• UGI USER
  • Sep 21, 2023
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Microfinance vs. Self-Help Group Financing

Relevance

  • GS Paper 3 Indian Economy and issues relating to Planning, Mobilization of Resources.
  • Tags: #SHGvsMFI #FinancialInclusion #EconomicEmpowerment #RuralDevelopment #WomenEmpowerment #FinancialServices #CreditAccess #Minteditorial #UPSC.

 

Why in the News?

The microfinance industry in India is facing scrutiny and differing viewpoints on its growth trajectory. This raises questions about the moral and economic aspects of microfinance institutions (MFIs) and self-help groups (SHGs).

RBI’s Regulatory Revisions (March 2022)

The RBI has initiated revisions to the regulatory framework governing the microfinance industry, aiming to bring about greater accountability and transparency.

  • In a later development, the RBI has cautioned microfinance institutions (MFIs) against an exclusive focus on business growth, emphasizing the need for a more balanced approach.

Differing Views on Growth

  • RBI’s Perspective: The RBI’s stance reflects concerns that rapid expansion may overshadow the core mission of microfinance, which is poverty alleviation and women’s empowerment.
  • Sa-Dhan’s Perspective: Sa-Dhan, represented by its CEO in an April 2023 op-ed, perceives growth as integral to realizing the socioeconomic goals of microfinance, suggesting it’s a means to an end.

Unresolved Moral Charge

  • The question remains whether the RBI’s regulatory changes effectively address the moral charge it seeks to impose on the industry, highlighting a divergence in viewpoints between the regulator and industry players.

Divergence in Growth Approach

  • RBI Cautions Against Debt-Driven Growth: RBI warns against MFIs expanding in ways that increase the financial burden on those already in debt.
  • Sa-Dhan Advocates Expansion: Sa-Dhan urges MFIs to expand to new areas and promote formal credit access for greater impact.

Is MFI Growth All Positive? : Questioning MFI Growth Model

  • The big question is whether the way MFIs have been growing, and will likely continue to grow in new places, is an entirely good thing.
  • This brings us back to the moral charge and doubts about uncontrolled growth.

Comparison Between Self-Help Groups (SHGs) and Microfinance Institutions (MFIs)

Aspect Self-Help Groups (SHGs) Microfinance Institutions (MFIs)
Origination Purpose Moral commitment to help each other. MFIs originate with an economic calculation primarily focused on lending.
Formation Core SHGs consist of rural women (Mahila Mandal) who are committed to helping each other and pool tiny savings. Joint liability groups (JLGs) created for lending purposes, comprising unrelated members.
Financial Model SHGs initially prioritize mutual aid and later incorporate joint liability loans. MFIs introduce joint liability loans on top of the primary goal of lending.
State Support Supported by the state with structured resources like village-level organizations, federations, and rural livelihoods missions Limited direct state support; relies heavily on commercial bank debt.
Interest Rates Low-interest rate, around 12% per annum, made feasible with state subsidies. Higher interest rates, typically around 22% per annum, to cover operational costs.
Operational Structure Small groups of approximately 10 women each, maintaining a local and primary role. Growing complexity with technological systems, offices, staff, and commercial focus.
Group Dynamics Strong emphasis on group meetings and mutual support Group meetings becoming less relevant with digital loan disbursement.
Savings Encourages group savings as part of financial inclusion. Group savings not allowed, reducing avenues for member savings.
Outcomes Distributed decision-making Struggle to instill trust, capacity, and personal development

 

We are completely in favor of MFI expansion in the sector serving credit-seeking consumers, but only if important distinctions between SHGs and JLGs are understood. We think that by making it clear how the two vary, it will be possible to reevaluate the MFI development model as well as the best ways for the government and the state to promote the sector’s expansion.

Source: Livemint.

Mains Question

Explain the distinction between Self-Help Groups (SHGs) and Microfinance Institutions (MFIs) in India, Discuss the implications of recognizing these differences for the growth and regulation of the microfinance sector?