Micro finance is an important issue in IAS preparation, and it is covered in the UPSC material under the GS-II portion. So, let’s see what we can learn about microfinance institutions, company, bank in India, and other significant information for the UPSC exam. You should first understand the Background of micro finance company. So, let’s get started with the article.
History of Micro Finance
Micro finance has a history that goes back to the mid-nineteenth century. Lysander Spooner, a theorist, wrote about the benefits of minor loans to entrepreneurs and farmers in the 1800s as a way to help people move out of poverty. Friedrich Wilhelm Raiffeisen later formed the first cooperative lending bank on his own to help farmers in rural Germany. However, the word “microfinancing” was first used in the 1970s during the emergence of Bangladesh’s Grameen Bank, which Muhammad Yunus, a microfinance pioneer, founded. Yunus institutionalized microfinance ideas in 1976, thanks to the Grameen Bank’s inspiration in Bangladesh. Because a vast number of people in developing nations still rely on subsistence farming or basic food trade for a living, smallholder agriculture in these countries has benefited from enormous resources.
This is an incredibly crucial topic for the RBI Grade-B Phase 2 exam’s essay writing. More such articles can be found in our website’s UPSC Study Material part.
Micro Finance Institute in India
Many traditional banks in India refused to lend to the poor due to a lack of security and rising operating costs. As a result, the country’s microfinance institutions have developed and grown. They functioned as a compliment, with the goal of achieving financial equality. Microfinance operates in India through two channels: SHG – Bank Linkage Programme (SBLP) and Microfinance Institutions (MFIs)
SEWA (Self-Employed Women’s Association) Bank, a cooperative bank, was founded in Ahmedabad in 1974 and was one of the country’s first modern-day microfinance organizations. The National Bank for Agriculture & Rural Development (NABARD) was founded in 1982 to provide and regulate loans and other facilities for the promotion and development of rural India’s varied economic activities.
The western and southern Indian states have garnered the most microfinance loans in the country. SHGs are self-sustaining by nature and can run independently with only a little help from NGOs and institutions like NABARD and SIDBI (Small Industries Development Bank of India).
Micro finance institutions lend using the Joint Liability Group model (JLG). JLGs are groups of five to ten people who band together to get a bank loan, either individually or collectively. A mutual guarantee is used to secure the loan.
What is Mudra?
The central government established the Micro Units Development Refinance Agency (MUDRA) in 2015 with the goal of refinancing collateral-free loans of up to Rs 10 lakh issued by lending institutions to non-corporate small borrowers for revenue generation initiatives in the non-farm sector. Currently, loans provided under this system are classified into three parts: Shishu loans up to Rs 50,000, Kishor loans between Rs 50,001 and Rs 5 lakhs, and Tarun loans between Rs 5 lakhs and Rs 10 lakhs. In addition, the government plans to establish a Rs 3000-crore Credit Guarantee Fund to support these loans in order to popularise the MUDRA scheme.
Micro Finance: Benefits
- Customers can get quick credit and small loans without putting up any collateral.
- It increases the amount of money available to the poorest sectors of the economy, resulting in higher household income and employment.
- Serving the underserved, such as women, the unemployed, and those with disabilities.
- It aids the disadvantaged and marginalized sections of society by educating them about the financial instruments accessible to them and encouraging the development of a saving culture.
- According to World Bank estimates, more than 500 million people have benefited from microfinance-related organizations.
- In addition, the International Finance Corporation (IFC) projected that over 130 million people benefited directly from microfinance activities as of 2014.
- However, only about 20% of the world’s poor, or three billion individuals, can benefit from these microfinance enterprises.
- In addition, the IFC assisted in the establishment or improvement of credit reporting bureaus in 30 developing countries.
Micro Finance: Challenges
- Inadequate Data: Data on the relative poverty-level improvement of MFI clients is fragmented, so while overall loan accounts have been expanding, the real impact of these loans on clients’ poverty levels is hazy.
- COVID-19’s Impact: It has had an impact on the MFI industry, with collections taking a knock at first and disbursals still lagging behind.
- Overlooked Social Objective: The social purpose of MFIs—to enhance the lives of the marginalized sectors of society—seems to have been gradually weakening in their pursuit of growth and profitability.
- Higher interest rate: Most Microfinance Institutions charge a very high-interest rate (12-30%) compared to commercial banks (8-12%), limiting their financial success in India compared to commercial banks.
- Geographic Constraints – Around 60% of MFIs think that geographic factors make it challenging to engage with clients in remote places, posing a problem for the organization’s growth and expansion.
- Loans for Conspicuous Consumption: The percentage of loans used for non-income generating purposes may be significantly greater than the RBI’s guidelines. These are short-term loans, and given the clients’ economic profiles, it’s likely that they’ll soon find themselves in the vicious debt trap of needing to take out another loan to pay off the first.
The Top 10 Microfinance Companies in India
These are the Top 10 Micro Finance companies in India.
- Annapurna Microfinance Pvt Ltd
- Arohan Financial Services Pvt Ltd
- Disha Microfin is a company based in India.
- Equitas Microfinance Pvt Ltd is a microfinance company based in India.
- ESAF Microfinance and Investments is a micro finance and investment company
- Fusion Microfinance
- Asirvad Microfinance Pvt Ltd
- Bandhan Financial Services Pvt Ltd
- Cashpor Micro Credit
- BSS Microfinance Pvt Ltd
Micro Finance: Way Forward
- The RBI should urge all organizations to use a ‘social impact scorecard’ to track their impact on society.
- MFIs should make certain that the ‘stated purpose of the loan,’ which is frequently requested from consumers throughout the loan application process, is checked at the conclusion of the loan’s term.
- The customer data in a scoring system, which is verified and managed to capture digitally, can be used to assess the impact of each loan on the client’s lives, the subsequent improvement in their earning capacity over time, and other direct and indirect benefits derived from loan utilization, and finally how quickly MFI customers can transition out of the MFI fold.
To sum up, we have included all relevant information on the Micro Finance Company in this post. Learn more about the history of microfinance company, institutions, and banks in India. We also talked about the challenges faced by Micro Finance as well as the benefit. This information will aid you in your UPSC exam preparation. We understand how difficult it is to cover all of the exam topics. However, it is critical to achieving the highest possible exam marks. As a result, this article will provide you with all of the necessary information. For the most up-to-date information & notifications, go to the UPSC website. So don’t forget to visit the UPSC’s official website by clicking here.
FAQ- Micro Finance
Regardless of the fact that these borrowers do not provide a reliable guarantee of repayment, microfinance institutions give “microloans” to borrowers together with help (funding a new business or an expansion plan, paying for urgent family needs, supporting mobility to obtain a job, etc.).
Microfinance is a type of banking that is offered to unemployed or low-income individuals or groups that would otherwise be unable to obtain financial services.
SEWA Bank is a financial institution. The Self-Employed Women’s Association (SEWA) in Gujarat was the first to pioneer microfinance in India, establishing SEWA Bank in 1974. Since then, this bank has been providing financial services to those in rural areas who want to start their own enterprises.
According to the Reserve Bank of India, only a Non-Banking Finance Company (NBFC) should be allowed to conduct financial transactions. The RBI, on the other hand, grants specific businesses exemptions to conduct financial activities up to a set limit.
The Reserve Bank of India (RBI) is responsible for regulating the microfinance sector, and it has the authority to impose upper limits on lending rates and margins for Micro Finance Institutions (MFIs). The income limit for a rural home to be eligible for microfinance is Rs. 1.25 lakhs, whereas the income limit for urban and semi-urban households is Rs. 2 lakhs.
Editor’s Note | Micro Finance
To summarise, this post contains all the necessary information about the Micro Finance Company. Learn about the history of India’s microfinance companies, institutions, and banks. A UPSC exam aspirant must be familiar with the topic’s history, benefits, and other relevant information. You can also find more useful study materials in the link provided in the post. We hope you find this article helpful in your exam preparation. If you have the appropriate coaching, passing UPSC examinations is not challenging. Students have a number of coaching alternatives available to them, both online and offline. On the other hand, choosing the appropriate one is critical to achieving the desired outcome. Moreover, the more you revise, the more confident you will feel about the topics. Finally, we wish you all the best!