Microfinance

One of the strongest pillars of the Indian economy is microfinance. The microfinance institutions in India provide the ultimate platform for small businesses, people, and ventures in the rural areas where they can save and borrow money, as well as, seek financial assistance in exchange for an interest rate.

These institutions are considered as societies and trusts which are non-government organizations that can act as a non-banking financial company that does not take deposits. This is the only difference between the microfinance organizations in India and the small banks serving rural people. In this article, we will explore what microfinance is and what these institutions are.

What is Microfinance?

Microfinance can be considered as the extension of the loan and other financial instruments designed by the government authorities that look after the economy and finance of the country. These small loan structures provide an excellent platform for micro-enterprises to seek financial support in exchange for a nominal interest rate in order to make their foundations stronger.

The microfinance institutions follow the path designed by the Reserve Bank of India. According to this supreme authority, the non-government organizations that are not recognized under the Section 25 of the Indian Companies Act 1956 are called microfinance institutions. A microfinance bank in India can only hold a net fund of INR 5 Crore according to the amendment of the act. This amount is INR 2 Crore for the microfinance institutions located in the northeastern states in India.

The definition also suggests that the net qualifying asset should be at least 85% of the net asset an institution holds. These microfinance institutions (MFIs) also come recognized as non-banking financial companies as per the Indian Companies Act 1956 but they cannot take deposits from the account holders. The prime aim of the MFIs is to help low-income people to survive by providing financial aid in exchange for an interest rate.

One of the prime issues that these MFIs are facing is the huge gap between the money disbursed as microloans and the amount recovered. This is why RBI has been requested to reform the definition of these NBFCs and let them keep deposits to recover money and let it be used by the local people. This step will reduce the gap between borrowed and recovered money and will also reduce the interest rate on the loans exceptionally.

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What are the Reasons for Developing Microfinance Companies in India?

Microfinance is the sole idea of Muhammad Yunus, a Nobel Laureate, social entrepreneur, and banker. He introduced this system to enhance the flow of funds to the rural and remote areas of Bangladesh to escalate the quality of professions, services, and lives.

He introduced this idea to ensure the safety of rural people from loan sharks. These micro-financing ideas can be proliferated to entrepreneurs too where they can seek microcredit from these NBFCs and can strengthen the foundation of the businesses. This step from the eminent personality literally revolutionized the economical map of the rural points of Bangladesh.

It was his idea to move funds to the remotest part of a country and to provide exceptional financial aid to all kinds of professions that fail to qualify as borrowers in front of the public and private banks. He initiated this model and established ‘Grameen Bank’ to create a platform to seek microcredit for the professional, economical and social development of the rural population in Bangladesh.

This revolutionary idea was a hit. Soon, many 3rd world countries started to adopt this model of micro-financing to address poverty and to strengthen families financially. The Nobel Committee in Norway understood how this model can be used effectively to tackle poverty and how society can be a part of it. The universal application of this financial and economic model shows its use in any country. According to its business model, even the poorest can qualify as a borrower and seek financial assistance in terms of the defined ways.

They can seek loans, insurance, etc, and can also seek counseling and training from the authorities. The microfinance companies in India also follow the same defined route to encourage entrepreneurs in rural areas and people from various professional backgrounds to become independent. Eventually, this idea has been introduced to help out the micro-businesses but it has evolved into different business models offering a strong platform for developing a new industry.

Microfinance Companies in India

In India, the institutions that follow these models come under the definition of trusts and societies. The microfinance organizations in India get help from commercial banks, cooperative societies, regional rural banks, and other lenders. These institutions also offer loans to a group of borrowers to ensure a proper financial platform to follow and strengthen their causes.

The Features of Microfinance in India are:

• Borrowers Belong to the Low-Income Group

The borrowers fall under the low-income group and can only seek such financial aid when they qualify as per the amended eligibility criteria.

• Icroloans

The amount of the loans is very small. Even a small group of borrowers seek loan amounts that are quite small when compared to the conventional amounts borrowed in general banks.

• Short Duration Tenure

The tenure of all the loans has a shorter tenure when compared to the traditional loans.

• No Collateral

The prime reason why the population cannot qualify as borrowers to the banks is collateral. This is where the microfinance companies in India extend financial support without collateral to this group of people.

• Quick Repayment of a Loan

The loan borrowed is quickly repaid by the borrower so that others can seek similar financial aid.

• Loans are for Professional Purposes

Loans are sought for micro-business, entrepreneurship, and other income generation reasons.

Prime Constraints of Microfinance in India

India is the second-highest populated country in India with one-third of its population falling under the poverty line. Imagine the pressure on the microfinance institutions in India when it comes to extending a financial helping hand to all.  This tool can be used as poverty alleviation and people have been really benefited in the past decades. They have fortified their professions and escalated their standard of living in due course of time.

One of the prime constraints is that these NBFCs do not allow any deposit of any amount. This causes a huge gap in the loan disbursal and repayment which eventually results in the inflation of the interest rate.

Another problem is that microcredit is offered without seeking collateral. Hence, the risk of microfinance organizations in India increases considerably.

Top 10 Microfinance Companies in India

As per the definition of microfinance in India, the top 10 microfinance company in India are:

1. Arohan Financial Services Pvt Ltd

2. Annapurna Microfinance Pvt Ltd

3. Bandhan Financial Services Pvt Ltd

4. Asirvad Microfinance Pvt Ltd

5. Cashpor Micro Credit

6. BSS Microfinance Pvt Ltd

7. Disha Microfin Pvt Ltd

8. ESAF Microfinance and Investments Pvt Ltd

9. Equitas Microfinance Pvt Ltd

10. Fusion Microfinance Pvt Ltd

There are different issues with the various models utilized in this domain. Over the last 5 years, this segment has witnessed remarkable growth. However, there is one single problem that makes it a tough tool to control.

There is no hard and fast rule that these microfinance companies follow in terms of lending money and operating in the Indian rural markets. It means that a standardized flow of operations and services are not offered causing a chaotic situation in some cases. Moreover, the practices and trends differ from location to location and company to company. The microfinance institutions in India do have the potential to escalate the economic condition of the people under the poverty line or qualify as borrowers but have no proper regulatory medium to follow or operate.

This reason causes low repayment of the loans disbursed in every segment of a microfinance company. The borrowers create a huge gap between the disbursed amount and the amount present in the company as net capital to be borrowed. This is why microfinance companies need proper regulation, supervision, and deposition of savings to keep the funds rolling.