Microfinance

Introduction

Microfinance is one of the often-heard terms in financial circles, it gains more weight in the developing part of the world. Microfinance has had different definitions over the years and we shall see how the word has changed

Micro finance: A Definition

Present in all parts of the world, microfinance can be seen as a key cog in the wheel which aims to provide financial inclusion in the form of affordable financial products, these products are not only limited to credit like personal loans and credit cards but also to in other products such as savings, fixed deposits and other banking services. It is one of the ways in which all round economic development can be achieved.

The most accepted and broad definition is one that defines microfinance as a micro credit offered to unemployed and those who get minimum wages as salaries. The institutions which participate in this system of micro credit are called micro finance companies.

The Microfinance Services Bill of India defines microfinance specifically as the service which provides financial assistance to an individual or anyone who is eligible to receive credit. In the same bill, the microfinance institutions in India are organisations or association of individuals and that which has been established for carrying on the business of making credit available for these sections of the population.

Common Objectives of Microfinance Institutions

We shall now see that the broad objectives that Microfinance Institutions that operate in India strive for

• To promote social and economic development among weaker sections of the economy
• Strengthen self help groups and use them as a tool towards economic development
• To promote women empowerment, financial liberation of women and support women entrepreneurs

Micro Finance & India: A History

Micro finance is not a new concept in any part of the world, just that there have been different definitions over the years, the earliest precedent that we can see in India with money lending groups in Kerala. The modern version of Micro Finance in India starts from the 1970s, where many of the microfinance institutions were set up.

The whole micro finance set up was given a boost based the Government of India’s boost towards the alleviation of poverty. While the institutions were started in the 1970s, the companies gained prominence only in the 90s, the most famous of those is the SEWA organisation or Self-Employed Women’s Organisation bank

Number of Micro Finance Institutions

The number of micro finance companies are estimated to be around 20 in the country, while there is no exact estimate on how many are there in total because the co-operative organisations cannot be effectively calculated.

Micro Finance Models in India

The models that are prevalent in India are a mix of traditional and innovative methods and cater to a large section of the people who are having difficulties in accessing credit in India; the common models are the Grameen model which is based on the successful model in Bangladesh.

In a self-help group model the group member vary from 5-20 members are homogenous, the first thing that is done is to pool in an initial principle from their savings. The groups are formed based on common interests which leads to common goals and it is seen that most of these groups are predominantly made up of women and lays the path towards women empowerment. The NGOs operate within the SHG group model

There are also Government sponsored microfinance initiatives such as NABARD or the National Bank for Agricultural and Rural Development

From being a nascent sector in the 1970s to being recognized by the Reserve Bank of India in the 2000s, the microfinance institutions have a come a long way; now we will see how they will lend to their target groups.

What are the different type of loans that are given through Microfinance companies?

The products cover the needs of those who need immediate cash, the products that include loans for

• women to increase their income generation
• loans for home grown entrepreneurs
• emergency medical loans
• home improvement loans
• home extensions/ business improvement loans

It has been seen that now loans which are of a higher amount have been given to the groups that depend on microfinance companies. Even appliances like mobile phones which are essential for their business have been bought using loans from microfinance companies.

How Microfinance Companies give loans to borrowers?

Since the target segment they are catering to is specialized base who do not have access to credit previously, while this loan amount however small would help them immensely there is also a risk factor involved which needs to be factored in by the microfinance companies.

Once the skills and the purpose and the education qualifications of the loans are ascertained by the representative from the microfinance institution, then they draw up an agreement which contains the terms during the loan period.

The presence of a similar peer group helps in the part of maintenance and recollection of the loan, if the borrower has a specialised skill like weaving and handicrafts or towards a new business opportunity, then the microfinance company might treat it differently.

This is the difference that microfinance companies are making in the country while having a robust process governed by social norming and peer groups, they are also able to ensure a good collection stat. These institutions will help taking Indians towards the next level in financial inclusion.

The other trends that are noticed through the microfinance companies are that, experts have thought that the microfinance was catering to only the rural sectors where people who supported themselves through agriculture and allied fields, but it was also seen that the microfinance companies were giving out different types of loans to the urban poor too. The microfinance companies have also started giving loans to the micro enterprises and filling in a gap in the credit system, through this way the dreams of small entrepreneurs are also being realized.

Credit Score and Microfinance

While most microfinance lend to those who at most times might not have a credit score, there is a huge opportunity for the target groups of being inducted into the credit system by opening bank and eventually loan accounts and build a credit score. Getting into the credit system is the only way true financial inclusion is possible, this is still in its early stages with initiatives like the Jan Dhan Yojana. There is no doubt about the importance of the role of microfinance companies in getting more people to experience credit.