Microfinance Institutions

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.

The different types of institutions that offer microfinance are:

• Credit unions
• Non-governmental organisations
• Commercial banks

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.

Goals of Microfinance Institutions

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:

• Transform into a financial institution that assists in the development of communities that are sustainable.
• Help in the provision of resources that offer support to the lower sections of the society. There is special focus on women in this regard, as they have emerged successful in setting up income generation enterprises.
• Evaluate the options available to help eradicate poverty at a faster rate.
• Mobilise self-employment opportunities for the underprivileged.
• Empowering rural people by training them in simple skills so that they are capable of setting up income generation businesses.

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.

Key Benefits

The part that microfinance plays in economic development is noteworthy. Some of the key benefits of MFIs include the following:

• It enables people expand their present opportunities – The income accumulation of poor households has improved due to the presence of microfinance institutions that offer funds for their businesses.
• It provides easy access to credit – Microfinance opportunities provide people credit when it is needed the most. Banks do not usually offer small loans to customers; MFIs providing microloans bridge this gap.
• It makes future investments possible– Microfinance makes more money available to the poor sections of the economy. So, apart from financing the basic needs of these families, MFIs also provide them with credit for constructing better houses, improving their healthcare facilities, and exploring better business opportunities.
• It serves the under-financed section of the society – Majority of the microfinance loans provided by MFIs are offered to women. Unemployed people and those with disabilities are also beneficiaries of microfinance. These financing options help people take control of their lives through the betterment of their living conditions.
• It helps in the generation of employment opportunities – Microfinance institutions help create jobs in the impoverished communities.
• It inculcates the discipline of saving – When the basic needs of people are met, they are more inclined to start saving for the future. It is good for people living in backward areas to inculcate the habit of saving.
• It brings about significant economic gains – When people participate in microfinance activities, they are more likely to receive better levels of consumption and improved nutrition. This eventually leads to the growth of the community in terms of economic value.
• It results in better credit management practices – Microloans are mostly taken by women borrowers. Statistics prove that female borrowers are less likely to default on loans. Apart from providing empowerment, microloans also have better repayment rates as women pose lesser risk to borrowers. This improves the credit management practices of the community.
• It results in better education – It has been noted that families benefiting from microloans are more likely to provide better and continued education for their children. Improvement in the family finances imply that children may not be pulled out of school for monetary reasons.

Groups Organised by Microfinance Institutions in India

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.

Difference between JLGs and SHGs

• SHGs are units oriented to the communities when compared to JLGs. Members own and control SHGs and they decide all terms and conditions associated with the group’s functioning. Banks and NGOs provide support to these units so that they can prosper.
• SHGs have internal control, but this can lead to conflict among members. JGs are controlled externally by the institutions that promote them. The terms and conditions of the JLG are also determined by the promoting institution. The operations of JLGs are more standardised and easier to replicate, when compared to SHGs.
• Under an SHG, the group members will be required to save before they are eligible for a loan. In a JLG model saving is not compulsory; groups need not build internal capital for inter-loaning. Most of the times, MFIs initiate the formation of JLGs by asking members to form such groups with the motive of getting a loan.
• Donor agencies support SHGs in skill development and capacity building through NGOs. This process of internal capacity building makes the process of getting a bank loan more time-consuming for an SHG. Since JLGs are managed externally, there is very little focus on capacity building. Hence, these units may find it easier to procure loans. JLGs are hence, referred to as “fast growth models”. SHGs are more decentralised and democratic than JLGs.
• SHGs are self-managed and self-reliant. Hence, an MFI representative has to spend very little time over the management of the group. This implies that several groups can be managed by a single representative, resulting in low cost management. In the JLG model, the MFI’s employees are responsible for monitoring the routine operations of the group. This makes it an expensive model.
• JLGs are more immune to internal and external threats as they have better protection from the supporting MFIs. However, they are less empowered in comparison to SHGs.

To summarise, the difference between SHGs and JLGs are as follows:

Top 10 Microfinance Companies in India

1. Equitas Small Finance

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 Details:

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

2. ESAF Microfinance and Investments (P) Ltd

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 Details:

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

3. Fusion Microfinance Pvt Ltd

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 Details:

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

4. Annapurna Microfinance Pvt Ltd

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 Details:

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

5. Arohan Financial Services Limited

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 Details:

Loan Amount	Rs.1,100 - Rs.50,000
Loan Tenure	3 months - 24 months
Interest Rate	20.70% - 21.25% p.a.

6. BSS Microfinance Limited

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 Details:

Loan Amount	Rs.8,000 - Rs.60,000
Interest Rate	25% p.a.
Processing Fee	1% + GST (for loans above Rs.25,000)

7. Asirvad Microfinance Limited

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 Details:

Loan Amount	Rs.2,498 - Rs.45,000
Loan Tenure	12 months - 24 months
Interest Rate	21.70% p.a.

8. Cashpor Micro Credit

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.

Loan Details:

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.

Regulations for MFIs

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.

Traditional Banks versus Microfinance Institutions

MFIs, more often than not, function on a unique operating model when compared to traditional lending institutions.

• Evaluation of eligibility - When loans are provided by microfinance institutions, the eligibility of a borrower is not scrutinised on the bases of stong financial guarantees like traditional loans. Mainstream banks assess the salary and assets of a loan applicant before granting the loan. Microfinance banks rely more on the “human” criteria instead.

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.

• Group solidarity as guarantee - While traditional banks consider hypothecation as guarantee for some loans, MFIs replace this practice with a group solidarity mechanism. For instance, when investing in mutual funds, each borrower serves as a guarantor for each of the other members in the group. Self-help groups are examples of the same.
• Training programmes – Unlike traditional banks, MFIs are liable to building bonds with the beneficiaries of microloans. They also offer strong support to the borrowers. Since the motive is to help borrowers succeed in their projects, MFIs also undertake training programmes that focus primarily on educating beneficiaries on the budgeting of projects.
• Flexible repayment schedules – MFIs usually configure the repayment method for microloans in such a way that is suits the financial capabilities of the target customer base. Thus, there are MFIs that are likely to provide loans with weekly repayment dates, unlike traditional banks.

• Flexible credit schemes – Microlending has products that are usually adapted to suit the repayment capabilities of borrowers. This is one of the main differences between a traditional lender and an MFI.

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.

Process of Granting Microloans

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.

How are MFIs Funded?

Microfinance Institutions get funding from several sources, such as:

• Member and customer deposits – This is applicable to MFIs that are organised as mutual funds, cooperatives, and microfinance banks offering savings products.
• Subsidies and grants – Grants are more prominent when the MFI is just being set up.
• Own capital – The microfinance institution’s own finance/capital accounts for a part of the funding extended to borrowers.

• Loans from partner banks – This is the primary source of funding for an MFI.
• Funding received from public investors – Bilateral or multilateral organisations offer funds to MFIs. This is a source of long-term funding for the MFI.
• Funding received from private investors – These funds are supplied directly to the MFI or through investment funds that specialise in microfinance. This is also a source of long-term funding for the MFI.

Challenges Faced by MFIs in India

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.

Overborrowing Threat to the Microfinance Industry

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.