Role of Micro finance institute in India

In the covid times when the urban economy has come to standstill amid lockdown restrictions, it is India’s rural economy which continues to strong and key contributor to nation’s economic growth.  This is evident from the fact despite the pandemic, Agriculture and Allied activities clocked a growth of 3.4% at constant prices during 2020-21(first advance estimate) according to the Economic Survey released in January 2021. Further, micro finance industry – a key provider to credit to the rural economy year on year growth of outstanding loans was 31% at Rs 2,36,427 crore as of March 2020 according to Sa-Dhan’s ‘Bharat Microfinance Report 2020’. While is lower than 41% growth seen in the previous year it could be directly associated with the considerably lower growth of Banks (24% vs 69% in previous year) and NBFCs (7% vs 59% in previous year). However, it could be also highlighted here that during the last one year many external factors have influenced the sector in different parts of the country such as natural disasters (Fani cyclone in Odisha and flood in Kerala) and political interferences (some districts of Assam and Karnataka). 

Despite the challenges, micro finance institutes (MFIs) are instrumental in providing financial services such as loans, access to savings account, insurance and money transfer facility to low-income individuals, small and medium enterprises (SMEs), entrepreneurs, women and nascent businesses who otherwise don’t have access to organised financial institutes like banks. Micro finance institute offers credit at much affordable rates with simple procedures. In the last few years, the central government is keen to provide money to the low-income groups evident from the launch of Pradhan Mantri MUDRA Yojana (PMMY) in 2015 which offers loans to non-corporate, non-farm small/micro enterprises. These loans are given by Commercial Banks, regional rural banks (RRBs), Small Finance Banks, MFIs and NBFCs. Apart from the government, the Reserve Bank of India (RBI) continued to issue guidelines for the sector and other regulatory bodies like Insurance Regulatory and Development Authority of India (IRDAI), Securities and Exchange Board of India (SEBI) continue to provide friendly environment for the microfinance sector to carry on its activities.  Development financial institutes (DFIs) like National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), National Housing Bank (NHB), banks and other non-banking financial companies continue to provide funds to the micro finance sector in India making it easier for them to carry out their operations.

These institutes play a key role in the economic development in the following way:

• Financing the needs of economically deprived and marginalized population specially women, people from scheduled castes, scheduled tribes and minorities
• Assist in expansion of operations of the SME’s and provide them more customised and complete range of banking and financial products meeting their exact demand and nature of business
• Micro financers can provide credit with easy procedure, lesser documentation and taking little or less collateral
• Create employment opportunities by providing credit to unskilled and semi-skilled labourers, women
• By providing working capital to small businesses and households MFIs they are able to generate income, alleviate poverty and improve their standard of living
• MFIs have played a critical role in driving financial inclusion, spreading financial literacy which can aid the low-income population in the better management of the finances

The micro finance in India operates via two channels:

• SHG – Bank Linkage Programme (SBLP)
• Micro Finance Institutions (MFIs)

SHG – Bank Linkage Programme (SBLP) was the world’s largest micro finance model which began in 1992 by NABARD with Rs 29 lakh lent to 225 SHGs (Self-Help Groups). Under this model, members usually 10-20 women coming together to form a semi-formal community-based institution to meet their common financial and social needs.  These members give their savings in the group periodically and from these savings small loans are provided to the members. In the later period these SHGs are provided with bank loans generally for income generation purpose. According to Sa-Dhan’s ‘Bharat Microfinance Report 2020’, SBLP played a major role in the financial inclusion with 102.43 lakh SHGs covering nearly 133 million households leading to the social, economic and financial empowerment of the rural poor, especially the women.  

There are 202 Micro Finance Institutions (MFIs) with a branch network of 19,073 and 1.52 lakh employees reaching out to over 42 million clients with an outstanding loan portfolio of Rs 1,01,663 crores. Non-Banking Financial Companies (NBFCs) MFIs, Co-operative societies, trust form the part of the MFIs.  Sri Kshethra Dharmasthala Rural Development Project (SKDRDP) has the largest MFI loan portfolio followed by CreditAccess Grameen, Satin Creditcare, Spandana. MFIs lend through the concept of Joint Liability Group (JLG).  JLG is an informal group comprising of 4-10 individuals coming together for the purpose of availing bank loan on individual basis or through group mechanism against mutual guarantee.  MFIs traditionally have been lending or both consumption and productive purposes. RBI regulation stipulated that a minimum of 50% of the MFI loans are to be deployed for income generating activities. Analysis of the loan portfolio held by reporting MFIs for 2019-20 showed that the proportion of income generation loans to non-income generation loans is 93:07 according to Sa-Dhan.   MFIs had witnessed tremendous growth and had minimal regulation earlier till the Andhra Pradesh crisis in the fall of 2010. To protect the sector, RBI formed the Malegam Committee which provided its recommendations in 2011. The MFIs continue to follow RBI guidelines and the strengthened regulatory framework has resulted in the efficient functioning and strong performance of these institutes.

Impact of the pandemic on the micro finance sector

Covid-19 pandemic has thrown several challenges to the micro finance sector which offers credit to the vulnerable segment of the society.  As the loan portfolio is one of the key assets of MFIs whose health depends on the loan repayment, this repayment of the loan came to standstill amid the lockdown and temporary shutting down of the SMEs and several small businesses. The uncertainty pertaining to repayment intensified with the second wave of the pandemic giving yet another blow to small businesses and entrepreneurs.  But MFIs are integral part of the financial inclusion target of the government and the central bank. The small and the mid-sized MFIs continued to receive the liquidity support of the government, NABARD, SIDBI and also public sector banks and will be in the forefront in providing credit to the vulnerable sections.