Models of Microfinance in India

Microfinance in India refers to the delivery of small-scale financial services—including credit, savings, insurance, and remittance facilities—to low-income households and micro-entrepreneurs who lack access to formal banking systems. The microfinance sector in India has evolved significantly since the 1990s, adopting diverse institutional and operational models to serve the needs of rural and semi-urban populations.
These models differ in their approach to service delivery, target clientele, institutional structure, and linkages with formal financial institutions. Collectively, they have become a cornerstone of financial inclusion and poverty alleviation strategies in India.

Evolution of Microfinance Models in India

The evolution of microfinance in India can be traced through three broad phases:

1. Informal Community Initiatives (Pre-1990s):Informal self-help groups, chit funds, and cooperative societies provided small loans based on mutual trust and community ties.
2. Formal Linkage with Banks (1990s–2000s):The Self-Help Group–Bank Linkage Programme (SHG–BLP) introduced by NABARD in 1992 became the dominant institutional model.
3. Emergence of Institutional MFIs (2000s onwards):The rise of Non-Banking Financial Company–Microfinance Institutions (NBFC–MFIs) and other intermediaries expanded outreach, professionalism, and financial sustainability in the sector.

Major Models of Microfinance in India

The microfinance ecosystem in India primarily operates through the following models:

1. Self-Help Group (SHG)–Bank Linkage Model

This is the most prominent and widely adopted model of microfinance in India, pioneered by the National Bank for Agriculture and Rural Development (NABARD) in 1992.

Structure and Functioning:

• SHGs are small, voluntary associations of 10–20 members, predominantly women, who save regularly and pool their resources.
• The group maintains its own savings and internal lending activities.
• After establishing a track record, the SHG is linked to a bank for external credit.
• Loans are provided to the group as a whole, which then distributes funds among members based on need.

Models of SHG–Bank Linkage (as per NABARD):

1. Model I: SHGs formed and financed directly by banks.
2. Model II: SHGs formed by NGOs or government agencies and financed by banks.
3. Model III: SHGs financed by banks using NGOs or other agencies as financial intermediaries.

Key Features:

• Group-based lending with collective responsibility.
• Emphasis on savings, credit discipline, and self-management.
• Credit flow without collateral.
• Capacity building through NGOs and rural development agencies.

Advantages:

• Promotes social cohesion and women’s empowerment.
• Encourages savings behaviour.
• Reduces transaction costs for banks.
• Ensures better loan recovery through peer pressure.

Example:

As of 2023, over 12 million SHGs are operating under the Deendayal Antyodaya Yojana–National Rural Livelihood Mission (DAY–NRLM) framework.

2. Joint Liability Group (JLG) Model

The Joint Liability Group (JLG) model is another major microfinance mechanism introduced by NABARD in 2004, primarily targeting small and tenant farmers, sharecroppers, and landless labourers who lack collateral.

Structure and Functioning:

• A JLG consists of 4–10 members who come together to avail of bank loans collectively.
• Loans are extended to individuals in the group, but all members share joint liability for repayment.
• Credit is usually provided without collateral.

Key Features:

• Members mutually guarantee each other’s loans.
• Primarily credit-oriented (no savings component, unlike SHGs).
• Promotes credit discipline through peer accountability.

Advantages:

• Suitable for agricultural and allied sectors.
• Enhances credit flow to landless farmers and micro-entrepreneurs.
• Reduces default risk for lenders.

Example:

NABARD has promoted over 2 million JLGs across India, mainly in states like Tamil Nadu, Maharashtra, and Karnataka.

3. Grameen Model (Village Banking Model)

The Grameen Model, adapted from Bangladesh’s Grameen Bank founded by Dr. Muhammad Yunus, focuses on group-based lending with peer monitoring and joint liability.

Structure and Functioning:

• Groups of five borrowers form the basic unit.
• Several groups are federated into a centre of 8–10 groups.
• Loans are provided to individuals, but repayment responsibility lies with the group collectively.
• Weekly or fortnightly meetings are conducted for repayments and savings.

Key Features:

• Focus on small, frequent loans with regular repayments.
• Heavy reliance on peer pressure and group solidarity.
• Direct lending through MFIs or NGO intermediaries.

Advantages:

• Ensures high repayment rates.
• Builds a sense of responsibility and mutual support.
• Effective for income-generating and micro-enterprise activities.

Example:

Many Indian MFIs such as SKS Microfinance (Bharat Financial Inclusion Ltd.), Spandana Sphoorty, and Bandhan Bank initially followed the Grameen model.

4. Cooperative Model

The Cooperative Model operates through credit cooperatives, thrift societies, and cooperative banks that provide micro-loans and savings services to members.

Structure and Functioning:

• Members pool savings and extend loans within the cooperative framework.
• Operates under democratic principles (“one member, one vote”).
• Supervised by the Registrar of Cooperative Societies at the state level.

Key Features:

• Member-owned and member-managed.
• Focus on both savings and credit services.
• Local and community-based operation.

Advantages:

• Builds local participation and trust.
• Reduces dependence on external funding.
• Can handle multiple financial products (credit, savings, insurance).

Example:

Urban Cooperative Banks (UCBs) and Primary Agricultural Credit Societies (PACS) serve as examples of the cooperative microfinance model.

5. Microfinance Institution (MFI) Model

This is an institutional and commercially driven model, where specialised Microfinance Institutions (MFIs)—registered as NBFCs, Section 8 companies, trusts, or societies—deliver financial services to low-income clients.

Structure and Functioning:

• MFIs mobilise funds from banks, investors, or development agencies.
• Loans are provided directly to individuals or groups (often following the Grameen or JLG structure).
• Operations are supported by trained field staff and digital monitoring.

Key Features:

• Focus on scalability and sustainability.
• Offer multiple products—credit, savings facilitation, insurance, and remittances.
• Operate under the Reserve Bank of India (RBI) regulatory framework for NBFC–MFIs.

Advantages:

• Professional management and efficient delivery mechanisms.
• Wide outreach through rural and semi-urban branches.
• Financial sustainability due to repayment-based operations.

Examples:

Prominent MFIs in India include:

• Bandhan Bank (originated as an MFI)
• Bharat Financial Inclusion Ltd. (SKS Microfinance)
• Spandana Sphoorty Financial Ltd.
• Ujjivan Small Finance Bank
• Equitas Small Finance Bank

6. Federated or NGO–MFI Model

In this model, Non-Governmental Organisations (NGOs) act as intermediaries between financial institutions and beneficiaries.

Structure and Functioning:

• NGOs mobilise groups (SHGs or JLGs), provide capacity building, and facilitate credit linkage with banks.
• Some NGOs transform into regulated MFIs to expand their financial services (e.g., Bandhan, BASIX).

Advantages:

• Strong social orientation with developmental objectives.
• Capacity building and awareness creation among borrowers.
• Bridges the gap between formal finance and rural communities.

Example:

Organisations such as MYRADA, ASA, and PRADAN have pioneered NGO-based microfinance operations in India.

7. Bank-Led Microfinance Model

Under this model, commercial banks, regional rural banks (RRBs), and cooperative banks directly provide micro-loans or refinance MFIs and SHGs.

Mechanism:

• Banks either lend directly to individuals or indirectly through MFIs/SHGs.
• Supported by RBI priority sector lending norms, where lending to microfinance counts toward mandatory targets.

Advantages:

• Expands credit outreach under formal banking.
• Reduces dependence on external donor funding.
• Ensures lower interest rates compared to informal sources.

Example:

Banks such as State Bank of India (SBI), NABARD, and SIDBI play major roles through refinancing and direct linkage programmes.

Comparative Overview of Major Microfinance Models

Challenges in Microfinance Models

Despite extensive outreach, microfinance models face persistent issues:

• High interest rates charged by some MFIs.
• Over-indebtedness due to multiple borrowings.
• Limited financial literacy among clients.
• Geographical concentration in select states.
• Regulatory and governance challenges in smaller institutions.

Recent Policy Developments

• RBI’s 2022 Framework for Microfinance Loans: Introduced a uniform regulatory framework for all lenders, emphasising borrower protection and interest rate transparency.
• Integration with Digital Finance: Use of fintech and mobile platforms for loan disbursal, monitoring, and repayment.
• Government Schemes: Convergence with programmes like Pradhan Mantri Mudra Yojana (PMMY) and National Rural Livelihoods Mission (NRLM) to expand microfinance coverage.

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