Evolution of Micro Finance in India

Overview of India’s Micro Finance
In a developing country like India, there is a need to support low-income families as well as uplift and provide them with a better standard through supporting them financially in a more efficient way, and there came the concept of "microfinance," which is a form of financial service that provides small loans and other financial services to poor and low-income households in a consistent and legitimate way. It is an economic tool designed to promote financial inclusion, which enables poor and low-income households to come out of poverty, increase their income levels, and improve their overall living standards. It can facilitate the achievement of national policies that target poverty reduction, women's empowerment, assistance to vulnerable groups, and an improvement in the standard of living.

Broadly, two different approaches are followed in India for extending microfinance services:

• The bank-led approach, Self-Help Groups-Bank Linkage Program (SHG-BLG),
• The Micro Finance Institution (MFI)-led approach

The microfinance sector in India is varied, with a variety of firms providing low-income people with financial services like lending, insurance, and pensions. Five broad categories can be used to classify the various microfinance industry participants: Small Finance Banks, NBFC MFIs, Banks, and Non-profit MFIs. All of these, with the exception of non-profit MFIs, are under RBI regulation. The majority of non-profit MFIs are registered as trusts or societies, and they are regulated by the corresponding acts while majorly the non-profit organizations (NGOs) that have been operating in the industry as financial intermediaries are registered as trusts or societies.

India's History and Development of Microfinance
In India, microfinance has a long and illustrious history. It was first introduced by the SEWA Bank, a division of the Self-Employed Women's Association (SEWA), in Gujarat in 1974, and has ever since played a crucial role in providing financial services to numerous people who have been left out of the mainstream of society's economy.

For NBFC-MFIs with loan portfolios of US$ 1 billion or more, the Malegam Committee recommended a margin cap of 10%; for other NBFC-MFIs, it suggested a cap of 12%; and for individual loans, it suggested a cap of 24%.
A consistent margin cap of 12% was imposed for all NBFC-MFIs in the final rules published on December 2, 2011, along with a cap of 26% on individual loans. The set interest rate ceiling of 26% was lifted in 2012 due to the fluctuating costs of borrowing and to allow for operational flexibility, although with the restriction that the maximum difference between the minimum and maximum interest rate for individual loans cannot be more than 4%.

Therefore, it should come as no surprise that the industry saw 40% annual growth rates up until quite recently. Numerous crises and macroeconomic shocks, most recently the Covid-19 epidemic, have punctured this period of rapid growth.

Current Status of Micro Finance in India
As on 31 March 2022, the programme now covers US$ 140 million families, and US$ 11.9 million SHG groups having cumulative savings of US$ 472.4 billion. The credit linkage is also impressive so far that US$ 3.4 million SHGs have been credit linked during FY 2021–22 (as against US$ 2.9 million groups in 2020-21) and loans worth US$ 997.2 billion disbursed. The credit outstanding as on 31 March 2022 is US$ 1510.5 billion for US$ 6.74 million SHGs (an average of US$ 0.24 million per SHG). Though the average ticket size is not big, the impact can be life-changing as is reflected in the various success stories in this publication.

The E-Shakti programme, under which financial and non-financial data of over US$ 1.2 million SHGs has been digitized to give comfort to banks for credit linkage of SHGs, is hoped to improve credit linkage.

State-wise credit linkage of the status of SHGs as of December 31st, 2022, is depicted through the figure shown below, wherein: Overall, out of US$ 11.8 million SHGs savings, 57% SHGs have loans outstanding with banks. Nine states have credit linkage % higher than the all-India average. Andhra Pradesh is leading with 90% of its SHGs having loans outstanding, followed by Bihar (89%) and Karnataka (87%). Southern and Eastern states dominate the list along with Tripura.

Importance of Microfinance
In our nation, almost 50% of people lack a simple savings account. However, to achieve their goals of wealth accumulation and risk mitigation, they need financial services and individuals with limited access to capital can do so thanks to microfinance. These groups would have turned to borrowing money from friends or family if microfinance organizations had not been providing loans to this section of society. They have a greater likelihood of choosing payday advances or fast cash loans, both of which have extremely high-interest rates. Microfinance supports the government's goal of financial inclusion in the nation by assisting these groups in making informed investments in their enterprises.

Key Principles of Microfinance
The idea that the poor need more than just loans is one of the fundamental microfinance principles while financial institutions are the backbone of the underprivileged, and microfinance is a potent tool in the fight against poverty. Reaching a sizable portion of the underprivileged population requires financial sustainability and the creation of enduring regional financial institutions is the goal of microfinance. In addition to higher interest rates that might make it more difficult for the low-income group to receive financial assistance, microcredit is not always the best option. Meanwhile, governments do not directly provide financial services; rather, they serve as catalysts for the flourishing of those in need.

Role of Microfinance in India
A microfinance institution is focused on providing low-income individuals and groups with banking services. These organizations get funding from established financial institutions and aid the underprivileged. As a result, microfinance institutions are becoming one of the best tools for reducing poverty in India.

The following sources provide microfinance services:

• Formal institutions, such as rural banks and cooperatives
• Semiformal organizations, such as non-governmental ones
• Informal sources, including small-scale lenders and store owners
• Institutional microfinance includes both formal and semiformal institutions' offerings.

While some MFIs are well-managed and have a stellar record of accomplishment, others are self-sufficient in terms of operations.

The various categories of institutions providing microfinance in India are as follows:

• Commercial banks
• Credit unions
• NGOs
• Sectors of government banks
• Cooperatives

The services provided by banks are supplemented by microfinance organizations. Financial services like insurance, savings, and remittance are additionally offered in addition to microcredit. Additionally, non-financial services like training, counselling, and support for borrowers are provided in the most practical way possible. The borrower receives the mentioned services at their convenience, as noted below. Interest rates charged by MFIs are typically higher than those of traditional banks. Interest rates vary depending on the loan purpose and borrower history. Borrowers also determine the repayment schedule.

Objectives of Micro Finance in India
A proposal has been made to start a pilot programme to identify SHG members and develop their capacities to become entrepreneurs, enable credit linkage, and facilitate market linkage. This is done in order to:

• Graduate to microentrepreneurs using higher capital, employing more laborers, using better technologies, and operating continuously, without seasonal fluctuations.
• Development of new skill sets, in addition to assisting first-generation entrepreneurs and upgrading the operations of current companies.
• Conducting a trainers' training programme for NGOs to support and scale up start-ups among SHG and JLG members.
• Providing special emphasis to the under-served states in various regions of India.
• Introduction of digital banking for SHGs in collaboration with banks to maintain regular updates on financial and non-financial data on the portal.

Features of Micro Finance in India

• The borrowers are from low-income backgrounds
• Loans availed under microfinance are usually of small amounts, i.e., microloans
• The loan tenure is short
• Microfinance loans do not require any collateral
• These loans are usually repaid at higher frequencies
• The purpose of most microfinance loans is income generation

Structure of Microfinance
The structure of MFI has been created to address the difficulties that the traditional financial services sector encountered in satisfying the low-income segment's credit requirement at a reasonable and sustainable cost.

a) A Joint Liability Group (JLG) is an informal association of 4-10 people who work as a team to apply for bank loans either individually or collectively under mutual guarantee.

b) A SHG is a group of registered or unregistered microentrepreneurs with similar socioeconomic origins that get together voluntarily to save modest amounts of money monthly, mutually agreeing to contribute to a common fund, and meeting their emergency needs through mutual assistance. To ensure proper credit use and prompt repayment, the group members typically rely on their collective knowledge and peer pressure.

The Road Ahead
Microfinance is very necessary for India to achieve financial inclusion for the poor in rural and urban areas. Lending to the poor population, if handled in an effective manner, can be a miracle for the development of the country and the alleviation of poverty. When the government and MFIs work together, Microcredit can play a significant role in poverty alleviation. The challenging issue of microfinance helps to reduce the financial problems faced by poor people. The inability of MFIs to get sufficient funds is a major challenge for the microfinance industry's growth, so these institutions should look for alternative sources of funding. Microfinance has a significant impact on poor people's confidence, courage, and skill development. Thus, external factors such as microfinance institutions are needed to help fix these problems.