Microfinance - An Introduction

Microfinance services should mean providing thrift, credit of small amounts (say, Rs50000 for small and tiny enterprise, agriculture, allied activities, including consumption purposes; or Rs.150000 for housing purposes) or micro insurance services to any individual or a member of a SHG or a SHG itself or any such other groups formed for the purpose of providing micro finance services.

2. NABARD Task Force (1999) has defined microfinance "provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi urban and urban areas for enabling them raise their income levels and improve their living standards."

3. Microfinance institutions (MFIs) engaged in such activities are mostly incorporated under one of the following forms:

(a) Non Banking Financial Companies (NBFCs) registered under Section 25 of the Companies Act, 1956;
(b) Other NBFCs engaged in microfinance activities;
(c) Societies registered under Societies Registration Act; and
(d) Trusts registered under the Trusts Act/Indian Trusts Act.

4. Multiple models have emerged in different parts of the country. Most of the banks follow Self Help Group model and SHG Bank linkage programme has emerged as an acclaimed and successful model. The scheme was launched in 1992 by NABARD and the progress can be seen in the post "NABARD on Microfinance" on this Blog. As can be seen from from NABARD figures, 2.2 million SHGs, involving approximately 33 million households have been credit linked with credit flow of Rs 11,398 crores by end of March 2006. Other microfinance initiatives are estimated to have a total disbursements of around Rs 2000 crores by aroung 800 non government organizations, not for profit companies and some for profit non banking finance companies.


5. It may be noted that Reserve Bank has advised the banks that they may not impose any models for financing by them. However, under the SHG-Bank Linkage Programme, the following three models had evolved:

a) Where banks promote, nurture and finance the SHGs
b) Where NGOs promote and nurture SHGs, but banks do direct financing to the SHGs; and
c) Where Non Government Organizations (NGOs) not only promote and nurture SHGs, but also act as financial intermediaries on behalf of financing banks.

6. Among the above three models, the second model wherein NGOs promote the SHGs and banks provide credit directly to the groups is the most popular model.