MICROCREDIT & MICROFINANCE INSTITUTIONS
Microcredit is the extension of very small loans (microloans) to impoverished borrowers who typically lack collateral, steady employment, or verifiable credit history. It is designed to support entrepreneurship and alleviate poverty. Nobel Laureate Muhammad Yunus is credited with laying foundation of modern MFIs with establishment of Grameen Bank, Bangladesh in 1976.
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Significance of MFIs
- Social benefits
- Promote women entrepreneurs: Almost 99% microfinance loans in India are provided to women from low-income households.
- Women empowerment: With access to financial resources, women are better equipped to meet practical needs, contribute to household resources, and challenge gender inequity.
- Example: Mission Shakti in Mayurbhanj district [Odisha], Annapurna Pariwar Mumbai.
- Rural development: 76% of the loan portfolio is in rural areas. MFIs enhance credit to the poor even in the absence of a formal mortgage. This allows them not to borrow from local moneylenders at exorbitant interest rates.
- Anti-poverty vaccine: Acts as an anti-poverty vaccine as it helps with greater level of asset creation and income security.
- Self-esteem: Access to finance generates self-esteem among the poor.
- Multiplier Effect: Improved economic and other conditions help in reducing poverty, hunger, and even improve education opportunities for children.
- Economic benefits
- Development of secondary and tertiary sector: A large portion of loans of MFIs [64%] goes to manufacturing, trade, and services.
- Scope for enhancing financial inclusion: MFIs have grown so fast and attracted so many new investors that they have raised enough capital to become universal banks.
Examples:
- Bandhan MFI started with Rs. 2 lakh in 2001 and reached a market capitalisation of Rs. 1,00,000 crore during pre-Covid days.
- Several MFIs have become SFBs, such as Equitas, Ujjivan, and Janalakshmi.
- Employment Levels: Microfinance promotes self-employment as people get small employment opportunities.
- Income Levels: Through small loans, one can buy improved seeds to increase productivity, hence income levels.
- Financial discipline: Non-performing assets have remained under 1% over the years despite external shocks in the recent past.
- Control over financial life: Access to savings, credit, money transfer, payment, and insurance can help the poor take control of their financial life.
- Other benefits
- Fewer regulatory hassles: Many MFIs prefer to remain NBFCs, which have fewer regulatory hassles. This ensures speedy disbursal of loans to the needy.
- Indirect benefits: E.g., Entrepreneurs who create successful businesses, in turn, create jobs, trade, and overall improvement within a community.
Issues
- Issues related to Microfinance Institutions (MFIs)
- Inability to generate funds: MFIs have the inability to raise sufficient funds in microfinance. Though NBFCs are able to raise funds through private equity investment, such MFIs are restricted from taking public deposits.
- High interest rates: Interest rates range between 18-24%. This leads the very same borrowers to seek loans elsewhere in order to pay back the original loan, creating a vicious cycle.
- Heavy dependence on banks: MFIs are dependent on borrowing from banks. In these cases, available bank funds are typically short term, i.e., maximum 2 years period.
- Weak governance: Many MFIs are not willing to convert to a corporate structure; hence they avoid transparency, thus unable to attract capital.
- Regional imbalance: 68% concentration of loan portfolio in East & North East and South regions [Highest in West Bengal followed by Tamil Nadu].
- Low digital infrastructure: MFIs largely serve in rural and semi-urban areas. The penetration of digital infrastructure in such areas is low and internet connectivity is poor.
- Multiple borrowings: In some cases, MFIs allow clients to take out multiple loans. Here, borrowers may default and also MFIs run the risk of not being repaid.
- Loan Design: Mostly fixed income loans are given, which are not based on the precise need of the client’s business.
- Lack of borrower credit history: There is a need to know the borrower history, especially for rural borrowers, since it is difficult for small lenders to establish their credit history and determine their repayment capability.
- Issues related to Borrowers
- Financial illiteracy: Illiteracy of the people makes it difficult in creating awareness of microfinance and even more difficult to serve them as microfinance clients.
- Lack of information: There are various sources of credit information in India, but none of these focuses on small, rural borrowers.
- Loans for Conspicuous Consumption: Loans are sometimes utilized for non-income generating purposes, hence bringing customers into a debt trap.
- Socio-Economic Issues
- IL&FS crisis: It led to tightened liquidity conditions and affected the funding profile of NBFC-MFIs.
- Localized distress: Environmental events such as floods in Kerala and socio-political events in Assam also caused localized distress.
- Demonetization: MFI operations have traditionally been cash-intensive. Consequently, demonetization in 2016 imposed a cash crunch on the MFI sector.
- COVID-19 Pandemic: The loan disbursal went under severe crunch during the pandemic due to lockdown.
- Inadequate Data: While overall loan accounts have been increasing, the actual impact of these loans on the poverty level remains unmonitored.
Way Forward
- Improving credit flow: Inability to get sufficient funds acts as a major hindrance in the growth of the sector.
- Use of technology: For reaching the poorest of the poor, expanding in rural areas can increase the availability of loans to them.
- Social Impact Scorecard: Should be promoted to monitor the impact of each loan in the lives of the clients. Also, this ‘social impact scorecard’ should be leveraged when MFIs themselves seek funding to support their operations.
- Verify End Use: MFIs should ensure that the ‘stated purpose of the loan’ that is asked from customers at the loan-application stage is verified at the end of the tenure.
- Diversify Lending Institutes: There is a huge money demand and supply gap. Thus, there is a need to diversify lending institutes. There is a need to diversify the lending institutes.
- Improving services: Bringing in innovation and efficiency, transparency in pricing should be adopted by MFIs.
- Availability of borrower credit history: This will help MFIs gauge the risk appropriately and accordingly decide the amount of loan to be dispersed along with the rate of interest.
- Role of Local and leading Banks: Leading banks must be taken into consideration for district-wise and block-wise economic opportunities and resource mapping.
- Private sector: Especially the private banks should play a greater role.
Case study:
Dedicated Regulator in Bolivia
The State has put in place an empowered financial regulatory authority called ‘Superintendencia de Bancos Entidades Financieras’ (SIBEF) to develop and govern the MFI sector. The informal sector in this country is a source of major employment, and MFI plays a greater role.
Evolution of Micro-finance institutions in India [STATIC Information]:
- 1974 – Sewa Bank: First form of microfinance.
- 1984 – NABARD Trust for SHGs.
- 2002 – SHG loans on par with secured loans.
- 2004 – MFI lending treated as PSL.
- 2006 – Krishna Crisis in Andhra Pradesh.
- 2007 – Entry of PE Players.
- 2009 – MFIN launched.
- 2010 – SKS IPO, Andhra Crisis & Ordinance.
- 2012 – Malegam Committee & RBI guidelines.
- 2014 – RBI gave universal banking license to Bandhan.
- 2015 – MUDRA Bank launched; 8 MFIs granted SFB licenses by RBI.