Microfinance Institutions - Interest Rate & Eligibility

Top 10 Microfinance Companies in India

1. SKS Microfinance / Bharat Financial Inclusion Ltd. (BFIL)

1. Spandana Sphoorty Financial Limited

1. Bandhan Financial Services (Bandhan Bank)

1. Arohan Financial Services

1. Asirvad Microfinance Ltd.

1. ESAF Microfinance and Investments Pvt. Ltd.

1. Satin Creditcare Network Ltd.

1. Ujjivan Financial Services (Ujjivan Small Finance Bank)

1. Equitas Microfinance Ltd. (Equitas Small Finance Bank)

1. Fusion Microfinance

Goals of Microfinance Institutions

Microfinance institutions have been gaining popularity in the recent years and are now considered as effective tools for alleviating poverty. Most MFIs are well-run with great track records, while others are quite self-sufficient. The primary goals of microfinance institutions are the following:

1. Transform into a financial institution that assists in the development of communities that are sustainable.
2. Help in the provision of resources that offer support to the lower sections of the society. There is special focus on women in this regard, as they have emerged successful in setting up income generation enterprises.
3. Evaluate the options available to help eradicate poverty at a faster rate.
4. Mobilise self-employment opportunities for the underprivileged.
5. Empowering rural people by training them in simple skills so that they are capable of setting up income generation businesses.

Key Benefits

The part that microfinance plays in economic development is noteworthy. Some of the key benefits of MFIs include the following:

1. It enables people expand their present opportunities - The income accumulation of poor households has improved due to the presence of microfinance institutions that offer funds for their businesses.
2. It provides easy access to credit - Microfinance opportunities provide people credit when it is needed the most. Banks do not usually offer small loans to customers; MFIs providing microloans bridge this gap.
3. It makes future investments possible- Microfinance makes more money available to the poor sections of the economy. So, apart from financing the basic needs of these families, MFIs also provide them with credit for constructing better houses, improving their healthcare facilities, and exploring better business opportunities.
4. It serves the under-financed section of the society - Majority of the microfinance loans provided by MFIs are offered to women. Unemployed people and those with disabilities are also beneficiaries of microfinance. These financing options help people take control of their lives through the betterment of their living conditions.
5. It helps in the generation of employment opportunities - Microfinance institutions help create jobs in the impoverished communities.
6. It inculcates the discipline of saving - When the basic needs of people are met, they are more inclined to start saving for the future. It is good for people living in backward areas to inculcate the habit of saving.
7. It brings about significant economic gains - When people participate in microfinance activities, they are more likely to receive better levels of consumption and improved nutrition. This eventually leads to the growth of the community in terms of economic value.
8. It results in better credit management practices - Microloans are mostly taken by women borrowers. Statistics prove that female borrowers are less likely to default on loans. Apart from providing empowerment, microloans also have better repayment rates as women pose lesser risk to borrowers. This improves the credit management practices of the community.
9. It results in better education - It has been noted that families benefiting from microloans are more likely to provide better and continued education for their children. Improvement in the family finances imply that children may not be pulled out of school for monetary reasons.

Groups Organised by Microfinance Institutions in India

There are several types of groups organised by microfinance institutions for offering credit, insurance, and financial training to the rural population in India:

1. Joint Liability Group (JLG)

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. Farmers, rural workers, and tenants fall into this category of borrowers. Each individual in a JLG is equally responsible for the loan repayment in a timely manner. This institution does not need any financial administration, as it is simple in nature.

2. Self Help Group (SHG)

A Self Help Group 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 group takes care of the debt recovery. There is no requirement of a collateral in this kind of group lending. The interest rates are generally low as well. Several banks have had tie-ups with SHGs with a vision to improve financial inclusion in the rural parts of the country.

The 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.

3. Grameen Model Bank

The Grameen Model 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. However, in India, SHGs have been more successful as MFIs when compared to Grameen Banks.

4. Rural Cooperatives

Rural Cooperatives were established in India at the time of Indian independence. The resources of poor people were pooled in and financial services were provided from this fund. However, this system had complex monitoring structures and were beneficial only to the creditworthy borrowers in rural India. Hence, this system did not find the success that it sought initially.

Difference between JLGs and SHGs

1. SHGs are units oriented to the communities when compared to JLGs. Members own and control SHGs and they decide all terms and conditions associated with the group's functioning. Banks and NGOs provide support to these units so that they can prosper.
2. SHGs have internal control, but this can lead to conflict among members. JGs are controlled externally by the institutions that promote them. The terms and conditions of the JLG are also determined by the promoting institution. The operations of JLGs are more standardised and easier to replicate, when compared to SHGs.
3. Under an SHG, the group members will be required to save before they are eligible for a loan. In a JLG model saving is not compulsory; groups need not build internal capital for inter-loaning. Most of the times, MFIs initiate the formation of JLGs by asking members to form such groups with the motive of getting a loan.
4. Donor agencies support SHGs in skill development and capacity building through NGOs. This process of internal capacity building makes the process of getting a bank loan more time-consuming for an SHG. Since JLGs are managed externally, there is very little focus on capacity building. Hence, these units may find it easier to procure loans. JLGs are hence, referred to as "fast growth models". SHGs are more decentralised and democratic than JLGs.
5. SHGs are self-managed and self-reliant. Hence, an MFI representative has to spend very little time over the management of the group. This implies that several groups can be managed by a single representative, resulting in low cost management. In the JLG model, the MFI's employees are responsible for monitoring the routine operations of the group. This makes it an expensive model.
6. JLGs are more immune to internal and external threats as they have better protection from the supporting MFIs. However, they are less empowered in comparison to SHGs.

To summarise, the difference between SHGs and JLGs are as follows:

Highlights

• According to a report on the MFI sector compiled by MFIN for the fiscal year 2022-23, NBFC-MFIs extended financial assistance with a loan outstanding amounting to Rs.1,38,310 crore as of 31 March 2023, constituting 39.7% of the total industry portfolio.
• NBFC-MFIs have registered a 24% YoY growth recently. They also have a market share of 38% in in Q3 FY19 and have maintained their dominance in the lending market. (As per SIDBI-Equifax newsletter). 
• The total number of active loans of MFIs stand at 8.22 crore at the end of Q3 FY19. The GLP (Gross Loan Portfolio) was at Rs.1,57,644 crore at the same time. This indicates a Q-o-Q growth of 7%.
• Microfinance institutions have a presence in 615 districts in India. The regional distribution is as follows:
  • North-East and East - 37%
  • South - 25%
  • North - 14%
  • West - 15%
  • Central India - 9%

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