The delivery of microfinance institutions (MFIs) around the world follows a variety of different methodologies for the provision of financial services to low–income families.
The Task Force constituted by NABARD in 1998 to arrive at a conceptual policy framework encompassing issues in policy, regulation, financing, and capacity building, for sustainable growth of Micro Finance in the country, has suggested a working definition of microfinance as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards”. The focus of microfinance services was mainly on women. This decision is because of the observations that in financial matters, they are more responsible than men particularly since their mobility is restricted by family responsibilities.
The microfinance sector in India is varied, with a variety of firms providing low-income people with financial services like lending, micro-insurance, and pensions. Five broad categories can be used to classify the various microfinance industry participants: Small Finance Banks, NBFC MFIs, Banks, and Non-profit MFIs. All of these, except non-profit MFIs, are under RBI regulation. The majority of non-profit MFIs are registered as trusts or societies, and they are regulated by the corresponding acts while majorly the non-profit organizations (NGOs) that have been operating in the industry as financial intermediaries are registered as trusts or societies.
The Micro Finance Institutions (mFIs) can be broadly under three categories:
1. Not-for-Profit mFIs: Societies registered under the Societies Registration Act, 1860 or similar State Acts, Public Trusts registered under the Indian Trust Act, 1882, and Non-profit Companies registered under Section 25 of the Companies Act, 1956.
2. Mutual Benefit mFIs: State credit co-operatives, National credit co-operatives, Mutually Aided Co-operative Societies (MACS).
3. For-Profit mFIs: Non-Banking Financial Companies (NBFCs) registered under the Companies Act, 1956 Banks that provide mF along with their other usual banking services could be termed as mF service providers.
Microfinance institutions use two basic methods in delivering financial services to their clients in India. These are: (1) Group Method and. (2) Individual method (explained in the article on joint liability group)
Group method:
The structure of these MFIs in India either the Self-help Group (SHG) or Joint Liability Groups (Grameen model and its variants) are two common credit delivery models in India. To know the details of JLG ‘s role in delivering microfinance read: THE ROLE OF JOINT LIABILITY GROUPS (JLG) IN DELIVERING MICROFINANCE SERVICES
The Linkages between banks and Self-Help Groups (SHGs) supported by the National Bank for Agriculture and Rural Development (NABARD), on one hand, and Joint Liability Group (JLG) on the other, have emerged as the two most prominent means of delivering microfinance services in India. (Read the full article “WHAT IS SHG BANK LINKAGE PROGRAMME?”)
Difference between JLGs and SHGs:
| Sr.No. | SHG | JLG |
| 1 | SHG is primarily a saving-oriented group in which borrowing power is determined based on savings. | JLG is a credit-oriented group that is primarily formed to avail loans. JLGs can be promoted by business facilitators/correspondents, NGOs, farmers’ clubs, farmers’ federations, Panchayati raj institutions, agricultural universities, bank branches, PACS, cooperative societies, individuals, mFIs, and many others. from banks or formal credit institutions. |
| 2 | SHGs have group size of 10-20 members. | JLG has a smaller group size of 5-10 members. |
| 3 | SHGs have a more formal structure as compared to JLG. SHGs have internal control; it has positions like secretary, and treasurer which act as an interface of all SHG members with the financial institutions. But this can lead to conflict among members. | All members of JLG have to directly interact with financial institutions themselves. |
| 4 | In the case of SHG lending is done in the name of SHG, not individuals i.e. group lending is done | In the case of JLGs lending is done to individual members though all members are guarantors of each other. |
| 5 | SHG members make regular savings and deposits with the financial institution. Lending to SHGs is based upon the amount of savings that SHG has in the bank account. Generally, the loan amount is 5 times the amount of savings. | JLG members generally invest loan amounts for different purposes. |
| 6 | SHG members make regular savings and deposits with the financial institution. Lending to SHGs is based upon the amount of savings that SHG has in the bank account. Generally, loan amount is 5 times the amount of savings. | JLG is a credit-oriented group that is primarily formed to avail loans from banks or formal credit institutions. |
| 7 | Under an SHG, the group members will be required to save before they are eligible for a loan. | In a JLG model saving is not compulsory; groups need not build internal capital for inter-loaning. Most of the time, MFIs initiate the formation of JLGs by asking members to form such groups with the motive of getting a loan. |
| 8 | SHGs are supported by donors in skill development and capacity building through NGOs. This process of internal capacity building makes the process of getting a bank loan more time-consuming for an SHG. | JLGs are managed outwardly; there is very little focus on capacity building. Hence, JLG units may find it easier to procure loans. |
| 9 | SHGs are self-managed and self-reliant. Hence, an MFI representative has to spend very little time on the management of the group. This implies that several groups can be managed by a single representative, resulting in low-cost management. | In the JLG model, the MFI’s employees are responsible for monitoring the routine operations of the group. This makes it an expensive model. |
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