Synopsis: In today’s blog, we will highlight the instrumental role played by microfinance in advancing the cause of financial inclusion and poverty alleviation in India.

The financially underprivileged sections of society—women, low-income households, and MSMEs, often, face several constraints when accessing affordable finance. They are generally perceived as high-risk, owing to lack of collateral and poor financial position, thus making credit extension a high-cost business for lenders.

Moreover, the demand for small-sized loans worsens the lending cost dynamics further. However, microfinance has been leveling the financial playing field by providing tailored, sachet loans to borrowers situated at hard-to-reach locations. 

But what is microfinance, and how is it promoting financial inclusion? Let’s find out.

Understanding Microfinance

Basically, microfinance is a kind of financial service provided to unbanked and underserved households and businesses in the form of small loans, also known as microcredit. As per RBI’s guidelines, microfinance loans are collateral-free loans provided to a household with a yearly income of up to Rs. 3 lakhs.

These loans can be used for various purposes, including income generation, and meeting personal requirements of house building, education, and health expenses. Additionally, some microfinance institutions (MFIs) may offer other financial services, such as insurance, remittance, and pensions, in addition to providing credit.

Thus, microfinance enables credit-deprived households and MSMEs to access loans, streamline cash flows, and fuel growth, while also serving as a crutch to cope and rebuild during a financial crisis. 

Per the latest MFIN Micrometer report (Q2FY23), India’s microfinance gross loan portfolio (GLP) has crossed over Rs. 3 lakh crores, as of 30^th September 2022, a 23% rise from over a year ago. Even the average loan size has experienced a growth of 12% from the previous year and currently stands at Rs. 40,571. This microcredit demand is further forecasted to balloon to Rs. 17-20 lakh crores by 2025.

Evolution of Microfinance 

But what has spurred the growth of microfinance in India? 

As mentioned above, low-income families and small enterprises find it difficult to access affordable credit and avoid falling into a debt trap. Consequently, the Indian government established the SEWA Bank in 1974, an offshoot of the Self-Employed Women’s Association (SEWA), to provide loans to people living in rural hinterlands.

This was followed by the government following two distinct microfinance models:

• Self Help Group (SHG) – Bank Linkage Programme (SHG-BLP)
• Specialized MFIs-led model

While the SHG-BLP scheme aimed at improving rural credit penetration by following a community-based approach, MFIs focus on providing small loans directly at flexible terms, without requiring collateral. The micro-lending landscape was further polished through several reforms recommended by RBI’s YH Malegam committee; it recommended the setting up of NBFC-MFIs in 2011.

Presently, microfinance is provided by a plethora of lenders, not limited to microfinance institutions (MFIs), scheduled commercial banks (SCBs), non-banking financial companies (NBFCs), cooperative banks, regional rural banks (RRBs), small finance banks (SFBs), and Section 8 companies. 

Microfinance: The financial inclusion enabler

So, how does microfinance further financial inclusion?

Financial inclusion, as the term suggests, indicates access to adequate, inexpensive, and responsible financial products, which have been tailored to the borrower’s needs. It precludes access to the full suite of financial services, including deposits, digital payments, lending, and insurance.

Due to poor credit penetration historically, low-income households and MSMEs were forced to rely on informal lenders who charged exorbitant interest rates. However, with microfinance becoming mainstream, barriers to formal lending and economic loan products have been broken.

As per RBI’s latest FI Index, financial inclusion has improved significantly; the index stands at 56.4 for FY22 vis-a-vis 53.9 for FY21. This means people at the bottom of the pyramid are benefiting from increased loan access that can augment their income and wealth generation in the long run.

Microfinance: Serving the unserved women

The expansion of microfinancing can tremendously benefit women and women-led MSMEs. According to the National Family Health Survey (NFHS) 2019-21, the awareness about microcredit loans has soared among women to 51%, with 11% opting for a microcredit loan. This enables women to become financially independent, while also having a higher say in the household’s financial decisions.

However, there is scope for more. Presently, there are about 13.5-15.7 million women-owned businesses in India, with over 95% of them belonging to the micro category. The 2022 IFC report touts an unmet Rs. 836 billion credit demand by women-owned very small enterprises (WVSEs)—a space that can be filled by microfinance.

Microfinance: Poverty alleviation

As Jeffery Sachs, an American economist will have you believe, “The key to ending extreme poverty is to enable the poorest of the poor to get their foot on the ladder of development.” But this ladder requires access to a minimum amount of capital, which serves as the necessary boost to climb up the first rung of the development ladder. 

Therefore, by facilitating inclusive participation, microfinance can accelerate the pace of poverty reduction—a target christened in the UN’s 2030 Sustainable Development Goals (SDGs). In fact, financial inclusion can assist in meeting 7 of the 17 SDGs.

Providing access to immediate, short-term, bespoke loans aids MSMEs in meeting their capital requirements, thus fueling growth. Likewise, microfinance stems from falling into vicious debt cycles by arranging funds in times of emergencies.

As per the MFIN Micrometer report (Q2FY23), over 6.2 crores of unique borrowers (12 crore total accounts) have already benefited from microfinance. NABARD reports providing microfinance to over 14.2 crore households through 119 lakh SHGs under its SHG-BLP scheme.

Digital Microfinance

Buoyed by exponential smartphone penetration, cheap data, and integration of tech with finance, microfinance has been given a new lease on life. By offering digital payments, mobile banking, cash flow-based loans, prepaid instruments, etc., lenders have been sustaining the momentum of microfinance and financial inclusion.

Several traditional lenders have been collaborating with financial companies that mine customer data based on their digital footprint and transaction history to ascertain their creditworthiness. By further interpreting these results through artificial intelligence (AI)-based models, lenders are now in a better position to sanction loans tailored to the borrowers’ needs.

Subsequently, they have also commenced cross-selling products, such as offering insurance and pension products along with credit. This has gone a long way in further improving the financial literacy of the masses. 

Microfinance for Resilient Businesses

Microfinance has served as an essential economic conduit for enhancing credit access and promoting financial inclusion. Not only has it enabled last-mile connectivity by affording loans to borrowers living in the remotest corners of the country, but has also helped in empowering underprivileged classes, reducing poverty, and improving living standards.

And if you, like your peers, are looking for a customized business loan that will supplement your MSME’s growth and resilience, opt for Protium! We offer collateral-free business loans, with funds dispersed within 3 days of approval. Call us at 8828827800 to know more!