Microfinancing is the buzz word today. It started with the sole aim of weeding out poverty from the lower classes of society by focusing on microcredit lending designed to spur growth in developing economies. The concept of Microfinance is not a recent development in India, it has been followed from earlier times when there were money lenders who used to provide ready credit to farmers and other low-income people.
Muhammad Yunus a Nobel Prize winner, introduced the concept of Microfinance in Bangladesh in the form of the “Grameen 80 Bank” in 1976. NABARD (National Bank for Agriculture and Rural Development) took this idea and started concept of Micro Finance in India in the year 1998. Financial inclusion has emerged as a major policy objective in the country; Microfinance has become a medium of extending financial services to unbanked sections of population through the Jan Dhan Yojana.
Initially the term Microfinance had a limited definition: the provision of microloans to poor entrepreneurs and small businesses lacking access to credit.
The two main mechanisms for the delivery of financial services to such clients were:
(1) relationship-based banking for entrepreneurs / wannapreneurs / solopreneurs and small businesses; and
(2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group.
Over time, microfinance has emerged as a larger movement whose object is: “a world in which everyone, especially the poor and socially marginalized people and households have access to a wide range of affordable, high quality financial products and services, including not just credit but also savings, insurance, payment services, and fund transfers.” Microfinance is targeted at the low-income and unemployed fraction of the population.
All these micro & small enterprises play a significant role in the Indian Economy, the government also aims to increase the MSME sector’s share in the GDP to 40 per cent to benefit the rural poor. It won’t be wrong to refer them as the ‘Backbone of the country.’
So, in very simple words the full form of the acronym itself says it’s meaning i.e., Micro, Small & Medium Enterprises, which are classified into two sectors Manufacturing Enterprises & Services Enterprises. For example, group of women dealing in tailoring work, or making Pickles, etc.
The basis for classifying MSME as micro, small and medium enterprises has been updated recently. Revised MSME classification effective from 1st July 2020 is:
As per the report published in Feb 2021, around 6.5 crore micro, small and medium enterprises (MSMEs) contribute 30 per cent to GDP. The government of India has taken various steps to boost up the growth of this sector. Also, everyone might have heard about various campaigns like AatmaNirbhar Bharat Abhiyan or Self-reliant India, Vocal for Local etc., by PM Narendra Modi, that are directly approaching MSMEs and all the new startups and small traders & domestic business on small scale etc.
In the Budget 2021, following measures were taken by the Gov. of India to promote MSMEs-
Microfinance in India operates primarily through two channels:
Microfinance in India operates primarily through two channels:
Usually, the banking framework is reasonably standard in most countries. However, this is not the case for the microfinance industry and countries in Asia have different frameworks. This is primarily due to the regulatory environment. Examples of different kinds of institutions are:
The reason for this wide variety in the types of institutions providing microfinance is that it is recognized as an attractive business opportunity as well as a tool for social good.Reserve Bank of India Self-Regulating Bodies- MFIN (Microfinance Institutions Network), Sa-Dhan are the Regulatory bodies of the institutions like NBFC-MFIs, Banks, NGOs in India.
Digital technologies are rapidly making inroads into all realms of human life and the microfinance sector is one such area. Ongoing innovations in digital technology contribute to reshape its operational models, governance structures, its risk profile, industry networks and dominant practices.
Microfinance players are using and exploring new technologies and solutions for improved client outreach, decision-making and operations. Technology is revolutionizing the way financial services are delivered and the same disruptions are affecting the technology landscape of the microfinance sector.
Fintech companies have become significant within the microfinance institution (MFI) ecosystem with different technology stacks enabling the microfinance sector to carry out more than their basic operations through collaboration and development.
A large Indian small finance bank has implemented a technology solution in partnership with a fintech company through which they have enabled Aadhaar-linked know your customer (KYC), video ID verification, verification of e-documents via Digi Locker and uses artificial intelligence and machine learning technologies for preventing fraud, customer authentication and automating the customer onboarding process.
There are certain new technologies & innovations with the deployment of which Microfinance sector can work more effectively and efficiently.
Microfinance sector also got hit by this pandemic and is facing another big crisis after 2010 AP amendment bill and 2016’s demonetization. Small and micro loans serve large segment of population running small and micro enterprises mostly in unorganized livelihood domains. These financial institutions play a key role between commercial lending institutions ready to take moderate risk for better returns and clients who are in need of non-collateralized loans to finance their livelihood activity.
The microfinance sector in India has been undergoing a transformation. COVID-19 presents new challenges and significant financial risks. It also presents an opportunity to build long term resilience.
While the challenges are real, in general microfinance clients indicate that they are willing to continue their business activities and are willing to take the risk of restarting their operations.
Following are some of the actions and policies that may help clients of microfinance to restart their businesses and/or repay their outstanding loans:
Several initiatives undertaken by SHGs in various villages, Districts and States for combating COVID-19 & adapting to changing environment:
At the end, it would be simple to conclude that there are many impactful changes that enhanced the importance of microfinance in India. Micro finance plays a major role to lessen the impact of poverty from the society. Many initiatives have also been taken by the government to ease compliances and to promote such institutions.
Also, these institutions work towards the empowerment of women, which is a great move towards the development of the country.