Microfinance is a very popular term in today’s financial market scenario. As the name suggests, microfinance refers to microcredit or micro-loan. Microfinance refers to a banking or financial service that is offered by banks or other financial institutions to individuals who belong to the low-income or underprivileged sections of the society. Microfinance can be in the form of loans, insurance, and savings deposits.
It is very helpful to small-sized enterprise owners as well as entrepreneurs with low capital. There are many people across the world, especially in India, who do not have access to proper financial assistance. They live in rural areas as well as in urban areas of India and do not have sufficient knowledge and access to take help from conventional sources of finance such as banks and investors.
Microfinancing is a great way to help poor individuals to be financially independent. They can use these funds offered by banks at very low rates of interest to start their own small venture or to make their other dreams come true. Many of the underprivileged people in the nation do not have any idea about saving money or managing their finances. When they acquire microfinance from a reliable institution, they will get exposure to managing money on their own and also about utilising funds in a sensible manner.
Microfinance is also offered to people who are interested in purchasing equipment or vehicles of high value that are required for carrying out their business activities. These can be tractors for agriculture, machines for manufacturing textiles, trucks for transportation of the goods created by the small entrepreneurs, etc.
Microfinancing is typically defined as the process of providing loans, credit, savings, and other necessary financial services and products to individuals who are extremely poor to get access to the regular sources of finance such as banks or other financial institutions.
Microfinance is provided to the underprivileged people with the belief that charity or philanthropy is not the solution to poverty.
Both banks and non-banking financial corporations (NBFCs) offer microfinance in India. There are also microfinance institutions in the country that are exclusively dedicated to offering microfinance to people. Microfinance institutions aim at getting people out of poverty and improving poor people’s financial conditions. Microfinance institutions target poor people who are unemployed, who are or want to be entrepreneurs, and who are into farming.
Microfinance is usually procured by loan applicants through 3 modules and they include:
In our country, there are a number of institutions that offer microfinance exclusively. We will take a look at only a few select microfinance institutions in the country:
When an individual belonging to an underprivileged section of the society borrows microfinance from a bank or an NBFC, he or she can make use of the funds for being financially independent. It can help the borrower to be involved in a variety of activities that he or she could not have done without the microfinancing.
Many poor adults in the country may not have had sufficient funds during the early stages of their lives to be educated. Hence, they tend to miss out on the various employment options that are offered to educated people. Therefore, many of them remain unemployed.
There is another category of poor adults who are not educated, but are involved in unskilled labour. Unskilled labour refers to working in the segment that requires limited skills and that offers low wages to the labourers. Unskilled labourers have limited qualification such as high school or diploma or no qualification. Unskilled labour can include construction work, domestic help, security work, laundry, etc.
There is also a category of individuals who live in rural areas and semi-urban areas who are dedicated to farming. They are agriculturists and many of them earn very low incomes. Many of these farmers do not earn enough money for the hard work they put in. They do not have adequate funds to buy a land for sowing crops. They have to rely on rich landlords for renting land and they are forced to pay the little money that they make, to the landlords.
There are also many people who are originally from rural India who move to urban areas for alternative sources of employment apart from agriculture. They get into fields such as cooking, construction, restaurants, housekeeping, etc. and earn low incomes.
All the above-mentioned low-income individuals struggle to meet even the basic necessities to lead a life. They have very limited funds to get access to food, clothing, shelter, and proper healthcare facilities. Many of them are unable to send their children to school even for basic education.
Many of these people also cannot open bank accounts or apply for traditional loan options as they generally do not meet the minimum eligibility criteria. Banks have specific eligibility criteria where loan applicants or prospective depositors need to meet minimum income, age, and employment requirements. They also need to furnish relevant documents as proofs of identity that are issued by the central government. Many of these underprivileged people may not have any identity proof, which is again due to lack of access or lack of knowledge regarding the importance of government-sanctioned documents. This is where microfinance comes into the picture.
Microcredit or microfinance is offered to people keeping in mind about these above-mentioned requirements for regular bank loans. You can acquire small or micro loans at economical interest rates. Microfinance institutions chiefly work to help people who cannot acquire loans from normal banks. Hence, they make sure that loans are provided to the applicants at very low rates. They ensure that microfinance loan expenses are very minimal.
The purpose of microfinance is to assist low-income people who have the enthusiasm to make their lives better. It provides the right amount of capital to low-income people to start a new small business activity or to finance their child’s education or to buy a small piece of land for carrying out agricultural operations. Microfinance not only supports an individual in starting something new to earn better, it also helps in sustaining their income to have a decent standard of living throughout their life.
There are exclusive microfinance loans that are provided to marginal farmers who need funds for enhancing their productivity of crops. This can be done when they invest in superior quality fertilisers, excellent farming tools, quality check processes, marketing of their crops, packaging of their output, transportation of their output, storage of their output in safe and hygienic warehouses, and proper sales techniques in order to secure the profits that they are entitled to after putting in so much effort for several months.
Many farmers in India do not have sufficient funds or knowledge to invest in these aspects of farming. Microfinance loans aim to guide farmers by providing them with accurate information and funds required to enhance their output.
There are many households that have irresponsible male members who do not contribute towards saving money for the family. They tend to use money senselessly on things that are absolutely not required. Many of them spend money on alcohol, gambling, tobacco, etc. without keeping in mind about other expenditures. In such households, the female members are more responsible with money. They are very careful with the little money that they earn and spend it very judiciously. They make sure that the money is not within the reach of the men of the house.
Keeping this in mind, there are many banks, NBFCs, and microfinance institutions that extend microfinance exclusively to women in India. These women borrowers treat microfinance as their saviour and utilise the funds very sensibly.
These microfinance options for women also help in empowering women. There are many households where the men do not permit women to handle money. They expect women to only take care of domestic chores. However, the truth is that many women in several households have proved to be more financially responsible when compared to men. They do not waste money on unnecessary purposes.
Women also make sure that their children attend school sincerely without dropping out of school. When these women take microfinance for their various needs, they will ensure that the funds are utilised for a good purpose. They will ensure that their kids go to school, and this, in turn, will help brighten the future of the society.
One thing is for sure that women will repay their micro finance loans on time. Each installment of the loan will be paid promptly without any delay. This is a great relief for microfinance lenders. Microfinance loans can be repaid through equated monthly installments (EMIs) promptly. Moreover, women will make well-planned decisions for the household.
There are many self-help groups in Indian rural places that are made by women for women. Only women manage these groups and help each other in starting new low-cost business ventures such as handicraft ventures, horticultural ventures, artistry, pickle business ventures, paintings, trinket making activities, and many other business activities that they are good at doing. Since many of them are naturally talented at developing these creations at low costs, they can produce them on a large scale and sell them on various platforms and make profits gradually. The capital for these small business ventures can be generated from microfinance options. The borrower can repay the funds on a monthly basis through installments.
Most importantly, microfinance helps in job creation for women. In most regions of the country, women are forced to be unemployed and are not allowed to step out of their homes. They are restricted to the limits of their house. With the generation of microfinance, women are given an opportunity to showcase their entrepreneurial skills and management abilities. Microfinance also brings women together and encourages them to work as a team to achieve the ultimate goal of being independent. They do not have to rely on men for money or for other aspects. They also do not have to wait for the approval of the male member in the house.
Microfinance has been quite a popular and effective mode of financing in the Indian subcontinent. From an early period, people in India used to be involved in lending and credit operations through individual money lending, chit funds, and other indigenous financial institutions. All these modes practiced the system of microfinance very successfully.
The modern and systematic method of offering microfinance or microcredit to individuals started in the 1970s in India.
It chiefly originated when the Grameen Bank was started by Professor Mohammed Yunus in the year 1976 in Bangladesh. It was a pilot project of having a unique lending system where micro loans are offered to the disadvantaged sections of the society, especially the rural poor. This programme was launched to introduce the concept of financial services to the rural poor who never had access to any form of credit.
This iconic event led to the conversion of the project into an autonomous bank. This was done through a government legislation and it came to be known as Grameen Bank. The bank has assisted several poor people in both Bangladesh and India to be financially secure and to improve their financial conditions. This even resulted in the creation of a ‘Grameen model’ which is used by many financial institutions and banks to offer affordable loans to the poor.
There was also Self-Employed Women's Association (SEWA) that was started by Ela Bhatt. This organisation was unique in its own way. It was an all-women’s bank. It is the first microfinance bank in the country. It was set up in Ahmedabad, Gujarat in the year 1972. It was set up to help women of low-income groups to earn the rights that they are entitled to. It works towards making women independent by offering them the right funds at the right time to help them be self-employed. The institution also offers first-class training to women to help them specialise in handicrafts and other forms of artistry.
India also saw the establishment of National Bank for Agriculture and Rural Development (NABARD) which is exclusively committed to offering inexpensive modes of credit and bank accounts to the people living in rural areas. These people are mainly engaged in agriculture and other artistry activities in the country. The bank observed many unique banking models in order to offer high-quality and affordable financial solutions to the unbanked people. The bank also focused on including women by encouraging them to open bank accounts in their names and taking small loans to meet their requirements. The bank also promoted rural people to be involved in alternative activities apart from agriculture in order to earn additional income.
The Regional Rural Banks (RRBs) were launched in 1975-76. These banks were established to have banking operations in the rural areas and semi-urban areas of the various states of the country. Some of the regional rural banks are also set up in urban areas where they offer banking services to the poor people of the society.
There is also the Micro Finance Institution (MFI) that was set up in India in the year 1974. The operations of the institution started to pick up only in the 1990s.
All these institutions had a common objective and that was to provide financial assistance to the unbanked people of the society. They worked on setting up many bank branches in the most remote areas of the country. They mainly focussed on empowering the disadvantaged sections of the society.
Until the banks in India were nationalised in the year 1969, co-operative banks were the only banks that provided small loans to the economically underprivileged sections of the society. Small borrowers did not have any other source of financial assistance. Loan applicants had to furnish some form of security to the bank those days. They also had to make arrangements for a guarantor in order to apply for a loan. The chief objective of banking was profit, which is still prevalent in today’s commercial banks. Institutions offering microfinance started to emerge and began to change this profit-oriented banking scenario. Nationalisation of banks also changed the old banking setup and started to build branches in different rural parts of the nation.
Microfinance institutions also enhanced the condition of self-help groups. More and more self-help groups were created by impoverished people with the objective of making them financially self-sufficient. With these groups, the members did not have to go begging rich moneylender who mainly lent money solely to make profits. They also did not have to depend on others to get any form of employment. They created their own small venture by coming together by honing their skills.
India has a number of institutions that offer microfinance exclusively. Each institution uses a particular model or a blend of different models in order to provide microfinance to applicants. These microfinance institutions have embraced both conventional and advanced ideas of lending in order to distribute credit evenly in the society without uneven accumulation of credit among the rich people. There are many microfinance models in the country and this could be because of the high number of social and cultural groups, the large geographical size of the nation, the presence of multiple economic classes, and a solid existence of non-governmental organisations that are dedicated to uplifting the socio-economic condition of the disadvantaged people of the country.
The main six categories of microfinance models that are followed in India include:
A self-help group (SHG) is described as a group of 5 to 20 individuals who belong to the low-income class. Each group member typically contributes funds from their own savings and then this money is pooled in together. These funds are then utilised to support their common goal of improving their lifestyles and to make themselves financially secure.
They can use this money to obtain training to create superior-quality products. They receive training not only to make products, they also get trained on how to market, promote, and sell their products. Many of the poor people are not aware of how to reach out to customers. Some of them may not know how to assess their creation and fix an appropriate price for their product. Hence, many of them may fail to make profits when they sell products without proper knowledge. Being a part of a self-help group will give them proper awareness about how to make a product, price it, package it, promote it, market it, and sell it to the end-customer efficiently.
In the self-help group model for microfinance, the members of the group are encouraged to meet on a regular basis to discuss their savings, new developments, and credit operations. The members can also plan future activities for achieving their big goals step by step.
The Grameen model to distribute microfinance originated in Bangladesh. After seeing the success of the model in Bangladesh, many institutions in India started to adopt it by making some adjustments. A few of the institutions that acquired the principles of the Grameen model are CASHPOR Financial and Technical Services Limited, SHARE Microfinance Limited, Activists for Social Alternatives (ASA).
This particular model believes in providing a mandatory training course to the group members for at least 7 days. The model will offer microfinance to an applicant without asking for any collateral at low costs. The loan application process has minimum or zero paperwork and is processed very quickly keeping in mind the urgency for funds.
Some groups that apply the Grameen model have a Group Recognition Test (GRT) that refers to a screening process to divide group members into serious and non-serious groups. Every member must compulsorily save some money every week. This model is very particular about group discipline. This is generally achieved with the help of peer pressure. Each group member motivates the other to be very careful with the money that they borrow from their lender. Under this model, a loan typically ranges from Rs.4,000 to Rs.10,000.
These organisations apply the co-operative model to offer microfinance in rural areas. The Cooperative Development Forum (CDF), Hyderabad has applied the co-operative credit union model successfully by giving primary importance to savings. The main entities in the CDF are women’s or men’s thrift co-operatives (WTCs and MTCs). They have small groups of individuals wherein each group has a particular leader who heads group meetings, accumulates the savings of each group member, and looks into the repayment of loans. The group leader is responsible for making sure all small loans are repaid promptly by each member.
The Cooperative Development Forum (CDF), Hyderabad began functioning with units of small size. Soon, they started to create larger units in order to increase the impact. The CDF encourages members to focus more on their thrift cooperatives instead of the group goals. Each group’s size can differ. This will depend on the group leader’s ability and the leader will be appointed according to the votes of group members.
A normal self-help group (SHG) is typically consistent of a few members with the aim of making each member self-sufficient with adequate funds and high-quality equipment to produce first-class output. It is usually small in size. Due to the success of these groups, there was a need for a large-scale self-help group. This led to the establishment of federated self-help groups. A federated self-help group refers to a large scale self-help group with a large number of members. It is a federation of multiple self-help groups. A federation of self-help groups will have around 1000 to 2000 members whereas a single self-help group will have only up to 20 members.
A federated self-help group model has a very interesting arrangement where there are 3 levels. The main and basic level is the self-help group. The middle level in this arrangement is a cluster. The highest unit in this arrangement is a top body that indicates the complete self-help group.
Since a federated self-help group is big in nature, at the cluster level, 2 members of every self-help group will serve as representatives of that particular group. These representatives will be required to get together on a frequent basis in order to update statuses of the group. They will need to discuss funds, utilisation of funds, production, changes in plans and schedules, etc. This cluster level is also responsible for providing details and updates about the entire self-help group to the top body. If there are any updates from the top body or apex body, then the cluster will communicate it to the group.
The cluster level serves as a form of intermediary between the whole group and the apex body. Leaders of these clusters are required to have excellent monitoring and team building skills. They need to check the status of the group’s operations on a regular basis. The daily and weekly productivity of each team will be checked and feedback and support will be provided by the cluster leaders to the group members. This cluster level in the federated self-help group model helps in making the entire system decentralised.
Decentralisation is very effective and helpful as each member is responsible for his or her duties. Also, there is no sense of unfair hierarchy in the system. Each person is given an opportunity to showcase his or her skills. Moreover, every member has the right to offer ideas for the development of his or her self-help group. The microfinance funds allocated for such a model will help in the distribution of funds in an even manner. There will be no scope for misappropriation or misuse of funds. Each member will make sure that the money is used for the overall development of the self-help group.
The apex body or the executive body in a federated self-help group has an important responsibility of being the intermediary between the entire self-help group and the non-government organisation (NGO) or any other organisation that is committed to assisting the group in carrying out its activities. This apex body will have around 10 to 15 members.
The best part about federations of self-help groups is that these groups also help certain NGOs as there are many NGOs in our country that have fewer funds and resources but that aim at reaching out to the less fortunate masses of the society. These federations of self-help groups assist these NGOs to bring a change to the society effectively even though they do not have adequate resources.
Some of the organisations in the nation that apply the federated self-help group model include Chaitanya, PRADAN, Dhan Foundation, SEWA, and lots more. These federated self-help groups have the competency to handle the constraints experienced by single self-help groups. Most of these federations are incorporated under the Societies Registration Act.
These federated self-help groups enable members to apply for bigger loan amounts. Moreover, these groups assist members to save more money efficiently. Due to the large scale at which these groups function, they have the ability to offer additional financial services to members such as micro insurance.
Micro insurance for microfinance is extremely necessary and helpful. It protects the borrower’s funds against damage, loss, or any other troubles. When there is micro insurance, the borrower need not worry about its security. When one takes a loan, especially a micro loan, he or she will need to be very careful and ensure that it is safe and secure. One needs to understand that a micro loan is offered to the less fortunate sections of the society. In such a case, when the funds are stolen or lost or misplaced, it is very tough for the borrower to get a loan again. He or she will also have difficulty in recovering the lost funds.
With a micro insurance policy which is offered at very low premium rates, the borrower can have a peace of mind without worrying about the safety of the funds. Even if something unfortunate happens with the microfinance borrowed from a federation of self-help groups, then this micro insurance cover will take care of everything. The unforeseen losses and costs will be compensated and reimbursed by the micro insurance policy at an affordable price.
A federation of self-help groups also takes care of something very important, which is the prevention of idle funds. Many small self-help groups sometimes face the issue of having too many idle funds or even insufficient amount of funds. With a federated self-help group, there is no scope for the formation of idle funds. They use well-planned techniques to direct the flow of money accurately. When there is a proper flow of funds, there will not be any chance for the creation of idle funds. These federations always work to make sure that the demand for micro loans is lesser than the actual supply of funds that is obtainable. In single self-help groups, demand for credit is more when compared to the availability of funds. A federation of self-help groups works towards maximising the distribution of local capital in order to gain maximum returns on this capital.
Federations of self-help groups also assist individual self-help groups in recovering loans proficiently. They also encourage and promote new or upcoming self-help groups. They function in a very flexible and relaxed manner. They promote financial as well as non-financial exchanges between different groups. They encourage collaboration of various groups in order to achieve goals together. They also help other self-help groups in establishing and sustaining relations with agencies and NGOs.
These federations encourage self-help group members to save money in different ways. The federations recommend multiple savings methods to members so that they can make savings with the help of the group and also through other modes. A few of these federations have designed certain savings schemes that allow members to deposit their money and earn savings over a particular period. They also attract funds from external sources and lend them to members.
Under this model, funds are offered to groups of individuals through unconventional means. The members of such associations include individuals who have certain common features such as ethnicity, community, language, professions, occupations, etc. These members contribute funds on a regular basis and utilise them for attaining a common goal.
The whole model works according to a systematic way where every member receives funds within a particular time frame and he or she is required to repay it before the deadline. After this member, another member will start the whole micro loan process. It functions in the form of a cycle. Unless one member completes the repayment cycle on time, a new member cannot procure a loan. Hence, with the help of peer pressure and efficient monitoring skills from the association’s leaders, each member will make sure that the loan is repaid promptly without any delay. Due to fear if the loan cycle will stop because of any one person, every member ensures that each loan is repaid on time.
Chit fund companies in India carry out their lending operations just like ROSCAs. They encourage the underprivileged people of the society to save money and accumulate lump sums for the purpose of purchasing high-value products. A chit fund scheme will have a fixed tenure and a fixed value. Every member will be required to pool in money on a monthly basis and this will be utilised for the goals of a company. These ROSCAs or chit fund models help in eliminating the gap between different sections of the society that is present due to conventional banking ways.
In India, microfinance companies can be registered as a non-banking financial company (NBFC) under Companies Act or Reserve Bank of India (RBI). An NBFC engages in accumulating funds and using them for offering credit and other financial services to other people. An NBFC generally provides personal loans, car loans, two-wheeler loans, crop loans, agricultural loans, and lots more. Non-banking financial companies can offer both regular loans as well as micro loans to the less fortunate people of the society. These NBFCs can be regulated by the Reserve Bank of India (RBI) or the Companies Act.
Microfinance companies function as separate legal entities that offer microfinance to the needy. Nowadays, microfinance companies are not seen as organisations that are only involved in social service. They are seen as proper business entities that work towards offering concrete financial solutions to the impoverished people of the society. These companies hold that the poor people do not need charity but ways to be financially independent. They are committed to improving the socio-economic situation of the poor individuals of the society.
Microfinance companies can be non-profit organisations, profit organisations, or mutual benefit institutions. Non-profit organisations work solely for empowering the needy by concentrating on their economic and societal conditions. Profit organisations work by registering themselves as an investment trust, an association of persons, or a company that will be a bank or an NBFC. Mutual benefit institutions function for the purpose of helping only its members.
There are many impoverished people in the country who do not have any knowledge about alternative sources of finance apart from conventional bank loans. They also do not know that they can engage in other sources of employment to earn a livelihood. However, they do have the need for funds in order to meet their essential necessities. With the help of microfinance, they can learn to procure inexpensive forms of credit for a short period and also learn to manage their expenses efficiently. They will understand how to allocate money for different purposes and save a particular amount for emergencies. They can also save money to utilise it for other big purposes.
Microfinance will teach a less fortunate person to slowly get out of his or her economic situation. A few poor people may also be in high-debt situations due to previous credit. Microfinance can help them tackle previous debts proficiently as they will learn to manage their finances.
Microfinance has succeeded in making poor people and poor enterprises sustainable and strong by providing them with funds, training, production skills, access to market platforms, insurance, innovation, technology, and equipment. They aim to continue to work with the same goals by using advanced techniques and newer ideas.