Why in the news?

  • A report published by Sa-Dhan, a microfinance self-regulatory body, pointed out that defaults in microfinance loans have seen a sharp increase in 2024-25.

Microfinance

  • What is it?:
    • Microfinance refers to the provision of financial services- such as small loans, savings, insurance, and remittance facilities to low-income individuals or groups who lack access to traditional banking.
    • It aims to promote financial inclusion by enabling the poor, especially women and small entrepreneurs, to engage in income-generating activities.
  • Evolution of Microfinance in India:
    • 1970s–80s: NGO-led pilot initiatives (SEWA Bank, MYRADA).
    • 1992: Launch of SHG–Bank Linkage Programme by NABARD.
    • 2000s: Emergence of commercial MFIs (SKS, Bandhan, Spandana).
    • 2011 onwards: RBI regulation of NBFC-MFIs; code of conduct post-Andhra Pradesh crisis.
    • 2022: RBI issued Harmonised Regulatory Framework for Microfinance Loans- removing interest rate caps, focusing on household indebtedness and transparency.
  • Objectives:
    • Empower women and marginalised groups.
    • Encourage entrepreneurship and self-employment.
    • Reduce dependence on moneylenders.
    • Improve household income, consumption, and social indicators.
    • Strengthen grassroots democratic and cooperative structures.
  • Salient Features:
    • Collateral-free loans typically ₹10,000–₹1,25,000.
    • The group lending model ensures peer monitoring and high repayment rates (90–95%).
    • Credit + services approach- combining loans with literacy, skill training, and health interventions.
  • Regulation in India:
    • Reserve Bank of India (RBI): Primary regulator for NBFC-MFIs.
    • NABARD: Promotes and monitors SHG–Bank Linkage Programme.
    • Microfinance Institutions Network (MFIN) and Sa-Dhan: Industry self-regulatory bodies.
    • Credit Information Companies: Maintain borrower data to prevent over-lending.
  • Major Business Models in India:
    • Joint Liability Group (JLG):
      • Informal group of 4–10 individuals formed to access credit collectively.
      • Loans mainly for agricultural or allied activities such as dairy, poultry, or small trading.
      • Members mutually guarantee each other’s loans.
      • Promotes peer pressure for repayment and credit discipline.
    • Self-Help Group (SHG):
      • Voluntary association of 10–20 individuals, generally women, from similar socio-economic backgrounds.
      • Members pool savings into a common fund to meet credit needs.
      • Classified as non-profit organisations.
      • NABARD’s SHG–Bank Linkage Programme (1992) allows SHGs with good repayment history to borrow from banks.
    • Grameen Model Bank:
      • Small loans (micro-credit) to poor households without collateral.
      • Focus on group accountability and social development.
      • End-to-end development of the rural economy through micro-enterprise, savings mobilisation, and women’s participation.
    • Rural Cooperative Model:
      • Multi-tier system- Primary Agricultural Credit Societies (PACS), District Central Cooperative Banks (DCCBs), and State Cooperative Banks (SCBs).
      • Mobilise rural savings and provide affordable agricultural credit.
  • Significance:
    • Boosts financial inclusion, aligned with PM-Jan Dhan Yojana, Digital Payments Mission, and National Strategy for Financial Inclusion (2024–29).
    • Encourages women-led development and SDG-1 (No Poverty), SDG-5 (Gender Equality), SDG-8 (Decent Work).
    • Serves as a bridge between informal and formal finance.
    • Facilitates livelihood diversification in agriculture and allied sectors.
  • Challenges:
    • Multiple lending / over-indebtedness leading to defaults.
    • Weak governance and accountability in some MFIs.
    • Regional concentration (Southern states dominate).
    • Lack of financial literacy and risk awareness.
    • Limited insurance and savings products.
  • Government & Policy Initiatives:
    • National Rural Livelihood Mission (NRLM): SHG promotion & credit linkage.
    • Stand-Up India Scheme (2016): Credit for SC/ST & women entrepreneurs.
    • Pradhan Mantri Mudra Yojana (PMMY): Micro-enterprise loans up to ₹10 lakh via MUDRA Bank.
    • Financial Literacy Centres (FLCs) and Digital Financial Inclusion under PMJDY.
    • Social Stock Exchange for impact-oriented microfinance ventures.