In the realm of finance, microfinance emerges as a powerful tool to uplift low-income households and foster financial inclusion. Let's delve into the world of microfinance, its historical evolution, present status, and regulatory dynamics, to better understand its impact on marginalized communities.
Understanding Microfinance
Microfinance loans, characterized by their collateral-free nature, extend financial assistance to households with an annual income of up to ₹3,00,000. In this context, a household constitutes an individual family unit, encompassing parents and unmarried children. Regardless of their application method or purpose, these loans, provided through physical or digital channels, cater to low-income households, thus falling under the umbrella of microfinance loans.
A Brief History of Microfinance
The inception of microfinance traces back to the 1970s with the establishment of the Grameen Bank in Bangladesh, pioneered by Muhammad Yunus. Formalizing the principles of microfinance in 1976, Yunus laid the foundation for this financial paradigm. This approach gained traction due to the prevalence of subsistence farming and basic trading in developing nations.
India's microfinance journey commenced with the establishment of SEWA in 1974, focusing on providing financial services to marginalized self-employed women. The 'Self-Help Groups' (SHG) concept emerged in the 1980s, thanks to collaborative efforts involving Aloysius Prakash Fernandez, Canara Bank, and MYRADA.
The landscape evolved as loans were extended to groups of customers, with Public Sector Banks and NGOs playing a pivotal role. BASIX, led by Vijay Mahajan, adopted the 'Joint Liability System' model akin to Grameen Bank in 1996, introducing loans with group accountability. The early 2000s witnessed NBFCs adopting this model in Andhra Pradesh, though rapid expansion led to conflicts with the government.
Regulated growth ensued, with Bandhan's transition to a universal bank by 2015 marking a significant milestone. In the same year, RBI granted provisional licenses to leading microfinance NBFCs among Small Finance Banks, aiming to provide vital financial services to underserved sections. Despite challenges like interest rate caps and recent crises such as Covid-19, the sector demonstrated resilience.
Microfinance's Current Landscape in India
As of March 31, 2022, the program has reached 140 million families and 11.9 million SHG groups, amassing savings of $472.4 billion. Notably, credit linkage has been robust, with FY 2021-22 witnessing 3.4 million SHGs being credit-linked, disbursing loans totaling $997.2 billion. The credit outstanding by March 31, 2022, is $1510.5 billion, averaging $0.24 million per SHG across 6.74 million SHGs. The impact of even modest loans has been transformative, evident in numerous success stories.
Initiatives like E-Shakti have furthered credit linkage by digitizing data for over 1.2 million SHGs. State-wise data as of December 31, 2022, highlights that 57% of SHGs availed loans from their $11.8 million savings. Andhra Pradesh leads with 90%, followed by Bihar (89%) and Karnataka (87%).
As of March 2023, microfinance's gross loan portfolio has exceeded Rs 5 lakh crore, serving over 13 crore borrowers—an impressive growth from the Rs 51,773 crore portfolio and 7 crore borrowers in March 2012. This sector has witnessed substantial growth, with Universal Banks and Small Finance Banks now contributing 58% of the market share, marking a shift from NBFC-MFIs' dominant position a decade ago.
Navigating Regulatory Changes
Microfinance gained priority sector lending (PSL) status in 2004, encouraging larger banks to fund NBFC-MFIs and engage with the sector. Despite the 2010 Andhra Pradesh crisis causing a temporary setback, the sector rebounded. RBI introduced norms post the Malegam committee's recommendations, including a borrower liability cap of Rs 1.5 lakh and a two-lender limit.
Self-regulated organizations (SROs) like MFIN and SaDhan were established to ensure customer protection, promoting cautious industry growth through codes of conduct and grievance mechanisms. Regulatory norms expanded to cover all microfinance lenders, underlining the importance of customer protection.
In 2022, RBI removed pricing caps on NBFC-MFI spreads, introducing risk-based pricing based on total household income and fixed obligation-to-income ratio (FOIR). The household income limit increased to Rs 3 lakh in urban/semi-urban areas and Rs 1.25 lakh in rural areas, expanding the microfinance market's reach.
Government initiatives like Jan Dhan, Aadhaar, Mudra Scheme, PSL for MSMEs, and affordable housing have further propelled sector growth, attracting larger lenders and banks.
Microfinance Regulations
Each registered entity (RE) must implement a board-approved policy for household income assessment. Additionally, a board-approved policy regarding the pricing of microfinance loans should be in place, subject to supervisory scrutiny by the Reserve Bank. Pre-payment penalties on microfinance loans are prohibited, and any penalties for delayed payment are levied on the overdue amount rather than the entire loan.
In conclusion, microfinance serves as a beacon of hope, empowering low-income households and fostering financial inclusivity. Its historical journey, present impact, and evolving regulations collectively shape a dynamic sector that continues to make a difference in countless lives.
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