role in empowering women, who constitute around 80% of MFI clients.

Microfinance in the Present Context

• The microfinance sector has witnessed growth and stabilization in recent years.
• As of 2022-2023, 16.19 crore rural households were covered under the SHG-BLP.
• A total of 134.03 lakh SHGs were linked to the banking sector, with savings of Rs. 58,892.67 crores.
• The repayment rate of loans by SHGs to banks is 97.71% as of 2023-2024.

Region-Wise Progress of Microfinance

• The Southern region has the highest number of SHGs, with savings of Rs. 28,96,845 lakhs.
• The Western region has the highest growth rate of 65% in terms of SHG savings.
• Maharashtra has the maximum number of SHGs, followed by West Bengal, Bihar, and Andhra Pradesh.

Microfinance and Women Empowerment

• Microfinance has proven to be a powerful tool for women's empowerment, with around 50 million women benefitting from microfinance services as of 2023.
• Women make up approximately 90% of all microfinance clients.
• Microfinance has significantly impacted women's empowerment, increasing their income levels, savings, and decision-making power.### Microfinance and Women Empowerment
• Microfinance has a positive impact on women's empowerment, economic growth, and child-rearing approaches in Bangladesh, but has a negative impact on their position in the family and society.
• In India, microfinance has significantly enhanced the standard of living for the poor, especially women, by providing financial services, including deposits, loans, payment services, and micro-credit.
• The duration of participation in microfinance programs is crucial for positive outcomes, with women's involvement in social and financial decisions increasing after joining these programs.

Women's Empowerment through Microfinance

• Microfinance empowers women socially and psychologically, but has a limited impact on economic empowerment.
• The government and NGOs should focus on women's education and organize training programs to support their empowerment.
• Microfinance strengthens women's roles in their households and communities, enabling them to start microenterprises, which fosters empowerment and reduces gender inequalities.

Impact of Microfinance on Women's Lives

• Microfinance improves women's decision-making abilities, enabling them to make decisions about loans and their use, including choosing SHG loans over moneylenders.
• Women involved in SHGs for longer periods and attending more meetings are more empowered.
• Despite gains in social decision-making, women still struggle to make decisions about healthcare, living arrangements, household budgets, and medical treatment.

JEEVIKA Model and Women's Empowerment

• The JEEVIKA model has significantly promoted women's economic inclusion and empowerment in Bihar.
• JEEVIKA has played a crucial role in implementing the alcohol ban, and many women have transformed into entrepreneurs through their involvement with SHGs.
• Women participating in SHGs are considerably more empowered than those who are not.

Bihar's Aspirational Districts

• Bihar has 13 aspirational districts, which are part of the Aspirational District Program launched by the Government of India in 2018.
• The program aims to rapidly transform the development of these districts, focusing on key development indicators like health, education, agriculture, water resources, financial inclusion, and skill development.
• Two districts, Banka and Katihar, have been ranked as the first and second among five best ADPs in the country in the field of agriculture and water.