Microfinance involves providing small loans, savings opportunities, and other financial services to low-income individuals. The term microfinance was coined in the 1970s when organizations like the Grameen Bank in Bangladesh began making small, collateral-free loans to the poor. Microfinance aims to help alleviate poverty by allowing poor and low-income individuals to start small businesses or expand existing ones to increase their earnings. It operates through self-help groups and Grameen model groups and provides not only credit but also savings, insurance, remittances, and training support. While microfinance has helped many, issues still exist like over-indebtedness, multiple lending, and a lack of transparency in pricing. Recommendations to strengthen the

1. Mrs. Priya Antony
Assistant Professor
Department of Social Work
St. Joseph’s College, Autonomous, Thrissur, Kerala

2. The concept of Micro Finance:
 The term micro finance is of recent origin and is
commonly used in addressing issues related to poverty
alleviation, financial support to micro entrepreneurs,
gender development etc.
 The term 'Micro' literally means "small". But the task
force has not defined any amount. However as per
Micro Credit special Cell of the Reserve Bank of India,
the borrowable amounts up to the limit of Rs.25000/-
could be considered as micro credit products and this
amount could be gradually increased up to Rs.40000

3.  The mantra of "Micro finance" is banking through
groups. The essential features of the approach are to
provide financial services through groups of
individuals, formed either in joint liability or co-
obligation mode.

4.  “Microfinance is the provision of financial services to
low-income clients or solidarity lending groups
including consumers and the self-employed, who
traditionally lack access to banking and related
services.”

5.  Microfinance is not just about giving micro credit to
the poor rather it is an economic development tool
whose objective is to assist poor to work their way out
of poverty. It covers a wide range of services like credit,
savings, insurance, remittance and also non-financial
services like training, counseling etc.

6.  The other dimensions of the micro finance approach
are:
 Saving/Thrift precedes credit
 Credit is linked with savings/thrift
 Absence of subsidies
 Group plays an important role in credit appraisal,
monitoring and recovery

7. History of Micro Finance
 Over the past centuries practical visionaries, from the
Franciscan monks who founded the community-oriented
pawnshops of the 15th century, to the founders of the
European credit union movement in the 19th century (such
as Friedrich Wilhelm Raiffeisen) and the founders of the
microcredit movement in the 1970s (such as Muhammad
Yunus) have tested practices and built institutions
designed to bring the kinds of opportunities and risk-
management tools that financial services can provide to the
doorsteps of poor people.[23] While the success of the
Grameen Bank (which now serves over 7 million poor
Bangladeshi women) has inspired the world, it has proved
difficult to replicate this success.

8. History of Micro Finance
 The modern use of the expression "microfinancing"
has roots in the 1970s when organizations, such as
Grameen Bank of Bangladesh with the microfinance
pioneer Muhammad Yunus, were starting and shaping
the modern industry of microfinancing.

10. 2 KIND OF GROUPS
 Self Help Groups (SHGs): The group in this case does
financial inter mediation on behalf of the formal
institution. This is the predominant model followed in
India.
 Grameeen Groups: In this model, financial assistance is
provided to the individual in a group by the formal
institution on the strength of group's assurance. In other
words, individual loans are provided on the strength of
joint liability/co-obligation. This micro finance model was
initiated by Bangladesh Grameen Bank and is being used
by some of the Micro Finance Institutions (MFIs) in our
country.

11. Salient features of Microfinance:
 Borrowers are from the low income group
 Loans are of small amount – micro loans
 Short duration loans
 Loans are offered without collaterals
 High frequency of repayment
 Loans are generally taken for income generation
purpose

12. Channels of Micro finance
 In India microfinance operates through two channels:
 1. SHG – Bank Linkage Programme (SBLP)
 2. Micro Finance Institutions (MFIs)

13. Problems in MF
 Financial illiteracy
 Inability to generate sufficient funds
 Drop outs & migration of members
 Transparent pricing
 Multiple lending
 Over indebtedness


14. Recommendations
 Proper Regulation: The regulation was not a major
concern when the microfinance was in its nascent
stage and individual institutions were free to bring in
innovative operational models. However, as the sector
completes almost two decades of age with a high
growth trajectory, an enabling regulatory environment
that protects interest of stakeholders as well as
promotes growth, is needed.

15. Recommendations
 Field Supervision
: In addition to proper regulation of the microfinance
sector, field visits can be adopted as a medium for
monitoring the conditions on ground and initiating
corrective action if needed. This will keep a check on
the performance of ground staff of various MFIs and
their recovery practices. This will also encourage MFIs
to abide by proper code of conduct and work more
efficiently. However, the problem of feasibility and cost
involved in physical monitoring of this vast sector
remains an issue in this regard.

16. Recommendations
 Encourage rural penetration
: It has been seen that in lieu of reducing the initial cost,
MFIs are opening their branches in places which
already have a few MFIs operating. Encouraging MFIs
for opening new branches in areas of low microfinance
penetration by providing financial assistance will
increase the outreach of the microfinance in the state
and check multiple lending. This will also increase
rural penetration of microfinance in the state.

17. Recommendations
 Complete range of Products: MFIs should provide
complete range of products including credit, savings,
remittance, financial advice and also non-financial
services like training and support. As MFIs are acting
as a substitute to banks in areas where people don’t
have access to banks, providing a complete range of
products will enable the poor to avail all services.

18. Recommendations
 . Transparency of Interest rates: As it has been
observed that, MFIs are employing different patterns
of charging interest rates and a few are also charging
additional charges and interest free deposits (a part of
the loan amount is kept as deposit on which no
interest is paid). All this make the pricing very
confusing and hence the borrower feels incompetent
in terms of bargaining power. So a common practice
for charging interest should be followed by all MFIs so
that it makes the sector more competitive and the
beneficiary gets the freedom to compare different
financial products before buying.

19. Recommendations
 Technology to reduce Operating Cost: MFIs should use
new technologies and IT tools & applications to reduce
their operating costs. Though most NBFCs are adopting
such cost cutting measures, which is clearly evident from
the low cost per unit money lent (9%-10%) of such
institutions. NGOs and Section 25 companies are having a
very high value of cost per unit money lent i.e. 15-35
percent and hence such institutions should be encouraged
to adopt cost-cutting measures to reduce their operating
costs. Also initiatives like development of common MIS
and other software for all MFIs can be taken to make the
operation more transparent and efficient.