Microfinance Lending

There is growing distress caused by microfinance loans (MFIs) in rural Karnataka, where many borrowers are facing significant financial hardships.

What is Microfinance lending?

• Microfinance lending refers to providing small loans, typically to individuals or small businesses in low-income or rural areas, who don't have access to traditional banking services.
• These loans are usually given without requiring collateral and are meant to help people start or expand small businesses, improve their living conditions, or cover emergency needs.
• The idea is to empower people, particularly those from marginalized groups, by giving them access to credit to improve their financial situation.
• Microfinance institutions (MFIs) are the organizations that offer these loans. They operate under the belief that even people with very low incomes can repay small loans, provided they are offered the opportunity. MFIs usually work with individuals who may not qualify for conventional bank loans due to factors like lack of a credit history or collateral.
• The loans are often used for purposes like:
  • Starting or expanding a small business (e.g., selling goods or providing services)
  • Paying for education or healthcare
  • Covering emergency costs (e.g., repairing a house or buying farming tools)

Evolution of the Microfinance Sector in India:

The microfinance sector in India has evolved over four distinct phases:

• Initial Period (1974–1984):
  • In 1974, the Shri Mahila Sewa Sahakari Bank was established to provide financial services to women in the unorganized sector.
  • In 1984, the National Bank for Agriculture and Rural Development (NABARD) advocated for Self Help Group (SHG) linkage, which became a key tool in poverty alleviation.
• Change Period (2002–2006):
  • 2002: Norms for unsecured lending to SHGs were aligned with those for secured loans, creating an environment for increased lending.
  • 2004: The Reserve Bank of India (RBI) recognized microfinance as part of the priority sector, formally acknowledging MFIs as instruments for financial inclusion.
  • 2006: Allegations of high interest rates and unethical recovery practices resulted in the shutdown of some MFI branches, bringing the sector under scrutiny.
• Growth and Crisis (2007–2010):
  • 2007: Private equity players entered the microfinance market, leading to rapid growth in the MFI loan book.
  • 2009: The formation of the Microfinance Institutions Network (MFIN) allowed NBFC-MFIs to operate more cohesively and regulate themselves.
  • 2010: The Andhra Pradesh crisis, marked by aggressive debt collection practices and borrower suicides, led to government intervention and the implementation of an Ordinance that significantly impacted MFIs.
• Consolidation and Maturity (2012–2015):
  • 2012: The Malegam Committee provided recommendations, which resulted in new RBI regulations aimed at stabilizing the sector.
  • 2014: RBI granted Bandhan Bank, the largest microlender, a universal banking license, marking the mainstreaming of microfinance.
  • 2015: The government launched the MUDRA Bank, aimed at financing small businesses and promoting entrepreneurship.