Let’s not conflate microfinance with self-help group financing

Source– The post is based on the article “Let’s not conflate microfinance with self-help group financing” published in the “Live Mint” on 21st September 2023.

Syllabus: GS 3 – Indian Economy

Relevance – Issue related to financial sector

News – The Reserve Bank of India made regulatory changes to the microfinance sector  in March 2022. IT issued  warnings against excessive focus on business expansion in November 2022.

What is the divergence in perspectives between RBI and MFI industry  regarding MFI sector growth?

1. RBI is against prioritizing growth as a mission of microfinance. MFIs should serve as a tool for economic development, poverty alleviation, and women’s empowerment. Whereas, Sa-Dhan, a representative body for the microfinance sector, views growth as essential for achieving these aims.
2. RBI is not in favor of MFIs growth that would increase the debt burden on those who are already heavily indebted. On the other hand, MFI industry is advocating for broader geographical expansion and the extension of formal credit to areas where its impact is low.

What are Self Help Groups(SHGs)?

SHG model is a collective of economically disadvantaged rural women who are dedicated to assisting one another. They provide this support through pooling of small savings. The primary objective remains the moral commitment to aid one another.

The government has taken steps to support the SHGs through various structured resources, such as village-level organizations, cluster-level federations, state-level rural livelihoods missions, and the National Rural Livelihoods Mission.

The concept of a joint liability loan was introduced later in 1993, nearly two decades after the inception of the first SHGs. This economic approach was superimposed onto the pre-existing social principle of mutual assistance.

Government provides interest subsidies at a low interest rate of approximately 12% per annum.

What are some facts about MFIs?

MFIs establish joint liability groups (JLGs) primarily for economic reasons related to lending as a business activity.

Factors like growth, scale, and efficiency have guided the natural evolution of this institutional structure.

Over time, MFIs have invested in advanced technology systems, expanded their offices, hired staff, standardized processes, engaged in marketing, and conducted fundraising.

JLGs have come to include economically disadvantaged women who may not have prior personal connections.

Operational, compliance, management, and fundraising costs are currently financed through commercial bank debt. So, it is economically unviable for MFIs to conduct business at interest rates below 22% per annum.

MFIs do not facilitate group savings, and the state does not provide direct support.

What are the differences between SHGs and MFIs?

1. SGGs begin with a moral commitment and incorporate economic considerations. MFIs begin with an economic rationale and integrate a moral commitment.
2. SHGs offer their female members a practical model for decentralized and contextually-aware decision-making, and empowerment. The business-oriented approach of MFIs are unable to foster the same level of trust, capacity building, and personal development.

Way forward-

It is essential to recognize the critical distinctions between SHGs and JLGs.

Clarity regarding these differences will enable a reevaluation of the MFI growth model, and appropriate forms of regulatory and state support required to promote the sector’s expansion.