Microfinance institutions (MFI) are faced with many problems which restrict their potential. These issues, mainly associated with credit risk, are discussed here.
The financial sector in India has been formally serving the economic needs of its urban and rural populations for over three centuries. This sector comprises banking and non-banking network which is present in multiple layers to cater to specific and varied requirements of different customers.
Poverty, a raging economic issue, exists in most of the developing countries. The actual reason for severe poverty lies in the inequality in income distribution, which is chronic in developing countries, especially in India.
Microfinance organization 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.
Microfinance institutions (MFIs’) serve two major needs of the rural poor population in India. These twin needs are the financial and social support to fulfill their needs. One of the most critical salient features of Indian microfinance industry is that most players operate on the lines of Non-Government Organization (NGO) system (Mimo Finance, 2011).
With the increased usage of technology and recognition of the significance of human resources in determining enterprise success, the concept of operational risks has gained importance.
For a long time now, microfinance institutions (MFI) in India have followed the traditional operational model of procurement and distribution of money among rural people. However, during the past 10 years the industry changed radically with a new business model.
Group lending is one of the innovative tools used to mitigate credit risk. The outstanding feature of group lending is that no collateral is required to lend loans but the group is responsible for the payback of the loan (EY 2014).