Microfinance In India

Microfinance or microcredit is provided to unemployed or low-income people who do not have access to formal financial services. Under microfinance, loans, credit, insurance, savings bank account are provided to small business entrepreneurs.

Microfinance is not a new concept and has been in existence from the 18th century. The modern microfinance was conceptualised by Mr. Muhammad Yunus in 1976 by formation of Grameen Bank in Bangladesh. In India, Mr. Vikram Akula commenced SKS Microfinance (now known as Bharat Financial Inclusion Ltd) in 1997 on lines of Grameen Bank initially as a non-profit organisation and later as for-profits.

How does Microfinance work?

• Microfinance Institutions (MFIs) fund small / low-income entrepreneurs who run micro-enterprises

• These entrepreneurs have no credit history as no loans are generally available to them

• These micro loans typically have a high default rate and hence, high interest rates.

  • The interest rates are generally upwards of 18% p.a.

  • Gross Non-Performing Asset (GNPA) of NBFC-MFI increased from 2% of total advances as on March 2020 to 4.9% in March 2021 (mainly due to delay in collections due to second covid wave)

• However, these days, with mobile phones and certain data points, some sort of creditworthiness can be determined.

• MFIs lend through the concept of Joint Lending Group (JLG) which is an informal group of 5-10 members who seek loan either individually or jointly.

Features of Microfinance Loans:

• Micro Borrowers are low-income groups

• Loans availed are of very small ticket size.

  • It can be between Rs. 10,000 to Rs. 100,000

• Loan duration is also very short (1 to 3 years)

• Generally, no collateral is provided by the micro borrower

• Women are major borrowers of microfinance

Leading Microfinance Companies in India:

1. Arohan Financial Services Pvt Ltd

2. Equitas Microfinance Pvt Ltd

3. Spandana Spoorthy Financial Ltd

4. Asirvad Microfinance Pvt Ltd

5. Bandhan Financial Services Pvt Ltd

6. Disha Microfin Pvt Ltd

7. Annapurna Microfinance Pvt Ltd

8. ESAF Microfinance and Investments Pvt Ltd

FinFact:

• Microfinance market is of Rs. 247,839 cr as on 31st March 2021 (Sa-Dhan report)

• Microfinance industry size institution-wise is as under:

  • Banks: 44%

  • NBFC-MFI’s: 32%

  • Small Finance Bank: 15%

  • NBFC’s and Non-Profit MFI: 9%

Criticism of Microfinance:

The purpose of a microfinance company was to eradicate the poverty cycle. However, it has been argued that it has made the poverty situation worse as those who are not able to pay off the initial loan were asked to take further loan to pay off existing debt.

Having said that, it has helped countries like India, Bangladesh, Vietnam to generate employment, create new income stream and improve standard of living.  World Bank has estimated that microfinance related activities have benefitted ~ 500 million people directly or indirectly across the globe.

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