Microfinance models in India
Small Business Model
Small and medium-sized businesses have a significant amount of responsibility under this paradigm. With the faltering informal sector, SMEs may play an important role in creating jobs for the disadvantaged by offering training and opportunities to raise their income. To support SMEs, the government provides direct and indirect interventions such as training, technical guidance, and an enabling policy and market environment. Microcredit is a vital component offered to SMEs, either directly or as part of a wider economic development programme.
ROSCA Model or Chit Funds
Rotating Savings and Credit Associations allow you to save and borrow concurrently. These are members who make a recurring fixed cycle contribution to a shared fund. At the conclusion of a cycle, the whole amount collected is distributed to any one member. Chit Funds are India’s version of ROSCA. It aims to fill the void created by conventional banking. The main advantages here are easy accessibility and versatility. There are now thousands of ROSCA in operation in India.
Village-Based Model
This concept is similar to community banking and the Group model in that it is built on community savings and credit. A group of 25-50 persons band together to increase their earnings via self-employment activities. They get their first loan from the implementing agency, which helps them establish the community credit business. They choose members, elect office bearers, develop rules, distribute loans to people, and receive savings and payments. The only collateral they have is faith. As collateral, the collective supports the individual. NGO Model NGOs play a significant role in microfinance. They serve the cause of microfinance by acting as a middleman in several aspects. They are crucial in establishing numerous microcredit initiatives and boosting the credit scores of the disadvantaged. They provide training programs and seminars to give people the chance to learn about microfinance. They help the borrower group while also promoting the loan institution. Various non-governmental organizations (NGOs) are promoting microfinance. Examples include MYRADA in Karnataka, SHARE in Andhra Pradesh, RDO in Manipur, RUDSOVAT (Rural Development Society for Vocational Training) in Rajasthan, and ADITHI in Bihar.
Individual Banking Model.
The individual banking model is an evolution from the group-based concept. The MFI makes loans to individuals depending on their creditworthiness. It also helps with skill development and outreach activities. This strategy is ideal for product-oriented small firms. This concept is often used by cooperative banks, commercial banks, and regional rural banks to provide loans to the unorganised agricultural and non-farming sectors.
Intermediary Model
This strategy places a third party between lending institutions and borrowers. These third parties are members of a local community who know about the borrowers’ creditworthiness. They might be local moneylenders, non-governmental organizations (NGOs), microcredit programs, or commercial banks for government-sponsored projects. Credit-giving organizations might include government agencies, commercial banks, or even foreign contributors. Incentives are provided to intermediaries in both monetary and non-monetary ways.
Credit Union Model
This idea is based on credit unions, which are member-owned, self-help financial institutions. A union of members is established. These individuals are from the same community. They agree to pool their savings and lend each other money at a low interest rate. Credit unions, unlike co-operative banks, are democratic, non-profit financial cooperatives.
Bank Guarantee Model
The Bank Guarantee Model includes borrowing from a commercial bank. When a person or self-formed organization approaches a commercial bank for loan, the bank requires collateral. This collateral is derived from a Bank Guarantee, which is offered to the borrower either by external actors (donations or government agencies) or internally via member deposits. The guaranteed money may be utilized for a variety of reasons, including loan recovery and insurance claims. Several international and UN agencies have established guarantee funds to which banks may contribute. Bellwether Microfinance Funds (India) is one such example.
Grameen Banking Model
This strategy, the brainchild of Professor Muhammad Yunus, creator of Bangladesh’s Grameen Bank, is based on the principle of shared responsibility. It advocates credit as a human right and operates on the assumption that the poor’s abilities are underused. A center is created with a small number of individuals, and loans are made to just a few of them.
Cooperative Model.
The cooperative model is similar to the association and community models, with the exception that its ownership structure excludes the poor. It is an independent group of individuals who freely band together to address their shared social, economic, and cultural concerns. Members are shareholders, and they own equity capital. They also split the profits. These cooperative institutions make use of local resources and play an important role in promoting microsavings and microlending. Peer pressure insures saves, and creditworthiness is dependent on savings. The Cooperative Development Forum Hyderabad is a successful example of this approach. It has established a network of women and men’s thrift organizations. This strategy produces long-term local prosperity.
Community Banking Model
This is a more formalized variant of the association model. It treats the whole community as a unit. Microfinance is distributed via semi-formal or formal institutions, depending on the locality. Sometimes a semi-formal institution administered by the community is developed with the assistance of external aid, such as non-governmental organizations (NGOs), who teach community members in different financial operations of community banking. These institutions have both savings and income-generating programs. As a result, the group’s internal financial capability improves. It is further divided into two categories: Community Managed Loan Funds (CMLF) and Village Savings and Loan Associations (VSLA). A successful example is the Royal Bank of Scotland (RBS) Foundation India, which provides microfinance to India’s poorest communities.
Association or Group Model
More than ten to twenty individuals of a target community join a group or organization based on their gender, religion, political or cultural orientation. The group makes recurring savings of a certain amount in a shared fund. After many months of effective operation, the organization has been connected to a financial institution. The institution then provides credit to the association. The group is thereafter accountable for the repayment. This concept uses social relationships, peer monitoring, and peer pressure to ensure loan payback.
In India, the Self-Help Group-Bank Linkage Program (SHG-BLP) is a popular loan distribution system. NABARD (National Bank for Agriculture and Rural Development) oversees all SHG-BLP programs. According to NABARD, the SHG-BLP is the biggest microfinance program in the world.