Microfinance is the provision of broad range of financial services such as deposits, loans, payment services, money transfers and insurance to low income households and their micro enterprises
Microfinance institutions borrow money from mainstream financers like banks to lend to entrepreneurs without credit histories. These institutions serve those borrowers who are unable to avail of loans from banks. Microfinance loans can be as small as $ 100 or even less. Now a days, microfinance services are not limited to credit but include savings, insurance and money transfers.
MFIs in India
The Indian MFI sector is one of the fastest growing and most efficient in the world. MFIs in India operate in different models, Non Banking Financial Institutions (NBFCs), NGOs, Cooperatives, private commercial banks and sectors of government banks.
At present about 1000 MFIs are operational in India There are about 100 million borrowers in this sector who have graduated from subsistence livelihoods to become micro entrepreneurs. These entrepreneurs are spurned by banks on the pretext of their being unworthy of credit. However ironically the performance of the MFI sector which registers less than 1% default rate has proven that the credit worthiness of the underprivileged micro entrepreneurs.
Their role in women empowerment has been tremendous. This is explained by the fact that one in every four borrowers are women.
Prominent MFIs in India are Equitas Micro Finance, Arohan, Sonata, Bandhan, SKS and Asmitha among others. These MFIs are ranked among the best in the world.
Who can avail microfinance?
Microfinance clients are usually self-employed, household-based micro entrepreneurs. As Vinatha M Reddy of Grameen Koota says, ‘All sorts of micro-entrepreneurs like kirana shops, animal husbandry, agricultural land leasing, small hotels, astisans, street vendors and the likes can avail of microfinance. MFI loans are primarily provided for commercial activities that can start yielding revenues immediately.
Disbursement of Loans
Lending through SHGs
The most important thing about MFI loans are that loans are granted without any collateral. Disbursement of loans at MFIs takes place in two models: The group model and the individual model. In the group model, credit is disbursed through self help groups (SHGs). Some commercial banks like Yes Bank lend to micro entrepreneurs through their own promoted SHGs. There is another model followed by Grameen Bank pioneered by Mohammad Yunus, Nobel Prize winner. Under this model, about 50 people collect at one place on a given day in a week and organize themselves into groups. The group representative goes to the bank, collects money and disburses loans. Repayment is also done through the group representatives.
Vinatha M Reddy, Director, Grameen Koota says, ‘The group members of an SHG should be almost of the same age group, same socio-economic condition and must enjoy mutual trust.’
‘The group is giving financial training over a few days whereby members are trained in the procedure of obtaining loan and the repayment system,’ says Sivani Shankar, Assistant Manager, SKS microfinance. Once the organization finds the group compatible enough, loans are granted.
Under the individual model, loans are forwarded to individuals directly and they are solely responsible for this model. Yes Bank is currently following this model. Once a customer visits an MFI for finance, the MFI sends its field staff to visit the customer, assess his financial condition, his occupation and needs, make the customer aware of the process for obtaining credit and thereafter other formalities are completed.
The group lending model is considered more effective as far as repayment of loans is concerned. This is because the responsibility of repayment rests on the group as a whole. So members exert peer pressure on the individual to replay his loan amount.
Amount of Credit Disbursed
The Reserve Bank of India mandates all banks to lend MFIs, terming them as priority sector. According to RBI definition, all credit given which is less than Rs. 50, 000 qualifies as microcredit. As these loans are provided without any collateral security, the loans size is deliberately kept small, well within repayment capacity of micro entrepreneurs.
The upper limit of credit disbursed depends upon group or individual lending model. Different MFIs have different minimum and maximum limits for disbursal of loans. As in Grameen Koota, in the group lending scheme, Rs.10, 000 can be given in the first cycle. If the group is able to repay the amount in time, then, the loan amount can be extended to Rs.15000 in the second cycle. This can go up to Rs.30 000 in the 5th cycle.
In the individual lending model, as Vinatha says, ‘An individual entrepreneur can avail of Rs.40 000 which can increase upto 50% of the amount in the first cycle subject to timely repayment of the first loan. However the upper limit is pegged at Rs.50 000.’
Interest Rates and Repayment
Interest rate on MFIs varies from 12 to32 percent which depends on the loan size. Interest rate also depends on lending model i.e. group or individual. As Vinatha says, ‘Grameen Koota charges a flat 10% per annum on group loans and a flat 15% per annum on individual loans.
This is explained on account of the borrowing costs of the MFI from other banks and its administrative expenses. However MFIs credited with being a far more just alternative to local money lenders who can charge interest rates of upto 50% and also confiscate the assets of hapless people.
Most MFIs seek repayment through weekly, monthly or fortnightly instalments.