Role played by MFIs in India/ Socio-Economic Impact

According to the report of the 2018 of World population this is the well-known fact that
much of the Indian population still resides in rural area with lack of facilities and
knowledge.

The income earned is too low and it is not su cient for the people to meet with their
basic needs. Micro nancing plays a vital role in the lives of small businessmen and
entrepreneurs in under developed urban and rural parts of India. The people of rural areas
have very low access to the institutionalized credit, So micro nancing helps them to have
stability with respect to their nancial issues.

Micro nance plays a vital role in the development of India

Micro nance act as an anti-poverty vaccine for the people living in rural areas. It aims at
assisting communities which are economically excluded to achieve greater level of asset
creation and income security at the household and community level.

The utmost signi cance of micro nance in India is that it provides access to the capital to
small entrepreneurs. Micro nance in India also provides loans, insurance, access to
savings accounts.

The concept of micro nance focuses on women also by granting them loans. It act as a
tool for the empowerment of poor women as women are becoming independent, they are
able to contribute directly to the well beings of their families and are able to confront all
the gender inequalities. The major targets of micro nance are the poor rural and urban
households and women too.

Credit is important to the poor people for maintaining the common imbalance in between
the income and their expenditure. It is also vital to the poor people for the income
generating activities like investing in marginal farms and other small scale self
employment ventures. Their access to formal banking channels are low due to the lack of
resources an nature of formal credit institutions. Consequently in India, Micro nance
institutions and self help groups are leading to other traditional banking channels as they
are catering the need of credit to poor people. It has contribute a lot in enhancing the
quality of life of the poor people.

The credit gap has decreased to 43.33% in FY 2021-22 from 48.5 % in FY 2020-21.

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 EVOLUTION OF MFI / Micro nance in India

Ever since the rst MFI came into existence in 1996, the micro- nance sector has witnessed a stable
growth, but the momentum picked up only after 2004 and during the last several years, has
witnessed a phenomenal growth with number of lending institutions up from a few to several
hundreds. The quantum of credit, which MFIs are providing to the poor and nancially excluded
bene ciaries, has crossed R1.16 lakh crore. However, the micro- nance sector has changed over the
last few years with the greater market share of banks, NBFCs and SFBs together accounting for
2/3rd of the sector. The combined portfolio of the sector has reached over R2.6 lakh crore with a
client base of 6 crore. At the same time, the credit demands by clients for various purposes have
risen, be it consumption loans, income-generating activities, MSME, housing, education, water &
sanitation, health and agriculture.

Over the years, the sector has evolved and become more systematic with the regulatory framework
issued by the RBI in 2011 and the Industry Code of Conduct formulated by the SROs. Moreover,
the changing dynamics (as the sector which was once dominated by NBFC-MFIs, is now seeing
other institutions increasingly growing in market share) have given way to the development of the
Code for Responsible Lending, a voluntary code for all lenders operating in the micro nance sector.
In March 2022, the RBI issued a New Regulatory Framework for Micro nance Loans, which
provides a level playing eld to all lenders operating in the sector as it outlines a common set of
regulations for all lenders.

Furthermore, technology also has contributed signi cantly in the evolution of m s. From its many
ef ciency-enhancing bene ts, technology has now also become an operational necessity for MFIs.
The process of adoption of technology has been accelerated in the recent past by events in the
external environment. As an outcome of demonetization, most MFIs started crediting loan amounts
to bank accounts, avoiding cash disbursements. The pandemic resulted in MFIs looking at the
digital collection methodologies. To fully leverage the potential of technology, there is a need to
make investments to build the nancial and digital literacy of their clients, so that clients become
con dent in undertaking cashless transactions.

MFIs are also at the forefront of implementing development programmes of national interest.
Several MFIs are actively involved in the nancing of water-sanitation products and services, as
also renewable energy products. The MFI sector is also showing active interest in taking the
Aayushman Bharat Programme to the nook and corner of the country with its wide outreach as well
as in affordable housing and an active partner of the PM SVANidhi Scheme for street vendors.
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