Microfinance offers a solution to small business owners, who do not have access to banking and associated services. These institutions offer services similar to that of a bank. They do charge interest on loans but the interest rate is lower than that charged by most banks in the country. They help small- and medium-sized businesses scale up with access to funds at the right time.
The evolution of microfinance in India can be traced back to the 1800s. This is when small credit to entrepreneurs and farmers were used to help people emerge out of poverty. Microfinancing was first used in 1970; at the time of the development of Grameen Bank of Bangladesh. The bank was founded in 1976 by Muhammad Yunus, who institutionalized the approach of microfinance.
The salient features of microfinance include:
Due to low security and increasing operating costs, many traditional banks were not willing to provide loans to the poor in India. This led to the development & growth of microfinance institutions in the country. They worked as an alternative, with an aim to create financial equality. In India, there are two channels through which microfinance operates:
SHG – Bank Linkage Programme (SBLP) and Microfinance Institutions (MFIs)
In 1974, SEWA (Self-Employed Women’s Association) Bank, a cooperative bank, was established in Ahmedabad; as one of the first modern-day microfinance institutions in the country. The National Bank for Agriculture and Rural Development (NABARD) was established in 1982 to provide & regulate credit and other facilities for the promotion & development of various economic activities in rural India. The western and southern states of India have attracted the largest number of microfinance loans in the country. The SHGs are self-sustaining in nature; and can function on their own with limited support from NGOs and institutions like NABARD and SIDBI (Small Industries Development Bank of India).
The microfinance institutions lend through the concept of Joint Liability Group (JLG). JLGs are a group of 5-10 members who join hands to avail of a bank loan, either individually, or collectively. The loan is provided against a mutual guarantee.
The top 10 microfinance institutions in India are:
In 2015, the Government of India introduced the Micro Units Development & Refinance Agency (MUDRA), to refinance collateral-free loans of up to ₹10 lakh that is granted by lending entities to non-corporate small borrowers, mainly for revenue growth in the non-farm sector. Loans that are granted under MUDRA fall under three categories: Shishu loans (up to ₹ 50,000), Kishor loans (₹ 50,000 to ₹ 5 lakh), and Tarun loans (₹ 5 lakh to ₹ 10 lakh).
Microfinance institutions in India help the poor with funds; and allow the growth and development of small- and mid-sized enterprises in the country. They play a crucial role; and have successfully managed to bring the unbanked sector into the organized sector in the country.
This topic is an extremely important for essay writing in the RBI Grade-B Phase 2 exam. Read more such informative articles under the Academic Article section on our website.
Career Launcher brings to you an online comprehensive course for RBI Grade-B Exam Preparation. You can enroll in our course to boost your preparation; and enhance your chance of selection. Make the most of this lockdown time to prepare for the exam! Get in touch with our course counselors to get complete information on course deliverables.