Microfinance Institutions

• 24 Apr 2021

Why in News

Microfinance institutions (MFIs) have urged the Centre to consider prioritising vaccinations for their employees and self-help group workers.

• This request is in order to ensure that lines of credit remain open for the poor amidst the rising second wave of Covid-19 infections.

Key Points

• About:
  
  • MFI is an organization that offers financial services to low income populations.
    
    • These services include microloans, microsavings and microinsurance.
  • MFIs are financial companies that provide small loans to people who do not have any access to banking facilities.
    
    • The definition of “small loans” varies between countries. In India, all loans that are below Rs.1 lakh can be considered as microloans.
  • In most cases the so-called interest rates are lower than those charged by normal banks, certain rivals of this concept accuse microfinance entities of creating gain by manipulating the poor people’s money.
  • Microfinance sector has grown rapidly over the past few decades and currently it is serving around 102 million accounts (including banks and small finance banks) of the poor population of India.
  • Different types of financial services providers for poor people have emerged - non-government organizations (NGOs); cooperatives; community-based development institutions like self-help groups and credit unions; commercial and state banks; insurance and credit card companies; telecommunications and wire services; post offices; and other points of sale - offering new possibilities.
  • Non Banking Finance Company (NBFC)-MFIs in India are regulated by The Non-Banking Financial Company -Micro Finance Institutions (Reserve Bank) Directions, 2011 of the Reserve Bank of India (RBI).
• Major Business Models:
  
  • Joint Liability Group:
    
    • This is usually an informal group that consists of 4-10 individuals who seek loans against mutual guarantee.
    • The loans are usually taken for agricultural purposes or associated activities.
  • Self Help Group:
    
    • It is a group of individuals with similar socio-economic backgrounds.
    • These small entrepreneurs come together for a short duration and create a common fund for their business needs. These groups are classified as non-profit organisations.
      
      • The National Bank for Agriculture and Rural Development (NABARD) SHG linkage programme is noteworthy in this regard, as several Self Help Groups are able to borrow money from banks if they are able to present a track record of diligent repayments.
  • Grameen Model Bank:
    
    • It was the brainchild of Nobel Laureate Prof. Muhammad Yunus in Bangladesh in the 1970s.
    • It has inspired the creation of Regional Rural Banks (RRBs) in India. The primary motive of this system is the end-to-end development of the rural economy.
  • Rural Cooperatives:
    
    • They were established in India at the time of Indian independence.
    • However, this system had complex monitoring structures and was beneficial only to the creditworthy borrowers in rural India. Hence, this system did not find the success that it sought initially.
• Benefits:
  
  • They provide easy credit and offer small loans to customers, without any collateral.
  • It makes more money available to the poor sections of the economy, leading to increased income and employment of poor households.
  • Serving the under-financed section such as women, unemployed people and those with disabilities.
  • It helps the poor and marginalised section of the society by making them aware of the financial instruments available for their help and also helps in developing a culture of saving.
  • Families benefiting from microloans are more likely to provide better and continued education for their children.
• Challenges:
  
  • Fragmented Data:
    
    • While overall loan accounts have been increasing, the actual impact of these loans on the poverty-level of clients is not clear as data on the relative poverty-level improvement of MFI clients is fragmented.
  • Impact of Covid-19:
    
    • It has impacted the MFI sector, with collections having taken an initial hit and disbursals yet to observe any meaningful thrust.
  • Social Objective Overlooked:
    
    • In their quest for growth and profitability, the social objective of MFIs—to bring in improvement in the lives of the marginalized sections of the society—seems to have been gradually eroding.
  • Loans for Non-income Generating Purposes:
    
    • The proportion of loans utilized for non-income generating purposes could be much higher than what is stipulated by the RBI which is 30% of the total loans of the MFI.
    • These loans are short-tenured and given the economic profile of the customers, it is likely that they soon find themselves in the vicious debt trap of having to take another loan to pay off the first.

Way Forward

• MFIs need to focus on creating a sustainable and scalable microfinance model with a mandate that is unequivocal about both economic and social good.
• MFIs should ensure that the ‘stated purpose of the loan’ that is often asked from customers at the loan-application stage is verified at the end of the tenure of the loan.
• RBI should encourage all institutions to monitor their impact on society by means of a ‘social impact scorecard’.

Source: TH