NTCC SEMINAR -2 REPORT

REPORT ON:

MICROFINANCE IN INDIA’S FINANCIAL INCLUSION LANDSCAPE

SUBJECT CODE

MSSM602

FOR THE PARTIAL FULFILMENT OF THE AWARD OF THE DEGREE

SUBMITTED TO:

AMITY COLLEGE OF COMMERCE AND FINANCE

AMITY UNIVERSITY KOLKATA

UNDER THE GUIDANCE OF :

DR.MILI KAR

SUBMITTED BY

SANA TRANNUM

ENROLMENT NO.-A90957621007

COURSE:MASTERS OF COMMERCE(SEM2)

BATCH:2021-2023
 DECLARATION
I hereby declare that this Seminar -2 Report entitled “Microfinance in India’s financial

Inclusion landscape”, is a genuine work carried out by me under the guidance of DR. Milli kar ,
Amity college of Commerce and Finance, Amity university Kolkata.

Place- kolkata

Date-27/05/2022

Signature of the Student

Sana Trannum

A90957621007
 ACKNOWLEDGEMENT
While bringing out this project on “Microfinance in India’s Financial Inclusion Landscape’, I
would like to thank my supervisor, DR.MILI KAR for her valuable guidance and encouragement
through the period of the project.

Although this report has been prepared with utmost care and deep routed interest, even than I
accept imperfections.
MICROFINANCE IN INDIA’S FINANCIAL
INCLUSION LANDSCAPE
 ABSTRACT
Microfinance is currently considered one of the most important tools for international
development and poverty alleviation.. Despite numerous empirical inquiries, however ,the actual
effects of microfinance on economic and gender variables relative to poverty remain unclear, and
a number of critiques have challenged the efficacy of microfinance at promoting women’s
empowerment and alleviating poverty. Moreover, since the 1970’s, microfinance has grown and
transformed into a largely commercial financial sector that connects capital investors with poor
borrowers at a significant scale. Nonetheless, through its business success ,microfinance has also
engendered a series of over-indebtedness crises, most notably the one in India in 2010.These
crises, as well as the strong critiques levied against microfinance ,have prompted the sector to
search for new methods and a new mission as well as new markets to conquer.
CONTENTS
CHAPTER 1-INTRODUCTION

1.1-INTRODUCTION

1.2-MEANING

1.3-EXAMPLES

1.4-

1.5-

1.6-

1.7-

1.8-

1.9-

1.10-

1.11-

1.12-

CHAPTER 2-LITERATURE SURVEY

2.1-Microfinance in the Literature

2.2-Objective of the study

CHAPTER 3-DATA& METHODOLOGY

3.1-Method used

3.2-Research Methodolgy

CHAPTER 4-DISCUSSION&ANALYSIS

4.1-Data Analysis& Interpretation

4.2-Major Findings

CHAPTER 5-CONCLUSION&RECOMMENDATION

5.1-Conclusion
5.2-Recommendation

5.3-Limitation of the study

BIBLIOGRAPHY

CHAPTER 2-LITERATURE SURVEY

 CHAPTER 1-INTRODUCTION

1.1.-INTRODUCTION

Since the beginning, microfinance has been playing a key role in financial inclusion in India,
having come into existence to specially serve the smaller and more overlooked sections of
society. In laymen’s terms, micro credit is a loan of a very small amount given to the self-
employed rural population, to help them live better and improve their living conditions. The
common types of employment of the individuals who seek micro credit are vegetable vendors,
artisans, farmers, rickshaw pullers, fishermen, etc. The basic idea behind microcredit is to
provide economic inputs to those in rural areas that are willing to pull themselves out of poverty.
The need for credit is demonstrated by the fact that Microfinance Institutions (MFIs) constitute
one of the fastest growing segments in recent years in terms of reaching out to small borrowers.
Microfinance in India started through the Self-Help Group-Bank Linkage model which was an
initiative by National Bank for Agriculture and Rural Development (NABARD) in 1992, to link
the un-organised sector to the formal banking sector. This industry has evolved over the last two
decades and reached over 25 per cent penetration level in the total addressable market, in 2019
The microfinance lenders aim to provide easy access to formal credit to customers that need it
the most and would not typically be eligible for bank credit, thus providing inclusion for a large
rural and urban population of the country. A vast majority of the borrowers constitute women
who are just above the poverty line and striving to improve the living conditions of their
household.

Microfinance, involving extension of small loans and other financial services to low income
groups, is a very important economic conduit designed to facilitate financial inclusion and
assist the poor to work their way out of poverty. In 2006, Government of India constituted a
‘Committee on Financial Inclusion’ which was headed by Dr. C. Rangarajan, Chairman,
Economic Advisory Council to the Prime Minister. They broadly defined financial inclusion as
the process of ensuring access to financial services and timely and adequate credit where needed
by vulnerable groups such as weaker sections and low-income groups at an affordable cost. This
definition is not limited to banking services but also includes universal access to Insurance and
Risk Management products at reasonable prices.
1.2-MEANING

What Is Microfinance?

Microfinance refers to the financial services provided to low-income individuals or groups who

are typically excluded from traditional banking. Most microfinance institutions focus on offering
credit in the form of small working capital loans, sometimes called microloans or microcredit.
However, many also provide insurance and money transfers, and regulated microfinance banks
provide savings accounts.

Microfinance aims to improve financial services access for marginalized groups,

especially women and the rural poor, to promote self-sufficiency.
1.3-MICROFINANCE PROVIDERS IN THE INDIAN LENDING LANDSCAPE

Different players like banks, SFBs, MFIs, NBFCs and not-for-profit MFIs enable microlending
in India. MFIs hold the largest share of the loan portfolio, which stands at INR 681 billion and
accounting for 38% of the total industry portfolio.7 This suggests that borrowers are more
inclined to take loans from MFIs.
1.4-DIFFERENT TYPES OF MICROFINANCE INSTITUTIONS IN INDIA

The microfinance models are developed in order to cope with the financial challenges in
financially backward areas. There are various types of microfinance companies operating in
India.

Joint Liability Group (JLG)

Joint Liability Group can be explained as the informal group consisting of 4-10 individuals who
try to avail loans against a mutual guarantee from banks for the purpose of agricultural and allied
activities. This category generally consists of tenants, farmers and other rural workers. They
work primarily for lending purposes, although they also offer a savings facility. In this type of
institution, every individual of a borrowing group is equally liable for the credit. This kind of
institution is simple in nature and requires little or no financial administration.

However, one of the serious problems of this structure is personal preferences in lending credit
which resulted in a partial failure of the system. Of late due to various promotional initiatives are
taken by banks such as Indian Bank, Karur Vysya Bank and Indian Overseas Bank, the
credibility of the Joint Liability Group model has received a boost. It still remains a landmark
movement in the area of protection of farmers’ land ownership rights.

Self Help Group (SHG)

Self Help Group is a type of formal or informal group consisting of small entrepreneurs with
similar kind of socio-economic backgrounds. Such individuals temporarily come together and
generate a common fund to meet the emergency needs of their business. These groups are
generally non-profit organizations. The group assumes the responsibility of debt recovery. The
advantage of this micro-lending system is that there is no need for collateral. Interest rates are
also generally low and fixed especially for women. In addition, various tie-ups of banks with
SHGs have been implemented in the hope of better financial inclusion in rural areas.

One of the most important ones is the NABARD SHG linkage program where many self-help
groups can borrow credit from banks once they successfully present a track record of regular
repayments of their borrowers. It has been very successful, especially in Andhra Pradesh, Tamil
Nadu, Kerala and Karnataka and during the year 2005-06. These states received approximately
60% of SGH linkage credit.

The Grameen Bank Model

Grameen model was introduced by the Nobel laureate Prof. Muhammad Yunus in Bangladesh
during the 1970s. It has been widely adopted in India in the form of Regional Rural Banks
(RRB). The goal of this system has been the overall development of the rural economy which
generally consists of financially backward classes. But this model has not been fully successful
in India as rural credit and system of recovery are a real problem. A huge amount of non-
performing assets also led to the failure of these regional banks. Compared to this model Self
Help Groups have been more successful as they are more suited to the population density of
India and far more sustainable.

Rural Cooperatives

Rural Cooperatives in India were set up during the time of independence by the government.
They used the mechanism to pool the resources of people with relatively small means and
provide financial services. Due to their complex monitoring structure, their success has been
limited. In addition, this system only catered to the credit-worthy individuals of rural areas, not
covering a large part of the country’s financially backward section.
 1.5-TABLE SHOWING DETAILS OF DIFFERENT MICROFINANCE INSTITUTIONS

Joint Liability Self Help Group Grameen Bank Model Rural

Group Cooperatives

Size 5-10 members per 10-20 members per Starts with only 2 70-80 members
group group members per group in per group
a village, eventually
increased after the
loan is successfully
repaid
Services Generally lending Regular savings in Savings and deposits Primarily lending
only, irrespective deposit accounts to extremely poor services for
of the savings with the financial sections of the society agricultural
amount institutions. for business, health purposes
and housing
Model Members invest All individuals of The field Manager A cooperative
loan amounts for group work visits villages to form society
different purposes together on the groups of 5 and lends consisting of
but are same activity to 2. Amount members are
guarantors of recovered is formed for a
each other reinvested in further singular
lending and purpose; such as
infrastructure real estate,
development in agriculture,
villages infrastructure,
etc.
Structure All members More formal with A formal structure All members
interact with the defined positions in consisting of Unit interact with the
financial each group like Manager, Field financial
institution treasurer and Manager, etc. Who institution
individually secretary interact with every jointly
family in a village

1.6-IMPORTANCE OF MICROFINACIAL INSTITUTIONS:

The Planning Commission evaluated that 27.5% of the Indian populace was all the while living
underneath the poverty line in 2004-2005. In India, around 75% of the poor live in rural zones,
with the vast majority of them comprising of landless workers, daily bread earners, and
independently employed families. India has one of the highest rates of destitute individuals on
the planet with an expanding gap between the rich and poor. Indians have an intriguing cultural,
political, and monetary history, which impacts the destitution and gender discrimination inside
the nation. After India's freedom from Britain in 1945, another democratic government was
made, which aims at providing equivalent rights, opportunities and financial stability. Since the
Indian populace needs opportunities, for example, financial assets and the capacity to get
employment, they are stuck in an interminable cycle without any open doors for individuals to
lift themselves out of destitution (Burra 2005, 32)

Since the 1950s, microcredit has DOI:10.24105/gjiss.7.2.1804 22 been utilized as a strategy by

government in developing nations, international financing associations and benefactor offices,
with a specific end goal to help the poor population. Amid the 1950s and1960s in a joint effort
with the Indian banking system, the Indian government began dispensing advances to families in
rural zones that worked in the agricultural segment and in addition city-staying families to
advance financial development all through India (Fisher 2002, 84). Households in the
agricultural market were divided into three different groups of workers, which decided the
amount of loans they would receive. The groups were determined by the type of work they did
and the profitability of that work (Ibid.).  The first group was medium to small agricultural
farmers, artisans and people who rear poultry and other landless livestock.  The second group
was microenterprise workers, who are either agricultural or poultry/dairy farmers who sell their
crops and produce; and the non-farm sector-micro-enterprise workers who work in repair shops,
wooden furniture making shops, etc.The third group was small agricultural, poultry, dairy-based
enterprises; and non-farming individuals that employ 6-10 workers, working in enterprises.
(Fisher 2002, 84)
1.7-Problem Faced by Microfinance Institutions: -

These financial institutions were facing the problems of asymmetric information, moral lazard
and high transaction cost while proving credits to the poor people.

# providing credit to the poor people through group lending and creating a joint liability amongst
them for each other’s behavior pertaining to the repayment of loan has overcome the problems of
asymmetric information and moral lazard.

# Most country family units in India still don't approach to banks to access an account, hindering
them from access to saving funds and credit (Basu 2006). In India it is greatly troublesome for
the rustic poor to get credit or even have savings account from the formal banking system.

#It is to a great degree troublesome for the poor to get credit from banks because of their absence
of guarantee and in light of their naiveté in formal fund since they ordinarily borrow cash from
moneylenders and businesspeople.

1.8-Development Of Microfinance Institution In India:-

By 1969, Prime Minister Indira Gandhi began to nationalize commercial banks so they could
open up to the world keeping in mind the end goal i.e. to meet a portion of the new policy
objectives, such as making it less demanding for non-wealthy people to approach a bank
(Kamakar 2008, 20). The main objective of Nationalization was:  to restrict corporations from
controlling all the banks; to utilize bank resources to allocate wealth more uniformly;  to
arrange public savings (including the rural areas); and  to target on agriculture and small
industry” Therefore, a huge number of new bank branches were opened all through rural India in
the 1970s. Amid this time, credits were given to artisans and additionally to agricultural and
dairy farmers. One of the objectives of these new banks was to prevent moneylenders from
giving advances. The banks and their approaches turned into a vital part of the economy. The
government began concentrating on financial advancement and credit arranging. Consequently,
banks began disseminating advances in rural groups to agribusiness and little scale businesses.
The point was to achieve financial and social change through the distribution of credits. After
two decades in the 1990s, microfinance institutions (MFIs) began to wind up well known in
India as the economy began extending and ending up more focused (Fisher 2002, 36). In 1992 ,
the National Bank for Agriculture and Rural Development DOI:10.24105/gjiss.7.2.1804 21
(NABARD) began a program to back and promote the dispensing of advances to Self help
groups (SHGs), which comprise of little gatherings of ladies who begin their own organizations
from small scale loans. After a year in 1993, Rashtriya Mahila (RMK or the National Credit
Fund for Women) was set up to disseminate credit from NGOs to independently employed ladies
in the unorganized sector. RMK has helped nearly 1,100 NGOs give around Rs 72.6 crore (726
million) to 393,000 ladies by March 2001.

1.9-POTENTIAL OF MICROFINANCE:

A major demographic change is taking place in our country with a huge and growing working
population. There is a big chunk aspiring to grow into the middle class with the support of
institutional credit. Therefore, microfinance can play a big role in meeting their requirements and
fulfilling their goals. The credit needs of low-income groups range from emergency loans,
consumption loans, business loans, working capital loans, housing, etc. In addition to credit, poor
households would benefit from a combination of financial services, including savings,
remittances, loans, micro-insurance, micro-pensions, and the like. In today’s world, technology
is shaping the future of finance. All the key players are harnessing technology to provide an
efficient experience to the end user. In the Indian context, improving the accessibility of financial
platforms using FinTech is key.

Therefore, designing suitable financial products that cater to specific needs of the financially
excluded population, and provide facilities like digital onboarding, is vital in achieving the
objective of financial inclusion. The goal of universal Financial Inclusion can be achieved only
through synergistic efforts between the mainstream financial entities and other players like MFIs,
Fintech etc. as they play a complementary role in championing this cause. Therefore, banks and
NBFCs need to explore the possibility of establishing business collaboration among themselves,
and with FinTech firms as it could be pivotal in accelerating the agenda of financial inclusion
through innovation. In addition to incorporating emerging technology faster into their businesses,
the entities engaged in microfinance could also look at collaborating with FinTechs and other
entities who can help them mine customer and transaction data, cross- sell products and
introduce new customer centric products and services, and streamline operations. They will also
have the opportunity and need to raise the digital literacy of their customers that is not highly
informed and aware and, therefore, can be susceptible to frauds.

1.10-STARTUPS OFFERING MICROFINANCING SOLUTIONS

Rufi Rural FinTech – Micro-Lending For Rural Communities

Microfinance advances small sums of credit, usually to help young or marginalized and
unbanked communities. All around the world, microcredit is gaining in popularity and shows
promise for lifting large sections of the world population out of poverty. Families accessing
microfinance solutions are able to look beyond living with only essentials into savings and
investments.

Mexican startup Rufi Rural Fintech employs big data and advanced analytics techniques to
extend micro-lending services to rural communities. Rufi targets businesses by providing
digitization services for rural enterprises and also builds digital communities and internet cafes
targeting young rural people.
Momentum Credit – Loan Products For Small & Medium Enterprises (SMEs)

Micro, small and medium enterprises usually form the majority of businesses in many countries
around the world. This, in turn, makes SME development a priority for several governments, and
many have schemes to support SME growth. Microfinance is a powerful tool for SMEs as it
provides timely money, no matter how nominal the amount. Systematic investing in small
businesses improve economic diversity as well as stability.

Kenyan startup Momentum Credit advances structured working capital to individuals and SMEs.

The startup’s range of micro-loan products includes invoice factoring, logbook loans, bid bonds,
and payment guarantees. These solutions allow those with low incomes or collateral to finance
their businesses with alternative security arrangements.

Money Bank – Peer-To-Peer (P2P) Lending Platform

Increasingly, governments are looking for ways to implement financial inclusion policies, mainly
to bring more people into the formal banking sector. Microfinance plays an especially useful role
in catering to previously unbanked communities like women and younger people from low-
income regions. Start-ups’ develop simple and easy-to-use P2P solutions to improve the
livelihoods of millions of people around the world.

Vietnamese startup Money Bank provides a 24/7 digital P2P lending platform across Vietnam.
Using digital technologies, the startup extends loans without requiring any paperwork or
collateral. Borrowers have several options for choosing their loan amount and repayment plans.
Money Bank also works to minimize investors’ risk by utilizing a data-driven, reliable scoring
technology along with inputs from risk analysts and experts.

Thitsa Works – Microfinance Data Sharing Platform

Microfinance is largely considered a low-risk venture, mainly because the sums of money
involved are relatively small. However, it takes powerful data-driven analysis to ensure that
finance is extended only to those most likely to repay the money. As an industry, microfinance
also provides employment opportunities and pushes local development from the bottom up.
Myanmar-based startup Thitsa work is developing a range of financial and regulatory technology
solutions for microfinance institutions. The startup offers a microfinance data-sharing platform
along with data visualization services. In partnership with Musoni, the startup provides
governments with core banking systems for financial institutions. 

Sandah – Microfinance For Financial Inclusion

One of the more surprising aspects of microfinance has to do with the high repayment rates,
according to various studies conducted in existing markets. By borrowing and working to repay
smaller sums of money, more people are able to access the finance that they need, in terms of
both money and repayment period. Low-income workers’ earnings usually remain stagnant,
making it difficult for them to access credit from larger lenders. Microfinance helps these groups
of the population avoid both formal banking complexities, as well as loan sharks.

Egyptian startup SANDAH extends microfinancing and home financing solutions starting from
1.000 Egyptian Pounds (EGP) up to 30.000 EGP. In addition, the startup also works to improve
project opportunities, create job prospects for young professionals, and enhance the skills of
industrial workers.

Awamo– Biometric Microfinance Software

At the end of the day, financial pressures, in particular for low-income families, lead to increased
stress and depression. Microfinance startups are working to alleviate several societal pressures
by extending small sums of credit that radically improve livelihoods. Biometrics-based solutions
aim to help, in particular, the poor, underbanked, and unbanked populations, and empowers them
to shift from surviving to thriving.

German FinTech start-up AWAMO is building its eponymous software, awamo 360– a mobile,

biometric banking software tailored for microfinance institutions and savings and credit
cooperative organizations (SACCOs). This software completely digitizes client businesses at
affordable rates.

1.12-TOP 10 MICROFINANCE COMPANIES IN INDIA:

  Equitas Small Finance

The lender offers small loans between Rs.2,000 and Rs.35,000 to the Economically Weaker
Section (EWS) and Low Income Group categories in the country.
Loan Details:

Loan Amount Interest Rate

Up to Rs.25,000 24% p.a.

More than Rs.25,000 23% p.a.

 ESAF Microfinance and Investments (P) Ltd

ESAF Microfinance is a leading MFI in India that has empowered more than 4 lakh members
through its 150 branches. It offers an extensive range of business development and financial
services to the economically and socially challenged members of the society. The institution
offers a bouquet of loan products to suit the varied needs of customers:

Loan Details:

Loan Amount Rs.1,000 - Rs.1 lakh

Interest Rate 22% - 26% p.a. on diminishing basis

Processing Fee 1% - 2% of loan amount + GST

Loan Tenure 3 months – 60 months

  Fusion Microfinance Pvt Ltd

Fusion Microfinance is an RBI registered NBFC-MFI that works on a JLG lending model of
Grameen. The institution offers loans to women in the rural and semi-urban regions. Apart from
offering financial support and insurance protection, the company also imparts financial literacy
to its customers.

Loan Details:

Loan Amount Rs.3,000 – Rs.60,000

Loan Tenure 8 months – 2 years

Interest Rate 21% - 21.50% p.a. on reducing balance method

Processing Fee 0 – 1% of loan amount + GST

  Annapurna Microfinance Pvt Ltd

The purpose of Annapurna Microfinance is to provide loans to the financially underserved
population. Technical and financial education is also imparted to beneficiaries to strengthen their
entrepreneurial skills. It is one of the top ten NBFC-MFIs in India today.

Loan Details:

Loan Amount Rs.1,500 – Rs.25 lakh

Loan Tenure 12 months – 240 months

Interest Rate 18% - 26% p.a. (reducing)

Processing Fee 1% - 2% + GST

  Arohan Financial Services Limited
Eastern India’s largest NBFC MFI, Arohan Financial Services Limited offers financial inclusion
products to 1.9 million customers throughout India. The local partners of the company help in
improving its reach to remote locations. Non-financial products are also offered by the company
at affordable costs. Arohan also has an MSME lending business in its portfolio.

Loan Details:

Loan Amount Rs.1,100 - Rs.50,000

Loan Tenure 3 months - 24 months

Interest Rate 20.70% - 21.25% p.a.

  BSS Microfinance Limited

The company offers microloans to poor women so that they can be part of income generating
activities that bring them out of poverty. The institution offers loans in the states of Maharashtra,
Karnataka, Tamil Nadu, and Madhya Pradesh.

Loan Details:

Loan Amount Rs.8,000 - Rs.60,000

Interest Rate 25% p.a.

Processing Fee 1% + GST (for loans above Rs.25,000)

  Asirvad Microfinance Limited
This microfinance institution has an extensive network of branches throughout 22 states in India.
It offers microloans to women entrepreneurs from low-income households for income generation
activities. Currently, three types of loans are offered to borrowers, i.e., Product Loan, Income
Generation Program (IGP) Loan, and Small and Medium Enterprise (SME) Loan.

Loan Details:

Loan Amount Rs.2,498 - Rs.45,000

Loan Tenure 12 months - 24 months

Interest Rate 21.70% p.a.

  Cashpor Micro Credit

Cashpor is a microfinance institution that works towards bringing the economically backward
sections of the society out of poverty. The products offered by the company include credit
facilities, savings services, insurance coverage, and pension services.

Loan Details:

Credit facilities offered by Cashpor is predominantly for undertaking income generation

activities. Loans are also provided for non-income generation activities and acquisition of assets
that improve the health and social status of the beneficiaries. For instance, loans for the
construction of toilets, women empowerment, and the procurement of gas connections are
commonly offered by the company.

 Bandhan Financial Services Limited

The motive of the institution is to reduce socio-economic poverty by generating employment
opportunities for low-income households. Cost-effective financial and non-financial products are
provided in this regard.

 Fincare Business Services Limited

The Fincare group consists of two NBFC-MFIs, i.e., Disha Microfin Ltd. (now referred to as
Fincare Small Finance Bank) and Future Financial Services Pvt. Ltd. (FFSPL). The company
caters to the semi-urban and rural households of the country, offering Microenterprise Loans
(MEL) and loan against gold with quick disbursals.
CHAPTER 2-DISCUSSION & ANALYSIS

2.1-MICRO FINANCE IN THE LITERATURE:

The few definitions that can be found in Literature are the following:

Robinson (2001), defines Microfinance as “small-scale financial services for both credits and
deposits– that are provided to people who farm or fish or herd; operate small or micro enterprises
where goods are produced, recycled, repaired or traded; provide services; work for wages or
commissions; gain income from renting out small amounts of land, vehicles, draft animals,
or machinery and tools; and toother individuals and local groups in developing countries, in
both rural and urban areas”

Asian Development Bank (ADB) defines microfinance as “the provision of a broad range
of financial services such as deposits, loans, money transfers, and insurance to small
enterprise and households.”

CGAP (2003) defines microfinance as “a credit methodology that employs effective

collateral substitutes to deliver and recover short-term working capital loans to micro
entrepreneurs.”

NABARD (2000) defined micro finance as the “provision of thrift, credit and other financial
services and products of very small amounts to the poor in rural semi – urban or urban areas
enabling them to raise their income levels and improve living standards”. The reserve bank of
India (RBI) uses the same definition (RBI 1999).

The Canadian International Development Agency (CIDA) defines microfinance as, “the
provision of a broad range of financial services to poor, low income households and micro-
enterprises usually lacking access to formal financial institutions .
2.2- OBJECTIVE OF THE STUDY

1. To study the concept of microfinance programs in India

2. To study the growth of microfinance in India

3. To examine the research methodologies and previous studies on Microfinance

4. To analyze the problems and opportunities of Microfinance in India.

THE WAY FORWARD

Thanks to the growth of the internet and mobile phones, today we are seeing an explosion of data
in several sectors of our economy. Likewise, in microfinance, a lot of formal and informal data is
becoming available in the form of digital footprints by low income customers who also transact
on e-commerce platforms and use the internet. These digital footprints are being used by leading
banks and online lending firms to lend to individuals and micro and small enterprises. Artificial
intelligence (AI) and machine learning are also finding greater application in the Indian banking
and financial services industry. It is interesting to see that leading e-commerce companies have
tied up with banks and NBFCs to offer working capital loans to their suppliers at competitive
terms. Most of the suppliers are micro and small entrepreneurs

The introduction of Goods and Services Tax (GST), which is one of the largest and most
significant tax reforms in the world, is also helping formalise the informal economy in a
significant way. As a result of a much-improved digital footprint, individuals engaged in
proprietary businesses, micro and small enterprises, now become attractive clients for banks and
NBFCs, thereby reducing their dependence on informal sources of funds. The cost of credit for
the micro and small enterprises will also decrease significantly as lending will shift from
collateral based to cash flow-based. While opening a new world of opportunities, the application
of technology in finance has its own share of risks and challenges for the regulators and
supervisors. Early recognition of these risks and initiating action to mitigate the related
regulatory and supervisory challenges is key to harnessing the full potential of these
developments. This also brings in the need for a transparent, technology and data driven
approach. Similarly, systemic risks may arise from unsustainable credit growth, increased
interconnectedness, pro-cyclicality, and financial risks manifested by lower profitability. Data
confidentiality and consumer protection are major areas that also need to be addressed.
Objectives of the Study
Conclusion

This research study is conducted to meet three objectives. The main purpose of this research
study is to examine the depth of the outreach of the microfinance program. Generally,
microfinance programs are designed to help the poor rural people to convert their potential into
productive ventures. Microfinance was started with the thought of helping poor rural people but
now its focus has been shifted towards needy people in India cause of several factors playing
important role in providing credit to poor people. Poor people do not have collateral to provide
as a security against credit so they looked at microfinance institutions with the hope of getting
credit against their social status. The repayment rate in India was continued to fall and
microfinance was losing its foothold in India. So a paradigm shift from poor to needy people has
been made. Now-a-days, Microfinance institutions do not only provide micro-credit facilities but
also provide other facilities or new innovative sources to make live stable of needy people
SUMMING UP

To sum up, the microfinance sector is undergoing a multitude of changes amidst growing
competition, rising expectations of masses, technological advancements and an evolving
regulatory landscape. The sector is, therefore, expected to widen the horizon beyond micro credit
to transform the livelihoods of the borrowers. Being constantly mindful of the technological
transformation in the banking and financial services industry, the sector must continue to pursue
the adoption of innovative, futuristic and high-impact business models. The focus of the sector
must be on Digital Microfinance. Keeping in view the need to increase transparency, address
customer-centric issues and safeguard the interests of low-income customers, microfinance
lenders must put the interests of their clients first and implement the Code for Responsible
Lending and the Code of Conduct in both letter and spirit. Redressing consumer complaints
quickly and effectively should be on top of the agenda for MFIs and the Self Regulatory
Organisations (SROs). The Microfinance institutions must broaden their client outreach to
reduce concentration risk and to serve a wider clientele base. From a financial inclusion
perspective, they should also critically review their operations to ensure that some of the regions
do not remain underserved. While the growth of the microfinance sector in the past few quarters
has been quite healthy, we must be cognizant of the vulnerability of the sector to factors such as
external developments, technological changes, event risks and income inconsistencies of the
borrowers. The growing use of technology would give rise to operational risks and there would
be concerns related to client data protection which would need to be addressed.
Database and Methodology

The study is exploratory in nature and is based on the existing literature on the subject including
books, journals, articles, newspaper reports, reports of concerned committees and institutions,
research based articles on microfinance published in journals and international best practices, etc.
The analysis part has been done on the basis secondary data which have been collected from
various sources including State of the Sector Report, Sa-Dhan Report, MFIN Newsletter,
different websites, e.t.c.
CHARACTERISTICS OF FIRST GENERATION AND NEW GENERATION MFIs

CATEGORY FIRST NEW GENERATION MFIs

GENERATION
MFIs

promoter profile Development workers Management graduate,first generation

entrepreneurs
objectives Financial inclusion Aggressive expansion,social impact with
with growth
social intermediation
Legal forms not for profit structure Start as NBFC
Capital structure Look at debt as main start with private equity or equity investor
instrument
Areas of operation usually southern India National,even global Ambitions
Management And HR socially motivated and Professional advisors&external
structure locally consultants,outsourcing
picked staff operational job work
(Source: The International Finance Corporation (2009) The following Table-2 highlights the
major milestone for the Indian MFI)
Pricing of Micro finance Loans

Over the years, modifications in the regulatory instructions and clarifications governing loan
pricing for MFIs have evolved in sync with changing circumstances. Following the
recommendations of Malegam Committee, the guidelines issued in December 2011 prescribed a
uniform margin cap (12 per cent for smaller NBFC-MFIs with portfolio of Rs. 100 crore and less
and 10 per cent for others) along with a cap of 26 per cent on individual loans. Later, in 2012, the
fixed interest rate ceiling of 26 per cent was removed while in April 2014 an additional criterion
was introduced where in the lending rate was fixed at a multiple (2.75 times) of the average base
rate of five largest commercial banks.

The regulatory ceiling on interest rate is applicable only to NBFC-MFIs. The prescription of a
ceiling on lending rate for NBFC-MFIs has had an unintended consequence of not allowing
competition to play out. There is a concern that the current guidelines, while prescribing an
interest rate ceiling for only NBFC-MFIs, are effectively acting as a benchmark for other lenders
as well. It is generally observed that interest rates of other lenders in micro finance segment also
hover around this ceiling despite comparatively lower cost of funds. Even among NBFC-MFIs,
increasing size of the operations leading to greater economy of scale has not resulted in any
perceptible decline in their lending rates. As a result, it is the borrowers who may be getting
deprived of the benefits of enhanced competition, monetary policy impulses as well as
economies of scale.

While banks (including SFBs) have been advised to benchmark all new floating rate personal or
retail loans to an external benchmark w.e.f. October 1, 2019, benchmark-based pricing has not
been introduced for NBFCs, including NBFC-MFIs, yet. In view of the substantial divergence
between the financing and operational costs among the lenders operating in the micro finance
space, mandating any specific benchmark or any spread over a benchmark is unlikely to remove
the constraints observed in the current system. Therefore, under the revised framework, it is
proposed to do away with the prescribed ceiling and mandate all lenders to have a board
approved policy on all-inclusive interest rate charged to the micro finance borrowers. The
lenders would also have to make available a simplified factsheet on pricing of micro finance
loans to the borrowers along with the disclosure of minimum, maximum, and average interest
rates charged by them. The intention is to enable the market mechanism to come into play with
the expectation that it will bring the lending rates downwards for the entire microfinance sector
and empower the customer through transparent disclosures.

Customer Protection Measures

Now, let me dwell briefly upon one other critical aspect of customer protection that the Reserve
Bank is looking to strengthen through the proposed changes. The inability/ difficulty of a
borrower to repay his loan may be caused by several reasons such as unforeseen/ unavoidable
adverse circumstances, natural calamities, over-indebtedness, etc. A cap on the loan repayment
obligation of a household as a percentage of the household income is expected to address the
inability of the microfinance borrowers to repay the loan.

Further, in this case borrowers often lack the type of collateral preferred by the lenders and
whatever little collateral they have for pledging may be of little value for the lenders even while
it might be highly valued by the borrower. Even if lenders take such collateral, it is more for
inducing repayments rather than to recover losses. Therefore, it has been proposed to extend the
collateral free nature of microfinance loans, as applicable to NBFC-MFIs, to all lenders in the
micro finance space.
Benefits of Microfinance

Access to essential financial services can empower individuals economically and

socially by creating self-reliance and economic sustainability in impoverished communities
where salaried jobs are scarce. The benefits of microfinance include:

 Small loans enable entrepreneurs to start or expand micro, small and medium enterprises.

 Savings help families build assets to finance school fees, improve homes (e.g., install
power or running water) and achieve goals.

 Insurance products can offset the cost of medical care.

 Money transfers and remittances allow families to easily send and receive money across
borders.