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Evolution of Micro Finance in India

Microfinance in India provides small loans and financial services to low-income households, aiming to promote financial inclusion and alleviate poverty. Key features include small loan sizes, group lending models, and a focus on empowering women, while challenges include high-interest rates and risk of over-indebtedness. The sector has evolved since its inception in 1974, with significant growth in credit linkage and the need for sustainable funding sources to support its expansion.

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6 views20 pages

Evolution of Micro Finance in India

Microfinance in India provides small loans and financial services to low-income households, aiming to promote financial inclusion and alleviate poverty. Key features include small loan sizes, group lending models, and a focus on empowering women, while challenges include high-interest rates and risk of over-indebtedness. The sector has evolved since its inception in 1974, with significant growth in credit linkage and the need for sustainable funding sources to support its expansion.

Uploaded by

shikha22bcom24
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We take content rights seriously. If you suspect this is your content, claim it here.
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Overview

of India’s
Micro
Finance

Dr Akasha Sandhu
Concept
the concept of "microfinance," which is a form of financial service
that provides small loans and other financial services to poor and
low-income households in a consistent and legitimate way.
It is an economic tool designed to promote financial inclusion, which
enables poor and low-income households to come out of poverty,
increase their income levels, and improve their overall living
standards.
It can facilitate the achievement of national policies that target
poverty reduction, women's empowerment, assistance to vulnerable
groups, and an improvement in the standard of living.
Concept of Microfinance
Microfinance refers to financial services provided to low-income individuals or groups who
traditionally lack access to conventional banking and financial systems. It encompasses a range of
financial products such as small loans (microloans), savings accounts, insurance, and remittances.
The primary goal of microfinance is to empower economically disadvantaged people, enabling them
to improve their living standards and escape the cycle of poverty.
Key Features of Microfinance
1. SmallLoan Sizes: Loans provided are typically small, suitable for micro-enterprises or personal needs.
2.Group Lending Model: Often, borrowers are organized into groups to ensure collective responsibility for repayment.
3.Minimal Collateral: Loans are usually extended without traditional collateral, relying instead on trust or group
guarantees.
4.Empowering Women: Many microfinance programs target women, who are seen as key agents of change in
communities.
5.Capacity Building: Beyond financial support, microfinance institutions (MFIs) often provide training and education to
enhance borrowers' financial literacy and business skills.
The bank-led approach, Self-Help
Two different Groups-Bank Linkage Program (SHG-
approaches
are followed BLG),
in India for
extending
microfinance The Micro Finance Institution (MFI)-led
services
approach
Small Finance
NBFC
Banks

Five broad
categories can be
MFI Banks
used to classify
the various
microfinance
industry
participants: Non-profit MFIs.
Alleviate Alleviate poverty by fostering self-employment.

Provide Provide financial inclusion to underserved populations.


Objectives of
Microfinance Promote Promote entrepreneurial activities in rural and urban areas.

Empower Empower women and marginalized communities.


Economic Independence: Enables individuals to start small
businesses or invest in income-generating activities.

Social Development: Contributes to better education, health,


Benefits of and living conditions.

Microfinance Financial Inclusion: Bridges the gap for those excluded from
traditional banking systems.

Community Empowerment: Strengthens social ties through


group lending mechanisms.
High-interest rates due to operational costs.

Challenges in Risk of over-indebtedness among borrowers.


Microfinance Limited scalability and reach in remote areas.

Sustainability of MFIs in competitive markets.


India's History and Development
of Microfinance
• It was first introduced by the SEWA Bank, a division of the Self-
Employed Women's Association (SEWA), in Gujarat in 1974
• For NBFC-MFIs with loan portfolios of US$ 1 billion or more, the Malegam
Committee recommended a margin cap of 10%; for other NBFC-MFIs, it
suggested a cap of 12%; and for individual loans, it suggested a cap of
24%.
• A consistent margin cap of 12% was imposed for all NBFC-MFIs in the
final rules published on December 2, 2011, along with a cap of 26% on
individual loans. The set interest rate ceiling of 26% was lifted in 2012
due to the fluctuating costs of borrowing and to allow for operational
flexibility, although with the restriction that the maximum difference
between the minimum and maximum interest rate for individual loans
cannot be more than 4%.
Current Status of Micro Finance
in India
• As on 31 March 2022, the programme now covers US$ 140 million
families, and US$ 11.9 million SHG groups having cumulative savings of
US$ 472.4 billion.
• The credit linkage is also impressive so far that US$ 3.4 million SHGs
have been credit linked during FY 2021–22 (as against US$ 2.9 million
groups in 2020-21) and loans worth US$ 997.2 billion disbursed.
• The credit outstanding as on 31 March 2022 is US$ 1510.5 billion for US$
6.74 million SHGs (an average of US$ 0.24 million per SHG).
• The E-Shakti programme, under which financial and non-financial data
of over US$ 1.2 million SHGs has been digitized to give comfort to banks
for credit linkage of SHGs, is hoped to improve credit linkage.
State-wise Overall, out of US$ 11.8 million
SHGs savings, 57% SHGs have
loans outstanding with banks.
credit Nine states have credit linkage %
higher than the all-India average.
linkage of Andhra Pradesh is leading with
90% of its SHGs having loans
outstanding, followed by Bihar
the status (89%) and Karnataka (87%).
Southern and Eastern states
of SHGs dominate the list along with
Tripura.
Key Principles of Microfinance
The idea that the poor need more than just loans is one of the fundamental microfinance principles while financial
institutions are the backbone of the underprivileged, and microfinance is a potent tool in the fight against poverty.

Reaching a sizable portion of the underprivileged population requires financial sustainability and the creation of
enduring regional financial institutions is the goal of microfinance.

In addition to higher interest rates that might make it more difficult for the low-income group to receive financial
assistance, microcredit is not always the best option.
Formal institutions, such Semiformal
as rural banks and organizations, such as
cooperatives non-governmental ones
Sources
provide
microfinance Institutional
Informal sources,
services including small-scale
microfinance includes
both formal and
lenders and store
semiformal institutions'
owners
offerings.
Categories of institutions
providing microfinance in India

Commercial banks Credit unions NGOs Sectors of government Cooperatives


banks
Objectives of Micro Finance in
India
•Graduate to microentrepreneurs using higher capital, employing more laborers,
using better technologies, and operating continuously, without seasonal
fluctuations.

•Development of new skill sets, in addition to assisting first-generation


entrepreneurs and upgrading the operations of current companies.

•Conductinga trainers' training programme for NGOs to support and scale up start -
ups among SHG and JLG members.

•Providing special emphasis to the under-served states in various regions of India.

•Introductionof digital banking for SHGs in collaboration with banks to maintain


regular updates on financial and non-financial data on the portal.
Features of Micro Finance in India
•The borrowers are from low-income backgrounds
•Loansavailed under microfinance are usually of small amounts, i.e.,
microloans
•The loan tenure is short
•Microfinance loans do not require any collateral
•These loans are usually repaid at higher frequencies
•The purpose of most microfinance loans is income generation
Structure of Microfinance
a) A Joint Liability Group (JLG) is an informal association
of 4-10 people who work as a team to apply for bank
loans either individually or collectively under mutual
guarantee.
b) A SHG is a group of registered or unregistered
microentrepreneurs with similar socioeconomic origins
that get together voluntarily to save modest amounts of
money monthly, mutually agreeing to contribute to a
common fund, and meeting their emergency needs
through mutual assistance.
The Road Ahead
Microfinance is very necessary for India to achieve financial inclusion for the poor in
rural and urban areas. Lending to the poor population, if handled in an effective
manner, can be a miracle for the development of the country and the alleviation of
poverty.
When the government and MFIs work together, Microcredit can play a significant
role in poverty alleviation.
The challenging issue of microfinance helps to reduce the financial problems faced
by poor people.
The inability of MFIs to get sufficient funds is a major challenge for the
microfinance industry's growth, so these institutions should look for alternative
sources of funding. Microfinance has a significant impact on poor people's
confidence, courage, and skill development. Thus, external factors such as
microfinance institutions are needed to help fix these problems.

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