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MFIs to play a leading role in India’s economic growth: Study

GS Paper 3

Syllabus: Financial Inclusion

 

Source: Economic Times

Context: As per the study conducted by PricewaterhouseCoopers (PwC) and the Association of Microfinance Institutions of India, Microfinance institutions (MFI), will play a leading role in the growth process of India.

 

What are MFIs?

Microfinance institutions (MFIs) are financial companies that provide small loans to people who do not have any access to banking facilities. The definition of “small loans” varies between countries. In India, all loans that are below Rs. 1 lakh can be considered microloans.

 

The Origin:

Microfinance institutions (MFIs) came into being in the 90s as banks’ reluctance to lend to those without credit history provided an opportunity to those willing to take the risk and organize rural communities.

Significance of microfinance institutions in the economy

  • Empowerment of women: About 95 per cent of some loan products extended by microfinance institutions are given to women, as well as those with disabilities
  • Access to credit esp. for the poor: It has acted as a financial support system to low-income households by offering credit access to six crore borrowers in the last few years
  • Poverty alleviation: Microfinance disrupts the cycle of poverty by making more money available. They provide easy credit and offer small loans to customers, without any collateral.
  • Savings in rural households: It helps the poor and marginalized section of society by making them aware of the financial instruments available for their help and also helps in developing a culture of saving.
  • Creating employment
  • Social benefits: Families benefiting from microloans are more likely to provide better and continued education for their children and quality healthcare facilities for family members.
  • Digitization: From 2017 onwards, the Indian MFI industry embraced the digital route by using online delivery channels, mobile banking and e-wallets.

 

Fig: In 2011, Y H Malegam Committee helped establish MFI as a legitimate asset class.

 

Issues concerning MFI:

  • Minimal or no regulatory structure: The combination of   minimal   regulation   and   rapid   sector   growth   led   to   an environment   where   customers   were   increasingly   dissatisfied   with   microfinance services, culminating in the Andhra Pradesh crisis in the fall of 2010.
  • Regulatory role of RBI wrt MFIs: RBI more or less caters to commercial and traditional banks more than it helps MFIs.
  • Very little regulation exists for NGO-MFIs and Cooperatives
  • Delinquency among microfinance borrowers
  • Dependence on commercial banks
  • Over-indebtedness of MFIs
  • MFIs have strayed away from their original purpose of poverty alleviation and social empowerment to short-term profit-making.
  • MFIs are harassing their clients who are usually too desperate to turn away from the credit being offered. This is true even when credit comes with the catch of high repayment rates.

 

Way forward

  • There is a need for MFIs to consider adopting more flexible operating models, providing skills training, and offering services such as the portability of accounts
  • RBI’s new regulatory framework for Microfinance institutions: RBI has recently released its Consultative Document on the Regulation of the Microfinance sectoraimed at protecting and empowering borrowers.
  • A diversified menu of microloan products linked to sustainable income generation activities via micro-enterprises or the creation of community-based pooled enterprises could make it more attractive and compatible with the requirements of women.
  • Linking developmental initiatives to an institution (hand-holding) to nurture, monitor, and handhold those activities in the formative stages is crucial for sustainability.

 

Conclusion

As per the World Bank estimates, more than 500 million people have improved their economic conditions via microfinance-related entities. Strengthening the credit check and debt collection processes and educating the villagers about products and consequences is important.

 

Insta links

Microfinance Regulations

 

Mains Links:

Q. By highlighting the significance of microfinance institutions in the economy, analyze if the present regulatory framework can effectively manage these institutions. (15M)