Microfinance institutions (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.
Similar to Microfinance Institutions we can opt personal loan
The different types of institutions that offer microfinance are:
Some government banks also offer microfinance to the eligible categories of borrowers.
Although most microfinance institutions target the eradication of poverty as their primary motive, some of the new entrants are focussed on the sale of more products to consumers.
Microfinance institutions have been gaining popularity in the recent years and are now considered as effective tools for alleviating poverty. Most MFIs are well-run with great track records, while others are quite self-sufficient. The primary goals of microfinance institutions are the following:
As per World Bank data, close to 1.7 billion people across multiple countries do not have access to basic financial services. This is where microfinance institutions play a major role.
The part that microfinance plays in economic development is noteworthy. Some of the key benefits of MFIs include the following:
There are several types of groups organised by microfinance institutions for offering credit, insurance, and financial training to the rural population in India:
1. Joint Liability Group (JLG)
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. Farmers, rural workers, and tenants fall into this category of borrowers. Each individual in a JLG is equally responsible for the loan repayment in a timely manner. This institution does not need any financial administration, as it is simple in nature.
2. Self Help Group (SHG)
A Self Help Group 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 group takes care of the debt recovery. There is no requirement of a collateral in this kind of group lending. The interest rates are generally low as well. Several banks have had tie-ups with SHGs with a vision to improve financial inclusion in the rural parts of the country.
The 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.
3. Grameen Model Bank
The Grameen Model 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. However, in India, SHGs have been more successful as MFIs when compared to Grameen Banks.
4. Rural Cooperatives
Rural Cooperatives were established in India at the time of Indian independence. The resources of poor people were pooled in and financial services were provided from this fund. However, this system had complex monitoring structures and were beneficial only to the creditworthy borrowers in rural India. Hence, this system did not find the success that it sought initially.
To summarise, the difference between SHGs and JLGs are as follows:
|Parameters||SHG Model||JLG Model|
|Financial focus||Based on savings||Based on credit|
|Control and ownership||With members||With the promoting microfinance institution|
|Capacity targets||Builds internal capacity||Depends on external capacity|
The lender offers small loans between Rs.2,000 and Rs.35,000 to the Economically Weaker Section (EWS) and Low Income Group categories in the country.
|Loan Amount||Interest Rate||Processing Fee|
|Up to Rs.25,000||24% p.a.||Nil|
|More than Rs.25,000||23% p.a.||1% + GST|
ESAF Microfinance is a leading MFI in India that has empowered more than 4 lakh members through its 150 branches. It offers an extensive range of business development and financial services to the economically and socially challenged members of the society. The institution offers a bouquet of loan products to suit the varied needs of customers:
|Loan Amount||Rs.1,000 - Rs.1 lakh|
|Interest Rate||22% - 26% p.a. on diminishing basis|
|Processing Fee||1% - 2% of loan amount + GST|
|Loan Tenure||3 months – 60 months|
Fusion Microfinance is an RBI registered NBFC-MFI that works on a JLG lending model of Grameen. The institution offers loans to women in the rural and semi-urban regions. Apart from offering financial support and insurance protection, the company also imparts financial literacy to its customers.
|Loan Amount||Rs.3,000 – Rs.60,000|
|Loan Tenure||8 months – 2 years|
|Interest Rate||21% - 21.50% p.a. on reducing balance method|
|Processing Fee||0 – 1% of loan amount + GST|
The purpose of Annapurna Microfinance is to provide loans to the financially underserved population. Technical and financial education is also imparted to beneficiaries to strengthen their entrepreneurial skills. It is one of the top ten NBFC-MFIs in India today.
|Loan Amount||Rs.1,500 – Rs.25 lakh|
|Loan Tenure||12 months – 240 months|
|Interest Rate||18% - 26% p.a. (reducing)|
|Processing Fee||1% - 2% + GST|
Eastern India’s largest NBFC MFI, Arohan Financial Services Limited offers financial inclusion products to 1.9 million customers throughout India. The local partners of the company help in improving its reach to remote locations. Non-financial products are also offered by the company at affordable costs. Arohan also has an MSME lending business in its portfolio.
|Loan Amount||Rs.1,100 - Rs.50,000|
|Loan Tenure||3 months - 24 months|
|Interest Rate||20.70% - 21.25% p.a.|
The company offers microloans to poor women so that they can be part of income generating activities that bring them out of poverty. The institution offers loans in the states of Maharashtra, Karnataka, Tamil Nadu, and Madhya Pradesh.
|Loan Amount||Rs.8,000 - Rs.60,000|
|Interest Rate||25% p.a.|
|Processing Fee||1% + GST (for loans above Rs.25,000)|
This microfinance institution has an extensive network of branches throughout 22 states in India. It offers microloans to women entrepreneurs from low-income households for income generation activities. Currently, three types of loans are offered to borrowers, i.e., Product Loan, Income Generation Program (IGP) Loan, and Small and Medium Enterprise (SME) Loan.
|Loan Amount||Rs.2,498 - Rs.45,000|
|Loan Tenure||12 months - 24 months|
|Interest Rate||21.70% p.a.|
Cashpor is a microfinance institution that works towards bringing the economically backward sections of the society out of poverty. The products offered by the company include credit facilities, savings services, insurance coverage, and pension services.
Credit facilities offered by Cashpor is predominantly for undertaking income generation activities. Loans are also provided for non-income generation activities and acquisition of assets that improve the health and social status of the beneficiaries. For instance, loans for the construction of toilets, women empowerment, and the procurement of gas connections are commonly offered by the company.9. Bandhan Financial Services Limited
The motive of the institution is to reduce socio-economic poverty by generating employment opportunities for low-income households. Cost-effective financial and non-financial products are provided in this regard.10. Fincare Business Services Limited - The Fincare group consists of two NBFC-MFIs, i.e., Disha Microfin Ltd. (now referred to as Fincare Small Finance Bank) and Future Financial Services Pvt. Ltd. (FFSPL). The company caters to the semi-urban and rural households of the country, offering Microenterprise Loans (MEL) and loan against gold with quick disbursals.
The regulations pertaining to MFIs are usually based on their statuses. A microfinance bank will be required to adhere to all banking regulations like traditional banks. Cooperatives and NGOs will not be expected to comply with the same regulations. However, they may be regulated by similar oversight authorities.
MFIs, more often than not, function on a unique operating model when compared to traditional lending institutions.
If the loan helps in the setup of a new activity that brings income to the borrower, the chances of it being sanctioned are high. The viability evaluation of the loan will include talks with the borrower, and not just the review of the loan application form.
This difference is highly conspicuous in the case of group loans. An MFI requests borrowers to constitute a group and then grants a single loan to the group. These are usually offered to the poorest of borrowers. These microloans do not require any guarantee; it relies on the solidarity of the members of the group, i.e., a kind of social guarantee. Each member in the group, hence, becomes responsible to the MFI and the co-borrowers.
Through the group solidarity mechanism, MFIs instill a sense of mutual confidence within the borrowers.
Before the microloan is sanctioned, a committee examines the requests and evaluates the borrower’s capability to repay. As indicated above, this is primarily based on social and human criteria such as experience in the field, competence, and motivation. The viability of the project is also considered.
Microfinance Institutions get funding from several sources, such as:
Although microfinance institutions have been profitable in India, there have been regulations and populist politics that have proved to be unfavourable to them. The small size of these institutions imply that they will be affected by small adverse developments resulting in fragile finances.
Banks usually have multiple products and an assured deposit structure. On the other hand, micro lending institutions are highly dependent on the market for funding. This means that at the smallest of events affecting business, MFIs could find it difficult to procure financing.
Additionally, banks today have a presence in the microlending space and they are also partnering with MFIs through strategic stakes. MFIs are also finding it difficult to grow independently without any support from anchor investors.
As of 2017, there were 223 MFIs that included NGO-run units and societies. 47 non-banking finance companies – microfinance institutions (NBFC-MFIs) had also been registered with the Microfinance Institutions Network (MFIN). The top 10 MFIs always find it easy to get bank loans or equities; the smaller entities are usually at a disadvantage here.
Several microfinance institutions have converted into small finance banks. This implies that they can lend at higher interest rates. Moreover, they will have access to deposits that are low-cost. Banks are now some of the largest providers of micro-finance as per MFIN reports. MFI-turned banks are still the major providers of micro finance.
Since financial inclusion is on the rise, MFIs have many more years of opportunity remaining. The key to their survival is the constant backing from investors.
The biggest risk looming over the microfinance industry today is the tendency to overborrow on the part of loan seekers. As per CRIF High Mark data, there was a hike in the average microfinance loan size within the last 2 years. Several borrowers have also attempted borrowing from multiple lenders.
Borrowers who sought loans from more than 4 lenders formed a major part of this threat. It was found that these loans increased from Rs.60,000 to Rs.81,000 between March 2017 and March 2019. During the same period, there were loan seekers approaching more than five banks as well. The rise in loan amount in this scenario was from Rs.73,000 to Rs.1,02,000.
The fact that 20% to 30% of loan applications are now being rejected by MFIs is attributed to the excess borrowing witnessed in the industry.
As per RBI regulations, the total microloan amount that a single loan seeker can avail should not exceed Rs.60,000 in the initial cycle. In the subsequent cycles, the amount should not be above Rs.1 lakh. The borrower is also not allowed to approach more than two microfinance institutions for the same. As part of self-regulation, MFIN increased the lending bar to Rs.80,000 as there was a huge demand for loans.
As on March 2019, Tamil Nadu is one of the biggest markets for microfinance in India. Almost 6.58% of loan seekers have got loans from more than 4 lenders here. The percentage has also increased from 1.46% in March 2018, as per the CRIF High Mark report.
No, NBFCs-MFIs do not have to follow the credit concentration norms.
No, a prepayment penalty cannot be levied by an NBFC-MFI.
According to the RBI, it is mandatory for all MFIs to display the interest rates on its official website and its offices.
NBFC-MFIs can levy a processing fee of up to 1% of the gross loan amount. Processing charges may not be a part of the margin cap as well.
No, it is not mandatory for an NBFC-MRI to be a member of the SRO. However, they are encouraged to be a member of an SRO.
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