Inside the Operations of a Microfinance Company, How Do They Operate and Work?

India’s financial sector acts as a key factor of stability in our economy. It is one of the fastest-growing sectors and consists of commercial banks, insurance companies, and non-banking financial companies (NBFCs). Commercial banks have a large percentage of financial assets compared to cooperative and regional rural banks. On the other hand, NBFCs manage assets for other activities like leasing and micro-finance.

Many banks like the National Bank for Agriculture and Rural Development (NABARD), Regional Rural Banks (RRBs), and Cooperative banks focus on providing credit to develop the rural economy of India. Microfinance institutions (MFIs) have funded many small businesses to improve the lives of people who don’t have access to formal banking facilities in rural areas of our country. Their contribution to India’s economic growth includes providing small loans to fund businesses like carpentry, farming, idol making, and garments. But how do these Microfinance institutions work? Let’s find out through this blog.

How do They Operate 

• Creditworthiness: MFIs provide many financial services to people in the underprivileged parts of India. Unlike commercial banks that offer loans as per the CIBIL score, these institutions offer loans after assessing 5Cs (Character, Capacity, Collateral, Condition, Capital) to reduce the risk of financial loss.
• Financial Literacy: Apart from their financial products, MFIs also conduct literacy programs to spread awareness of financial services and products. This is very important, especially in regions where people don’t have access to proper literacy. It helps people learn more about these services and gain a better understanding of how they can access finance for their businesses.
• Loans: In 2023, the rural population of India was recorded at 63.64%, and more than 50% of Micro, Small and Medium Enterprises (MSMEs) are in rural areas. MFIs play a vital role when it comes to providing loans to these businesses. They offer loans to businesses in various sectors.
• Interest Rates and Repayments: Microfinance institutions provide loans with higher interest rates than commercial banks. Since the RBI has removed the Interest rate cap, these MFIs set the rates based on factors like risk and operational cost. The interest rate can vary based on the borrower’s loan purpose and repayment history as well.
• Joint Liability Groups: Empowering communities in rural areas can benefit our country’s economic growth. MFIs focus on improving rural populations by forming Joint Liability Groups that can borrow money without any security. These groups consist of 4-10 members who join together to take a loan, and each of them is responsible for repaying their loan amount.
• Surveys: Microfinance institutions provide micro-loans but before granting them, they conduct surveys to reduce the risk of financial loss. These institutions collect information from the borrower as well as the people who know them. It helps MFIs to assess their character and condition to make sure they can repay the loan.
• Non-financial Services: Community development is among the major focus of these Microfinance institutions. Apart from providing loans, they provide counseling, financial training, and support to the borrowers. This allows them to help people in the rural parts of our country who need support to start their businesses.
• IT Systems: Technology has reached India’s financial sector, which has allowed people to conduct online transactions. Unlike the traditional banking system, digital banking has changed how people handle their finances, and many MFIs are also aiming to make their process digital to reach remote areas.

How MFIs Have Impacted the IFS 

Microfinance institutions have brought financial services to the underprivileged regions, that do not have access to formal banking facilities. This way, MFIs are able to provide their services by considering culturally diverse populations and promoting inclusivity in their practices. They help low-income families in the rural areas by leading them out of poverty.

Conclusion 

In conclusion, Microfinance institutions play an important role in our country’s economic growth. They provide financial services to communities, particularly in rural areas. By focusing on financial literacy and community development, they empower individuals who want to start their small businesses. This is contributing to poverty alleviation and promoting financial inclusivity in rural areas.

As a prominent microfinance institution in India, Chaitanya has positively impacted the lives of women in rural sections of India by funding their small businesses. It has led them to create a stable source of income and lead a better life. We provide loans and form Joint Liability Groups (JLGs) to help empower these communities.