Micro-finance

Micro-finance refers to the provision of a wide range of financial services—including credit, savings, insurance, and money transfers—to low-income individuals or groups who traditionally lack access to conventional banking and financial institutions. It aims to promote financial inclusion, empower the poor (especially women), and support income-generating activities in rural and semi-urban areas.
Micro-finance serves as a powerful tool for poverty alleviation, enabling small entrepreneurs, artisans, and marginal farmers to access capital for productive purposes and improve their standard of living.

Concept and Definition

The term micro-finance encompasses all financial services tailored to meet the needs of economically weaker sections. It is broader than micro-credit, which refers only to the provision of small loans. Micro-finance includes:

• Micro-credit (small loans for productive activities)
• Micro-savings (safe deposit facilities for small amounts)
• Micro-insurance (protection against risks like illness, death, or crop loss)
• Remittance services (money transfer facilities for migrants and rural households)

According to the Reserve Bank of India (RBI), micro-finance provides “financial services in small quantities to poor and low-income households, enabling them to raise income levels and improve living conditions.”

Objectives of Micro-Finance

The key objectives of micro-finance include:

• Promoting financial inclusion by extending banking services to unbanked populations.
• Providing access to credit for self-employment and micro-enterprises.
• Reducing dependence on informal moneylenders and exploitative borrowing.
• Encouraging savings and financial discipline among low-income households.
• Empowering women by supporting their participation in economic activities.
• Enhancing livelihood security and reducing vulnerability to economic shocks.

Evolution of Micro-Finance in India

Micro-finance in India evolved through several stages, influenced by both institutional initiatives and grassroots movements:

1. Early Experiments (1970s–1980s):
   • Initiatives like the Self-Employed Women’s Association (SEWA) in Gujarat (1974) and MYRADA in Karnataka pioneered micro-credit and self-help initiatives.
   • The failure of state-led subsidised credit programmes, such as the Integrated Rural Development Programme (IRDP), highlighted the need for sustainable micro-finance models.
2. SHG–Bank Linkage Programme (1992):
   • The National Bank for Agriculture and Rural Development (NABARD) launched the Self-Help Group–Bank Linkage Programme (SHG–BLP), which became the world’s largest micro-finance initiative.
   • Under this model, self-help groups (SHGs) of 10–20 members, mostly women, pool their savings and access bank credit collectively.
3. Emergence of Micro-Finance Institutions (MFIs):
   • From the late 1990s, non-banking financial companies (NBFCs) and non-governmental organisations (NGOs) began operating as dedicated micro-finance providers.
   • Examples include SKS Microfinance (now Bharat Financial Inclusion Ltd.), Bandhan, and Spandana Sphoorty.
4. Regulatory Developments (2011 onwards):
   • Following the Andhra Pradesh micro-finance crisis (2010), the RBI introduced a regulatory framework for NBFC–MFIs in 2011 to ensure responsible lending and consumer protection.
   • Subsequent reforms have strengthened transparency, borrower protection, and interest rate guidelines.

Models of Micro-Finance

Micro-finance delivery in India operates through various models, depending on institutional structure and target clientele:

1. Self-Help Group (SHG) Model:

• SHGs are small, informal groups (10–20 members) that pool savings and lend to each other.
• They later become eligible for bank linkage to access formal credit.
• Prominent under NABARD’s SHG–Bank Linkage Programme.

2. Joint Liability Group (JLG) Model:

• Small groups of borrowers jointly guarantee each other’s loans.
• Common among tenant farmers and small entrepreneurs.
• Encourages credit discipline and reduces default risk.

3. Grameen Model:

• Inspired by the Grameen Bank of Bangladesh (founded by Dr. Muhammad Yunus).
• Involves structured lending through small, homogeneous groups with peer monitoring.

4. Cooperative Model:

• Credit cooperatives and thrift societies mobilise savings and provide micro-loans to members.

5. MFI Model (Institutional Model):

• Dedicated micro-finance institutions—registered as NBFC–MFIs, societies, or trusts—offer financial services to low-income clients.

Regulatory Framework in India

The Reserve Bank of India (RBI) is the primary regulator for micro-finance in India. Key aspects of the regulatory framework include:

• Definition of Micro-Finance Loans (RBI, 2022):A micro-finance loan is a collateral-free loan provided to a household with an annual income of up to ₹3,00,000.
• Types of Entities Engaged in Micro-Finance:
  • NBFC–MFIs (Non-Banking Financial Companies – Micro Finance Institutions)
  • Banks (including Regional Rural Banks and Small Finance Banks)
  • Cooperative societies
  • NGOs and trusts
• Regulatory Guidelines:
  • Caps on loan repayment obligations relative to borrower income.
  • No collateral requirement.
  • Transparent disclosure of interest rates.
  • Flexibility in repayment frequency (weekly, fortnightly, or monthly).
  • Prohibition of coercive recovery practices.

Major Micro-Finance Institutions (MFIs) in India

Some of the leading MFIs operating in India include:

• Bandhan Bank (formerly Bandhan Financial Services Ltd.)
• Bharat Financial Inclusion Ltd. (formerly SKS Microfinance)
• Spandana Sphoorty Financial Ltd.
• Ujjivan Small Finance Bank
• CreditAccess Grameen Ltd.
• Equitas Small Finance Bank

These institutions collectively serve millions of clients, especially women and small entrepreneurs, across India.

Role of NABARD and SIDBI

• NABARD (National Bank for Agriculture and Rural Development):
  • Pioneered the SHG–Bank Linkage Programme.
  • Provides refinancing support and capacity building for micro-finance institutions.
• SIDBI (Small Industries Development Bank of India):
  • Established the SIDBI Foundation for Micro-Credit (SFMC) to fund MFIs.
  • Promotes sustainable and scalable micro-finance models through refinancing and technical assistance.

Benefits of Micro-Finance

1. Empowerment of Women:
   • A majority of beneficiaries are women, enhancing their financial independence and decision-making power.
2. Poverty Alleviation:
   • Enables low-income households to invest in productive activities and improve livelihoods.
3. Financial Inclusion:
   • Integrates the unbanked population into the formal financial system.
4. Entrepreneurship Promotion:
   • Encourages the establishment of small and micro enterprises.
5. Community Development:
   • Strengthens social cohesion through group-based mechanisms like SHGs and JLGs.
6. Reduced Dependence on Moneylenders:
   • Provides affordable and transparent credit alternatives.

Challenges and Criticisms

Despite its success, the micro-finance sector faces several challenges:

• High Interest Rates: MFIs often charge higher rates due to operational costs and risk premiums.
• Over-Indebtedness: Multiple borrowing and aggressive lending practices can lead to debt traps.
• Lack of Financial Literacy: Borrowers may misuse funds or misunderstand loan terms.
• Geographical Concentration: Micro-finance outreach is uneven, with heavy concentration in states like Tamil Nadu, Karnataka, and West Bengal.
• Operational Sustainability: Small MFIs face funding constraints and high administrative expenses.
• Regulatory and Political Risks: State-level interventions can affect sector stability (as seen in Andhra Pradesh, 2010).

Recent Developments

• Revised RBI Regulatory Framework (2022): Introduced a uniform regulation for all entities engaged in micro-finance lending, ensuring borrower protection and transparency.
• Digital Micro-Finance: Increasing adoption of fintech and mobile-based platforms to reduce transaction costs and expand outreach.
• Integration with Government Schemes: Programmes like Pradhan Mantri Mudra Yojana (PMMY) and National Rural Livelihoods Mission (NRLM) promote micro-enterprise financing and SHG empowerment.

Future Prospects

The future of micro-finance in India lies in building a more inclusive, digital, and sustainable ecosystem. Emerging trends include:

• Integration of digital financial services and mobile banking.
• Focus on green and climate-resilient financing for rural livelihoods.
• Strengthening credit information systems to prevent over-indebtedness.
• Expanding outreach through Small Finance Banks and fintech partnerships.