2.4 Microfinance Institutions
- Introduction
- Promote Financial empowerment (SMEs, low-income groups, marginalized populations)
- Provision of financial services to thow who typically lack access to typical banking services
- Goal: Make them self reliant
- Role
- Financial Empowerment
- low-income population
- Services
- Insurance, saving accounts, microloans, financial education
Key Roles of Financial Empowerment
- Access to Credit for the Unbacked
- Challenge: large portion of pop is unbacked due to regulations, strictness
- MFI Role
- Small loans amounts
- SKS Microfinacne - Bandhan bank
- Promotion of Entrepreneurship
- MFI Role
- Minimal paperwork
- encourages self-employment
- Grameen Bank (Md. Yunus)
- Empowerment of Women
- Challenge
- Social Norms, limited asccess to edu
- MFI Role
- More likely to investment in their families and communities
- improve gender equality
- SEWA (Self-Employed Women's Association)
- Offer small loans and savings product
- Encourage Savings & Financial Discipline
- Challenge
- Lack of access to formal savings a/c
- can lead to fin instability
- MFI Role
- provide savings account
- promote capital accumulation & financial discipline
- e.g. Ujjivan Small Bank Finance
- Insurance for Low-income Groups
- Challenge
- Exclusion from Traditional Insurance Markets
- High premiums
- Complex documentation requirements
- MFI Roles
- MI products: Insurance with affordable premiums
- Helps risk mitigation for the pure
- e.g. MicroEnsure (MI to low-income group in India)
- Financial Literacy & Education
- Challenge
- lack necesary understnding to the terms of loas (e.g.)
- MFI
- Financial Education Programs
- How to mange? Understand the risk of over-indebtness & importance of savings
- e.g. Spandana Sphoorty Financial Limited
- Reduction of Poverty
- Challenge
- efforts are hindered by lack of access to capital for Small income-groups
- MFI Role
- Financial services to the poor
- Loans to Entrepreneurs
- e.g. Basicx
- Supporting Agricultural Dev
- Challenge
- Farmer's limited access to credit (seed, equipment) to improve productivity
- MFI Role
- Tailored to their need
- improve productivity and income
- e.g. NABARD (National Bank for Agriculture & Rural Development)
- Social Impact and Community Development
- Challenge
- Financial Exclusion of rural and underserved communities
- MFI Role
- Social dev of community
- Reinvestment in education, health & sanitation
- e.g. Equitas Small Finance bank
- Community Development Program
- healthcare, education, skill development
- Role in Supporting Small-scale industries
- Challenges
- Access to formal credit, lack of colleteral, financial illiteraty
- MFI Offerings
- small loans
- savings products
- fin lit programs
- MFI Role: Access to credit for business expansion
- Microcredit
- Traditional Finance institution: small biz are high risk
- Microfinance Institutions: offer small loan based on the borrower's potential instead of traditional creditworthiness
- e.g. A rural Weaver
- While repaying the loans (for input and production), the weaver can apply for more credit for the purpose of expansion
- Promotion of Entrepreneurship & Self-employment
- Provide microloans for startups (small businesses)
- Small-scale industries need minimum funding
- Self-employment and income in areas with limited job opportunities
- e.g. SHGs and JLGs (Self Help Groups and Joint Liability Groups) are facilitated by MFIs
- Group of women can pool their resources in an SHGs
- MFI will give these women will give them equipment and supplies
- This will create a sustainable business and additional income for families
- Working Capital Support
- To purchase raw materials
- to function smoothly without any disruptions
- critical for biz with cyclical production nature
- e.g. Small scale agro processor (farmer, harvest season)
- Reduction of dependency on informal moneylender (informal & unregulated)
- e.g. Small Grocery Shop Owner
- High-interest loans from local moneylenders
- Access loans at much lower interest rates
- Provide Financial Literacy and training
- Empowerment of Women and Marginalized Groups
- Tailoring, food, handicrafts
- means of contributing to household income
- Local goods production via SHGs
- Microfinance helped them obtain raw materials
- Supporting Supply chain and employment generation
- Small biz create employment opportunities
- e.g. small-scale furniture maker
- custom products
- MFIs => hire more workers
- more vibrant local economy, more jobs
- Case Studies & Examples
- Bandhan Bank
- as small as 5000
- support small-scale industries in Rural India
- Loan to group of women in West Bengal
- Women weavers
- improve overall living conditions
- Challenges faced in relation to women
- Limited Financial Literacy
- Don't understand loan terms, rates, schedules
- higher default rates
- Financial losses, strained client relationships
- uninformed biz decisions
- Cultural and societal barriers
- limited mobilities
- domestic responsibilities
- Hard to reach these women in conservative settings
- If women's earnings are not recognized/valued by the family
- Access to Colleteral
- Loans without traditional colleterals
- Women have limited assets to pledge
- affects borrowing for larger amounts
- Impact on MFIs
- Can't loan them large loans
- Over-indebtness
- Multiple loans from different MFIs or Informal Lenders
- Impact on MFIs
- higher default rates
- increase financial burden on MFIs
- Harm reputation from client financial distress
- Sustainability & Financial Viability
- Reliance on Donor funding will not be sustainable
- May need to cut back on program to empower women
- Changing Regulatory Environment
- Lending Practices
- Interest rates
- Unforseen changes
- increased compliance costs
- hard to serve women
- Limited Support Services
- Business training, mentorship and market access are limited
- Impact
- hard to leverage microfinance loans
- lower success rates
- reputation damage for MFIs
- Technology Gap
- Conclusion
- Enhance fin lit
- Fostering support regulatory environments
- Integrating additional support services
- Regulatory Framework
- RBI Guidelines
- Classification of MFIs
- NBFC MFIs
- Societies/Trusts/Cooperatives
- Non-banking financial companies (NBFC-MFIs)
- should adhere to capital requirements and operational requirements
- Minimum net owed fund (₹5cr)
- Societies/Trusts/Cooperatives
- State Govt regulations
- Guidelines by RBI for lending practices
- Interest Rate cap
- Max (Cost of funds + up to 10%)
- to ensure fair lending practices
- MFIs (Dev & Regulation) Bill, 2021
- Comprehensive Regulatory framework for MFI in India
- All MFIs should be licensed to standardize
- Helps to distinguish between MFIs based on their operational structure and models
- Regulatory authority has been established
- non-compliant entities will be penalized
- Consumer Protection
- Transparent Disclosure of Loans tnc
- Grievance redressal mechanism
- SROs (Self-Regulatory Organizations)
- Allow member orgs to set standards for operations and conduct
- e.g. Microfinance network
- responsible lending practices
- NRLM (National Rural Livelihood Mission)
- Reduce poverty
- Financial assistance and support
- financial inclusion
- access to credit
- PMMY (Pradhan Mantri Mudra Yojana)
- MF Support to MSE
- Funds at lower interest rates
- Shishu: upto 50k
- Kishore: 50k to 5 lakh
- Tarun: 5 - 10 lakhs
- Legal Framework & Consumer Protection Laws
- Consumer Protection Act, 2019
- Fair lending practicies
- Transparency in loan agreements
- The Indian Contract Act, 1872
- Follow provision to ensure enforcaeble and fair contracts
- Conclusion
- Regulatory bodies should address emerging challenges.
- Example
- BFIL (Bharat Financial Inclusion Limited)
- Ujjivan Small Finance Bank
- Transitioned from MF to Small Finance bank
- Stricter regulatory standards
- Underserved Populations
- BASIX
- low-income households
- Capacity building programs