Microfinance Institutions in India

Poverty continues to affect billions of people worldwide. Microfinance is just one of several tools available to help people get out of poverty. Microfinance specifically caters to the poor’s need for financial services. Microfinance institutions have been able to handle the issues of lending to the poor while producing products such as microcredit, micro-savings, insurance, and more, that can help customers pull themselves and their families out of poverty through innovative financial solutions like group lending.

Microfinance institutions try to reach the underserved and involve them as fully as possible in financial systems around the world with the help of network organizations, microfinance investment vehicles, funders, and technical support providers.

Microfinance institutions in India:

Microfinance was created as an alternative to providing loans to poor people to foster financial inclusion and equality. Bank loans to poor people have many constraints, including a lack of security and a high operational cost.

In the guise of the “Grameen Bank,” Nobel Laureate Muhammad Yunus brought the concept of microfinance to Bangladesh. NABARD utilized this concept and pioneered Micro Finance in India. The two principal cooperative financial institutions operating in urban areas are the Urban Co-operative Banks (UCB) and the Urban Credit Co-operative Societies (UCCS). In India, there are over 1400 UCBs with over 3400 branches and 14 million members. In 1990-91, their total lending outstanding was over Rs 80 billion, with deposits totaling Rs 101 billion. Similarly, there are over 32000 credit cooperative societies with over 15 million members, with a total outstanding loan of Rs 20 billion and deposits of Rs 12 billion in 1990-91.

Types of microfinance institutions:

1. Joint Liability Group: This is usually a small, informal group of four to ten persons who seek loans based on mutual assurance. Agricultural or associated businesses are the most common uses for loans. Farmers, rural labourers, and tenants are among the borrowers in this category. Personal preferences in credit lending are one of the structure’s fundamental faults, which has resulted in the system’s partial collapse.
2. Self-Help Group: A Self-Help Group is a collection of people from similar socioeconomic groups who join to assist one another. For a limited period, these small business owners combine to build a common fund to meet their mutual business needs. The NABARD SHG linkage program, for example, permits various self-help organizations to borrow money from banks if they can verify that their debtors have made regular payments.
3. Grameen Bank Model: This strategy’s major goal is to strengthen the rural economy from beginning to end. Since rural credit and recovery systems remain a big issue, this technique has not been fully implemented. Due to a substantial volume of non-performing assets, many regional banks also failed. Self-Help Groups have done better than this strategy since they are better suited to India’s population density and are far more sustainable
4. Rural Cooperatives: During India’s independence era, rural cooperatives were started. Poor people’s assets were collected, and this money was used to provide banking services. It had complicated standard operating procedures and exclusively benefited creditworthy borrowers in rural India. As a result, this system did not produce the desired results.

Salient features of microfinance: 

Microfinance by MFIs exhibits the following salient features:

• Microfinance is a tool for underprivileged women’s empowerment
• Microfinance loans are typically quite small
• Disbursement of loans based on need
• Microfinance is directed at low-income rural and urban households
• Because of group lending, transaction costs are low
• Microfinance credit is based on thrift, mobilization, and lending the same
• Operational transparency
• Short repayment time
• A straightforward method for examining, processing, and approving the loan and delivery credit applications
• Peer pressure serves as a form of collateral for loans
• Misuse is uncommon, and there is a guarantee of repayment

Role of Microfinance institutions (MFIs): 

MFIs give people easy access to credit or give people credit when they need it the most. Banks typically do not provide small loans to customers but MFIs that provide microloans fill this void. It allows for future investments by making more money available to the poor segments of the economy. As a result, in addition to financing these families’ basic needs, MFIs provide them with credit to build better houses, improve their healthcare facilities, and explore new business opportunities. Its role is for the underprivileged segments of society like the majority of microfinance loans provided by MFIs go to women, the unemployed, and those with disabilities. These financing options enable people to take control of their lives by improving their living conditions.

List of top 10 Microfinance Institutions in India: 

• State Bank of India
• Equitas Small Finance Bank Ltd.
• Mahindra and Mahindra Financial Services
• Ujjivan Financial Services
• Bharat Financial Inclusion Ltd.
• Spandana Sphoorty Financial Ltd.
• Bandhan Financial Services
• Share Microfin Ltd.
• Shri Kshetra Dharmasthala Rural Development Project
• Asmitha Microfin Ltd.

Conclusion: 

Thus, we can conclude by stating some ways to forward with MFIs such as focusing on developing a sustainable and scalable microfinance model with a clear mandate for both economic and social good. Also, The RBI should encourage all institutions to track their social impact and analyze it to further enhance microfinance lending institutions.