The origins of microfinance institutions in India can be traced back to 1974 when a Gujarat-based trade union Self-Employed Women’s Association (SEWA) established SEWA Bank to provide financial services to underprivileged women in rural areas. The bank along with other organisations like Working Women’s Forum (Chennai) immediately preceded the emergence of Self-Help Groups (SHGs) in India.
SHGs are a small group of 15-20 people, mostly women, formed to encourage habits of thrift, impart micro-credit, and promote micro-entrepreneurship among the members. The SHG model intended to create a common pool using contributions from members, who in turn can take loans from the pool during emergencies, mostly at flat interest rates. Thanks to the NGO, Mysore Resettlement and Area Development Agency (MYRADA), which started the SHG movement in the 1980s in South India. By 1986-87, there were roughly 300 SHGs under MYRADA.
As SHGs grew large enough and their credit needs increased, MYRADA started linking the entities to banks in 1984-85. In 1989, the SHG model was adopted by the National Bank of Agriculture and Rural Development (NABARD), which launched the SHG-bank linkage programme (SBLP) in 1992. SBLP formed the premise of microfinance activities and led to the recognition of the MFI sector in India.
In 1996, RBI decided to put SHGs under the “Priority Sector Lending (PSL)” portfolio of banks. The model became successful in states like Andhra Pradesh, Tamil Nadu, Kerala, and Karnataka, all receiving 60% of SBLP credit by 2005-06. Eventually, two models of microfinance emerged involving bank linkage as follows:
1. SBLP: Direct financing of SHGs by commercial banks, regional rural banks, and cooperative banks
2. MFI: Financial institutions like NBFCs, cooperative societies, trusts, and companies constituted under Section-25 of the Companies Act, 1956 extending microcredit to low-income groups for short tenures without any collateral for income-generating activities as well as for consumption, housing, and other purposes.
As the microfinancing sector grew and strengthened its position in furthering financial inclusion in India, concerns regarding regulating the sector arose in order to monitor, supervise, and promote MFIs in India. While NBFCs fell under the purview of RBI, other financial institutions (as mentioned in the MFI model) didn’t. The regulatory issue was exacerbated when the microfinance crisis struck in Andhra Pradesh (the motherland of the sector) in 2010 when some MFIs were accused of practicing a forced recovery process that purportedly led suicide of some borrowers. In the wake of the crisis, RBI eventually introduced a comprehensive regulatory framework in 2011, integrating customer-centric principles in the operations of NBFC-MFIs.
The need for asset securitisation for MFIs
Despite serving the objective of financial inclusion, Indian MFIs, mostly the small and medium ones, often get deprived of subsidized credit used for lending. The problem had been exacerbated post crises in the sector (like the one in Andhra Pradesh in 2010), which made the funding to the sector mire in political and other external risks. The below chart on the debt funding over FY18-20 describes the scenario.