InvestorQ : Can you please explain the difference between the different types of MFIs or microfinance institutions in India?
Swapnil Sarang made post

Can you please explain the difference between the different types of MFIs or microfinance institutions in India?

Ayushi Kampani answered.
4 years ago

Microfinance institutions in India developed in different ways to cope with the financial challenges in India’s backward areas.

Types of MFIs: - Joint Liability Group (JLG) Joint Liability Group can be explained as the informal group consisting of 4-10 individuals who try to avail loans against mutual guarantee from banks for the purpose of agricultural and allied activities. This category generally consists of tenants, farmers and other rural workers.

JLGs work primarily for lending purposes, although they also offer the savings facilities. In this type of institution every individual of a borrowing group is equally liable for the credit. This kind of institution is simple in nature and requires little or no financial administration. However, one of the serious drawback of this structure is personal preferences in lending credit, which resulted in a partial failure of the system. Of late, due to various promotional initiatives taken by banks such as Indian bank, Karur Vysya Bank and Indian Overseas Bank, the credibility of Joint Liability Group model has received a boost. It still remains a landmark movement in the area of protection of farmer’s land ownership rights.

- Self Help Group (SHG) The SHG is a type of formal or informal group consisting of numerous small entrepreneurs with similar kind of socio-economic backgrounds. Such individuals temporarily come together and generate a common fund to meet the emergency needs of their business.

Do note, that these groups are generally non-profit organizations and the group itself assumes the responsibility of debt recovery. The advantage of this micro-lending system is that there is no need for collateral. Interest rates are also generally low and fixed especially for women. Additionally, various tie-ups of banks with SHGs have been implemented for the hope of better financial inclusion in rural areas.

One of the most important SHG in India is NABARD SHG linkage program, where many self-help groups can borrow credit from bank once they successfully present a track record of regular repayments of their borrowers. SHGs have proven to be very successful, especially in Andhra Pradesh, Tamil Nadu, Kerala and Karnataka and during the year of 2005-06. These states received approximately 60% of SGH linkage credit.

- The Grameen Bank Model Grameen Model was introduced by the Nobel laureate Prof. Muhammad Yunus in Bangladesh during the 1970s. It has been widely adopted in India in the form of Regional Rural Banks (RRB).

The goal of the Grameen Bank Model has been the overall development of the rural economy which generally consists of financially backward classes. But this model has not been completely successful in India as rural credit and system of recovery are a big problem. Huge amount of non-performing assets also led to failure of these regional banks. Compared with this model, the Self Help Groups have been more successful as they are more suited to the population density of India and far more sustainable. - Rural Cooperatives Rural Cooperatives in India were set up during the time of independence by the government. They used the mechanism to pool the resources of people with relatively small means and provide financial services. Due to their complex monitoring structure, their success has been limited. In addition, this system only catered to the credit-worthy individuals of rural areas, not covering a large part of the country’s financially backward section.