How is the Government Assisting Microfinance Institutions in India?

India has become a significant player in the global economy. Its rapid growth and development have captured the attention of the world. From being one of the largest consumer markets to a hub of innovation and technology, the Indian economy has seen a positive trend over the recent years. The real GDP growth projection for 2024 has been raised to 7.2% from 6.8%, and in just the first quarter of this year, the Indian economy grew by 7.8%. With this estimation, we are going to see a lot of growth in various sectors, one of the most important being the rural economy. India’s aim to become a 5 trillion economy by 2025 can be achieved by focusing on the development of its rural economy.

Microfinance institutions in India are contributing to the growth of rural areas by lending small loans and forming self-help groups. They are helping low-income families in the underprivileged sections by providing various financial services. The Indian government is also helping these institutions to provide better services and uplift our country’s economy. Keep reading this blog, where we’ll discuss in detail about:

• The role of government in helping MFIs in India
• How MFIs have been impacted by the government
• Future expectations of government assistance in MFIs

Role of Government in helping MFIs in India 

1. India Micro Finance Equity Fund (IMEF): In the 2012 union budget, the government of India created an IMEF of Rs. 100 crore with the help of SIDBI (Small Industries Development Bank of India) to help increase the capital of small MFIs in many states. Recently, this fund was re-introduced in November 2022 when SIDBI planned to increase the total investment to attract more MFIs.
2. Pradhan Mantri MUDRA Yojana: In 2015, the Micro Units Development Finance Agency (MUDRA) and Pradhan Mantri Mudra Yojana (PMMY) were launched to allow small businesses to borrow micro credit up to Rs.10 lahks without collateral. These loans were given with the help of MFIs and other member institutions, which were refinanced by MUDRA Ltd.
3. Portfolio Risk Fund: The government has allowed microfinance institutions and non-government organizations (NGOs) to borrow money to use it as a security deposit if they want to borrow loans from SIDBI. These institutions can get 75% assistance for the security deposit and take loans from SIDBI.
4. Interest Rate Display: The Reserve Bank of India has made it compulsory for microfinance institutions to display their interest rates in their offices, pamphlets, and websites. This not only helps those who want to know the interest rates to borrow loans but also helps MFIs reach more people with clear communication.

How MFIs have been impacted by the Government 

• Interest rates: Many microfinance institutions charge slightly higher interest than commercial banks due to the low success rate in India’s financial sector. They usually offer micro credits at interest rates starting from 12% and can go up to 30%. In 2014, the RBI removed the interest rate cap at 26% to help MFI borrow loans at a lower rate of interest.
• Self-Help Groups: MFIs usually offer loans by creating Joint Liability Groups (JLG) or through SHGs. The government is also supporting such self-help groups, which allows them to borrow more money to fund their businesses. This is affecting MFIs because people are taking out more loans and these finance institutions are seeking a funding source.

Future expectations of Govt assistance in MFIs 

• Source of funds: Microfinance institutions cannot reach more people without proper funds. To allow people to borrow money, they need to have many sources to fund it. With new and improved schemes from the government, these institutions can get a stable source of funds for their loan products.
• Regulation: Since RBI is the only regulatory authority for MFIs in India, the structural changes also affect how MFIs work. These changes bring many issues, which make it difficult for new MFIs to continue their operations. A separate regulatory authority can create a sustainable environment for microfinance institutions in India.

Conclusion  

The Indian government plays an important role in supporting microfinance institutions with various funding schemes and regulations that aim to increase financial access and improve the rural economy. With a good regulatory environment and providing necessary resources, the government can increase the growth of microfinance as an essential contributor to India’s economic development.

Among many NBFC MFIs, Chaitanya is one such financial institution that aims to focus on empowering women in many sections of India. We offer microloans and joint liability groups to help people start their small businesses and improve their livelihood. Our financial products have helped many women become self-reliant and provide a good life to their families.