International Journal of Management and Economics

www.managementjournals.net
Online ISSN: 2664-7079, Print ISSN: 2664-7060
Received: 18-11-2023, Accepted: 03-12-2023, Published: 19-12-2023
Volume 5, Issue 2, 2023, Page No. 52-55

Progress and performance of microfinance institutions in India

Arindam Jana
Assistant Professor, Department of Economics, Goenka College of Commerce and Business Administration, Kolkata, India

Abstract
Microfinance is regarded as a useful tool for the economic wellbeing of low income groups in a developing country like India.
It plays a significant role in poverty alleviation through the provision of finance and other facilities towards productive activities.
Microfinance Institutions (MFIs) serve to provide microfinance to the weaker sections of the population through group based
mechanism. The emphasis of the present study is to assess the performance and role of microfinance institutions in India. The
purpose of this research paper is to identify how microfinance is made available in rural areas for needy people and also how
microfinance institutions can check or reduce poverty with the help of microfinance. The Government of India and the Reserve
Bank of India have created a conducive policy and regulatory framework for MFIs to operate in the country. The present article
aims at studying the overall progress of the MFI-Bank Linkage Program in India.

Keywords: Micro Finance Institutions (MFIs), Self Help Groups (SHGs), Joint Liability Groups (JLGs), National Bank for
Agriculture and Rural Development (NABARD)
Introduction 1980s.In the late 1990s, institutions such as SIDBI and
The goal of Microfinance Institutions (MFIs) is to offer low- NABARD entered the arena to assist the ailing microfinance
income individuals microfinance services. The wide range of business. The importance of microfinance can be assessed by
financial services offered to low-income individuals is the fact that the Reserve Bank of India classifies microfinance
referred to as microfinance. Microfinance is the term used to loans as priority sector loans.
describe financial services such as savings accounts,
insurance, and loans that are given to low-income small- Objectives of the Study
business owners and entrepreneurs who are unable to obtain To study the evolution of microfinance in India and the
bank loans because they lack collateral (Verma, 2019) [11]. progress of the MFI-Bank linkage program in India and its
MFIs have grown in importance as development policy tools delivery models.
in recent years. 1. To understand the concept of microfinance and delivery
In India nowadays, microfinance services are provided by a models of microfinance in India.
variety of public and private sector organisations. Such 2. To define features of the role and importance of
institutions are broadly categorized into two categories, microfinance in India.
namely formal institutions and non-formal institutions. The 3. To evaluate the current status and prospects of MFIs in
former category comprises of apex development financial India.
institutions, Commercial Banks, Regional Rural Banks, and Literature Review
Co-operative Banks that provide microfinance services in The study by Ahmed et al (2013) reveals that, ‘Microfinance
addition to their general banking activities. The informal Institution’ is a ‘social enterprise’, whose primary mission is
institutions that undertake microfinance services as their to improve the lives of poor people through provision of
main activities are referred to as Microfinance Institutions financial services. If a for-profit organisation followed a strict
(MFIs). Although both public and private ownership are "double bottom line" attitude, it might be able to meet this
found in formal financial institutions offering microfinance requirement; nonetheless, improving the lives of the
services, MFIs are mainly found in the private sector. There impoverished must undoubtedly be one indicator of success.
are three types of MFIs - not-for-profit MFIs, mutual benefit Better financial transparency has the potential to draw in
MFIs and for-profit MFIs (Mishra and Chowbey, 2009) [5]. contributors, investors, and other stakeholders, according to
According to Consultative Group to Assist the Poor (CGAP, the study.
2001) [1], the main objectives of Microfinance Institutions Moses (2011) [7] focuses on the history, definition, and
(MFIs) are: functions of microfinance as well as its role in India. He also
 To lower hazards and assist the impoverished and in reviews its strengths and shortcomings and offers
need in meeting their fundamental needs; recommendations for enhancing microfinance's potential as a
 To strengthen their financial situation by means of tool for empowering women, reducing poverty, and
savings accounts and minor loans; promoting rural development in the country.
 To provide self-employment opportunities, especially to The findings of Nikita's (2014) [8] study indicate that the
women. number of SHGs declined for the first time in 2012–2013,
To address this issue, the Government proposed the following the introduction of the SHGs BLP. The study also
introduction of MFIs, to be regulated and supervised by the finds out there was growth in the loan outstanding of SHG
RBI, which would lend to the poor at subsidized interest and which was responsible for increases in NPAs.
rates. This paved the way for the entry of MFIs in the Eventually, it is discovered that commercial banks hold the

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majority of the shares when the agency-wise loan to MFI is There are several different types of Mutual Funds (MFIs) in
given. He recommended that actions be taken to enhance the India. These include registered trusts under the Public Trust
results of programmes periodically introduced under Act of 1920 and the Indian Trust Act of 1882, cooperative
microfinance. societies registered under the Reciprocal Co-operative
Hartarska, Caudill and Gropper (2006) [3] in their paper Societies Act of States, and Non-Banking Financial
presented the first systematic statistical examination of the Companies (NBFC) - MFIs registered under section 25 of the
performance of MFIs operating in Eastern Europe and Companies Act of 1956 or registered with the Reserve Bank
Central Asia. A cost function was estimated for MFIs in the of NBFC. These MFIs are scattered all over the country and
region from 1999-2004. Microfinance institutions were the registration authorities are due to plurality. In India, the
important, particularly in developing countries, because they top four microfinance models are as follows:
expanded the frontier of financial intermediation by 1. The model I - Individuals or group borrowers are
providing loans to those traditionally excluded from formal financed directly by banks without the
financial markets. First, the presence of subsidies was found intervention/facilitation of any Non-Government
to be associated with higher MFIs costs. When output was Organization (NGO);
measured as the number of loans made, it was observed that 2. Model II - Borrowers are financed directly with the
MFIs became more efficient over time and that MFIs facilitation extended by formal or informal agencies like
involved in the provision of group loans and loans to women Government, Commercial Banks and Micro-Finance
had lower costs. However, when output was measured as Institutions (MFIs) like NGOs, Non-Bank Financial
volume of loans rather than their number, this last finding was Intermediaries and Co-operative Societies;
reversed. This might be due to the fact that such loans were 3. Model III - Financing is done in the form of facilities and
smaller in size; thus for a given volume more loans were financing agencies through NGOs and MFIs;
given. 4. Model IV - Grameen Bank model, similar to the model
followed in Bangladesh.
Materials and Methods
This study only uses secondary data that is currently For MFIs, there isn't currently a single regulatory framework
available. The data and information has been collected with in existence. While NBFCs are regulated by the Reserve
the help of Research Articles, Status of Microfinance in India, Bank of India, NGOs – MFIs, non-profit companies and
published by NABARD, mutual benefit MFIs are regulated by the specific Act under
Bharat Microfinance Report, published by Sa-Dhan, Annual which they are registered. As such, they are not subjected to
Report and Working Report of SIDBI, Annual Report of minimum capital requirements and other prudential norms.
CGAP etc. The data was collected for the period from 2012-
13 to 2016-17. Regulation and Governance of MFIs
This article is based on descriptive research with secondary Given the size of the market for microfinance, India requires
data. Various statistical methods and tools are used in this both a formal and self-regulatory framework. According to
study. These are average, percentage, Compound Annual the 2011 Report of the Central Board of Directors Sub-
Growth Rate (CGAR) etc. CGAR is used to find out the Committee of the RBI, "NBFC-MFIs have a very large
growth of credit disbursement, credit outstanding and the exposure to the banking system; even though they do not
number of MFIs being engaged in providing microfinance. accept public deposits." It is estimated that more than 75% of
Credit delivery model used by microfinance institutions their source of funds comes from the banking system’. This
The SBPL model and the MFI model are the two main models strongly underscores the strong need for regulating the
used to provide microfinance in India at the moment. NBFC-MFIs.
1. SHG-Bank linkage model As regards the apex regulatory body for microfinance, the
A Self Help Group (SHG) is usually a union with up to 20 Bill of May 2012 sought to empower the RBI as the regulator
members. SHGs refer to self-governed, peer- controlled, of MFIs but the Parliamentary Panel recommended an
informal groups of people with the same socioeconomic independent regulator. India has yet to see a comprehensive
background and collective aims. Here, poor people legislation for microfinance. RBI’s NBFC-MFIs guidelines
voluntarily group together to set aside as much funds as they came in handy for MFIs. In the absence of an enactment, the
can from their work for savings. They then agree to jointly operating guidelines of NABARD relating to SHGs and
contribute that amount to a common fund, from which they RBI’s master circulars (issued from time to time) relating to
will lend members' money to cover both productive and both SHGs and MFIs render guidance for the regulation and
emergent needs (Verma, 2019) [11]. In this paradigm, governance of microfinance. RBI8 proposed a Self-
cooperative banks (such as State Co-operative Banks, regulatory organisation for NBFC-MFIs (Krishnan and Rao,
NABARD, District Co-operative Banks, etc.) and 2014) [4].
commercial banks in the public and private sectors directly
fund Self Help Groups (SHGs). The SHGs create the corpus, The state and Growth of MFIs in India
which is supplemented by revolving cash credit from the 1. Progress under MFI-Bank Linkage Programme
banks. The Indian Microfinance Sector has witnessed phenomenal
2. Microfinance Institution (MFI) model growth over the past few years. The number of Institutions
MFIs were created to promote the key objectives of providing microfinance services has gone up from a few to
microfinance which is to help economically underserved several hundred. The total gross loan portfolio of MFIs,
communities achieve greater financial independence and excluding Small Finance Banks (SFBs), was over Rs.44,000
build sustainable livelihoods. MFIs seek to work closely with crore on 31 March 2023. This is a growth of around 26% over
regulators and other key stakeholders to achieve larger the previous year.
financial inclusion goals through microfinance (Mittal and The detail of loans extended to MFIs during the last 5 years
Srivastava, 2014) [6]. is shown below.

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Table 1: Loans to MFIs by all Agencies

Loans disbursed to MFIs during the year Loan outstanding against MFIs as on 31 March
Year
No.of Loan Accounts Amount No.of Loan Accounts Amount
2018-19 1933 14625.95 5488 17760.68
2019-20 4762 20226.00 15197 29288.62
2020-21 28562 12739.33 61181 22601.78
2021-22 24628 23173.45 58753 34865.37
2022-23 80211 36756.99 106355 44119.79
CAGR (%) 148.28 21.88 107.11 22.07
Source: Status of Microfinance in India 2018-19 to 2022-23

It can be observed that the total amount of loans disbursed to estimated CAGR of loan disbursement was 21.88 per cent,
1933 MFIs was Rs. 14625.95 crore during 2018-19. The while that of loan outstanding was around 22 per cent.
same has been increased to Rs. 36756.99 crore against 80211
2. Progress of Loans to MFIs by Small Industries
MFIs during 2022-23. The total amount of loans outstanding
Development Bank of India
against 5488 MFIs as of 31st March 2019 amounted to Rs. Table-2 shows the number of MFIs and the amount of loan
17760.68 crore. The same has been increased to Rs. 44119.79 given by Small Industries Development Bank of India
crore against 106355 MFIs as of 31st March 2023. The (SIDBI) to MFIs.

Table 2: Loans to MFIs by SIDBI

Loans disbursed to MFIs during the year Loan outstanding against MFIs as on 31 March
Year
No. of Loan A/Cs Amount No. of Loan A/Cs Amount
2018-19 20 905.00 84 1715.87
2019-20 16 1093.00 56 2032.79
2020-21 18 2583.00 78 1672.00
2021-22 - 2893.00 - 3118.00
CAGR (%) -5.41 54.43 -3.78 17.30
Source: Status of Microfinance in India 2018-19 and 2019-20, and Annual Report, SIDBI, 2020-21 and 2021-22.

Table-2 shows that though the number of MFIs getting loans outreach also increased from 98 per cent to 97 per cent. The
from SIDBI was not so prominent, the loan disbursement was gross outstanding portfolio has increased from Rs. 113459
quite adequate and was increasing significantly. During crore to Rs. 135099, crore, i.e. by about 19 per cent during
2018-19, Rs. 905 crore was disbursed by SIDBI to 18 MFIs this period in 2022 over 2021. Average loan per borrower has
which has increased to Rs. 2893 showing a CAGR of 54.43 shown upward movement during this period, i.e. average loan
per cent over a period from 2018-19 to 2021-22. The loan per borrower has increased by around 10 per cent during this
outstanding to MFIs also increased from Rs. 1715.87 to Rs. period. Out of total loans, the proportion of income
3118, showing a CAGR of 17.30 per cent. SIDBI is actively generating loans was 90 per cent in 2021 which increased to
working towards providing funds to Microfinance 96 per cent in 2022. The indicators relating to overall
Institutions. financial structure such as Return on assets (ROA) and
Return on equity (ROE) have increased over this period,
Performance of MFIs while the capital adequacy ratio (CAR) has decreased. The
Table-3 presents the overall performance of microfinance average Operational self-sufficiency (OSS) of the Indian
institutions during the years 2021 and 2022. MFIs has increased from 105 per cent in 2021 to 114 per cent
Table 3: Performance indicator of MFIs Model in India in 2022. Operational self-sufficiency measures the ability of
an MFI to meet all its operational and financial costs out of
Particular 2021 2022 its income from operations. The profit margin has also
Client outreach (Lakhs) 422 448 improved from 8.4 per cent in 2021 to 9.04 per cent in 2022.
Women client (%) 98% 99% Non-performing assets increased during this period from 1.85
Gross O/S Portfolio (RS. crore) 113459 135099
per cent to 2.05 per cent.
Average loan per borrower (Rs.) 18894 20789
Income generation loan (%) 90% 96% Conclusion
Equity outstanding (Rs. crore) 4637 6439 MFIs played a major role in bridging the gap between the
Fund flow (outstanding) (Rs. crore) 53152 64693
formal financial institutions and the rural poor. From the
Yield (%) 16.80% 16.50%
above study, it can be viewed that SHGs and MFIs are
Margin (%) 8.40% 9.04%
ROA (%) 0.64% 1.11% playing a vital role in the delivery of microfinance services
ROE (%) 2.83% 4.26% which leads to the development of poor and low income
OSS (%) 105% 114% people in India. The functioning of Microfinance institutions
CAR (%) 28.41% 28.00% in India has been playing an important role in rural areas for
NPA (%) 1.85% 2.05% the last two decades. This study focused on the MFIs in India
Source: Sa-Dhan, Bharat Microfinance Report, 2022 in terms of the provision of loans to clients as well as the
performance of them. It can be observed from the study that
Table-3 shows that client outreach increased by 6 per cent in MFIs have been disbursing sufficiently adequate credit to the
2022, over 2021. Similarly, the percentage of women's clients. At the same time, the overall performance of the MFI

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sector in recent years is satisfactory and has been improving

over time. Government should support this sector by
providing financial and technical help. At the same time it
should frame suitable policy perceptions to manage and
regulate MFIs efficiently.

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