Micro Finance Institutions (MFIs)

What exactly are MFIs?

• Microfinance Institutions, also known as MFIs, are businesses that provide financial services to low-income people.
• Typically, they operate in rural areas and among low-income people in urban areas, spreading small loans.
• MFIs offer much-needed assistance to the economically disadvantaged, who would otherwise be at the mercy of high interest rates and the local moneylender.
• The model began as a mechanism for poverty alleviation, focusing on the economic and social upliftment of marginalised groups by lending small sums of money to women for income-generating activities without any collateral.
• Some MFIs that meet certain requirements and are non-deposit taking entities are regulated and supervised by the RBI as Non-Banking Financial Companies (NBFCs). NBFC MFI refers to these “Last Mile Financiers.”
• The aim of bringing them under the RBI’s jurisdiction was to make these NBFC MFIs more healthy and accountable.

Digitalization and the MFI Sector’s Expansion

• Several improvements to the sector’s operating model have been implemented over time, including digital interventions in the lending value chain.
• Digital technologies have been embraced by MFIs to remove redundancies, allow fast customer onboarding, loan disbursements, and even cashless collections.
• MFIs have been able to use digital technology to not only reach a larger number of clients and therefore expand at a faster rate, but also to do so more efficiently by streamlining processes and shortening turnaround times.

Challenges associated with MFI 

• MFIs’ Social Objective Has Been Overlooked: In their pursuit of development and profitability, MFIs’ social objective—to better the lives of society’s marginalized—seems to have been steadily eroding.
• COVID-19’s Impact: It has had an effect on the MFI market, with collections taking a hit at first and disbursals already lagging behind.
• Inadequate Information: Although total loan accounts have increased, data on the relative poverty-level improvement of MFI clients is fragmented, making it difficult to determine the actual effect of these loans on clients’ poverty levels.