Economy / Banking System In India / Microfinance in India
Microfinance in India
Definition: Microfinance refers to the provision of financial services, such as credit and insurance, in small amounts to individuals in rural, semi-urban, and urban areas, especially those with low-income levels. Microfinance institutions (MFIs) are entities that offer these services to empower individuals to enhance their income and living standards.
Microfinance Models:
- Self-Help Group (SHG)-Bank Linkage:
- Dominant microfinance model in India.
- SHGs are groups of micro-entrepreneurs with similar social and economic backgrounds.
- Members save regularly, contribute to a common fund, and address mutual needs.
- Microfinance Providers in India:
- Domestic Commercial Banks (Public Sector Banks, Private Sector Banks, Local Area Banks)
- Regional Rural Banks
- Co-operative Banks
- Co-operative Societies
- Registered NBFCs (Non-Banking Financial Companies)
- Other providers such as Societies, Trusts, etc.
Challenges in Microfinance:
- Concerns:
- Unjustifiably high interest rates.
- Lack of transparency in interest rates and charges.
- Issues of multiple lending.
- Upfront collection of security deposits.
- Over-borrowing.
- Instances of ghost borrowers.
- Coercive methods of recovery.
- Malegam Committee Recommendations:
- MFIs should charge a maximum interest of 24% on small loans (up to ₹25,000).
- Creation of a separate category of Non-Banking Financial Companies for microfinance (NBFC-MFI).
- Small loans (up to ₹25,000) for families with an income of up to ₹50,000 per annum.
- 75% of MFI loans should be for income generation.
- Borrowers restricted to taking loans from a maximum of two MFIs.
- Regulation of MFIs by NABARD in coordination with the RBI.
- Bank lending to NBFCs qualifying as NBFC-MFIs entitled to 'priority lending' status.
- Borrowers limited to membership in one self-help group or joint liability group.
Microfinance plays a crucial role in financial inclusion, empowering individuals at the grassroots level, and supporting income-generating activities in India. Regulatory measures aim to address challenges and ensure responsible lending practices.
