In recent news, Microfinance institutions (MFIs) have solicited the central government’s attention to prioritize COVID-19 vaccinations for their employees and Self-help Group (SHG) personnel. The appeal comes amidst concerns that their services may be disrupted due to the intensifying second wave of COVID-19 infections.
Understanding Microfinance Institutions
MFIs are organizations that extend financial services, including microloans, microsavings, and micro-insurance, to economically disadvantaged sections. Such institutions are specifically designed to serve individuals without access to regular banking facilities, offering small loans defined according to the country’s standards. For example, in India, any loan below Rs.1 lakh is categorized as a microloan.
The rapid growth of the microfinance sector over recent decades has resulted in services reaching around 102 million accounts across India. Various service providers cater to the economically disadvantaged, from non-government organizations and cooperatives to commercial and state banks, among others.
Regulations on Microfinance in India
Non-Banking Finance Company-Micro Finance Institutions (NBFC-MFIs) in India comply with “The Non-Banking Financial Company -Micro Finance Institutions (Reserve Bank) Directions, 2011” set by the Reserve Bank of India (RBI).
Major MFI Business Models
MFI operates under numerous business models. A Joint Liability Group is an informal group comprising 4-10 individuals seeking mutual-guarantee loans, primarily for agricultural purposes. Self Help Groups are another model where individuals from similar socio-economic backgrounds pool funds for their business needs.
Other models include the Grameen Model Bank and Rural Cooperatives. However, these models met with varying levels of success due to complexities in monitoring structures and limited benefit only to creditworthy borrowers.
The Impact of MFIs
MFIs bear significant positive impacts on their customer base. They make more money available to underserved sections, leading to increased income and employment for deprived households. Additionally, they provide access to finance for women, the unemployed, and people with disabilities.
MFIs also contribute to raising awareness among the poor and marginalized about financial instruments available for their upliftment. Beneficiaries of microloans are more likely to ensure better and sustained education for their children.
Challenges Faced by MFIs
Despite their advantages, MFIs face several challenges, including fragmented data on the actual impact of their loans on poverty alleviation. The COVID-19 pandemic has marred the MFI sector with initial reductions in collections and slow recoveries in disbursements.
Some critiques argue that MFIs overlook their social objectives in pursuit of profits, resulting in a decline in the quality of life of marginalized communities. Furthermore, loans often get utilized for non-income-generating purposes, pushing recipients into a cycle of debt.
Way Forward for MFIs
To address these challenges and continue serving their target markets effectively, MFIs need to focus on developing sustainable and scalable microfinance models that ensure both economic and social good. Implementing thorough checks on loan utilizations and creating ‘social impact scorecards’ to monitor societal impacts should be integral to this process.
