Micro Finance

Introduction

Microfinance is a method of lending very small sums to individuals to start or expand a small business. These borrowers tend to be low-income individuals.

Features of Microfinance in India

• The principal amount borrowed is less than Rs 1 lakh
• Interest rates are lower than normal banks
• Does not require collateral for loan
• Issued to households with an annual income of up to Rs 3 lakh.

Micro Finance Institution- MFI

Microfinance Institutions are financial institutions that offer small loans to borrowers without access to banking services. Their services include microloans, micro savings, microinsurance, etc.

Objectives of Microfinance Institutions

• Offers support to the lower strata of society.
• Encourage rural entrepreneurship and self-employment generation
• Adopting an effective strategy to help eradicate poverty
• Ensure financial inclusion and accelerate the development process
• Improvise the skill set among rural people

Types of Microfinance Institutions

• Joint Liability Group (JLL)
• Self-Help Group (SHG)
• Regional Rural Bank
• Cooperatives

Benefits of Microfinance

Challenges Faced

Initiatives undertaken

Government Programmes

• SHG-Bank Linkage Programme (SHG-BLP)
  • Initiated by NABARD in 1992, this model especially incentivises women’s self-help group to unite mobilize resources to avail loans and other banking services.
• Micro Enterprise Development Programme (MEDPs) & Livelihood and Enterprise Development Programme (LEDP)
  • The programme enables SHG members to be up-skilled to take up income generating livelihood activities.
• Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
  • It implements the credit guarantee scheme for Micro and Small Enterprises which is extended to microfinance institutions as well.
• Financial Support by NABARD and SIDBI
  • NABARD provides Revolving Fund Assistance (RFA) while SIDBI aids through SIDBI Foundation for Micro Credit (SFMC), India Microfinance Equity Fund (IMEF)
• Micro Units Development & Refinance Agency Ltd (MUDRA)
  • Support to Microfinance sector was scaled up by Government of India by setting up MUDRA in 2015.

Regulatory Initiatives

• Y H Malegam Committee
  • In the wake of AP Microfinance crisis in 2010, it was constituted by the RBI to study issues and concerns in the Microfinance sector
• Introduction of Regulations for NBFC-MFIs
  • A comprehensive regulatory framework including eligibility criteria for loans for NBFC-MFIs was introduced in 2011 based on the Malegam Committee recommendations.
• Regulatory Framework for Microfinance Loans
  • RBI has implemented Regulatory Framework for Microfinance Loans, effective from April 1, 2022, to update Microfinance regulatory policy.

Muhammad Yunus and his grassroots Grameen Bank won the Nobel Peace Prize in 2006 for lending a social conscience to capitalism and “their efforts to create economic and social development from below” in Bangladesh.