Microfinance

• Microfinance refers to the provision of financial services such as microcredit, savings, insurance, and remittances to low-income and underserved populations, especially those excluded from traditional banking services.
• The primary goal is financial inclusion to empower the poor, especially women and rural communities, by offering small, collateral-free loans and other financial tools.

Components of Microfinance

• Microcredit – Small loans for self-employment or income-generating activities.
• Micro savings – Secure and accessible savings accounts for low-income groups.
• Micro insurance – Protection against health risks, crop failure, or natural disasters.
• Money Transfers – Low-cost remittance facilities for migrant workers and rural families.

Evolution of Microfinance in India

Key Institutions Involved

• NABARD – Pioneer in SHG–Bank linkage model.
• SIDBI – Refinances MFIs and promotes inclusive finance.
• RBI – Regulator of NBFC-MFIs.
• MUDRA Bank – Provides refinance to small enterprises under Pradhan Mantri MUDRA Yojana (PMMY).

Models of Microfinance in India

Self-Help Group (SHG)–Bank Linkage Model

• Promoted by NABARD.
• SHGs (10–20 people) pool savings and lend internally; banks later provide loans to the SHG.
• Focus on collective decision-making, peer monitoring, and women empowerment.

Microfinance Institutions (MFIs)

• Registered as NBFC-MFIs under RBI.
• Lend small amounts to individuals or groups, often at higher interest rates than banks.
• Follow Joint Liability Group (JLG) lending — peer pressure ensures repayment.

RBI’s Revised Regulatory Framework (2022)

• The RBI overhauled microfinance norms to standardize regulations across all lenders offering microfinance, including:
  • NBFCs
  • Banks
  • Small Finance Banks
  • Cooperative Banks
  • Not-for-Profit MFIs

Key Features:

• Uniform Definition of Microfinance Loan:
• Loans to households with annual income ≤ ₹3 lakh.
• No Collateral Requirement.
• Cap on Repayment Obligations:
• Total EMI should not exceed 50% of borrower’s monthly income.

Removal of Interest Rate Cap:

• Lenders must fix transparent, board-approved rates.
• Stronger Borrower Protection:
• Disclosure of terms, proper grievance redressal and fair recovery practices.

Benefits of Microfinance

• Financial Inclusion of the unbanked.
• Women Empowerment (70–80% of clients are women).
• Income Generation and self-employment.
• Reduces dependence on informal moneylenders.
• Promotes entrepreneurial culture in rural India.
• Encourages saving habits and risk resilience.

Challenges and Criticisms

• High Interest Rates – Often exceed 20–25%.
• Over-Indebtedness – Borrowers taking loans from multiple MFIs.
• Coercive Recovery Practices – Led to farmer suicides (e.g., Andhra Pradesh 2010 crisis).
• Mission Drift – MFIs focusing on profit, not poverty reduction.
• Lack of Financial Literacy among borrowers.
• Regulatory Arbitrage – Some MFIs escaping RBI regulation by registering as NGOs.

Government Initiatives Related to Microfinance

• Pradhan Mantri Jan Dhan Yojana (PMJDY) – Bank accounts for the unbanked.
• MUDRA Yojana – Loans up to ₹10 lakh to small entrepreneurs.
• DAY-NRLM – Promotes SHGs and livelihood support to rural poor women.
• Digital Financial Literacy Campaigns.

Important Committees

• Malegam Committee (2011): Set guidelines for NBFC-MFIs.
• Usha Thorat Committee (2010): Recommended differentiated banks, including small finance banks.
• Rangarajan Committee on Financial Inclusion (2008).