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Micro- Finance Institutions
Context:
The State of the Economy report released by RBI asked Micro- Finance Institutions (MFI) to slow down loan growth amidst the building up of non-performing assets (NPAs).
About Microfinance Institutions:
- Microfinance (Micro+Finance): The provision of financial services like small loans (micro-credit), savings, insurance, and remittance to low-income households.
- Microfinance loan/credit (one of the services under microfinance): is delivered through a variety of institutional channels viz. commercial & cooperative banks, NBFCs, NBFC-MFIs etc.
- Are collateral-free and offered to households earning up to ₹3,00,000 annually.
- Lenders must clearly state interest rates and applicable charges, ensuring transparency for borrowers.
- The Reserve Bank of India (RBI) is the regulatory body for Micro Finance Institutions (MFIs) operating in the country.
Microfinance in India operates through two main channels:
- Self Help Groups (SHGs): Informal groups (10-20 members, mostly women) that promote savings and receive credit through the Self Help Group-Bank Linkage Programme (SHG-BLP), linking over 87.44 lakh SHGs with formal banks.
- Microfinance Institutions (MFIs): Inspired by the Grameen Bank model, MFIs provide micro-credit and other services via Joint Lending Groups (JLGs).
MFIs include:
- NGO-MFIs
- Co-operative Societies
- Section 8 Companies (non-profits)
- NBFC-MFIs
Significance of Micro- Finance institutions:
- Financial Inclusion: Microfinance provides access to financial services for individuals who lack traditional banking options, promoting financial inclusion.
- Example: The Self-Employed Women’s Association (SEWA) in India offers microfinance services to women workers in the informal sector, helping them access credit and savings.
- Poverty Alleviation/ Wealth Accumulation:By enabling savings and credit access, microfinance helps individuals accumulate wealth and improve their financial stability.
- Example: Pradhan Mantri Jan Dhan Yojana (PMJDY) promotes financial inclusion by providing savings accounts and microloans to millions of low-income families across India.
- Risk Mitigation: Microfinance reduces reliance on high-interest loans and informal borrowing, helping individuals manage financial risks more effectively.
- Example: SKS Microfinance provides small loans with reasonable interest rates, allowing borrowers to avoid the cycle of debt from informal lenders.
- Economic Empowerment: Affordable loans empower low-income individuals to invest in businesses, fostering entrepreneurship and improving economic standing.
- Example: Ujjivan Small Finance Bank provides microloans specifically to women entrepreneurs, enabling them to start and grow small businesses.
- Contribution to Economic Growth: By integrating underserved populations into the formal financial system, microfinance supports broader economic growth and development.
- Example: NABARD supports microfinance initiatives that enhance agricultural productivity, contributing to rural economic development.
Reasons why RBI has asked MFI to slow credit growth:
- Rapid Credit Growth: MFIs have been expanding lending at an alarming rate, especially in states like Uttar Pradesh and Bihar, which account for over a quarter of total microfinance loans in India.
- Risk of Over-Indebtedness: Many microfinance borrowers are taking loans from multiple lenders simultaneously, with nearly 10% having loans from three or more sources in these states. This can lead to a debt trap where individuals struggle to repay existing loans and take new ones to cover old debts.
- Predatory Lending Practices: The RBI is concerned about reports of aggressive loan recovery methods by some MFIs, which have been linked to tragic outcomes like borrower suicides.
- High Interest Rates Concern: The RBI has identified instances of micro lenders and non-bank financiers charging high, usurious interest rates on small-value loans.
Recommendations by Malegaon Committee:
As Recommended by Malegaon Committee constituted in 2010 by RBI
- Creation of NBFC-MFIs: A separate category of NBFCs regulated by RBI to provide small, unsecured loans to low-income borrowers.
- Priority Sector Lending: Bank loans to NBFC-MFIs retain priority sector status.
- Single Group Membership: Borrowers can join only one SHG or JLG.
- Limited Lending: Maximum two MFIs can lend to a single borrower.
- Loan Moratorium: Minimum moratorium period between loan disbursement and repayment.
- Credit Information Bureau: Establishment of a credit bureau.
- Coercive Recovery: MFIs responsible for avoiding coercive recovery methods.
Customer Protection Code & Grievance Redressal
- Corporate Governance Code: MFIs to follow specific governance practices.
Government Measures for Development of the Microfinance Sector:
- India Microfinance Equity Fund (IMEF): The IMEF was established to improve liquidity for smaller, socially oriented MFIs, particularly in underserved areas.
- Pradhan Mantri MUDRA Yojana (PMMY): Launched to boost credit access for small businesses, PMMY offers loans without collateral.
- Addition of Technology: The E-Shakti initiative enhances microfinance by digitising information on Self-Help Groups (SHGs) through a dedicated platform. This effort improves transparency and accessibility of financial data.
Conclusion:
- Collaboration between the government and MFIs can overcome funding challenges, with alternative financing needed for MFIs.
- Despite hurdles, microfinance has empowered the poor by boosting confidence, skills, and economic participation. It complements traditional banking by serving marginalised and unbanked populations, fostering inclusive growth and economic equality.
