Module 4:

Microfinance & Financial Inclusion

What are Microfinance Institutions
(MFIs)?
• Specialized organizations providing financial
services (microcredit, savings, insurance) to the poor
and unbanked.

• Serve low-income households, micro-entrepreneurs,

especially in rural and semi-urban India.

• Focus on promoting financial inclusion.

Evolution of MFIs in India
1974: SEWA established in Gujarat to serve
women’s financial needs.

1992: NABARD initiates SHG-Bank Linkage

Program.
1990s–2000s: Emergence and growth of
dedicated MFIs (e.g., SKS Microfinance,
Bandhan).
2011 onwards: RBI regulates NBFC-MFIs, sector self-
regulates via MFIN, Sa-Dhan.
MFI Operating Models
• SHG–Bank Linkage Model: Groups of women save, then
borrow collectively.

• MFI Model: Registered MFIs directly extend loans.

• JLG Model: Small groups guarantee each other’s loans (peer

accountability).
Key Characteristics
• Focuses on low-income, unbanked, and
marginalized populations.
• Offers collateral-free loans, typically for
income-generating activities.
• Emphasizes women’s participation as clients
and leaders.
• Promotes regular savings, insurance, and
sometimes pension services.
• Strives for sustainability—balancing social
mission and financial stability.
Functions and Offerings
• Credit: Collateral-free small loans for business, consumption,
education, health, etc.

• Savings and Thrift: Encouraging members to save regularly.

• Insurance: Simple, low-premium life or health insurance

products.

• Pension: Micro-pension schemes supported by

government/private collaboration.

• Capacity Building: Financial literacy, entrepreneurship

development, and livelihood training.
Need for Microfinance Institutions in India

➢ Financial Inclusion ➢ Addressing High Transaction Costs

➢ Poverty Alleviation ➢ Supporting Government Policies

➢ Social and Economic Empowerment

Code of Conduct for
Microfinance Institutions
1. Integrity and Ethical Behaviour

2. Transparency

3. Fair Practices and Client Protection

4. Compliance and Good Governance

5. Privacy and Confidentiality

6. Reinforcing Responsible Staff Conduct

Regulatory and Industry
Oversight
• Reserve Bank of India (RBI)

• Self-Regulatory Organizations (SROs)

• Monitoring and Enforcement

• Multiple Borrowing Checks

• Audit and Monitoring

Self Help Groups (SHGs) in
India – Overview
• Definition: SHGs are small, informal associations of
individuals, typically from similar socio-economic
backgrounds, who voluntarily come together to achieve
collective objectives, primarily focused on savings and
credit activities.
• Typical Membership: Usually 10–20 members, most
commonly women.
• History: Originated with the Self-Employed Women’s
Association (SEWA) in 1972; expanded rapidly with
NABARD’s SHG Bank Linkage Programme since 1992.
• Support Agencies: NABARD, NGOs, State Governments,
Banks.
SHGs – Purpose
• Promote Financial Inclusion: Provide poor and marginalized
sections access to banking and financial services, including
credit, savings, insurance, and pensions.

• Encourage Entrepreneurship and Livelihood: Pool resources

for income-generating activities and self-employment.

• Empower Marginalized Groups: Build confidence,

leadership, and decision-making capacity, especially
among women.
SHGs – Purpose
• Community Development: Engage in social, health, and
educational initiatives for overall progress.

• Connect Unbanked with Formal Finance: Link members

to banks for micro-credit and other services.

• Savings Culture: Encourage regular saving [Link]

Support: Provide a platform for sharing problems and
finding collective solutions.
SHGs – Advantages
• Financial Inclusion and Security: Enable easy and secure
access to credit without collateral, encouraging regular
savings and banking literacy.
• Women Empowerment: Provide a platform for women’s
voices, leadership, and participation in decision-making at
household and community levels.
• Income Generation: Promote micro-enterprises, vocational
training, and alternative sources of employment.

• Social Support & Collective Strength: Foster mutual aid,

address social issues (dowry, alcoholism, early marriage),
and build community resilience.
SHGs – Advantages
• Implementation of Government Schemes: Help in more
effective and transparent rollout of government
initiatives, acting as pressure groups or social auditors.

• Skill Development: Equip members with skills needed for

entrepreneurship and community service.

• Poverty Alleviation: Facilitate poverty reduction through

credit access, livelihood support, and improved socio-
economic status.
SHGs – Limitations
• Limited Financial Literacy: Many members lack banking and
financial management skills, affecting their ability to
manage group finances efficiently.
• Inefficient Leadership & Group Dynamics: Lack of leadership
skills and interpersonal conflicts may hinder group
functioning and sustainability.
• Dependence on External Agencies: Some groups become
overly reliant on government or NGO support, risking
sustainability when support is withdrawn.
• Scalability Issues: Difficulty in expanding or scaling
operations due to limited resources and management
capacity.
SHGs – Limitations
• Social Barriers: Patriarchal attitudes, lack of family
support, and social restrictions, especially for women,
limit participation and leadership.

• Low Education Levels: Inadequate literacy hampers

record keeping, utilization of credit, and access to
services.
• Loan Recovery Challenges: Issues with defaulting on
repayments due to irregular income and poor financial
discipline.
SHGs – Ways to Strengthen
• Enhanced training in entrepreneurship and financial
management.
• Improved market linkages and branding of products.

• Regular monitoring and capacity building by banks and

NGOs.
• Digital literacy and technology adoption for record-
keeping.
Role of NABARD
➢ SHG-Bank Linkage Programme (SHG-BLP):
➢ Launched in 1992; links Self Help Groups (SHGs) with banks, expanding
financial access for the poor.
➢ The largest microfinance initiative in India, with millions of women SHG
members benefitting from credit and savings services.
➢ Financial Support and Refinance:
➢ Provides 100% refinance to banks giving loans to SHGs, enhancing
liquidity and enabling wider outreach.
➢ Capacity Building and Training:
➢ Organizes workshops, skill development, and leadership programs for
SHG members and micro-entrepreneurs.
➢ Support to Facilitators:
➢ Provides grants and guidance to NGOs, banks, and other institutions
promoting SHGs and microfinance.
➢ Policy Advocacy:
➢ Develops policies for inclusive finance, entrepreneurship, and
ecosystem strengthening.
Role of SIDBI
➢ Support to Microfinance Institutions (MFIs):
➢ Provides refinance, funding, and capacity building to MFIs, which then
serve micro-entrepreneurs and SHGs.

➢ Direct and Indirect Financing:

➢ Offers loans, credit lines, project finance, and technology upgrades for
micro and small enterprises, including those formed by SHGs.

➢ Promotion of MSMEs:
➢ Facilitates growth of micro, small, and medium enterprises (MSMEs)
with special schemes for financial access, skill development, and
market linkages.

➢ Entrepreneurship Programs:
➢ Collaborates with NGOs and other agencies to promote rural
entrepreneurship and innovation among low-income households.

➢ Integration with Government Schemes:

➢ Works with national programs like NRLM to ensure last-mile connectivity
and financial inclusion for vulnerable groups.
Priority Sector Lending
❖ Definition: Priority Sector Lending is a mandate by the
Reserve Bank of India (RBI) requiring banks to allocate a
portion of their lending to specific sectors that are vital
for economic development but often lack adequate
credit.

❖ Objective: Promote inclusive growth, social equity, and

meet the credit needs of underserved and vulnerable
segments.

❖ Applicability: All Commercial Banks, including Regional

Rural Banks (RRBs), Small Finance Banks (SFBs), and
Primary (Urban) Cooperative Banks.
Priority Sector Lending
Evolution of Priority Sector Lending
• 1969 – Gadgil Committee: Proposed the 'Area
Approach', leading to regional credit planning.

• 1972: PSL formalized by RBI to ensure credit to sectors

lacking access to institutional finance.

• Subsequent Committees: Recommendations for target

setting and revision of classifications.
Priority Sector Lending
PSL Targets & Regulatory Framework

▪ Scheduled Commercial Banks & Foreign Banks (≥20

branches): 40% of Adjusted Net Bank Credit (ANBC) or
Credit Equivalent Amount, whichever is higher.

▪ Regional Rural Banks & Small Finance Banks: 75% of

ANBC.

▪ Primary (Urban) Cooperative Banks: 60% of ANBC.

▪ Regulation: Governed by RBI guidelines; non-

compliance leads to contribution to funds like RIDF.
Priority Sector Lending
Classification of Priority Sectors:
Sector Description

Agriculture Loans to farmers, SHGs, JLGs, allied activities

Micro, Small & Medium Enterprises, including

MSMEs
manufacturing

Export Credit Financing export activities

Education Loans to students for higher/vocational education

Housing Loans for affordable housing and construction

Social Infrastructure Schools, drinking water, sanitation projects

Financing for solar, wind, biomass, and related

Renewable Energy
infrastructure
Weaker sections, microcredit, self-employment
Others
schemes
What is Financial Inclusion?
• Definition: Providing affordable financial services to
all sections of society, especially weaker & low-
income groups.

• Services include: Savings, Credit, Insurance, Pension,

and Payment systems.

• Aim: Inclusive growth and economic development.

Need for Financial Inclusion
➢ Large section of population excluded from
banking.

➢ Promotes equitable growth.

➢ Reduces poverty & dependence on

moneylenders.
➢ Encourages savings & formal credit access.
➢ Helps in implementation of Direct Benefit
Transfer (DBT).
Extent of Financial Inclusion in India
• Increase in bank accounts after Jan Dhan Yojana.

• Growth of digital payments (UPI, AEPS, etc.).

• Penetration of microfinance & SHGs.

• Challenges: low financial literacy, rural connectivity, dormant

accounts.
Pradhan Mantri Jan Dhan Yojana
(PMJDY)
• Features

− Launched: 28 August 2014.

− Zero-balance savings account facility.

− RuPay debit card with accident insurance cover.
− Overdraft facility (up to ₹10,000).
− Life insurance cover.
− Integration with DBT (subsidies, benefits).
Pradhan Mantri Jan Dhan Yojana
(PMJDY)
• Procedures

− Easy account opening with Aadhaar / KYC

documents.

− Accounts can be opened at banks, post offices,

BCs.
− No minimum balance requirement.
− Use of RuPay card & mobile banking for
transactions.
Pradhan Mantri Mudra Yojana (PMMY)
• Features
• Launched: 8 April 2015.
• Aim: Provide loans up to ₹10 lakh to small/micro
enterprises.
• Promotes entrepreneurship, self-employment & MSMEs.
• Loans classified into three categories:
• Shishu: up to ₹50,000.
• Kishore: ₹50,001 – ₹5,00,000.
• Tarun: ₹5,00,001 – ₹10,00,000.

• Collateral-free loans.
• Interest rate decided by lending institutions.
• Encourages women entrepreneurs, SC/ST, minorities.
Pradhan Mantri Mudra Yojana (PMMY)
• Procedures
• Eligibility: Non-farm small/micro enterprises.
• Application at banks, NBFCs, MFIs, RRBs.
• Requires business plan / loan proposal.
• Loan sanctioned based on credit appraisal.
• No collateral required, backed by Credit Guarantee
Fund for Micro Units (CGFMU).
CMA Analysis
(Credit Monitoring Arrangement)

Meaning:

✓ Financial analysis tool for loan appraisal.

✓ Prepared by borrowers & submitted to banks.

✓ Used by banks to assess creditworthiness.

CMA Analysis
(Credit Monitoring Arrangement)

Features:

➢ Standardised format prescribed by RBI.

➢ Covers financial statements & projections for 5–7 years.

➢ Ensures transparency in loan assessment.

➢ Helps lenders in monitoring fund utilisation.

CMA Analysis
(Credit Monitoring Arrangement)

Key Components:

❖ Details of existing & proposed limits.

❖ Balance Sheets (past, current, projected).

❖ Profit & Loss Statements.

❖ Cash Flow Statements.

❖ Ratio Analysis (Liquidity, Profitability, Leverage).

❖ Fund Flow Statements.

CMA Analysis
Importance in PMMY
▪ Loan appraisal – ensures eligibility & suitability

▪ Risk reduction – prevents NPAs

▪ Monitoring tool – continuous review of borrower’s

performance

▪ Financial discipline – encourages maintaining accounts

▪ Transparency – ensures proper utilisation of Mudra loans

CMA Data Format
(Simplified for PMMY)
▪ Borrower details & business profile

▪ Past financial performance (if available)

▪ Projected financials (sales, expenses, profit)

▪ Working capital requirement

▪ Means of finance (own vs. bank funds)

▪ Repayment schedule & cash flows

 CMA in PMMY Categories

▪ Shishu (up to ₹50,000): No CMA needed, basic details

sufficient

▪ Kishore (₹50,000 – ₹5 lakh): Simplified CMA with 1-year

projections

▪ Tarun (₹5 – ₹10 lakh): Detailed CMA with 2–3 years projections,

repayment plan, ratios

CMA Analysis
Benefits & Challenges
Benefits Challenges

For Banks: • Many micro-entrepreneurs don’t maintain

• Creditworthiness assessment books of accounts
• Risk reduction • Requires financial literacy/professional
• Better monitoring help
For Borrowers:
• Projections often unrealistic for small
• Clear financial planning businesses
• Easier access to credit
• Simplified CMA still considered complex
• Builds credibility with lenders
by borrowers
Thank you