{"id":143194,"date":"2024-11-16T19:33:33","date_gmt":"2024-11-16T14:03:33","guid":{"rendered":"https:\/\/pwonlyias.com\/stage\/?post_type=current-affairs&#038;p=143194"},"modified":"2025-02-13T15:59:06","modified_gmt":"2025-02-13T10:29:06","slug":"microfinance-in-india","status":"publish","type":"current-affairs","link":"https:\/\/pwonlyias.com\/stage\/current-affairs\/microfinance-in-india","title":{"rendered":"Microfinance In India"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">Banks are repeating past mistakes by<\/span><b> aggressively lending to India&#8217;s microfinance sector,<\/b><span style=\"font-weight: 400;\"> risking financial instability.<\/span><\/p>\n<h2><strong><span style=\"font-size: 18pt;\">What is Microfinance?<\/span><\/strong><\/h2>\n<ul>\n<li><span style=\"font-weight: 400;\">As per the\u00a0 <\/span><b>Task Force<\/b><span style=\"font-weight: 400;\"> on <\/span><b>Supportive Policy and Regulatory Framework for Microfinance<\/b><span style=\"font-weight: 400;\"> set up by <\/span><b>National Bank for Agriculture and Rural Development (NABARD)<\/b><span style=\"font-weight: 400;\"> in <\/span><b>1998<\/b><span style=\"font-weight: 400;\">:<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">Microfinance refers to the \u201cprovision of <\/span><b>thrift, credit and other financial services and products<\/b><span style=\"font-weight: 400;\"> of very<\/span><b> small amounts<\/b><span style=\"font-weight: 400;\"> to the poor in rural, semi-urban and urban areas for enabling them to<\/span><b> raise their income levels and improve living standards\u201d.<\/b><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p style=\"text-align: center;\"><span class=\"vc_button\"><a href=\"https:\/\/www.pw.live\/batches\/upsc?utm_source=seo+upsc+batch&#038;utm_medium=seo+upsc&#038;utm_campaign=seo&#038;utm_id=upsc\" target=\"_blank\" rel=\"noopener\">Enroll now for UPSC Online Course<\/a><\/span><\/p>\n<div class=\"vc_table_green\"><\/p>\n<table style=\"width: 99.6975%;\">\n<tbody>\n<tr>\n<th style=\"width: 100%; border-style: solid; border-color: #000000; background-color: rgba(184, 165, 217, 0.53); text-align: left; vertical-align: middle;\"><span style=\"color: #000000;\"><b>Origin of Modern Day Microfinance:<\/b><\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"color: #000000;\"><b>Grameen Bank Foundation: Grameen Bank in Bangladesh, <\/b><span style=\"font-weight: 400;\">founded in <\/span><b>1976 <\/b><span style=\"font-weight: 400;\">by Mohammed Yunus\u00a0 was the <\/span><b>pioneering institution in the realm of microfinance.\u00a0<\/b><\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"color: #000000;\"><b>Collateral-Free Loans:<\/b><span style=\"font-weight: 400;\"> The Grameen Bank offers <\/span><b>small loans to <\/b><span style=\"font-weight: 400;\">the impoverished <\/span><b>without asking for collateral.<\/b><\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"color: #000000;\"><b>High Female Participation: <\/b><span style=\"font-weight: 400;\">The bank has 8.4 million followers,<\/span><b> 97% of whom are women<\/b><span style=\"font-weight: 400;\">.<\/span><\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"color: #000000;\"><span style=\"font-weight: 400;\">Repayment Success Rates: The <\/span><b>bank has repayment success rates between 95 to 98 percent.<\/b><\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"color: #000000;\"><b>Nobel Peace Prize Recognition: <\/b><span style=\"font-weight: 400;\">In <\/span><b>2006<\/b><span style=\"font-weight: 400;\"> both <\/span><b>Mohammed<\/b> <b>Yunus and Grameen Bank <\/b><span style=\"font-weight: 400;\">were awarded the <\/span><b>Nobel Peace Prize<\/b><span style=\"font-weight: 400;\"> for their efforts to create economic and social development from below.<\/span><\/span><\/li>\n<\/ul>\n<\/th>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><\/div>\n<ul>\n<li><b>Regulatory Framework:\u00a0\u00a0<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">MFIs are governed by the <\/span><b>RBI\u2019s Non Banking Financing Company\u2013microfinance institutions (NBFC-MFIs)-<\/b><span style=\"font-weight: 400;\"> Directions,<\/span><b> 2022<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li><b>The Microfinance Institutions Network (MFIN)<\/b><span style=\"font-weight: 400;\"> was started as a <\/span><b>self regulatory body<\/b><span style=\"font-weight: 400;\"> for the sector and all the NBFC-MFI are eligible for membership.<\/span>\n<ul>\n<li><b>In 2014, <\/b><span style=\"font-weight: 400;\">MFIN was formally recognized as a <\/span><b>self regulatory body<\/b><span style=\"font-weight: 400;\"> by the<\/span><b> RBI.<\/b><span style=\"font-weight: 400;\">\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2><span style=\"font-size: 18pt;\"><b>Components of Microfinance<\/b><\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Microcredit: <\/b><span style=\"font-weight: 400;\">Small <\/span><b>loans<\/b><span style=\"font-weight: 400;\"> given to individuals without any collateral, steady employment or verifiable credit history.<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">As per the <\/span><b>Reserve Bank of India (RBI)<\/b><span style=\"font-weight: 400;\">: A microfinance loan is defined as a <\/span><b>collateral-free loan<\/b><span style=\"font-weight: 400;\"> given to a <\/span><b>household <\/b><span style=\"font-weight: 400;\">having <\/span><b>annual household income up to \u20b93,00,000.<\/b><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Microsavings: <\/b><span style=\"font-weight: 400;\">Small deposit requirements, no service charges for low income individuals.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Microinsurance: <\/b><span style=\"font-weight: 400;\">Affordable <\/span><b>low premiums and coverage<\/b><span style=\"font-weight: 400;\"> insurance products to manage risks such as health emergencies, natural disasters, crop failure etc.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Group Lending: <\/b><span style=\"font-weight: 400;\">A model where <\/span><b>small groups jointly guarantee loans<\/b><span style=\"font-weight: 400;\">, fostering accountability and reducing default rates<\/span><b>.<\/b>\n<ul>\n<li><b>Example: Joint Liability Group (JLG)<\/b><span style=\"font-weight: 400;\"> is an informal group of 4-10 individuals, primarily farmers or rural workers.<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">Loans are secured through mutual guarantees, with shared repayment responsibility.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li aria-level=\"1\"><b>Microfinance Institutions (MFI): <\/b><span style=\"font-weight: 400;\">A large number of organisations with varied size and legal forms offer Microfinance services.\u00a0<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-size: 18pt;\"><b>Microfinance In India<\/b><\/span><\/h2>\n<ul>\n<li><b>Microfinance&#8217;s contribution to India&#8217;s GVA: The microfinance sector <\/b><span style=\"font-weight: 400;\">contributed about <\/span><b>2% of India\u2019s gross value added (GVA) in 2018-19, <\/b><span style=\"font-weight: 400;\">according to a study by the National Council of Applied Economic Research (NCAER).<\/span><\/li>\n<\/ul>\n<div class=\"vc_table_green\"><\/p>\n<table style=\"width: 99.6975%;\">\n<tbody>\n<tr>\n<th style=\"width: 100%; border-style: solid; border-color: #000000; background-color: rgba(184, 165, 217, 0.53); text-align: left; vertical-align: middle;\">\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"color: #000000;\"><b>1974: <\/b><span style=\"font-weight: 400;\">First registered MFI, <\/span><b>Self Employed Women\u2019s Association (SEWA) at Ahmedabad\u00a0<\/b><\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"color: #000000;\"><b>1984: NABARD<\/b><span style=\"font-weight: 400;\"> advocated <\/span><b>SHG Linkage<\/b><span style=\"font-weight: 400;\"> as an important<\/span><b> tool for poverty alleviation.<\/b><\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"color: #000000;\"><b>2004: RBI<\/b><span style=\"font-weight: 400;\"> included <\/span><b>MFI lending<\/b><span style=\"font-weight: 400;\"> in <\/span><b>priority sector lending (PSL) <\/b><span style=\"font-weight: 400;\">and recognize MFI as a tool for financial inclusion.\u00a0<\/span><\/span><\/li>\n<\/ul>\n<\/th>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><\/div>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Geographic Distribution of Loans: 76%<\/b><span style=\"font-weight: 400;\"> of the loan portfolio is in rural areas, while <\/span><b>24%<\/b><span style=\"font-weight: 400;\"> is in urban areas.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Growth in Microfinance Sector\u2019s Loan Portfolio: <\/b><span style=\"font-weight: 400;\">As of March 31, 2024, the microfinance sector\u2019s gross loan portfolio<\/span><b> (GLP) <\/b><span style=\"font-weight: 400;\">increased by <\/span><b>24.5%<\/b><span style=\"font-weight: 400;\">, reaching <\/span><b>\u20b94.33 lakh crore<\/b><span style=\"font-weight: 400;\"> from \u20b93.48 lakh crore the previous year.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Annual Growth in Microfinance Loans: <\/b><span style=\"font-weight: 400;\">Microfinance loans grew by <\/span><b>18.3%<\/b><span style=\"font-weight: 400;\"> year-on-year as of June-end, although <\/span><b>default rates<\/b><span style=\"font-weight: 400;\"> have also increased.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Decline in Loan Collections and Rising Delinquencies: <\/b><span style=\"font-weight: 400;\">Data from <\/span><b>Microfinance Industry Network (MFIN) <\/b><span style=\"font-weight: 400;\">and India Ratings show a <\/span><b>decline in loan collections<\/b><span style=\"font-weight: 400;\"> and rising delinquencies.<\/span><\/li>\n<\/ul>\n<p style=\"text-align: center;\"><span class=\"vc_button\"><a href=\"https:\/\/store.pw.live\/govt-entrance-exams\/upsc-books?utm_source=SEO&#038;utm_medium=PW+Live&#038;utm_campaign=UPSC+CSE+Books\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">Check Out UPSC CSE Books From PW Store<\/span><\/a><\/span><\/p>\n<h2><span style=\"font-size: 18pt;\"><b>Significance of Microfinance<\/b><\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Poverty Alleviation: <\/b><span style=\"font-weight: 400;\">Microfinance helps individuals <\/span><b>start or expand small businesses, <\/b><span style=\"font-weight: 400;\">generating income and lifting families out of poverty.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Women Empowerment:<\/b><span style=\"font-weight: 400;\"> With a significant <\/span><b>focus on women borrowers,<\/b><span style=\"font-weight: 400;\"> it enhances their financial independence and decision-making power.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Economic Development: <\/b><span style=\"font-weight: 400;\">By supporting small businesses, microfinance contributes to local <\/span><b>economic growth and job creation.<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Social Impact:<\/b><span style=\"font-weight: 400;\"> It enables better access to education, healthcare, and improved living conditions for families.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Financial Inclusion: <\/b><span style=\"font-weight: 400;\">Microfinance institutions (MFIs) provide access to financial products and services to underserved populations, bridging the gap with mainstream banking.<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">Microfinance is a driver of financial inclusion and directly addresses <\/span><b>SDG 1 (No poverty), SDG 5 (Gender equality), and SDG 8 (Decent work and economic growth).\u00a0<\/b><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<div class=\"vc_table_green\"><\/p>\n<table style=\"width: 99.7992%;\">\n<tbody>\n<tr>\n<th style=\"width: 100%; border-style: solid; border-color: #000000; background-color: rgba(184, 165, 217, 0.53); text-align: left; vertical-align: middle;\">\n<h3><span style=\"font-size: 16pt; color: #000000;\"><b>Categories of Financial Institutions Engaged In The Microfinance Space In India<\/b><\/span><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"color: #000000;\"><b>NBFC-MFIs (Non-Banking Financial Company &#8211; Micro-Finance Institutions): <\/b><span style=\"font-weight: 400;\">Specialised NBFCs focused on providing small loans to low-income groups without collateral, aiming to promote financial inclusion.<\/span><\/span>\n<ul>\n<li><span style=\"color: #000000;\"><span style=\"font-weight: 400;\">As on 30 June 2024, NBFC-MFIs are the <\/span><b>largest provider of micro-credit<\/b><span style=\"font-weight: 400;\"> with a loan amount outstanding of Rs 1,68,747 Cr, accounting for <\/span><b>39.8%<\/b><span style=\"font-weight: 400;\"> to total industry portfolio.<\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<li><span style=\"color: #000000;\"><b>Banks: <\/b><span style=\"font-weight: 400;\">Licensed financial institutions authorised to accept deposits, offer loans, and provide various banking services to individuals and businesses.<\/span><\/span>\n<ul>\n<li><span style=\"color: #000000;\"><span style=\"font-weight: 400;\">As on 30 June 2024, <\/span><b>Banks hold the second largest share of portfolio in micro-credit <\/b><span style=\"font-weight: 400;\">with total loan outstanding of Rs 1,38,003 Cr, which is <\/span><b>32.5% <\/b><span style=\"font-weight: 400;\">of total microcredit universe.<\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"color: #000000;\"><b>Small Finance Banks (SFBs): <\/b><span style=\"font-weight: 400;\">Niche banks established to provide basic banking services, particularly to <\/span><b>underserved and unserved sections<\/b><span style=\"font-weight: 400;\">, including small businesses, marginal farmers, and micro-enterprises.<\/span><\/span>\n<ul>\n<li><span style=\"color: #000000;\"><span style=\"font-weight: 400;\">As on 30 June 2024, SFBs have a total loan amount outstanding of Rs 72,430 Cr with total share of<\/span><b> 17.1%.<\/b><\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"color: #000000;\"><b>NBFCs (Non-Banking Financial Companies): <\/b><span style=\"font-weight: 400;\">Financial entities that perform functions similar to banks, such as lending and investment, but <\/span><b>without holding a banking licence or accepting demand deposits.<\/b><\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"color: #000000;\"><b>Others (including Non-Profit MFIs): <\/b><span style=\"font-weight: 400;\">Entities, such as <\/span><b>non-profit organisations, trusts, or Section 8 companies<\/b><span style=\"font-weight: 400;\">, that engage in micro-finance activities to promote economic development without a profit motive.<\/span><\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"color: #000000;\"><b>National Rural Livelihood Mission (NRLM) <\/b><span style=\"font-weight: 400;\">also contributes significantly to the microfinance universe through its <\/span><b>Self Help Groups (SHGs) Bank Linkage Programme\u00a0 (SHG-BLP).<\/b><\/span><\/li>\n<\/ul>\n<\/th>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><\/div>\n<h2><span style=\"font-size: 18pt;\"><b>Reasons for Increased Microfinance Lending In India<\/b><\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Reduced Credit Demand:<\/b><span style=\"font-weight: 400;\"> Lack of corporate credit demand has driven banks<\/span><b> toward retail and micro-finance lending.<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">The <\/span><b>Reserve Bank of India (RBI) has tightened regulatory norms <\/b><span style=\"font-weight: 400;\">leading to <\/span><b>stiffer funding conditions.<\/b><\/li>\n<li><span style=\"font-weight: 400;\">Therefore, the<\/span><b> lending by banks and NBFCs<\/b><span style=\"font-weight: 400;\"> is expected to<\/span><b> slow down to 12%,<\/b><span style=\"font-weight: 400;\"> totaling \u20b919 lakh crore in FY25, down from \u20b922 lakh crore last year.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Priority-Sector Lending Pressure: <\/b><span style=\"font-weight: 400;\">Banks face mandates to meet lending targets in priority sectors.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Priority sector lending<\/b><span style=\"font-weight: 400;\"> is a government initiative which<\/span><b> requires banks<\/b><span style=\"font-weight: 400;\"> to allocate a percentage of investments in specified priority sectors at a reduced interest rate.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Currently <\/span><b>only microfinance institutions registered as NBFC-MFIs<\/b><span style=\"font-weight: 400;\"> are <\/span><b>designated as a priority sector.<\/b><\/li>\n<li><b>Targets under PSL:<\/b>\n<ul>\n<li><b>Regional Rural Banks and Small Finance Banks: 75<\/b><span style=\"font-weight: 400;\"> percent of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure (CEOBE), whichever is higher.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<div class=\"vc_table_green\"><\/p>\n<table style=\"width: 99.6988%;\">\n<tbody>\n<tr>\n<th style=\"width: 100%; border-style: solid; border-color: #000000; background-color: rgba(184, 165, 217, 0.53); text-align: left; vertical-align: middle;\"><span style=\"color: #000000;\"><b>Underwriting of Loans <\/b><span style=\"font-weight: 400;\">refers to the process by which a <\/span><b>lender evaluates and assesses the risk <\/b><span style=\"font-weight: 400;\">of lending money to a borrower.<\/span><\/span><\/th>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><\/div>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Regulatory Changes by RBI: Removal of interest-rate caps<\/b><span style=\"font-weight: 400;\"> offered by non-bank microfinance institutions (NBFC-MFIs) has fueled rapid growth in microfinance loans.<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">With this, the <\/span><b>underwriting of loans will be done on a risk-based analysis,<\/b><span style=\"font-weight: 400;\"> and a <\/span><b>risk premium will be charged based on the borrower.<\/b><\/li>\n<\/ul>\n<\/li>\n<li><b>Bridging Credit Gaps: <\/b><span style=\"font-weight: 400;\">The rise in microfinance lending can be seen as <\/span><b>\u00a0banks&#8217; efforts to bridge credit gaps<\/b><span style=\"font-weight: 400;\"> to <\/span><b>provide last-mile credit delivery<\/b><span style=\"font-weight: 400;\"> and empower underserved rural populations.<\/span><\/li>\n<li><b>Technological Advancements: <\/b><span style=\"font-weight: 400;\">The adoption of technology in loan disbursement, collection, and monitoring has made microfinance more efficient and scalable.<\/span><\/li>\n<li><b>Rise of Private Capital: <\/b><span style=\"font-weight: 400;\">With the sector&#8217;s proven potential and growing demand,<\/span><b> private capital has increasingly been attracted to microfinance institutions (MFIs),<\/b><span style=\"font-weight: 400;\"> fueling further expansion.<\/span><\/li>\n<\/ul>\n<p style=\"text-align: center;\"><span class=\"vc_button\"><a href=\"https:\/\/store.pw.live\/govt-entrance-exams\/upsc-books\/upsc-textbooks?utm_source=SEO&#038;utm_medium=PW+Live&#038;utm_campaign=UPSC+Textbooks\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">Check Out UPSC NCERT Textbooks From PW Store<\/span><\/a><\/span><\/p>\n<h2><span style=\"font-size: 18pt;\"><b>Potential Risks to the Banking Sector Due to Increase In Microfinance Lending<\/b><\/span><\/h2>\n<ul>\n<li><b>Reduced Profits<\/b><span style=\"font-weight: 400;\">: <\/span><b>Higher provisioning for bad loans<\/b><span style=\"font-weight: 400;\"> impacts profitability.<\/span><\/li>\n<li><b>Increased Interest Rates<\/b><span style=\"font-weight: 400;\">: Banks may charge <\/span><b>higher rates <\/b><span style=\"font-weight: 400;\">across the board to <\/span><b>protect margins.<\/b><\/li>\n<li><b>Credit Aversion<\/b><span style=\"font-weight: 400;\">: Rising defaults could make<\/span><b> banks hesitant to lend to the sector,<\/b><span style=\"font-weight: 400;\"> affecting underserved borrowers.<\/span><\/li>\n<li><b>Credit Risk<\/b><span style=\"font-weight: 400;\">: Over-indebtedness among microfinance borrowers can lead to<\/span><b> higher default rates, <\/b><span style=\"font-weight: 400;\">affecting banks indirectly.<\/span><\/li>\n<li><b>Systemic Risk<\/b><span style=\"font-weight: 400;\">: Defaults in the microfinance sector could trigger wider <\/span><b>financial instability,<\/b><span style=\"font-weight: 400;\"> impacting the banking system.<\/span><\/li>\n<li><b>Regulatory and Compliance Risks<\/b><span style=\"font-weight: 400;\">: Increased microfinance lending may lead to stricter regulations, raising <\/span><b>compliance costs for banks.<\/b><\/li>\n<li><b>Ever-Greening Loans: <\/b><span style=\"font-weight: 400;\">This practice involves <\/span><b>lenders providing new loans to borrowers unable to repay existing ones,<\/b><span style=\"font-weight: 400;\"> temporarily preventing default.\u00a0<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">However, it masks the borrower&#8217;s true financial health and can lead to over-leveraging, <\/span><b>increasing the risk of future defaults.<\/b><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2><span style=\"font-size: 18pt;\"><b>Overall Challenges of Microfinance Institutions\u00a0\u00a0<\/b><\/span><\/h2>\n<ul>\n<li><b>Higher Interest Rate Compared To Mainstream Banks : <\/b><span style=\"font-weight: 400;\">Microfinance institutions have a limited transaction volume, yet the <\/span><b>cost of those transactions is constant and substantial,<\/b><span style=\"font-weight: 400;\"> posing a considerable problem for all of them.\u00a0<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">Serving remote and rural areas involves significant administrative and logistical expenses.<\/span><\/li>\n<li><b>Operational costs of MFIs often translate into higher interest rates for borrowers.<\/b><\/li>\n<\/ul>\n<\/li>\n<li><b>Default on a loan : <\/b><span style=\"font-weight: 400;\">These institutions\u00a0 provide loans without requiring collateral, increasing the risk of default and bad debts.\u00a0<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">Borrowers often take multiple loans from different MFIs or informal lenders, leading to unsustainable debt levels.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Skewed Distribution: <\/b><span style=\"font-weight: 400;\">The <\/span><b>eastern and north-eastern regions<\/b><span style=\"font-weight: 400;\"> of India hold the largest share of <\/span><b>37% <\/b><span style=\"font-weight: 400;\">in the loan portfolio, followed by the <\/span><b>southern region<\/b><span style=\"font-weight: 400;\"> at<\/span><b> 27%<\/b><span style=\"font-weight: 400;\">, and the <\/span><b>western region<\/b><span style=\"font-weight: 400;\"> at <\/span><b>15%.\u00a0<\/b>\n<ul>\n<li><b>As of 2022, 82% of the loan portfolio was concentrated in ten States.<\/b><\/li>\n<\/ul>\n<\/li>\n<li><b>Limited Access to Capital: <\/b><span style=\"font-weight: 400;\">MFIs struggle to secure funds for their operations, especially in countries with underdeveloped financial markets.<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">Over-reliance on donor funding and grants can limit their ability to scale sustainably.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Lack of Financial Literacy: <\/b><span style=\"font-weight: 400;\">Borrowers often lack an understanding of loan terms, repayment obligations, and financial management.<\/span>\n<ul>\n<li><b>Poor financial literacy can lead to misuse of loans and an inability to repay.<\/b><\/li>\n<\/ul>\n<\/li>\n<li><b>Inadequate Ground-Level Presence: <\/b><span style=\"font-weight: 400;\">Banks lack the on-ground infrastructure that micro-finance institutions (MFIs), small finance banks, and regional rural banks possess.<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-size: 18pt;\"><b>Initiatives to Improve The Microfinance Ecosystem In India<\/b><\/span><\/h2>\n<ul>\n<li><b>SHG-Bank Linkage Programme (SHG-BLP):<\/b><span style=\"font-weight: 400;\"> was launched by<\/span><b> NABARD in 1992 <\/b><span style=\"font-weight: 400;\">Under this programme, <\/span><b>banks were allowed to open savings accounts for SHGs.<\/b>\n<ul>\n<li><b>Bank Sakhis<\/b><span style=\"font-weight: 400;\">, trained members from SHGs <\/span><b>served as intermediaries,<\/b><span style=\"font-weight: 400;\"> aiding SHG members in transactions and application processes.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Micro Finance Development and Equity Fund by NABARD: <\/b><span style=\"font-weight: 400;\">NABARD\u00a0 created the <\/span><b>Micro Finance Development and Equity Fund (MFDEF)<\/b><span style=\"font-weight: 400;\"> in <\/span><b>2006<\/b><span style=\"font-weight: 400;\"> to help MFIs with quasi-equity and subordinated debt instruments.<\/span><\/li>\n<\/ul>\n<div class=\"vc_table_green\"><\/p>\n<table style=\"width: 99.5959%;\">\n<tbody>\n<tr>\n<th style=\"width: 100%; border-style: solid; border-color: #000000; background-color: rgba(184, 165, 217, 0.53); text-align: left; vertical-align: middle;\"><span style=\"color: #000000;\"><b>Key Committees for Microfinance in India:<\/b><\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"color: #000000;\"><b>Rangarajan Committee on Financial Inclusion (2008): <\/b><span style=\"font-weight: 400;\">Highlighted the <\/span><b>role of microfinance<\/b><span style=\"font-weight: 400;\"> in achieving <\/span><b>financial inclusion.<\/b><\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"color: #000000;\"><b>Y.H Malegam Committee (2011): <\/b><span style=\"font-weight: 400;\">It was set-up by the <\/span><b>Reserve Bank of India (RBI) <\/b><span style=\"font-weight: 400;\">in the <\/span><b>backdrop<\/b><span style=\"font-weight: 400;\"> of <\/span><b>Andhra Pradesh Microfinance crisis in 2010 <\/b><span style=\"font-weight: 400;\">to study issues and concerns in the Microfinance sector.<\/span><\/span><\/li>\n<\/ul>\n<\/th>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><\/div>\n<ul>\n<li><b>Pradhan Mantri Mudra Yojana: <\/b><span style=\"font-weight: 400;\">It was launched by the government in <\/span><b>2015<\/b><span style=\"font-weight: 400;\"> for providing loans up to <\/span><b>Rs. 10 lakh <\/b><span style=\"font-weight: 400;\">to the non-corporate, non-farm small\/micro-enterprises.<\/span><\/li>\n<li><b>e-Shakti Programme of NABARD: <\/b><span style=\"font-weight: 400;\">The primary goal of the E-Shakti Project is to <\/span><b>digitise the accounts of various SHGs<\/b><span style=\"font-weight: 400;\"> and to bring the members of the groups under the fold of Financial Inclusion.<\/span><\/li>\n<li><b>PM Street Vendor&#8217;s AtmaNirbhar Nidhi (PM SVANidhi): <\/b><span style=\"font-weight: 400;\">The Ministry of Housing &#038; Urban Affairs launched this scheme to facilitate <\/span><b>collateral free working capital loans of up to INR10,000\/ of one-year tenure<\/b><span style=\"font-weight: 400;\">, to approximately 50 lakh street vendors.<\/span><\/li>\n<li><b>Kudumbashree:<\/b><span style=\"font-weight: 400;\"> It\u00a0 is a women empowerment and poverty eradication program launched by the <\/span><b>Kerala<\/b><span style=\"font-weight: 400;\"> government in <\/span><b>1998<\/b><span style=\"font-weight: 400;\">.\u00a0<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">It focuses on<\/span><b> microfinance<\/b><span style=\"font-weight: 400;\">, providing women in rural and urban areas with access to savings, loans, and financial support through <\/span><b>self-help groups (SHGs).\u00a0<\/b><\/li>\n<\/ul>\n<\/li>\n<li aria-level=\"1\"><b>RBI&#8217;s Regulatory Framework for Microfinance Loans:\u00a0<\/b>\n<ul>\n<li><b>Creation of NBFC-MFIs in 2011: <\/b><span style=\"font-weight: 400;\">Created a distinct category for microfinance institutions with a focus on customer-centric practices, such as capping borrower indebtedness and transparent pricing.<\/span><\/li>\n<li><b>Harmonised Guidelines in 2022:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">RBI has now set a common<\/span><b> household limit of Rs 300,000 <\/b><span style=\"font-weight: 400;\">for loans to<\/span><b> qualify as microfinance.\u00a0<\/b><\/li>\n<li><span style=\"font-weight: 400;\">For entities to qualify for an <\/span><b>NBFC-MFI licence,<\/b><span style=\"font-weight: 400;\"> they should have<\/span><b> at least 75% of assets in microfinance<\/b><span style=\"font-weight: 400;\"> and the <\/span><b>cap on NBFCs was increased to 25% of assets as against 10% earlier.<\/b><\/li>\n<\/ul>\n<\/li>\n<li><b>Advisories on Lending: <\/b><span style=\"font-weight: 400;\">Periodically issued advisories to <\/span><b>prevent multiple lending<\/b><span style=\"font-weight: 400;\"> and address unethical practices like <\/span><b>&#8220;ever-greening&#8221; loans.<\/b><\/li>\n<li><b>Continuous Monitoring: <\/b><span style=\"font-weight: 400;\">RBI emphasises <\/span><b>real-time data submission to Credit Information Companies (CICs) <\/b><span style=\"font-weight: 400;\">for effective risk management and regulatory oversight.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p style=\"text-align: center;\"><span class=\"vc_button\"><a href=\"https:\/\/www.pw.live\/batches\/upsc\/pw-only-ias?utm_source=seo+upsc+batch&#038;utm_medium=seo+upsc&#038;utm_campaign=seo&#038;utm_id=upsc\" target=\"_blank\" rel=\"noopener\">Enroll now for UPSC Online Classes<\/a><\/span><\/p>\n<h2><span style=\"font-size: 18pt;\"><b>Way Forward<\/b><\/span><\/h2>\n<ul>\n<li><b>Strengthening Regulatory Oversight:<\/b><span style=\"font-weight: 400;\"> Enforce strict<\/span><b> compliance with RBI\u2019s harmonised guidelines <\/b><span style=\"font-weight: 400;\">to ensure uniformity in practices across all microfinance players.<\/span><\/li>\n<li><b>Need for Balanced Oversight: <\/b><span style=\"font-weight: 400;\">Policymakers and banks must heed <\/span><b>early warning signs<\/b><span style=\"font-weight: 400;\"> to ensure stability in the microfinance sector without stifling credit delivery.<\/span><\/li>\n<li><b>Loan Purpose Verification:<\/b><span style=\"font-weight: 400;\"> Ensure loans are utilised as intended by <\/span><b>monitoring their end-use.<\/b><\/li>\n<li><b>Enhancing Financial Literacy: <\/b><span style=\"font-weight: 400;\">Conduct large-scale awareness programs to educate borrowers on <\/span><b>responsible borrowing, repayment obligations, and grievance redressal mechanisms.<\/b><\/li>\n<li><b>Improving Risk Mitigation: <\/b><span style=\"font-weight: 400;\">Promoting sharing of credit information among MFIs to prevent over-leverage by borrowers.<\/span><\/li>\n<li aria-level=\"1\"><b>Building Institutional Capacities: <\/b><span style=\"font-weight: 400;\">Invest in training and capacity building for <\/span><b>MFIs, SHG facilitators, and Bank Sakhis <\/b><span style=\"font-weight: 400;\">to enhance service delivery.<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-size: 18pt;\"><b>Conclusion<\/b><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Ensuring the health of the banking sector through <\/span><b>prudent lending practices <\/b><span style=\"font-weight: 400;\">and<\/span><b> robust oversight <\/b><span style=\"font-weight: 400;\">is crucial for <\/span><b>sustainable microfinance growth and financial stability<\/b><span style=\"font-weight: 400;\">.<\/span><\/p>\n<div class=\"vc_table_green\"><\/p>\n<table style=\"width: 100.043%;\">\n<tbody>\n<tr>\n<td style=\"width: 130.811%; text-align: center; border-style: solid; border-color: #000000;\" colspan=\"2\"><span style=\"font-size: 18pt;\"><b>Must Read<\/b><\/span><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 50.5357%; text-align: center; border-style: solid; border-color: #000000;\"><a 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instability.<\/p>\n","protected":false},"author":11,"featured_media":143172,"menu_order":0,"comment_status":"open","ping_status":"open","template":"","format":"standard","meta":{"rank_math_lock_modified_date":false,"footnotes":""},"tags":[],"paper-wise":[2089],"subject":[2100],"acf":[],"_links":{"self":[{"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/current-affairs\/143194"}],"collection":[{"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/current-affairs"}],"about":[{"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/types\/current-affairs"}],"author":[{"embeddable":true,"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/comments?post=143194"}],"version-history":[{"count":4,"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/current-affairs\/143194\/revisions"}],"predecessor-version":[{"id":143222,"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/current-affairs\/143194\/revisions\/143222"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/media\/143172"}],"wp:attachment":[{"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/media?parent=143194"}],"wp:term":[{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/tags?post=143194"},{"taxonomy":"paper-wise","embeddable":true,"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/paper-wise?post=143194"},{"taxonomy":"subject","embeddable":true,"href":"https:\/\/pwonlyias.com\/stage\/wp-json\/wp\/v2\/subject?post=143194"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}