Microfinance Institutions

  • October 6, 2021
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Microfinance Institutions

Subject – Economy

Context – MFIs seek additional ₹7,500 cr. under credit guarantee scheme

Concept –

  • These are organizations that offer financial services to low-income populations. They provide services such as micro loans(all loans that are below Rs.1 lakh), micro-savings, and microinsurance.
  • Microfinance Institutions provide small loans to people who do not have any access to banking facilities. Their area of operation includes rural areas and among low-income people in urban areas.
  • The Non-Banking Financial Company -Micro Finance Institutions (Reserve Bank) Directions, 2011of the Reserve Bank of India (RBI) is regulating all the Non-Banking Finance Company (NBFC)-MFIs in India.

Salient provisions of RBI document on Regulation of Microfinance sector

The suggested framework in the Document is intended to be made applicable to the microfinance loans provided by all entities regulated by the Reserve Bank. After the consultation, the RBI will release the overall guidelines for the regulation of the Microfinance Sector.

  • A common definition of microfinance loans: there is no common definition for microfinance loans available from various microfinance entities in India. The document aims to provide one common definition for all regulated microfinance sector entities.
  • Capping the outflow on account of repayment of loan obligations of a household to a percentage of the household income. Further, borrowers can determine the period of repayments as per their requirements.
  • A Board approved policy for household income assessment.
  • There should be no pre-payment penalty; no collateral requirement, and greater repayment frequency for all microfinance loans.
  • Alignment of pricing guidelines for NBFC-MFIs with guidelines for NBFCs.
  • Introduction of a standard simplified fact sheet on the pricing of microfinance loans. Further, MFIs need to display minimum, maximum and average interest rates charged on microfinance loans on their websites for greater transparency.
  • Aligning pricing guidelines for NBFC-MFIs with guidelines applicable to NBFCs.

Major Business Models:

  1. Joint Liability Group:
    • This is usually an informal group that consists of 4-10 individuals who seek loans against mutual guarantee.
    • The loans are usually taken for agricultural purposes or associated activities.
  1. Self Help Group:
    • It is a group of individuals with similar socio-economic backgrounds.
    • These small entrepreneurs come together for a short duration and create a common fund for their business needs. These groups are classified as non-profit organisations.
    • The National Bank for Agriculture and Rural Development (NABARD) SHG linkage programme is noteworthy in this regard, as several Self Help Groups are able to borrow money from banks if they are able to present a track record of diligent repayments.
  1. Grameen Model Bank:
    • It was the brainchild of Nobel Laureate Prof. Muhammad Yunus in Bangladesh in the 1970s.
    • It has inspired the creation of Regional Rural Banks (RRBs) in India. The primary motive of this system is the end-to-end development of the rural economy.
  1. Rural Cooperatives:
    • They were established in India at the time of Indian independence.
    • However, this system had complex monitoring structures and was beneficial only to the creditworthy borrowers in rural India. Hence, this system did not find the success that it sought initially.
economy Microfinance Institutions