Microfinance organisation is not new to the financial market in India. Due to the overwhelming poverty in India, government gave special attention to the development of rural credit. Taking All India Rural Credit Survey report (1950) into account, it reconstructed the cooperative structure which included the partnership of state in cooperatives, establishment of Regional Rural Banks (RRB) and National Bank for Agriculture and Rural Development (NABARD). In India, Non Government Organisations (NGOs) played a pivotal role in the development of micro financial service. Furthermore, microfinance industry in India has witnessed a fast-paced growth in last two decades. In 2009, the total number of microfinance institutions in India was around 150 (Tripathi, 2014).
Definition of microfinance institutions in India
Microfinance Services Regulation Bill of India, defines microfinance services as financial assistance to be provided to an eligible individual directly or by a group mechanism for:
- An amount of maximum fifty thousand in aggregate per person for small and cottage enterprises, agricultural and allied activities (consumption purposes of the person is also included) or
- A maximum amount of one lakh fifty thousand in aggregate per person for the purpose of housing or
- Such like the above amounts may be prescribed to a person for other purposes also.
The bill, in addition, explains microfinance institutions as the organization of individuals which includes the following if the establishment of the organization concentrates on the purpose of increasing microfinance services:
- Registration of society under Societies Registration Act (1860).
- A creation of trust under Indian Trust Act (1880) or registered public trust under state enforced governing trust.
- A society registered under the Multi State Cooperative Societies Act (2002) which can be a cooperative society or a mutual benefit corporative etc (Singh, 2016).
Different types of microfinance institutions in India
The microfinance models are developed in order to cope with the financial challenges in financially backward areas. There are various types of microfinance companies operating in India.
Joint Liability Group (JLG)
Joint Liability Group can be explained as the informal group consists of 4-10 individuals who try to avail loans against mutual guarantee from banks for the purpose of agricultural and allied activities. This category generally consists of tenants, farmers and other rural workers. They work primarily for lending purposes, although they also offer the savings facility. In this type of institution every individual of a borrowing group is equally liable for the credit (Singh, 2010). This kind of institution is simple in nature and requires little or no financial administration (UBI, no date).
However, one of the serious problems of this structure is personal preferences in lending credit which resulted in a partial failure of the system. Of late due to various promotional initiatives taken by banks such as Indian bank, Karur Vysya Bank and Indian Overseas Bank, the credibility of Joint Liability Group model has received a boost (The Hindu, 2016). It still remains a landmark movement in the area of protection of farmer’s land ownership rights.
Self Help Group (SHG)
Self Help Group is a type of formal or informal group consisting of small entrepreneurs with similar kind of socio-economic backgrounds. Such individuals temporarily come together and generate a common fund to meet the emergency needs of their business. These groups are generally non-profit organizations. The group assumes the responsibility of debt recovery. The advantage of this micro-lending system is that there is no need for collateral. Interest rates are also generally low and fixed especially for women (Chowdhury, 2013; Business Standard, 2017). In addition various tie-ups of banks with SHGs have been implemented for the hope of better financial inclusion in rural areas (Jayadev and Rao, 2012).
One of the most important ones is NABARD SHG linkage program where many self-help groups can borrow credit from bank once they successfully present a track record of regular repayments of their borrowers. It has been very successful especially in Andhra Pradesh, Tamil Nadu, Kerala and Karnataka and during the year of 2005-06. These states received approximately 60% of SGH linkage credit (Taruna and Yadav, 2016).
The Grameen Bank Model
Grameen Model was introduced by the Nobel laureate Prof. Muhammad Yunus in Bangladesh during 1970s. It has been widely adopted in India in the form of Regional Rural Banks (RRB). The goal of this system has been the overall development of the rural economy which generally consists of financially backward classes. But this model has not been fully successful in India as rural credit and system of recovery are a real problem. Huge amount of non-performing assets also led to failure of these regional banks (Shastri, 2009). Compared to this model Self Help Groups have been more successful as they are more suited to the population density of India and far more sustainable (Dash, 2013).
Rural Cooperatives in India were set up during the time of independence by the government. They used the mechanism to pool the resources of people with relatively small means and provide financial services. Due to their complex monitoring structure, their success has been limited. In addition, this system only catered to the credit-worthy individuals of rural areas, not covering a large part of the country’s financially backward section (Rajendran, 2012).
|Joint Liability Group||Self Help Group||Grameen Bank Model||Rural Cooperatives|
|Size||5-10 members per group||10-20 members per group||Starts with only 2 members per group in a village, eventually increased after loan is successfully repaid||70-80 members per group|
|Services||Generally lending only, irrespective of savings amount||Regular savings in deposit accounts with the financial institutions.||Savings and deposits to extremely poor sections of the society for business, health and housing||Primarily lending services for agricultural purposes|
|Model||Members invest loan amount for different purposes, but are guarantors of each other||All individuals of group work together on the same activity||Field Manager visits villages to form groups of 5 and lends to 2. Amount recovered is reinvested in further lending and infrastructure development in villages||Cooperative society consisting of members are formed for a singular purpose; such as real estate, agriculture, infrastructure, etc.|
|Structure||All members interact with the financial institution individually||More formal with defined positions in each group like treasurer and secretary||Formal structure consisting of Unit Manager, Field Manager, etc. Who interact with every family in a village||All members interact with the financial institution jointly|
Main goal of financial inclusion
Each type of microfinance institution is different from the other in many ways but they work towards the same goal- financial inclusion. Due to their operational frameworks, some models have been less successful than the others in attaining this objective. In addition to the above, microfinance institutions can also be categorised into large, medium and small scale. These institutions differ in terms of geographical reach, infrastructure, manpower skills availability, funding and lending processes, revenues and success in operations. These differences are explored further in the proceeding article.
- Business Standard (2017) ‘Centre to give Rs 1-3 lakh loans to self-help groups at very low rates’, Business Standard, 19 April. Available at: http://www.business-standard.com/article/economy-policy/centre-to-make-credit-available-at-low-rates-to-women-self-help-groups-117041900376_1.html.
- Chowdhury, M. (2013) ‘25 lakh women self-help groups to get loans at low interest rates’, Business Line, 6 May. Available at: http://www.thehindubusinessline.com/economy/25-lakh-women-selfhelp-groups-to-get-loans-at-low-interest-rates/article4689783.ece.
- Dash, A. K. (2013) ‘Micro-finance: A Brief Review and Comparison of the Grameen and the Self Help Group Models’, International Journal of Application or Innovation in Engineering & Management, 2(7), pp. 429–431.
- Imai, K. S., Arun, T. and Annim, S. K. (2010) ‘Microfinance and Household Poverty Reduction: New Evidence from India’, World Development, 38(12), pp. 1760–1774. doi: 10.1016/j.worlddev.2010.04.006.
- Jayadev, M. and Rao, R. N. (2012) ‘Financial resources of the microfinance sector: Securitisation deals – Issues and challenges Interview with the MFIs Grameen Koota and Equitas’, IIMB Management Review, 24(1), pp. 28–39. doi: 10.1016/j.iimb.2011.12.002.
- Rajendran, K. (2012) ‘Micro Finance Through Self Help Groups – a Survey of Recent Literature in India’, International Journal of Marketing, Financial Services & Management Research, 1(12), pp. 110–125.
- Shastri, R. K. (2009) ‘Microfinance institutions and poverty reduction in India ( A comparative study with Asian Countries )’, African Journal of Business Management, 3(4), pp. 136–140.
- Singh, P. (2010) ‘Understanding the structure of Microfinance Institutions in India and suggesting a Regulatory Framwork’.
- Singh, P. (2016) ‘Understanding the structure of Microfinance Institutions in India and suggesting a Regulatory Framework’.
- Taruna and Yadav, P. (2016) ‘Microfinance : Emerging Role, Issues and Challenges in India’, Indian Journal of Applied Research, 6(1), pp. 30–31.
- The Hindu (2016) ‘Banks now encourage joint liability groups’, The Hindu, 5 January. Available at: http://www.thehindu.com/news/cities/Tiruchirapalli/Banks-now-encourage-joint-liability-groups/article13982134.ece.
- Tripathi, V. K. (2014) ‘Microfinance – Evolution, and Microfinance-Growth, of India’, International Journal of Development Research, 4(5), pp. 1133–1153.
- UBI (no date) Joint Liability Group, Union Bank of India. Available at: http://www.unionbankofindia.co.in/RABD_Other_JLG.aspx.