What Are Micro-Finance Institutions?

Micro finance refers to an array of financial services, including loans, savings and insurance, available to poor entrepreneurs and small business owners who have no collateral and wouldn’t otherwise qualify for a standard bank loan. Most often, micro loans are given to those living in still-developing countries who are working in a variety of different trades, including carpentry, fishing and transportation.

India is growing economy with a large population. Government banks and private sector banks can not open their branch in every village. Though, Indian banks have increased their presence but still have limited reach in remote areas. Micro fiancé institutions (MFI) mainly working in villages / remote area to empower farmers and small business in village.

Features of Micro-Finance Institution

MFIs  functioning under different networks from the organizations concerned. The following are the key features of micro-finance Institution

  • Deals with low amounts of financing to people.
  • Must have a minimum net worth of as prescribed by the Regulator. .
  • Must be incorporated under the new Companies Act 2013, or the earlier Companies Act, 1956.
  • Has been registered with appropriate agency and obtained necessary licenses/ permits.

Benefits OF Micro-Financial Business

Government  of India and the Reserve Bank of India have created conducive policy framework for Microfinance Institutions (MFIs) to provide necessary legitimacy and impetus to the sector. The following are the benefit of Micro Finance Business.

  • Provide access to funding
  • Encourage self-sufficiency and entrepreneurship
  • It offers a better overall loan repayment rate than traditional banking products.
  • Strengthen financial condition for some days till situation gets better.
  • Help in meeting credit needs for such a population range from emergency loans, consumption loans, business loan, working capital loan, housing etc.

MFIs by Type of Legal Registration

Particulars NBFC-MFI Section 8 Companies Cooperatives and Mutually aided cooperative societies Societies and Trusts Nidhi Company
Registration Under Registered under Companies act 2013 and with Reserve Bank of India Registered under Companies act 2013 Multi-State Cooperative Societies Act, 2002 Societies Registration Act, 1860 and / or Indian Trust Act 1882 Registered under Companies act 2013
Net Worth Minimum net owned funds of 5 crore. Fo North Eastern requirement is ` 2 crore No minimum requirement No minimum requirement No minimum requirement No Minimum Capital Requirement
Recommended For Poor and lower income group Non-Commercial Banking and NPO Non-Commercial Banking and NPO where members have a common interest Poor and lower income group
Rate of interest 1) The average base rate of five largest commercial banks multiplied by 2.75 per annum
2) cost of funds plus margin cap of 10% for MFIs having loan portfolio above ` 100 crore and 12% for those with loan portfolio less than ` 100 crore
The lower of (1) and (2)
Same as NBFC-MFI Decided and Approved by the Board of Directors Decide and approved by members at general meetings and by the committee Maximum Rate of Interest on Loan = 7.5% + Maximum rate offered on deposits.

Brief about of micro finance business

Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)

NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:

  • loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding 1,00,000 or urban and semi-urban household income not exceeding 1,60,000;
  • loan amount does not exceed 50,000 in the first cycle and 1,00,000 in subsequent cycles;
  • total indebtedness of the borrower does not exceed 1,00,000;
  • tenure of the loan not to be less than 24 months for loan amount in excess of 15,000 with prepayment without penalty;
  • loan to be extended without collateral;
  • aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;

loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower

Section 8 Company:

Section 8 Company is a company registered under the Companies Act, 2013 for charitable or not-for-profit purposes, which pertains to a established ‘for promoting

  • commerce
  • art
  • science
  • sports
  • education
  • research
  • social welfare
  • religion
  • charity
  • protection of environment
  • or any such other object’, provided the profits, if any, or other income

is applied for promoting only the objects of the company and no dividend is paid to its members.

 3. Nidhi Company:

“Nidhi” means a company which has been incorporated as a Nidhi with the object of cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefit

4. Co-operative Society:

A cooperative (also known as co-operative, co-op, or coop) is an autonomous association of people united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled business.