Introduction: Micro Finance Institution

Microfinance is the financial service that provides access to various financial services such as credit, savings, micro-insurance, remittances, and leasing to low-income individuals including consumers and the self-employed, who traditionally lack access to banking and related services. The main objective is to provide permanent access to appropriate financial services which include insurance, savings, and fund transfer. It plays a significant role in bridging the gap between formal financial institutions and the rural poor. Micro Finance Institution has become more widely accepted and moves into the mainstream, the supply of services to the poor may also increase, improving efficiency and outreach while lowering costs.

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What is a Micro Finance Institution?

The NBFC -  Micro Finance Institution (NBFC-MFI) is a non-deposit-taking financial company having not less than 85% of its assets in the nature of qualifying assets* which should satisfy the following conditions:

• Loan to be disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding? 1,00,000 and in case of the urban and semi-urban household income not exceeding? 1,60,000;
• The loan amount should not exceed? 50,000 in the first cycle and ? 1,00,000 in subsequent cycles;
• The total indebtedness of the borrower should not exceed? 1,00,000;
• tenure of the loan should not be less than 24 months for loan amounts exceeding? 15,000 with prepayment without penalty;
• loan to be extended without any collateral;
• an aggregate amount of loans given for income generation should not be less than 50 percent of the total loans given by the MFIs;
• The loan is repayable in weekly, fortnightly, or monthly installments depending on the choice of the borrower.

Thus, by satisfying all the above conditions any non-banking finance company can perform the operations of a micro-finance institution.

*The Qualifying Assets are those assets that have a considerable period of time to be ready for their intended use or sale.

Pre-condition for NBFC-MFI license application

• NBFC-MFI shall not take the deposit. It should be a non-deposit-taking NBFC.
• Maintain a NOF minimum of Rs.5 crore (In case of NBFC-MFIs registered in the North Eastern Region of the country, it shall maintain Rs. 2 crores)
• “Qualifying assets” shall not be less than 85% of its net assets.
• A minimum of 50% of the loan should be given for productive purposes.

Goals of Micro Finance Institutions

• To improve the quality of life of poor individuals by providing them access to financial and support services;
• To be a viable financial institution that assists in the development of communities that are sustainable;
• To deploy resources in order to offer financial and support services to the lower section of society, particularly women, for feasible productive income generation enabling them to reduce poverty;
• Learn and evaluate the options available to move out of poverty faster;
• To create self-employment opportunities for the underprivileged;
• To empower rural people in simple skills by training them and enabling them to utilize the available resources and contribute to employment and income generation in rural areas.

Different types of microfinance institutions in India

Microfinance institutions are developed in order to cope with the financial challenges in financially backward areas. There are two types of groups organized by microfinance institutions that are offering credit, insurance, and financial training to the rural population in India. These are:

1. Joint Liability Group (JLG)

This is usually an informal group that consists of 4-10 individuals who try to seek loans against mutual guarantees from banks. These loans are usually taken for agricultural purposes or associated activities. Farmers, rural workers, and tenants generally fall into this category of borrowers. Each individual in a Joint Liability Group is equally responsible for the loan repayment in a timely manner. This institution does not require any financial administration, as it is simple in nature 

2. Self-Help Group (SHG)

A Self Help Group is a type of formal or informal group of individuals with similar socio-economic backgrounds. These small entrepreneurs temporarily come together for a short duration and generate a common fund for their business needs. These groups are generally classified as non-profit organizations. The group takes care of the recovery of debt. One of the advantages of micro-finance is that there is no requirement for collateral in this kind of group lending. The interest rates are generally low and fixed especially for women. Various banks had tie-ups with SHGs with a vision to improve financial inclusion in the rural parts of the country.

The NABARD SHG linkage program is important in this regard, as many Self Help Groups are able to borrow money from banks if they are able to present a track record of regular repayments of their borrowers.

Brief Procedure to be Followed for Set-Up Micro Finance Business

• Step-1: The Applicant Company should abide by the registration requirement under the Companies Act 2013 / Reserve Bank of India/ Multi-State Cooperative Societies Act, 2002 / Societies Registration Act, 1860 and/or Indian Trust Act 1882.
• Step-2: The applicant company should have sufficient net worth according to the microfinance business requirement.
• Step-3: Determining risk-bearing capacity and structuring your business.
• Step-4: Proceed for registration with a regulation agency and obtain the necessary permits/licenses.
• Step-5: After the satisfaction of all requirements the regulation agency shall grant registration certificate and necessary permits/license as the case may be.