Role and Impact of Micro Finance Institutions in India By- Utkarsh Srivastava
Role and Impact of Micro Finance
Institutions in India
Authored By-
Utkarsh Srivastava
Introduction
In today’s
world where every sector of human life is evolving still the economic structure
is limited and several activities are not calculated or converted in terms of
money. In general words, these activities can be monetized but there is no
sufficient availability of expendable fund to carry out these tasks. So
consequentially to tackle this issue, micro financing came into role took over
such areas of distress where fund are meager. In common parlance, micro
financing is that side of a same coin which gives liberty to those who are in
need of actual money to start a business, go to school or even gain access to
everyday livelihood. Micro finance has made a sudden surge in the economy,
lately but still it faces divergent hindrances including its regulation, loan
strategies and loan consumption. This article will make elaborative attempt to
analyze “Role and Impact of Micro Finance Institutions in India” by describing
its description, structure, challenges furthermore offer suggestions that could
have lucrative effects on the micro finance industry.
Meaning of Finance Institutions
To
understand the ambit, role and impact of microfinance institutions first we
have to understand what the meaning of Finance Institutions is. A Finance
Institution is a company which is engaged in the business of dealing with
financial and money related transactions like deposits, loans, investments and
currency exchange. These days’ financial institutions have a broad range of
business operations within the financial services sector which includes banks,
trust companies, insurance companies, brokerage firms and investment dealers.
Mainly
there are four types of Finance Institutions listed below:
i.
Commercial Banks
ii.
Investment Banks
iii. Insurance
Companies
iv. Brokerage
Firms
Definition of Microfinance Loan[1]
A micro finance
loan is defined as a collateral-free loan given to a household having annual
household income up to ?3,00,000. For this purpose, the household shall mean an
individual family unit, i.e., husband, wife and their unmarried children.[2]
Importance
of Financial Institutions
The
financial institutions provide a marketplace for money and assets so that they
can be used by the banks or institutions where it is needed most. If we take a
very practical example from real life then the institutions earns money by
providing loans and collecting profit from interest rates and at the same time
a depositor earns interest from the bank on his deposit.
So, this is
a two-sided business where one earns from the deposit of another and the other
earns by depositing a particular amount and hence the needful gets the help and
assistance.
Micro Finance Institutions
The basic
and layman's definition of microfinance institution can be described as that
these are small companies which give small or microloans to poor people or to
people who can't avail of proper banking services in India. An amount of up to
rupees 1 lakhs can be said as a microloan amount in India.[3]
In India
there are different types of Institutions which offer microfinance are:
i.
Credit Union
ii.
Non-Government organizations
iii. Commercial
banks
Further,
there are many government banks which also offer microfinance services to
eligible borrowers.
History of Micro Finance
The history
of Micro-financing can be traced back as long as to the middle of the 1800s
when the theorist Lysander Spooner was writing over the benefits for small
credits to entrepreneurs and farmers as a way getting people out of the
poverty.
Another pioneer in this sector is Akhtar Hameed khan. At that time a new wave of microfinance initiatives introduced many new innovations into the sector. Many pioneering enterprises began experimenting with loaning to the poor people.
Today the
World Bank estimates that more than 16 million are served by some 7000
microfinance institutions all over the world. In a gathering at a Microcredit
Summit in Washington DC the goal was reaching 100 million of the world's
poorest people by credit from the world leaders and major financial
institutions.
Objectives of Micro Finance Institutions
Most
microfinance institutions were formed to eradicate poverty but as time has
changed and with the change in time we can see that now most of them are
focusing on the sale of more products to the consumers. As per the World Bank
data, over 1.7 billion across the globe do not have access to basic financial
services and that is where the microfinance institutions play an important
role.[4]
Now, if we
talk about the main goal of most the microfinance institutions then they are as
follows:
a.
To assist in the development of sustainable
communities.
b.
To offer help to the lower section of society, and
mainly to help the women of lower sections of society.
c.
To help to eradicate poverty
d.
To generate self-employment policies by giving
microloans.
Microfinance
institutions play a very important role in the economic development of the
nation the main key benefits of microfinance institutions are as follows:
a.
It expands the ambit of opportunities for common
people. As these institutions offer funds for their business.
b.
It is very easy to take credit from these banks. Even
a very small amount can also be taken for credit very easily.
c.
It serves fundamental needs like construction or
renovation of the house, improvement of the health care facility and people can
explore better business opportunities.
d.
Women of weaker sections can also avail of loans
easily by this the condition and self-dependency in women is increasing day by
day.
In case, ITO,
Madurai v. Kalanjiam Development Financial Services, Madurai[5]
the court said that “Microfinance is seen as an effective tool to organize the
unorganized and build their nested institutions through enabling the poor
women. The primacy is on building the capacities of the poor and enabling them
to manage the financial services and build strong, sustainable people's
organizations to address their development and growth - financial and social.”
Groups Organized by Micro Finance
Institutions in India
In India,
there are four groups which organize microfinance institutions and they are as
follows:
i. Joint Liability Group: This is
usually an informal group that consists of 4-10 individuals. In this group, the
loans are usually taken for agricultural purposes. Farmers, rural workers, and
tenants fall into this category of borrowers. This institution does not need
any financial administration, as it is simple in nature.
ii. Self Help Group: It is a group of people of
the same financial status. In this, a group of people comes together to collect
funds to fulfill their business needs for a decided period.
iii. Grameen Model Bank: It was the idea of Nobel
Laureate Prof. Muhammad Yunus in Bangladesh in the 1970s. Later in India, it
became an idea for the generation of Regional Rural Banks with the motive with
generates an end to end development of the rural economic system.
iv. Rural corporative: It was established in India
during the Independence Stage. In this system, the sources of weaker section
people or sources of financially weak people were pooled in and financial
services were provided to them from this fund.
Regulation of Micro Finance Institutions
The regulations of Micro Finance
Institutions are usually based on their statuses, regulations and orders given
by the Reserve bank of India. A microfinance bank will be required to adhere to
all banking regulations like traditional banks.
Traditional Banks versus Micro Finance Institutions
Most Micro Finance Institutions work
very differently from the traditional banking systems, in the case of Micro
Finance Institutions the process is very easy and less time taking and helpful
for borrowers.
a.
Evolution of Eligibility: In the case of Micro Finance
Institutions the eligibility of a borrower is not scrutinized whereas if we
study the traditional loan in such cases the background of the borrower is
always scrutinized and further there should be a strong financial background
for the allowance of loan.
b.
Flexible Repayment: In the case of Micro Finance
Institutions the loan repayment scheme is very flexible and it is in accordance
with the borrower. The repayment of the loan can be done weekly or monthly
unlike the traditional banks.
c.
Flexible Credit Scheme: In the case of Micro-lending
it has products that are usually adapted to suit the repayment capabilities of
borrowers hence they can be used for repayment purposes in case the cash is not
available to the borrower. This is one of the main differences between a
traditional lender and a Micro Finance institution.
Process of Granting Microloan
For the microfinance institutions,
there shall be a sense of trust and confidence in the borrower for providing
the loan. Before the sanctioning of a microloan, a committee sits and examines
the requests and evaluated and examines the capability of the borrower to repay
the loan. Further, the viability of the project or cause for the loan is also
considered.
How Micro Finance Institutions funded?
The microfinance institutions get the
funding from various sources as follows:
a.
Member and customer deposits: Members and customers do invest in
such groups through mutual funds and by buying products.
b.
Subsidies and Grants: For some defined purposes the grants
and subsidies are granted to microfinance institutions for a defined purpose.
c.
Own Capital: The microfinance institutions have
their capital which they can lend to borrowers.
d.
A loan from Partner Banks: This is a primary source of funding
for Micro Finance Institutions.
e.
Funding from Public Investors: This is a long term source for the
institutions.
f.
Funding from Private Investors: These funds are provided directly to
Institutions and these are also long term funds.
The Micro Finance Institutions (Regulation
& Development) Bill, 2012[6] Highlights
of the Bill
a.
It
provides a statutory framework for the microfinance industry.
b.
It
mentions that the Reserve Bank of India shall regulate microfinance
institutions.
c.
The Bill provides for the creation of councils and
committees at the central, state and district level to monitor the sector.
d.
The Bill provides for a Micro-Finance Development Fund
managed by Reserve Bank of India (RBI).
e.
The Bill requires the Reserve Bank of India (RBI) to
create a grievance redressal mechanism.
Key Issues and Analysis
a. It holds the ambit of microfinance
institutions to hold the interest rate to a certain limit.
b. The bill provides the Micro Finance
Institutions to accept deposits.
c.
The Development Fund for MFIs is to be managed by the
Reserve Bank of India (RBI). The Bill
also enables regulatory powers to be delegated to National Bank for Agriculture
and Rural Development (NABARD). Both
these provisions could lead to a conflict of interest.
d.
The bill provides for the generation of a microfinance
committee but the institutions do not need to do so.
e.
The Bill allows Micro Finance Institutions to provide
pension and insurance services.
Malegam Committee[7]
The Reserve
Bank of India formed a sub-committee for the study of Micro Finance sector.
This committee was formed by the board members of Reserve Bank of India and the
objective of this committee was to deal with concerns in the microfinance
institutions.
The
Sub-Committee was under the chairmanship of Y.H. Malegam.
Further,
the committee had to look at the activities of MFIs in relation to interest
rates, lending and recovery measures to identify trends that impose on
borrowers’ interests.
Recommendations by Malegam Committee
The
committee recommended certain conditions to be satisfied for Non-Banking
Finance Companies (NBFCs) to be classified as non-banking finance companies –
micro finance institutions:
a.
Not less than 90% of its total assets (other than
cash, money market instruments and bank balances) are in the nature of
“qualifying assets.”
b.
The income it derives from other services is in
accordance with the regulation specified on that behalf.
Regulatory Framework issued by Reserve Bank
of India for Microfinance Loans
“The Reserve
Bank of India has instructed Regulated Entities (REs) lending to
the microfinance sector to ensure that loans are collateral-free
and not secured by a lien on the borrower’s deposit account, that
repayment obligations are capped, that interest rates are not usurious, and
that there is no prepayment penalty.”[8]
Key Points
a.
The central bank has removed the margin caps that were
only applicable to non-finance companies.
b.
The Reserve Bank of India (Regulatory Framework for
Microfinance Loans) Directions, 2022, has taken affect since April 1,
2022.
c.
All co-lateral loans shall be offered to low income
group families and as stated by Reserve Bank the family which earns below 3
lakhs annually is a low income group family and hence the loan will be termed
as micro finance loan.
d.
According to the directions issued by Reserve bank of
India the regulated entities must have a board approved policies which shall
make repayment of loans with ease for the borrower so that the borrower can
repay it periodically which-so-ever times suits him.
e.
Each regulated entities must approve a board approved
policy which clearly states the loan rates, method of calculations and
demarcation of interest rate components such as cost of funds, risk premium,
and margin, among others.
f.
The reserve bank should time to time conduct a
supervisory for the implementation of interest rates and methods of allocations
of loans.
Challenges Faced by Micro Finance
Institutions in India
Although microfinance institutions
are doing exemplary in India and they are getting famous and common among
peoples but still they face a tough competition among regular banks. As the
traditional banks are now in the business of providing micro loans and hence
people trust more on traditional banks than that of micro institutions.
The micro institutions are only
depended on the funds which they generate by their own sale of products where
as the micro institutions have more range of products and further various
sources of income. There structure are very strong that of micro institutions.
Even a small fall in market can affect the structure of micro institutions but
the thing is not same with the traditional banks.
Microfinance Companies In India
Some of the microfinance companies
that offer loans to the unbanked and under banked population in India as are
follows:
a. Arohan Financial Banks
b. BSS Microfinance Pvt Ltd.
c. Cashpor Microcredit
d. Equitas Microfinance Pvt Ltd
e. Asirvad Microfinance Pvt Ltd
f. Bandhan Financial Services Pvt Ltd.
g. Disha Microfin Pvt ltd
h. Annapurna Microfinance Pvt Ltd
i. Esaf Microfinance and Investments Pvt
Ltd
j. Fusion Microfinance Pvt Ltd
Conclusion and Recommendations
In this project it has been discussed
that how the financial institutions are working in India and what is there
practical implementation and real impact on society. Further, this article also
talks about the guidelines of Reserve Bank of India and its aim before these
institutions. The challenges which are faced by micro institutions might impact
them hard but the key solution to those impacts is the continuous investment in
institutions.
As we all know financial institutions
are the integral parts of India economy as it plays key role in economic
development and even in development of the whole nation by providing various
types of services. Therefore, India financial institutions are very strong but
operations of the same are adverse, somewhere we are lacking in its
implications. Like still our most of the population is still unaware of all the
services and products provided by our financial institutions. However micro
finance plays the major role in the alleviation of poverty from the society.
Many banks in India have initiated to lend money to the micro finance
institution. It works towards the empowerment of women, small startups, small
groups, lower income group families and specially aiding to provide education
aids to weaker section of society which is the great move towards the
development of the country.
My recommendations for Micro
Institutions are that these institutes should work on their basic structure and
should work on their funding. To run any institution, either financial or
non-financial, NGO there shall be a strong funding towards it and a strong
basic structure for that which is still not there with the case of micro
institutions. Secondary, people trust traditional banks more than that of
microfinance institutions and this is something which has to be work by micro
institutions, micro institutions should generate a bond with the society and
with its borrowers so that anyone can trust them significantly this will help
them with their funding also and it will improve their image in society also.