Microfinance - also called microcredit- is a way to provide small business owners and entrepreneurs access to capital. Small and individual businesses don’t have access to traditional financial resources from major institutions. It is harder to access loans, insurance, and investments that will grow their businesses. This sector has been instrumental in creating opportunities for low-income households by providing credit access to 64 million unique live borrowers who were previously beyond the reach of traditional financial services. Additionally, the microfinance sector has its own set of challenges, ranging from lack of formal credit history, absence of collateral, laborious customer acquisition process, and low digital and financial literacy. There are various microfinance models in India many of these models are indeed 'formalized' versions of informal financial systems.
Some of the significant features of microfinance are as follows:
- The borrowers are generally from low-income backgrounds
- Loans availed under microfinance are usually of a small amount, 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
Government initiatives play a significant role in channeling the credit flow to underserved sectors through priority sector lending, Micro Units Development, and Refinance Agency Ltd. (MUDRA) Yojana, loan co-origination, and private sector investments. In the last couple of years, the microfinance sector has seen promising growth on the back of the rapidly growing Indian economy.
Microfinance in India
Small and medium enterprises (MSMEs), thereby increasing the contribution of these segments to India’s overall GDP. In FY19, the microfinance sector displayed 40 % growth in terms of the loan portfolio. INR 10 billion funds have been released by the Small Industries Development Bank of India (SIDBI) to boost the microfinance sector. SIDBI has tied up with non-profit organizations and social ventures to channel funds at below-market rates to facilitate affordable borrowing.
In recent years, the microfinance sector has faced new challenges such as:
- Limited access to low-cost funding for Microfinance Institutions (MFIs)
- Low financial and digital literacy among targeted Borrowers
- The demand for more innovative
- Customer-centric products
Reserve Bank of India (RBI) has played a significant role in enabling the microfinance sector to reach out to new geographies. Recently, the Government of India has also increased the microlending limit of borrowers to INR 1.25 lakh to expand the reach of the microfinance sector.
Needs of the microfinance ecosystem
- Availability of alternative capital funding channels
- Customer centricity
- Mature risk and regulatory landscape
- Streamlined operations of customer-facing personnel
- Robust credit risk assessment mechanisms
- Technology enablement for the ‘high-touch’ industry
- Women empowerment and the emergence of an entrepreneurship-driven landscape
Different Models of Microfinance in India
The target community forms an 'association' through which various microfinance (and other) activities are initiated. Such activities may include savings. These associations or groups can form of a youth, women. It is also formed around political/religious/cultural issues. It can create support for microenterprises and other work-based issues.
According to NABARD, SHG-BLP is the world’s largest microfinance program in the world.
Bank Guarantees Model
A Bank guarantee is used to obtain a loan from a commercial bank. This guarantee may be arranged externally ( through donor/donation, government agency, etc. ) or internally (using member savings). The loans obtained may be given to an individual or they may be given to the self-formed group. It is a form of capital guarantee scheme. Guaranteed funds may be used for various purposes, including loan recovery and insurance claims. The guaranteed funds can be used for various purposes such as loan recovery or insurance claims.
Bellwether Microfinance Funds (India) is one such example.
Community Banking Model
In India, community banking looks very different. Self Help Groups (SHG) are often instituted in which members of the local community join together and pool capital resources for lending to members. They value transparency in their practices and utilizing their savings for their purposes of lending.
A successful example is the Royal Bank of Scotland (RBS) Foundation India, which has various microfinancing programs to help the poorest communities across India.
A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-owned enterprise. The members are the shareholders and have their share in equity capital. They also share the profit.
Co-operative Development Forum Hyderabad is a successful example of this model. It has built a network of women's thrift groups and men's thrift groups.
Credit Unions Model
This model is based on a member-driven credit union, a self-help financial institution. A union of members is formed. These members form the common community. They agree to save together and give loans to each other at a nominal rate of interest. A credit union's membership is open to all who belong to the group, regardless of race, religion, color, or creed.
The members are people of some common bond:
- Working for the same employer
- Belonging to the same church
- Labor union
- Social fraternity
- Living/working in the same community
Grameen Banking Model
It promotes credit as a human right and is based on the premise that the skills of the poor are underutilized. The Grameen Bank (GB) is based on the voluntary formation of slight groups of five people to provide mutual, morally necessary group guarantees instead of the collateral required by conventional banks.
The whole center is jointly responsible for the repayment. Grameen model is being followed by Sarv Seva Abhiyan (ASSEFA), Activities for Social Alternatives.
This model positions a third party between the lending institutions and the borrowers. The intermediary plays a critical role in generating credit awareness and education among the borrowers. Intermediaries could be individual lenders, NGOs, microenterprise/microcredit programs, and commercial banks (for government-financed programs). The intermediaries are incentivized in monetary and non-monetary forms.
Individual Banking Model
This is a straight forward credit lending model where microloans are given directly to the borrower. The individual banking model is a shift from the group-based model. The MFI gives loans to an individual based on his or her creditworthiness. It also assists in skill development and outreach programs. Co-operative banks, Commercial banks, and Regional Rural Banks mostly adopt this model to give loans to the farming and non-farming unorganized sector.
Self-employment women’s association in India s one such example to have adopted this model. The members own and govern the group.
NGOs are one of the key players in the field of micro-financing. They help the cause of micro-financing by playing the intermediary in multiple dimensions. Non-governmental Organizations (NGOs) played a vital role in rural reconstruction, agricultural development, and rural development even during a pre-independent era in our country. NGOs became a supplementary agency for the developmental activities of the government and in some cases, they become alternatives to the government.
Non-governmental Organizations are committed to the upliftment of poor, marginalized, underprivileged, impoverished, and downtrodden and they are close and accessible to their target groups.
Various NGOs are helping the cause of micro-financing. For example, MYRADA in Karnataka, SHARE in Andhra Pradesh, RDO (Rural Development Organization) in Manipur, RUDSOVAT (Rural Development Society for Vocational Training) in Rajasthan, and ADITHI in Bihar.
ROSCA Model Or Chit Funds
Rotating Savings and Credit Associations or ROSCAs, are essentially a group of individuals who come together and make regular cyclical contributions to a common fund, which is then given as a lump sum to one member in each cycle. At the end of a cycle, the total fund collected goes to any one member. Rotating Savings and Credit Associations are a means to save and borrow simultaneously. There are lakhs of ROSCA functioning in India today.
Village Based Model
It is closely related to the community banking and the Group model, this is the community-based saving and credit model. A group of 25-50 people gets together to enhance their income through self-employment activities. They get their first loan from the implementing agency, which helps them form the community credit enterprise.
Small Business Model
This model places a big responsibility on small and medium enterprises. This has been changing, as more and more importance is placed on small and medium enterprises (SMEs) - for generating employment, for increasing income, and providing services that are lacking.
Future of Microfinance in India
- Affordable borrowing for one and all: Easy access to microcredit
- Reaching the doorstep of every unbanked customer
- The road ahead for a digital microfinance
- Leveraging women empowerment and mobilizing the entrepreneurial landscape
India aims to become a USD 5 trillion economy by 2025 and the microfinance industry will play a leading role in uplifting the lives of millions of low-income households and enabling them to contribute to the country’s economic growth.