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Comprehensive Analysis of Future of Micro Finance Business in India

Posted by swarit on August 26th, 2020

Comprehensive Analysis of Future of Micro Finance Business in India

Micro finance businesses are defined as establishments that provide loans, credit, insurance, access to savings accounts, and money transfers to small business owners and entrepreneurs in the under privileged parts of India. Interest rates on micro loans are generally higher than that on traditional personal loan. Online Micro Finance Company registration is a significant aspect taken into consideration for an effective flow of the business.

What are the benefits of Microfinance Institutions?

Micro finance establishments are formed to serve specific purposes. In this section, certain benefits of microfinance institutions will be talked about.

  • Micro finance institutions provide income generating activities to help families.
  • These institutions are set up to help individuals with poverty become financially independent. In situations of economic difficulties, these establishments help by providing financial aid.
  • It aims at assisting communities of the economically excluded to achieve greater level of asset creation and income security at household and community level.

What are the key features of Microfinance institutions in India?

Following are certain characteristics of microfinance institutions:

  • The borrowers generally belong to low income households
  • Loans availed under microfinance are usually of small amount, i.e, micro loans
  • The loan duration of various loans offered by the institution is short
  • Microfinance loans do not require any collateral
  • These loans are usually repaid at higher frequencies

What is the goal of a Micro Finance Institution?

The goal of a microfinance institution is to improve easily accessible, cost effective and sustainable financial services to individuals living in the project area that will result in the increase in the investment in income generating activities which will further increase their income levels.

What are the examples of Microfinance Institutions of India?

Below mentioned are certain microfinance institutions of India:

  • Joint Liability Group (JLG)
  • Self Help Group (SHG)
  • The Grameen Bank Model
  • Rural Cooperatives

Comprehensive Analysis of the Future of Micro Finance Business in India

People who belong to lower financial backgrounds are denied from any kind of financial services that banks offer. This does not leave any option for individuals who fall into this category. Microfinance companies

Businessmen took small loans from individuals and groups in order to start businesses or ventures. But these establishments are ineffective and hence their effectiveness must be monitored. The potential growth of micro finance institutions in India is very high. The Microfinance market in India is expected to grow rapidly, if the Government of India initiates proper schemes in order to achieve greater financial inclusion, and growth in the country’s unorganized but priority sector.

Microfinance has evolved into a global movement at a fast pace which is dedicated to provide access of financial services to poor households. Worldwide, over a billion poor people are still without access to financial services. The Indian Government must find new ways to introduce new ways for the creation of awareness on how microfinance can benefit from loans to ensure disbursement of loans and grants to entrepreneurs.

The presence of asset liability mismatch is making the situation difficult for the microfinance institutions. RBI announced that banks and microfinance institutions (MFIs) can offer moratorium of 3 months. This would enable the borrowers to shelve their repayment installments. While interest will continue to accrue, borrowers can continue, borrowers get an opportunity to make their scheduled payments when the moratorium ends. Here arises a mismatch. The MFIs have to repay their debt obligations that are maturing to the wholesale funders.

What challenges are the Microfinance institutions facing currently?

Below are some issues that the microfinance institutions are currently facing:

  • The disruption of liquidity in the hands of borrowers,
  • The possibility of higher than normal non-performing assets building up,
  • The disruption of liquidity of lending institutions such as MFIs,
  • The need for finance for restarting livelihoods at the end of lockdown, and
  • A downturn in the economy, which is resulting in reduced demand - disproportionately impacting people at the bottom of the pyramid.

What are possible solutions to the problems to the challenges?

  • To delay repayment of clients’ loan installments until liquidity is in the hands of borrowers,
  • To postpone the reimbursement of debt which are maturing by MFIs to lenders to align institutions’ and clients’ liquidity,
  • To ensure sufficient financial resources for MFIs through continued wholesale financing so that they can help end-client borrowers in resuming as soon as possible their business activities; and
  • To ensure different treatment of assets covered under moratoria and loans that may be negligent because of the approaching recession and supply disruptions, so that the lending banks can still fund the MFIs which will eventually help the MFIs and their end-clients to undertake normal operations.

The Indian Microfinance Market is categorized into banks and non-banks. In India, banks are a preferred source for Microfinance because of various benefits they provide to individuals. Banks dominated the market in 2020 and the trend is likely to continue in the coming years as well. One major reason why banks are preferred by borrowers is because of the interest rates they offer in comparison to non-banking institutions.

The market is divided into Small Finance Companies, Commercial Banks, Regional Rural Banks, and Cooperative Banks. While Small Finance Companies accounted for the highest market share in Financial Year (FY) 2020, Commercial Banks and Regional Rural Banks were on the second and third positions respectively. As per regions are concerned, the India Microfinance Market is categorized into North, South, West, and East. In Financial Year 2020, South region accounted for more than one-third of the market share, followed by West, North and East regions.

Conclusion

Looking at the figures and the performance of the microfinance institutions in recent years, it is safe to say that these institutions are one of the major contributors in the finance industry. Since their introduction, these establishments have solved many financial issues of middle-lower households by providing them financial aid. The future of MFIs is absolutely great, provided they work on various problems and challenges that are facing to avoid bigger challenges in the future.

Related Services:-

Online Partnership Firm Registration | Online Public Limited Company Registration | Online Private Limited Company Registration

Also See: Microfinance Institutions, Micro Finance, Financial Services, Microfinance Market, Microfinance, Micro, Loans

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