Definition of Micro Finance Institution (MFI)

A type of banking service that is provided to unemployed or low-income individuals or groups who would have no other means of gaining financial services. Ultimately, the goal of microfinance is to give low income people an opportunity to become self-sufficient by providing a means of saving money, borrowing money and insurance.

One element of that is the opening of bank accounts under the Prime Minister’s Jan Dhan Yojana is being steered by the RBI, while the MFIs will be controlled by the MUDRA Bank under the finance ministry. Prime Minister Narendra Modi is scheduled to launch the proposed agency with a corpus of Rs 20,000 crore on April 8.

Micro Finance Institution (MFI) was created along with a regulatory framework governing the same. The Bank has been receiving representations from NBFCs that are primarily into micro financing, conveying difficulties in complying with the framework. 

Although most modern microfinance institutions operate in developing countries, the rate of payment default for loans is surprisingly low - more than 90% of loans are repaid. 

Like conventional banking operations, microfinance institutions must charge their lenders interests on loans. While these interest rates are generally lower than those offered by normal banks, some opponents of this concept condemn microfinance operations for making profits off of the poor.

The World Bank estimates that there are more than 500 million people who have directly or indirectly benefited from microfinance-related operations. 

Microfinance sector has grown rapidly over the past few decades. Nobel Laureate Muhammad Yunus is credited with laying the foundation of the modern MFIs with establishment of Grameen Bank, Bangladesh in 1976. Today it has evolved into a vibrant industry exhibiting a variety of business models. Microfinance Institutions (MFIs) in India exist as NGOs (registered as societies or trusts), Section 25 companies and Non-Banking Financial Companies (NBFCs). Commercial Banks, Regional Rural Banks (RRBs), cooperative societies and other large lenders have played an important role in providing refinance facility to MFIs. Banks have also leveraged the Self-Help Group (SHGs) channel to provide direct credit to group borrowers.