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Microfinance Institutions (MFIs) UPSC NOTE

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  Why in news Financial Services Secretary's M. Nagaraju emphasized the importance of responsible lending practices by Microfinance Inst...

 Why in news

  • Financial Services Secretary's M. Nagaraju emphasized the importance of responsible lending practices by Microfinance Institutions (MFIs) to avoid harming their clients, especially Self Help Groups (SHGs) and Joint Liability Groups (JLGs).

What are Microfinance Institutions (MFIs)?

  • MFI is an organization that offers financial services to low income populations.

  • These services include microloans, microsavings and microinsurance.

  • MFIs are financial companies that provide small loans to people who do not have any access to banking facilities.

  • In India, all loans that are below Rs.1 lakh can be considered as microloans.

  • In most cases the so-called interest rates are lower than those charged by normal banks

  • They provide easy credit and offer small loans to customers, without any collateral.

  • It serve the under-financed section such as women, unemployed people and those with disabilities.

  • Major Business Models: Joint Liability Group, Self Help Group, Grameen Model Bank, Rural Cooperatives

Categories of Microfinance Lenders: 

  • Non-Government Organizations (NGO-MFIs): Registered under the Society Registration Act 1860 or Indian Trust Act 1880, these NGOs extend micro-credit. 

  • Co-operative Societies: Registered under relevant laws, co-operative societies such as Primary Agricultural Credit Societies (PACS) offer microfinance services. 

  • Section 8 Companies (Formerly Section 25 of Companies Act 1956): These are non-profit entities that extend micro-credit under the Companies Act, 2013. 

  • Non-Banking Finance Companies (NBFC-MFIs): NBFC-MFIs raise funds from their own resources or bulk loans from banks to lend to JLGs. 

    • This category, introduced by the RBI in 2011, accounts for 80% of the microfinance market. 

Challenges for Microfinance Institutions

  • Poor underwriting practices can lead to over-indebtedness among borrowers, threatening the sustainability of MFIs.

  • Many clients lack financial knowledge, making them vulnerable to exploitation and poor financial decisions.

  • Economic challenges affecting borrowers can impact their ability to repay loans, increasing the risk for MFIs.

Way Forward

  • MFIs should focus on empowering clients through financial education and tailored support rather than aggressive lending.

  • Implementing strict lending criteria and ensuring clients understand their financial commitments.

  • Support programs like the SHG-Bank Linkage Programme and Lakhpati Didi Yojana to enhance the capacity and entrepreneurship of women in these groups.

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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Microfinance Institutions (MFIs) UPSC NOTE
Microfinance Institutions (MFIs) UPSC NOTE
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Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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