Date: 07/04/2023

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment; Inclusive growth and issues arising therefrom; Financial Inclusion and Microfinance.

Key Phrases: Microfinance Loan, Financial Services, Non-Banking Financial Companies, Regulatory Framework, Financial Inclusion, Prepayment Penalty, Microfinance Institutions, Self-regulatory Organisation (SRO), Customer Protection.

Context:

• In recent times, microfinance is available in nearly 85 per cent districts of India with more than two lakh frontline employees distributing credit and associated services.

Key Highlights:

• Microfinance is a basis of financial services for entrepreneurs and small businesses deficient in contact with banking and associated services.
• The term “microfinancing” was first used in the 1970s during the development of Grameen Bank of Bangladesh, which was founded by Muhammad Yunus.
• As per a latest study, Microfinance contributes about 130 lakh jobs and 2 percent of our GVA and it has the potential to reach all the 6.3 crore unincorporated and non-agricultural enterprises.
• Inclusive growth, necessitated bank nationalization.
  • The government is now deepening, widening and sharpening inclusive growth through several programmes including Jan Dhan Yojana, livelihood, social pension, insurance, DBT, and microfinance programmes.

Need of Microfinance:

• Growth becomes inclusive and sustainable only when ‘financial inclusion’ is integral to public policy.
• To safeguard the interest of people outside the formal financial system, Microfinance is a necessary tool.
• Failure of formal banking institutions in lending to the rural poor in the absence of proof of recognised employment or collateral that can be offered by them while applying for loans leaves the poor with no alternative but to borrow money from local moneylenders at high-interest rates.
  • In order to provide credit facilities to such individuals, MFIs are useful.

Self  Help Group Bank Linkage Programme:

• Microfinance, began with Self Help Group Bank Linkage Programme (SHG-BLP), which emanated from MYRADA’s action research project commissioned by Nabard in 1989.
  • The RBI’s initiative of linking informal groups with banks for micro deposits and loans made SHG-BLP a reality.
• What started with a humble target, linking 500 SHGs to banks, is now the world’s largest microfinance programme - 129 lakh bank linked SHGs with loan outstanding of about ₹1,81,500 crore.
• SHG-BLP combines the strengths of community, NGOs, government and banks, empowering women, creating social capital, enriching livelihoods and creating sustainable businesses for banks.
  • The Southern and Eastern States lead SHG-BLP.

Microfinance Institutions (NBFC-MFIs)

• Microfinance changed its complexion in the early 2000s, starting from southern India, with the primarily Microfinance Institutions (NBFC-MFIs).
  • The gross loan portfolio of all microfinance providers is about ₹3.2-lakh crore with 6.4 crore borrowers and per member loan outstanding of about ₹50,000.

Difference between SHG-BLP and MFIs:

• Under the SHG-BLP members can access loans from banks only after individual savings, regular group meetings and inter-lending amongst members.
  • MFIs usually give loans through joint liability groups (about five borrowers per group), who are jointly and severally responsible for repayment.
• While the SHG-BLP movement started with social objectives for accessing formal finance, MFIs gradually transformed the movement into an efficient commercial operation.

Positive Aspects of Microfinance:

• Financial Inclusion :
  • Microfinance has emerged as one of most important tools to foster financial inclusion.
  • It enables the poor and low-income households to come out of poverty, helps women to become owners of assets, have an increased say in decision making and lead dignified lives embodying the concept of a collective good.
• Inclusive Growth :
  • Microfinance plays a critical role in promoting inclusive growth by making credit available at the last mile and therefore, acts as a safety net for those at the bottom of the pyramid.
  • Microfinance loans provide financial access to the poorest that allows many of them to start new businesses,grow existing businesses,insure against shocks due to bad weather and illness,and smooth consumption.
• Adopting Tech :
  • MFIs (microfinance institutions) have been increasingly adopting technology to enhance operational efficiency, improve underwriting models and reduce expenses while continuing the focus on customer-centricity.
  • Audio-visual content in vernacular languages is widely utilised to continuously impart financial literacy.
• Improve Underwriting Models :
  • A separate credit bureau for microfinance was established about a decade back.
  • Intense efforts by MFIs and credit bureaus have led to the development of robust databases and a credit bureau report is an essential part of underwriting now.
• Expanding Reach of Microfinance :
  • In terms of reach, microfinance operations cover 28 states and 9 union territories (UTs).
  • In terms of regional distribution, eastern & north-eastern regions of the country have the largest share at 37 per cent followed by south at 27 percent and west at 15 per cent.
  • Thus, in impacting the lives and livelihoods, the role of microfinance continues to be important.
  • While microfinance is present in almost all nooks and corners of the country, in terms of geographical distribution, 82 per cent of the loan portfolio is concentrated in ten states.
• Strong Customer Protection :
  • The RBI regulations for microfinance provide an effective framework for customer protection.
    • This framework is supported by the RBI recognised self-regulatory organisation (SRO).
    • The SRO supports the MFIs in the implementation of the regulations, takes initiatives for capacity building, improves governance through regular guidance and surveillance and provides a platform for resolving sector level challenges.
• Digitalisation initiatives :
  • Digitalisation initiatives have been aligned to the rapid diffusion of smartphones and growing comfort of borrowers with digital modes of transactions.
  • Today, nearly 100 per cent of loans are digitally disbursed directly into the bank account of the borrowers and an increasing number of repayments are also being done digitally.

Need of Hour:

• Many development professionals opine SHG-BLP is the appropriate model for India because of interest subvention provided by government(s) and moderate interest rates charged to borrowers.
  • But under SHG-BLP per borrower loan amount has been small and the loaning process a tad longer, as compared to quicker and bigger loans from MFIs.
  • Hence borrowers are gradually opting for MFIs.
• Poverty, climate change and overexploitation of natural resources threaten sustainable development and SDGs.
  • Microfinance, with its bright and still unexplored future, has the potential to provide solutions.
• India is a vast country and many microfinance models are required.
  • Efficiency and flexibility to meet clients’ needs must be the differentiators.

Conclusion:

• The microfinance programme has witnessed phenomenal growth in India in the last decade.
  • However, the focus of most of the microfinance service providers has remained on expanding the outreach of microfinance programmes with little attention to the depth, quality and viability of the financial services.

Source: The Hindu BL

Mains Question:

Q. Efficiency and flexibility to meet clients’ needs must be the differentiators for choosing an appropriate model of microfinance in India". Critically analyze (250 Words).