MICROFINANCE

Types of microfinance institutions in India

Microfinance organisation is not new to the financial market in India. Due to the overwhelming poverty in
India, government gave special attention to the development of rural credit. Taking All India Rural Credit
Survey report (1950) into account, it reconstructed the cooperative structure which included the partnership of
state in cooperatives, establishment of Regional Rural Banks (RRB) and National Bank for Agriculture and
Rural Development (NABARD). In India, Non Government Organisations (NGOs) played a pivotal role in the
development of micro financial service. Furthermore, microfinance industry in India has witnessed a fast-paced
growth in last two decades. As of 2017, there were 223 MFIs that included NGO-run units and societies. 47
non-banking finance companies – microfinance institutions (NBFC-MFIs) had also been registered with the
Microfinance Institutions Network (MFIN).

Definition of microfinance institutions in India

Microfinance Services Regulation Bill of India, defines microfinance services as financial assistance to be
provided to an eligible individual directly or by a group mechanism for:
 An amount of maximum fifty thousand in aggregate per person for small and cottage enterprises,
agricultural and allied activities (consumption purposes of the person is also included) or
 A maximum amount of one lakh fifty thousand in aggregate per person for the purpose of housing or
 Such like the above amounts may be prescribed to a person for other purposes also.
The bill, in addition, explains microfinance institutions as the organization of individuals which includes the
following if the establishment of the organization concentrates on the purpose of increasing microfinance
services:
 Registration of society under Societies Registration Act (1860).
 A creation of trust under Indian Trust Act (1880) or registered public trust under state enforced
governing trust.
 A society registered under the Multi State Cooperative Societies Act (2002) which can be a cooperative
society or a mutual benefit corporative etc

Different types of microfinance institutions in India

The microfinance models are developed in order to cope with the financial challenges in financially backward
areas. There are FOUR types of microfinance companies operating in India. They are:
1. Joint Liability Group (JLG)
2. Self Help Group (SHG)
3. The Grameen Bank Model
4. Rural Cooperatives

Joint Liability Group (JLG)

Joint Liability Group can be explained as the informal group consists of 4-10 individuals who try to avail loans
against mutual guarantee from banks for the purpose of agricultural and allied activities. This category generally
consists of tenants, farmers and other rural workers. They work primarily for lending purposes, although they
also offer the savings facility. In this type of institution every individual of a borrowing group is equally liable
for the credit. This kind of institution is simple in nature and requires little or no financial administration.
However, one of the serious problems of this structure is personal preferences in lending credit which resulted
in a partial failure of the system. Of late due to various promotional initiatives taken by banks such as Indian
bank, Karur Vysya Bank and Indian Overseas Bank, the credibility of Joint Liability Group model has received
a boost. It still remains a landmark movement in the area of protection of farmer’s land ownership rights.

Self Help Group (SHG)

Self Help Group is a type of formal or informal group consisting of small entrepreneurs with similar kind of
socio-economic backgrounds. Such individuals temporarily come together and generate a common fund to meet
the emergency needs of their business. These groups are generally non-profit organizations. The group assumes
the responsibility of debt recovery. The advantage of this micro-lending system is that there is no need for
collateral. Interest rates are also generally low and fixed especially for women. In addition various tie-ups of
banks with SHGs have been implemented for the hope of better financial inclusion in rural areas.

One of the most important ones is NABARD SHG linkage program where many self-help groups can borrow
credit from bank once they successfully present a track record of regular repayments of their borrowers. It has
been very successful especially in Andhra Pradesh, Tamil Nadu, Kerala and Karnataka and during the year of
2005-06. These states received approximately 60% of SGH linkage credit.

The Grameen Bank Model

Grameen Model was introduced by the Nobel laureate Prof. Muhammad Yunus in Bangladesh during 1970s. It
has been widely adopted in India in the form of Regional Rural Banks (RRB). The goal of this system has been
the overall development of the rural economy which generally consists of financially backward classes. But this
model has not been fully successful in India as rural credit and system of recovery are a real problem. Huge
amount of non-performing assets also led to failure of these regional banks. Compared to this model Self Help
Groups have been more successful as they are more suited to the population density of India and far more
sustainable.

Rural Cooperatives
Rural Cooperatives in India were set up during the time of independence by the government. They used the
mechanism to pool the resources of people with relatively small means and provide financial services. Due to
their complex monitoring structure, their success has been limited. In addition, this system only catered to the
credit-worthy individuals of rural areas, not covering a large part of the country’s financially backward section.
Joint Liability
Self Help Group Grameen Bank Model Rural Cooperatives
Group
Starts with only 2 members per group
5-10 members per 10-20 members per
Size in a village, eventually increased after 70-80 members per group
group group
loan is successfully repaid
Regular savings in
Generally lending Savings and deposits to extremely poor
Servic deposit accounts with Primarily lending services
only, irrespective of sections of the society for business,
es the financial for agricultural purposes
savings amount health and housing
institutions.
Cooperative society
Members invest loan Field Manager visits villages to form
consisting of members are
amount for different All individuals of groups of 5 and lends to 2. Amount
formed for a singular
Model purposes, but are group work together recovered is reinvested in further purpose; such as real
guarantors of each on the same activity lending and infrastructure development
estate, agriculture,
other in villages
infrastructure, etc.
More formal with
All members interact Formal structure consisting of Unit All members interact with
Struct defined positions in
with the financial Manager, Field Manager, etc. Who the financial institution
ure each group like
institution individually interact with every family in a village jointly
treasurer and secretary
Main goal of financial inclusion
Each type of microfinance institution is different from the other in many ways but they work towards the same
goal- financial inclusion. Due to their operational frameworks, some models have been less successful than the
others in attaining this objective. In addition to the above, microfinance institutions can also be categorised into
large, medium and small scale. These institutions differ in terms of geographical reach, infrastructure,
manpower skills availability, funding and lending processes, revenues and success in operations.
Definition of Microfinance
Microfinance is the provision of a broad range of financial services such as – deposits, loans, payment services,
money transfers and insurance products – to the poor and low-income households, for their microenterprises
and small businesses, to enable them to raise their income levels and improve their living standards.

Core Principles for Microfinance

➣ The poor needs access to appropriate financial services
➣ The poor has the capability to repay loans, pay the real cost of loans and generate savings
➣ Microfinance is an effective tool for poverty alleviation
➣ Microfinance institutions must aim to provide financial services to an increasing number of disavantaged
people
➣ Microfinance can and should be undertaken on a sustainable basis
➣ Microfinance NGOs and programs must develop performance standards that will help define and govern the
microfinance industry toward greater reach and sustainability

Characteristics and Features of Microfinance

Characteristics Distinguishing Features
Type of client Low Income
Employment in informal sector; low wage bracket,
Lack of physical collateral
Closely interlinked household/business activities
Lending Technology Prompt approval and disbursement of micro loans
Lack of extensive loan records
Collateral substitutes; group-based guarantees
Conditional access to further micro-credits
Information-intensive character-based lending linked to
cash flow analysis and group-based borrower selection
Loan Portfolio Highly volatile
Risk heavily dependent on portfolio management skills
Organizational Remote from/non-dependent on government
Ideology Cost recovery objective vs. profit maximizing
Institutional Decentralized
Structure Insufficient external control and regulation
Capital base is quasi-equity (grants, soft loans)

Definition of Microfinance loans

Microfinancing loans are small loans granted to the basic sectors, on the basis of the borrower’s cash flow and
other loans granted to the poor and low-income households for their microenterprises and small businesses to
enable them to raise their income levels and improve their living standards. These loans are typically unsecured
but may also be secured in some cases.

Segments of Demand for Micro-credit

(1) The landless who are engaged in agricultural work on a seasonal basis and manual laborers in forestry,
mining, household industries, construction and transport; requires credit for consumption needs and also
for acquiring small productive assets, such as livestock.
(2) Small and marginal farmers, rural artisans, weavers and those self-employed in the urban informal sector
as hawkers, vendors and workers in household micro-enterprises: requires credit for working capital,
 including a small part for consumption needs. This segment largely comprises the poor but not the
poorest.
(3) Medium farmers/small entrepreneurs who have gone in for commercial crops and others engaged in dairy,
poultry . . . . Among non-farm activities, this segment includes those in villages and slums engaged in
processing or manufacturing activity. These persons live barely above the poverty line and also suffer
from inadequte access to formal credit.

Microfinance in India
Microfinance has become an indispensable part of India’s economy. The financial needs of India’s rural
areas reflect the volatile, uncertain, and irregular income streams and expenditure patterns. Critical examination
of their prerequisites shows that poor people value financial services and want them to be reliable, convenient
and flexible. India boasts a range of institutions providing microfinance which consists of formal financial
institutions at one end of the spectrum and private moneylenders at the other.
Small Industries Development Bank in India (SIDBI)
In the middle of the band lies semi-formal microfinance providers. Notable formal sector microfinance
providers in India are SIDBI (Small Industries Development Bank in India), ICICI Bank, SBI Bank, etc.
Despite numerous efforts, the informal sector consisting of landlords and traders provide microfinance
facility at high rates. A study conducted by RFAS in 2003, reported that 44% of rural households still borrow
money from informal agents.
Microfinance for the upbringing of women
Careful considerations of the past and prevailing situation in India makes it indispensable to explore the
relations between gender-based inequality and micro-finance. Numerous studies have been conducted in the
past on gender-based inequality and women empowerment in microfinance. Although women have constituted
a pivotal part of the total labour force in India, the race has been besieged with bias and discrimination. An
overwhelming portion of the total workforce in rural India is self-employed. Women in the workforce are
generally home-based workers such as garment makers, weavers, craft people and food processors and vendors.
Women in this section are embroiled in a vicious circle of indebtedness, poverty, low incomes and limited
government assistance. SEWA (Self-Employed Women’s Association) is the first Self-Help Group (SHG)
formed by these women in 1972 with an aim to strengthen its members’ bargaining power to improve their
income, employment and access to social society.
The mainstreaming of gender in development planning is critical in determining the extent to which men and
women could participate in and obtain benefit from developmental interventions. The empowerment of women
is one of the central issues in the process of development of countries all over the world. In India, it is estimated
that there are 92 million working women through 90% of them work in the organised sector

The table below reviews the differences between banks and MFIs in India.

Parameters Commercial Banks Microfinance Institutions

Deposit, lending, insurance, demat A/c, locker

1. Products facility, cash withdrawal from ATMs and credit/ Deposits, micro-credit, insurance
debit cards
2. Target group Urban, rural (both above/below poverty line) Mainly rural (below poverty line)
Not limited to households and diversified to various
3. Business Limited to households
sectors
Well defined and targets class banking with value Struggles with basic wiring, transportation,
4. Physical Infra
added facilities building
 Accessible 24 x 7 through tele-banking, ATMs, E
5. ICT Infra Minimal to none
banking, and Mobile banking
Lack of proper scrutiny and monitoring
6. Loan Process Proper scrutiny and monitoring
leading to high default
7. Collateral No collateral required and peer pressure works
Collateral required and forfeited in case of default
Requirement as collateral
8. Mechanism of Loan disbursed to individual/group depending
Loan disbursed in one or more installments
loan disbursal upon savings collected
9. Recovery of Less cases of default and collateral forfeited in case Large no. of cases of default/delinquencies
loan of default due to poor credit appraisal techniques
Poor/no mechanisms to manage risk and
limited funds provided by National Bank for
10. Risk Backed by huge capital and to employ state-of-the-
Agriculture and Rural Development
Management art risk management mechanisms
(NABARD), the apex development bank in
India.
11. Regulatory Governed by Reserve Bank of India and Basel Governed by NABARD, the rural financing
framework Norms arm of RBI

Microfinance industry is struggling for growth

The historical patterns of banking in India show that conventional banking institutions failed to understand the needs of
the rural market. This led to the introduction of the concept of microfinance. The role of MFIs is to provide financial
assistance to the rural poor who are unable to access commercial banking products. Both the institutions have similar kind
of structure in terms of operations but the degree of complexity is different. It can be said that even though the concept
was introduced over 40 years ago in India, these institutions have yet to excel like the commercial banks.

The MFIs are still struggling to sustain themselves in the rural sector. The Andhra Pradesh microfinance crisis, for
example, exposed the vulnerability of the MFI ecosystem. On the other hand, commercial banks (both private and public)
are reaching out to include the rural and priority sectors.

Highlights
1. NBFC-MFIs have registered a 24% YoY growth recently. They also have a market share of 38% in in
Q3 FY19 and have maintained their dominance in the lending market. (As per SIDBI-Equifax newsletter).
2. The total number of active loans of MFIs stand at 8.22 crore at the end of Q3 FY19. The GLP (Gross
Loan Portfolio) was at Rs.1,57,644 crore at the same time. This indicates a Q-o-Q growth of 7%.
3. Microfinance institutions have a presence in 615 districts in India. The regional distribution is as
follows:
 North-East and East – 37%
 South – 25%
 North – 14%
 West – 15%
 Central India – 9%