Microfinance is meant to provide very small credit to the poor and small businesses, which don’t have access to banking and related services. With organised banking sector not having much to offer to the poor and marginalised section of the society and the small entrepreneurs; microfinance sector has become one of the fastest growing sectors in the world. Microfinancing is also instrumental in the financial inclusion of the long left out sections of the Indian society.
Microfinancing and money lending in India follow various models based on the source of fund and its expenditure. All these models are loosely related to each other. Most microfinance institutions follow a combination of more than one model in their functioning. We briefly explain those models here:
Association Or Group Model
Over 10-20 members of a target community form a group or association based on gender, religion, political or the cultural orientation of its members. The group makes regular savings of fixed amount in a common fund. After the successful working of the group for some months, this group is linked to a financial institution. The institution then lends credit to the association. The group is then responsible for repayment. This model takes advantage of social ties, peer monitoring and peer pressure for repayment of the loan.
In India, the Self Help Group-Bank Linkage Program (SHG-BLP) is a prominent credit delivery method. All SHG-BLP come under NABARD (National Bank for Agriculture and Rural Development). According to NABARD, the SHG-BLP is the world’s largest microfinance programme in the world.
Community Banking Model
This is a more formal version of association model. It treats the whole community as a unit. Microfinance is disbursed through semi-formal or formal institutions depending on the location. Sometimes a semi-formal institution governed by the community is formed with the help of external help such as NGOs who train the community members in various financial activities of community banking. These institutions have saving components as well as income generating projects. Thus, the internal financial capacity of the group is developed. It is further classified into Community Managed Loan Funds (CMLF) and Village Savings And Loan Associations (VSLA). A successful example is Royal Bank of Scotland (RBS) Foundation India, which has various microfinancing programmes to help the poorest communities across India.
Co-operative model is like Association and Community model except for the fact that their ownership structure doesn’t involve the poor. It’s an autonomous association of the people who voluntarily get together to work towards their common social, economic and cultural needs. The members are the shareholders and have their share in equity capital. They also share the profit. These co-operative institutions utilise the local resources and are instrumental in mobilising the micro-savings and microlending. The peer pressure ensures savings and the creditworthiness depend on the savings. Co-operative Development Forum Hyderabad is a successful example of this model. It has built a network of women thrift groups and men thrift groups. This model creates sustainable local prosperity.
But the greatest challenge to the government is that a lot of these are not a part of the organised network.
Grameen Banking Model
A brainchild of Professor Muhammad Yunus, founder of the Grameen Bank in Bangladesh, this model works on the concept of joint liability. It promotes credit as a human right and is based on the premise that the skills of the poor are underutilized. A center is formed with limited people, and the loan is given to few people in the center.
The whole center is jointly responsible for the repayment. Grameen model is being followed by Sarv Seva Abhiyan (ASSEFA), Activities for Social Alternatives.
Bank Guarantee Model
Bank Guarantee Model involves borrowing from a commercial bank. When an individual or a self-formed group goes to the commercial bank for credit, the bank needs collateral. This collateral comes from a Bank Guarantee, which is provided for the borrower either by external agents (donations or government agency) or internally using its member savings. The guaranteed funds can be used for various purposes such as loan recovery or insurance claims. Several international and UN organisations have been creating the guarantee funds that banks can subscribe to. Bellwether Microfinance Funds (India) is one such example.
Credit Unions Model
This model is based on credit union which is member driven, self-help financial institution. A union of members is formed. These members are from the common community. They agree to save together and give loans to each other at a nominal rate of interest. Compared to co-operative banks, credit unions are a democratic, nonprofit financial co-operative.
This model positions a third party between the lending institutions and the borrowers. These third parties are a part of a local community with information about the creditworthiness of the borrowers. They can be local moneylenders, NGOs, microcredit programmes or commercial banks for government-sponsored programmes. The credit-giving institutions could be the government agencies, commercial banks or even international donors. The intermediaries are incentivised in monetary and non-monetary forms.
Individual Banking Model
Individual banking model is a shift from the group-based model. The MFI gives loans to an individual based on his or her creditworthiness. It also assists in skill development and outreach programmes. This model suits product-oriented small businesses. Co-operative banks, Commercial banks and Regional Rural Banks mostly adopt this model to give loans to farming and non-farming unorganised sector. Self-employment women’s association in India (Link to http://www.sewa.org/) (SEWA) is one such example to have adopted this model. The members own and govern the group.
NGOs are one of the key players in the field of micro financing. They help the cause of micro financing by playing the intermediary in multiple dimensions. They are instrumental in starting various microcredit programs and improving the credit ratings of the poor. They conduct training programs and workshops to create the opportunity to learn about micro financing. They act as a supporter for the borrower group as well as the promoters for the lending institution. Various NGOs are helping the cause of micro financing. For example, MYRADA in Karnataka, SHARE in Andhra Pradesh, RDO (Rural Development Organization) in Manipur, RUDSOVAT (Rural Development Society for Vocational Training) in Rajasthan and ADITHI in Bihar.
ROSCA Model Or Chit Funds
Rotating Savings and Credit Associations are a means to save and borrow simultaneously. These are a group of members who make a regular fixed cyclic contribution into a common fund. At the end of a cycle, the total fund collected goes to any one member. Chit Funds are the equivalents of ROSCA in India. It addresses the need to fill the gap left by traditional banking. Easy accessibility and flexibility are the key features here. There are lakhs of ROSCA functioning in India today.
Village Based Model
Closely related to community banking and Group model, this too is community-based saving and credit model. A group of 25-50 people gets together to enhance their income through self-employment activities. They get their first loan from the implementing agency, which helps them form the community credit enterprise. They choose the members, elect their office bearers, establish their bylaws, distribute loan to the individuals and collect savings and payments. The only collateral they work with is the trust. The group stands behind the individual as collateral.
Small Business Model
This model places a big responsibility on small and medium enterprises. With the struggling informal sector, the SMEs can play a significant role in generating employment for the poor by providing training and options to increase their income. The government to strengthen the SMEs is doing direct and indirect interventions in the form of providing training, technical advice and enabling policy and market environment. Microcredit is the critical component, which is being provided to the SMEs, either directly or as a part of larger enterprise development programme.
Several MFIs are using a mix of different models. It is seen that NGO based MFIs are mostly using SHG model while Non-Banking Financial Institutions (NBFI) are adopting SHG-Joint Liability Group model (SHG-JLG).
Given the recent policies and political scenario, a push for financial inclusion is evident. The government’s decision to review refinancing policy of Mudra for better financing by NBFCs is good news for NBFC-MFIs.