Microfinance means giving small loans to individuals or small businesses to meet their business requirement. The beneficiaries of Microfinance programmes are the persons who may be outside the formal banking channel. The microcredit programmes are run primarily by SIDBI in the field of Industry and Service, NABARD in the field of agriculture.
The scheme of Micro-Finance Programme has been tied-up with SIDBI by way of contributing towards security deposits required from the rated Micro Finance Institutions (MFIs) or Non-Governmental Organisations (NGOs to get loans from SIDBI. The MFIs and NGOs who source loans for manufacturing, service sector and non-farming activities can apply for the scheme. However, for every loan availed, the MFI or NGO is required to make a security deposit with SIDBI as SIDBI offers only secured loans. The amount of security deposit is 10% of the loan amount.
Since it becomes difficult for MFIs and NGOs to pay the security deposits of 10% for multiple loans due to financial constraints, the existing micro credit programmes had limited reach. In view of the above difficulties faced by MFI and NGOs, the Government of India has decided to provide funds for Micro-Finance Programme of SIDBI. The funds so provided by the Government to SIDBI shall be called ‘Portfolio Risk Fund’ (PRF). This fund would be used for security deposit requirement of the loan amount from the MFIs/NGOs and to meet the cost of interest loss. Out of 10% security deposit required by SIDBI towards loan amount, the share of MFIs/NGOs would be 2.5% of the loan amount (i.e. 25% of security deposit) and balance 7.5% (i.e. 75% of security deposit) would be adjusted from the funds provided by the Government of India.
SIDBI has to pay interest on funds provided by the Government at a rate same as that paid to MFIs/NGOs on their 2.5% deposit. SIDBI is solely responsible for recovery of loan. When the loan is recovered fully, the Government’s contribution of 7.5% of the loan and the interest earned thereon would be rotated and used for future loans. In case of non-recovery of loan, 2.5% security deposit of the loan pledged by the MFIs / NGOs will be first adjusted to the loan account. The security deposit of 7.5% provided by the Government and interest accrued thereon may be adjusted to the loan account only after SIDBI taking approval of Committee of Govt. of India.