Microfinance Institutions (MFI)

In News

Recently, a Report stated that Microfinance Institutions (MFI) will play a leading role in the growth process of India.

Key Points

• Support system: 
  • MFIs have acted as a financial support system to low-income households by offering credit access to six crore borrowers in the last few years.
• Changes with time: 
  • From February 2017 to June 2022, the MFI sector underwent several transformations in terms of inclusivity and expansion
• Expected Growth: 
  • The global market size of the MFI industry is expected to grow by USD122.46 billion from 2021 to 2026 at a compound annual growth rate of 11.61 per cent.
• Coordinated efforts: 
  • Global development agencies and several governments have made concerted efforts to alleviate poverty through micro-credits.
• Digitalised MFIs:
  • From 2017 onwards, the Indian MFI industry embraced the digital route by using online delivery channels, mobile banking and e-wallets.

What is Microfinance?

• Microfinance is a form of financial service which provides small loans and other financial services to poor and low-income households.
  • The definition of “small loans” varies between countries. In India, all loans that are below Rs. 1 lakh can be considered as microloans.
• Microcredit is delivered through a variety of institutional channels viz:
  • Scheduled commercial banks (SCBs) (including small finance banks (SFBs) and regional rural banks (RRBs)).
  • Cooperative banks.
  • Non-banking financial companies (NBFCs).
  • Microfinance institutions (MFIs) registered as NBFCs as well as in other forms.

About Micro Finance Institutions (MFIs)

• MFIs are financial companies that provide small loans to people who do not have any access to banking facilities.
• MFI promotes financial inclusion which enables the poor and low-income households to come out of poverty, increase their income levels and improve overall living standards. 
• It can facilitate achievement of national policies that target poverty reduction, women empowerment, assistance to vulnerable groups, and improvement in the standards of living. 
• Growth: 
  • The Indian microfinance sector has witnessed phenomenal growth over the past two decades in terms of increase in both the number of institutions providing microfinance as also the quantum of credit made available to the microfinance customers. 

Significance 

• It helps low-income households to stabilize their income flows and save for future needs. 
• In good times, microfinance helps families and small businesses to prosper, and at times of crisis it can help them cope and rebuild.
• It makes credit available easily thereby bettering the income and employment scenario.
• It helps in serving the under-financed sections such as women, unemployed people and those with disabilities.
• Families benefiting from microloans are more likely to provide better and continued education for their children.

Challenges 

• The diverse nature of customer segments, such as small farmers, vendors and labourers, will be tough to cater to.
• The consumer behaviour and loan requirements for different customers may require varied levels of services with financial products and digital literacy.
• The dependence on physical modes of interaction poses a challenge for MFIs to reach last-mile borrowers, which has been evident during the pandemic when group gatherings could not be held.

Way Ahead

• The future course of the industry will be determined by the ability of MFIs to forge partnerships, develop new products and investment channels and leverage technology.
• Technological integration will be able to assist MFIs in providing services as well as repayment collection processes.
• RBI should encourage all institutions to monitor their impact on society by means of a ‘social impact scorecard’.

Source: Print