Micro Finance Institutions (MFIs)
From Grameen Bank model (Prof Yunus, 1976/1983) to SHG-Bank Linkage Programme (NABARD 1992) to Malegam Committee (2011) — how India brings banking to the poorest households.
Microfinance — Overview and Evolution
Microfinance = small loans and other financial services to poor and low-income households. It is an economic tool for financial inclusion. Components: micro-savings + micro-credit + micro-insurance + micro-pensions.
Three Phases of Evolution of Microfinance in India
| Phase | Period | Key Events |
|---|---|---|
| Phase 1 | Pre-Independence | Agriculture Credit Department set up in RBI. Government promoted rural credit through cooperative institutions. |
| Phase 2 | Late 1960s | Lead Bank Scheme introduced by RBI in December 1969. Nationalisation of 14 commercial banks. RRBs set up 1975. NABARD established 1982. First SHGs emerged (MYRADA pioneered SHG concept; started linking SHGs with banks in 1984-85). IRDP (Integrated Rural Development Programme) launched 1980-81. |
| Phase 3 | Post-1990s (Modern) | SHG-Bank Linkage Programme formally launched by NABARD in 1992 — pilot project to finance 500 SHGs. By March 1993: ~600 SHGs financed. 1996: RBI included SHG financing in priority sector lending. 2010: Andhra Pradesh microfinance crisis (30 suicides in 45 days) → Malegam Committee formed. 2011: Malegam Committee recommendations → NBFC-MFI category created. |
Prof Muhammad Yunus experimented with microfinance concept in 1976. He met Sufia in Jobra village who needed 22 US cents (5 takas) for raw materials but couldn’t afford local moneylenders (10% per week/day). Yunus lent 856 taka to 42 people of Jobra village. Institutionalised by establishing Grameen Bank in Bangladesh in 1983. Awarded Nobel Prize in 2006. Today: about 2,600 branches, operates in 80,000+ villages, 9 million borrowers, 99% repayment rate. Key feature: group of 5 members; loan given on trust — no agreement or document required; members are also owners of the bank.
Self-Help Groups (SHGs) — Key Features
| Feature | Detail |
|---|---|
| Group size | 10–20 individuals (minimum 5 in hilly/tribal areas) |
| Membership | Homogenous social and economic background | Voluntary | Preferred all BPL; up to 20% (exceptional: 30%) APL allowed |
| Savings-linked loans | Ratio 1:1 to 1:4 (savings:loan) | Matured SHGs may exceed 4x at bank’s discretion |
| Collateral | NO collateral security taken from SHGs (RBI/NABARD guidelines) |
| PSL status | Lending to SHGs = Priority Sector Lending | Part of lending to weaker sections |
| Refinancing | Financing to SHGs by banks are 100% refinanced by NABARD |
SHG-Bank Linkage — Three Models
| Model | Structure | NGO Role | Key Feature |
|---|---|---|---|
| Model I | NABARD → Bank → SHG | No NGO intervention | SHGs formed and directly financed by banks |
| Model II | NABARD → Bank → SHG (with NGO as facilitator) | NGO promotes and links SHGs but does NOT intermediate funds | Most popular model — majority of SHGs financed under this |
| Model III | NABARD → Bank → NGO → SHG | NGO acts as financial intermediary — funds flow through NGO | Q4 PYQ: NGO as financial intermediary = Model III |
A JLG is a group of 4–10 people of the same village/locality of homogenous nature and same socio-economic background who come together to avail bank loans without any collateral. For those who need larger loans than SHGs can provide (some SHG members graduate faster). Members continue to remain members of their SHGs. JLGs may also be created for Small Farmers, Marginal Farmers, Tenant Farmers, Share Croppers, Micro Entrepreneurs, Artisans not yet covered by SHGs. Banks can use their own assessment techniques for determining terms. Financing to JLGs by banks are 100% refinanced by NABARD.
Types of MFIs in India
| Type | Legal Form | Examples | Regulated by |
|---|---|---|---|
| Not for Profit MFIs | Societies (Societies Registration Act 1860), Trusts (Indian Trust Act 1882), Not-for-profit companies (Sec 8 Companies Act 2013) | Many NGO-promoted MFIs | State registrar/Charity Commissioner |
| Mutual Benefit MFIs | State and National Cooperatives, Mutually Aided Cooperative Societies (MACS) | Cooperatives in Andhra Pradesh (MACS Act 1995) | Registrar of Cooperatives |
| For Profit MFIs (NBFC-MFIs) | NBFCs registered under Companies Act, regulated by RBI | Bharat Financial, Equitas, Ujjivan (before conversion to SFBs) | RBI — largest category |
RBI Micro Finance Directions 2022 — Key Provisions
| Provision | Detail |
|---|---|
| Definition of microfinance loan | Collateral-free loan to household with annual household income up to Rs 3 lakh. Household = husband, wife and unmarried children. |
| Repayment cap | Monthly loan repayment obligations capped at 50% of monthly household income |
| Pre-payment penalty | No pre-payment penalty on microfinance loans |
| Penalty on overdue | Penalty (if any) on overdue amount only — NOT on entire loan amount |
| NBFC-MFI qualifying assets | At least 75% of total assets must be microfinance loans |
| NBFC-MFI min NOF | Rs 5 crores (Rs 2 crores for North East) |
| NBFC-MFI CRAR | 15% (Tier I + Tier II) | Tier II ≤ 100% of Tier I |
Chapter 24 — Exam Points and PYQs
✅ Must-Know MFI Facts
- Lead Bank Scheme introduced: December 1969 (Q1 PYQ: answer = 1969)
- Grameen Bank country: Bangladesh (Q2 PYQ: answer = Bangladesh)
- NBFC-MFIs regulated by: RBI (Q3 PYQ: answer = NBFC-MFI)
- NGO as financial intermediary: Model III (Q4 PYQ: answer = Model III)
- Fair Practice Code includes ALL of: Board-approved loan format + no security deposit + not member of more than one SHG (Q5 PYQ: answer = All of the above)
- SHG-Bank Linkage formally launched: 1992 by NABARD | Pilot: finance 500 SHGs
- AP microfinance crisis: 2010 | 30 suicides in 45 days | Led to Malegam Committee
- Grameen Bank: Prof Yunus experimented 1976 | Grameen Bank established 1983 | Nobel Prize 2006
- SHG group size: 10–20 (min 5 in hilly/tribal) | Loan ratio 1:1 to 1:4
- Model I: No NGO | Model II: NGO as facilitator (most popular) | Model III: NGO as intermediary
- JLG size: 4–10 people | No collateral | 100% refinanced by NABARD
- Microfinance loan (RBI 2022): Collateral-free | Annual household income ≤ Rs 3 lakh | Repayment capped at 50% of monthly income