The boom of MFIs in India is encouraging as it can help in the upliftment of the poor. There are a plethora of such institutions in the country. Given below are some of the more popular ones.
Established in the year 2009, Annapurna Finance Pvt. Ltd (AFPL) had its roots as a not-for-profit company called Peoples Forum, an NGO that helped with the economic necessities of poor women in the state of Odisha. The company registered itself as an NBFC-MFI with the RBI in 2013. AFPL is now one of the top NBFC-MFIs in India. They offer a plethora of products such as group loans, MSME Finance, Housing Finance, etc.
An NBFC that was promoted in the year 2007, it is currently a subsidiary of Manappuram Finance Ltd. This company provides microloans to women who are from low-income households in India and has multiple branches across 22 states. Some of the products offered are Product Loans, Small and Medium Enterprise Loan (SME), and Income Generation Program Loan (IGP).
One of the most popular financial service providers in the country, Bandhan Financial Services Pvt. Ltd. was set up in the year 2001 to alleviate poverty as well as for women empowerment. Multiple cost-effective financial products are provided by Bandhan Financial Services Pvt. Ltd.
An NBFC-MFI that operates in a Joint Liability Group lending model of Grameen, Fusion Microfinance was set up in the year 2010. This company focuses on providing financial services to female entrepreneurs that belong to society as well as economically deprived sections of society. Fusion Microfinance Pvt. Ltd. provides financial support well as educates its customers on financial literacy as well.
Incorporated in the year 2002, Cashpor Microcredit is one of the top financial institutions in the country that provides micro credit. This company mainly operates in the most backward districts of Uttar Pradhesh, Bihar, Chattisgarh, Madhya Pradesh, and Jharkhand. Cashpor Micro Credit believes in providing financial literacy and empowering the downtrodden sections of society to break intergenerational poverty.
Suryoday Small Finance Bank, previously known as Suryoday Micro Finance is the only company from Maharashtra to obtain a ‘Small Finance Bank’ license from the RBI. This bank went live in 2017 and offers a number of products and services to its customers such as MFI loans, Shopkeeper loans, etc. MFIs have a different mode of operation as compared to traditional banks and NBFCs. Eligibility is evaluated differently, multiple training programs are offered, repayment schedules and credit schemes are also a lot more flexible. However, it is not always smooth sailing for MFIs as these institutions face a number of challenges such as over-borrowing, lack of funding, providing services while still ensuring lower rates of interest, etc.
MFIs have had a huge benefit on the economic landscape in India. It provides easy access to credit for those who cannot avail the same from larger banks or other NBFCs. MFIs also ensure that under-financed sections of society are not left in a lurch while helping generate employment opportunities. Additionally, MFIs can help in economic empowerment of the poor, better financial literacy, and subsequently better credit management practices.
Not everybody has the financial resources to fulfill their dreams such as owning a home, purchasing a car, or covering unexpected bills and in such cases loans are always helpful. However, lenders such as banks or Non-Banking Financial Institutions (NBFCs) have set criteria that applicants will have to fulfill before procuring the loan. These include having a credit score that is above 700, a certain amount of income every month, and sometimes even collateral. But not everybody can fulfill these requirements, especially those that come from an economically disadvantaged situation. According to the World Bank, as of 2017, around 2 billion people around the world lacked access to basic financial services. But this does not mean that the situation needs to stay the way it is. The solution being offered to aid borrowers in such situations is microfinance.
Microfinance is a broad category of financial services including microcredit, which provides essential financial services to those that are economically too backward to avail services by regular banks as they do not meet the criteria set by most lending institutions. There are multiple Microfinance Institutions (MFIs) in the country today that provide microfinance to those that require the same. Among other financial provisions, MFIs provide microloans and microcredit. It is important to note that charity is not always the answer to help those that are economically backward. By empowering them and ensuring their skills are utilized, one can help eradicate poverty a lot faster and more effectively. Microfinance is a boon in this regard. MFIs consist of lenders and bankers that provide services such as loans, deposits, money transfers, and other payment services to low-income households, nascent businesses, and entrepreneurs who would have otherwise not been able to procure this type of financial help.
There are articles that talk about the introduction of this term as far back as the 15th century in Europe. More recently, the Grameen Bank in Bangladesh made strides as a world-renowned microfinance institution. Founded by Nobel Prize Winner Muhammad Yunus, this bank now serves more than 7 million poor women in Bangladesh. In India, the Self-Employed Women’s Association (SEWA) established the SEWA Bank in Gujarat in the year 1974 and since then a number of individuals who wish to grow their business in rural areas have been benefiting from this initiative. There are many other microfinance institutions that have been established in the country since then, all of which aim to empower the poor economically, in both rural as well as urban areas. Additionally, other objectives that have been adopted are to increase the household income, empower women, as well as to promote socio-economic development. Therefore, some even address Microfinance Institutions as hybrid organizations as they have the responsibility to allow the poor to achieve financial self-sufficiency as well as ensure social outreach.
The goals of MFIs are essential to assist in the development of communities and offer support to the poorer sections of society that are unable to avail the services of larger banks and NBFCs. Additionally, mobilizing self-employment as well as empowering the rural community to set up income-generating businesses are also considered to be some of the most important goals of MFIs in India.
There are multiple business models that microfinance institutions use. The Joint Liability Group or JLG is a group that is informal and comprises around 4 to 10 persons who come together to avail a bank loan individually or as a group. All members are expected to engage in similar economic activities. The management is simple and can be formed without formal financial administration. Another model is that of a Self-Help Group or SHG which is a registered or unregistered group of micro-entrepreneurs who have a similar economic and social background. These individuals come together to save a regular sum of money and contribute the same to a common fund. This fund can then be used to meet emergency needs. There is no need for collateral in this system and flat interest rates are used for the loan calculations. Others include rural cooperatives and Grameen Model Bank that have been previously mentioned.
In addition to the above, the microfinance industry in India also counts trusts and societies, NGOs, and other institutions that work for a profit as well as not-for-profit as MFIs. A number of microfinance institutions have also become NBFCs to widen their base. The organizational structure varies from institution to institution. India is one of the largest microfinance markets in the world today and is therefore attracting not just domestic investment but also a number of foreign investors.
The primary regulatory body for MFI in India is the Reserve Bank of India (RBI). A MFI in India is registered as one of the following –
In case a company wishes to register itself as an NBFC-MFI, certain specifications by the RBI must be met. A minimum of 75% of the NBFC-MFI’s loan portfolio must have been originated for the purpose of activities that generate income. In addition to this, 85% of total assets must be qualifying assets.
By the year 2009, NBFC-MFIs was a significant contributor to all microfinance activity in India. As this industry grew, there was a stronger need for transparency, governance, and an established framework for client protection and fair practices. In order to address this need, the Microfinance Institutions Network or MFIN was established in 2009. As per the bye-laws of this organization, all NBFCs that have registered with the RBI as NBFC-MFI are eligible for memberships. Additionally, the MFIN has been recognized by the RBI as a Self-Regulatory Organization (SRO) of NBFC – MFIs.
The figure below illustrates the organizational chart of MFIN (as taken from the official MFIN website)
In a country like India where a majority live in rural areas and a significant population depends on agriculture for their survival, microfinance can be a boon. According to a research paper published in the year 2018 by the International Academic Journal of Accounting and
‘The study revealed that the number of MFIs availing loans from banks during the year 2015-16 and 2016-17 increased from 9.8 percent to 257.6 percent. The total loans to MFIs by banks decreased during 2016-17 by 7.2 percent over the previous year. The loan outstanding against MFIs increased all the subsequent years. It increased by 13.7 percent and 14.3 percent in 2015-16 and 2016-17. It is further found that the business models of MFIs in India are becoming urban-centric as is indicated by the fact that the share of rural client’s base of different states/UTs in 2017 with 2016 has declined, except Assam, Arunachal Pradesh, Nagaland, Jammu & Kashmir and Andaman.’
As is evidenced by the study, the growth of the Microfinance industry in India has been massive and this number is only expected to grow. Although the pandemic has hit individuals hard financially, there is no doubt that the MFI can play a significant role in the upliftment of those that are economically downtrodden.
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