MICROFINANCE IN

INDIA
OJASVINI
ROLL NO. 2404
MEANING OF MICROFINANCE
Microfinance, also called microcredit, is the provision of
“small credit” to the low-income individuals or groups
who otherwise would have no other access to financial
services.
The term ‘missing middle’ is often used for this section of
our society who
• lost out on formal credit because the formal banking
sector demand collateral
• become prey to exploitative informal institutions of credit.
It is here that Microfinance steps in, providing ‘micro’ credit
with easy-to-comply terms and conditions.
 ORIGIN OF MICROFINANCE
Grameen Bank Foundation: Muhammad Yunus introduced the
concept of microfinance in Bangladesh by launching the
"Grameen Bank” in 1976.
The Grameen Bank provided small loans to the “impoverished” without
asking for collateral.
Impressive Results --
• High Female Participation: The bank has 8.4 million followers, 97% of
whom are women.
• Repayment Success Rates: The bank has repayment success rates
between 95 to 98 percent.

Nobel Peace Prize Recognition: In 2006, both Mohammed

Yunus and Grameen Bank were awarded the Nobel Peace Prize
EVOLUTION OF MICROFINANCE IN INDIA

• NABARD took Yunus’s idea and launched

microfinance schemes in India.
• Microfinance in India began in the 1970s.
• Eventually, it reported strong growth figures after
1991, owing to the liberalization of the economy
and increased lending by private sector entities.
EVOLUTION OF MICROFINANCE IN INDIA
The development of the microfinance sector in India occurred in
four main phases:
 SIGNIFICANCE OF MICROFINANCE
• Poverty Alleviation: Microfinance helps individuals start or
expand small businesses, generating income and lifting families
out of poverty.
• Women Empowerment: With a significant focus on women
borrowers, it enhances their financial independence and
decision-making power.
• Economic Development: By supporting small businesses,
microfinance contributes to local economic growth and job
creation.
• Social Impact: It enables better access to education,
healthcare, and improved living conditions for families.
• Financial Inclusion: Microfinance institutions (MFIs) provide
 COMPONENTS OF MICROFINANCE

1. Microcredit: Small loans given to individuals without

any collateral, steady employment or verifiable credit
history.
• As per the Reserve Bank of India (RBI): A microfinance loan
is defined as a collateral-free loan given to a household
having annual household income up to ₹3,00,000.
2. Micro savings: Small deposit requirements, no
service charges for low-income individuals.
3. Microinsurance: Affordable low premiums and
coverage insurance products to manage risks such as
health emergencies, natural disasters, crop failure etc.
 COMPONENTS OF MICROFINANCE

4. Group Lending: A model where small groups jointly

guarantee loans, fostering accountability and reducing
default rates.
• Example: Joint Liability Group (JLG) is an informal group of 4-
10 individuals, primarily farmers or rural workers.

5. Microfinance Institutions (MFI): A large number of

organisations with varied size and legal forms offer
Microfinance services.
BUSINESS MODELS OF
MICROFINANCE
 FINANCIAL INSTITUTIONS ENGAGED
IN THE MICROFINANCE IN INDIA
1.NBFC-MFIs (Non-Banking Financial Company – Micro-
Finance Institutions): Specialised NBFCs focused on
providing small loans to low-income groups without collateral,
aiming to promote financial inclusion.
2.Banks: Licensed financial institutions authorised to accept
deposits, offer loans, and provide various banking services to
individuals and businesses.
3.Small Finance Banks (SFBs): Niche banks established to
provide basic banking services, particularly to underserved
and unserved sections, including small businesses, marginal
farmers, and micro-enterprises.
4.NBFCs (Non-Banking Financial Companies): Financial
 Source: NABARD “Status of Microfinance sector of India 2023-24 Report”

4. Others (including Non-Profit MFIs): Entities, such as non-profit

organisations, trusts,etc.
5. National Rural Livelihood Mission (NRLM) also contributes significantly to
the microfinance universe through its Self Help Groups (SHGs) Bank Linkage
Programme (SHG-BLP).
This chart summarizes the discussion till now.
 STATUS OF
MICROFINANCE
Microfinance contributes
about 130 lakh jobs and 2%
of our GVA, as per a
National Council of Applied
Economic Research
(NCAER) study (“India
Microfinance Review FY 24-
25”.).
It can potentially reach all
the 6.3 crore
unincorporated and non-
Source: Niti Aayog “Role of Microfinance in India 2022-24 R
agricultural enterprises.
 STATUS OF MICROFINANCE

According to a study by the National Council of Applied

Economic Research (NCAER) -- “India Microfinance Review FY
24-25”.
• Microfinance’s contribution to India’s GVA: The
microfinance sector contributed about 2% of India’s gross
value added (GVA),
• Geographic Distribution of Loans: 76% of the loan
portfolio is in rural areas, while 24% is in urban areas.
• Growth in Microfinance Sector’s Loan Portfolio: As of
March 31, 2024, the microfinance sector’s gross loan portfolio
(GLP) increased by 24.5%, reaching ₹4.33 lakh crore from
₹3.48 lakh crore the previous year.
 STATUS MFI OPERATIONS

Source: NABARD “Status of Microfinance sector of India 2023-24 Report”

 STATUS MFI OPERATIONS

Annual Growth in Microfinance Loans: Microfinance loans

grew by 18.3% year-on-year as of June-end, although default
rates have also increased.
Decline in Loan Collections and Rising Delinquencies:
Data from Microfinance Industry Network (MFIN) and India
Ratings show a decline in loan collections and rising
delinquencies.
Skewed Distribution: The eastern and north-eastern regions
of India hold the largest share of 37% in the loan portfolio,
followed by the southern region at 27%, and the western region
at 15%.
As of 2022, 82% of the loan portfolio was concentrated in ten
 CHALLENGES FACED BY
MICROFINANCE INSTITUTIONS
• High outreach costs in remote areas due to poor
infrastructure
• Over-indebtedness due to lack of proper assessment.
The RBI noted over 12% of microfinance clients had four or more active
loans as of March 2024, reaching 18% in some states, risking defaults
and damaging MFIs' reputations.

• Competitive disadvantage compared to mainstream banks.

• Difficulty in acquiring reliable data for appraisals.
• Limited reach to the urban poor.
 CHALLENGES FACED BY
MICROFINANCE INSTITUTIONS
• Inadequate risk management practices and lack of collateral.
• Dependency on External Funding:
MFIs frequently rely on external funding from banks and investors,
creating vulnerabilities during economic downturns.

• Limited operational flexibility and vulnerability to fluctuations

in banking policies.
• Lack of Financial Literacy:
Borrowers often lack an understanding of loan terms, repayment
obligations, and financial management, leading to misuse of loans and
an inability to repay.
 GOVT. INITIATIVES TAKEN TO
IMPROVE THE MICROFINANCE
ECOSYSTEM IN INDIA
• SHG-Bank Linkage Programme (SHG-BLP) was launched
by NABARD in 1992. Under this programme, banks were
allowed to open savings accounts for SHGs.
• Bank Sakhis, trained members from SHGs served as
intermediaries, aiding SHG members in transactions and
application processes.

• Micro Finance Development and Equity Fund by

NABARD: NABARD created the Micro Finance Development
and Equity Fund (MFDEF) in 2006 to help MFIs with quasi-
equity and subordinated debt instruments.
 CONT.
• Pradhan Mantri Mudra Yojana: It was launched by the
government in 2015 for providing loans up to Rs. 10 lakh to the
non-corporate, non-farm small/micro-enterprises.
• e-Shakti Programme: The primary goal of the E-Shakti Project is
to digitize the accounts of various SHGs and to bring the members
of the groups under the fold of Financial Inclusion.
• PM Street Vendor’s AtmaNirbhar Nidhi (PM SVANidhi): The
Ministry of Housing & Urban Affairs launched this scheme to
facilitate collateral free working capital loans of up to Rs. 10,000/-
of one-year tenure, to approximately 50 lakh street vendors.
• Kudumbashree: It is a women empowerment and poverty
eradication program launched by the Kerala government in 1998. It
focuses on microfinance, providing women in rural and urban areas
with access to savings, loans, and financial support through self-
help groups (SHGs).
 WAY FORWARD
• Strengthening Regulatory Oversight: Enforce strict
compliance with RBI’s harmonised guidelines to ensure
uniformity in practices across all microfinance players.
• Loan Purpose Verification: Ensure loans are utilised as
intended by monitoring their end-use.
• Enhancing Financial Literacy: Conduct large-scale
awareness programs to educate borrowers on responsible
borrowing, repayment obligations, and grievance redressal
mechanisms.
• Improving Risk Mitigation: Promoting sharing of credit
information among MFIs to prevent over-leverage by
borrowers.
• Building Institutional Capacities: Invest in training and
THANK
YOU
Ojasvini
Roll no. 2404