Role of Microfinance Institutions in Rural Economy

Discuss the Role of Microfinance Institutions (MFINs) in Rural Economy

            Microfinance is the financial services provided to low income and poor individuals or groups. Those institutions that primarily work in microfinance sector called microfinance institutions (MFI). Some MFIs are Bandhan financial services Pvt Ltd, Ujjivan financial services Pvt Ltd etc.

             These institutions lend through the concept of Joint Liability Group (JLG) comprising of 5-10 individual members who come together to avail banking loans. They shares responsibility and stand as guarantee for each other.

The benefits of MFIs are:

1. They provide short term loans without collaterals with easy repayment installments.

2. Provide opportunities to families to educate their children

3. Helps in poverty alleviation

4. Encourage people to save

5. Helps in upliftment of socio-economic status of poor etc.

            High operations cost, high interest rates, overdependence on banks for funding, regulatory issues, high risk in non repayment of loans, issue of multiple borrowings etc are some challenges in expansion of MFIs in India.

            To combat such issues, the Government launched MUDRA BANK aims to fund and promote MFI's in India. The RBI has constituted Y H Malegam committee on MFI which recommended transparency in interest rates and classify MFI as NBFC-MFI etc.

Suggestions:

           Setting up separate regulatory authority for MFIs, strengthening credit check and debt collection process and educating villagers about MFI's projects.

           As per NAFIS report, only 23% households reported any of its members are associated with a microfinance group, it is high time to strengthen MFIs as it has immense potential to reshape rural areas.