Micro Finance Institutions | Non-Banking Financial Companies | MODULE C: INDIAN FINANCIAL ARCHITECTURE

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Microfinance Institutions and NBFCs - Descriptive Notes

Micro Finance Institutions | Non-Banking Financial Companies | MODULE C: INDIAN FINANCIAL ARCHITECTURE

Microfinance Institutions (MFIs)

Evolution of Microfinance in India

Microfinance in India began as an informal sector practice and gained structure with the NABARD-supported SHG-Bank linkage programme in the early 1990s. It aimed at providing financial services to low-income groups, particularly women.

Grameen Bank Model

Inspired by the success in Bangladesh, this model relies on group lending with peer pressure to ensure repayment. It emphasizes trust and social collateral.

Delivery of Microfinance

  • Self-Help Groups (SHGs)
  • Joint Liability Groups (JLGs)
  • MFIs including NBFC-MFIs

SHG-Bank Linkage Programme

Launched by NABARD in 1992, this program links informal groups of micro-entrepreneurs to banks for credit support. Over 1 crore SHGs have been linked so far.

Joint Liability Groups (JLGs)

A group-based model of lending for agriculture and allied activities. Each member is jointly liable for the loans taken by others in the group.

Regulatory Framework for MFIs

  • Governed primarily by RBI regulations
  • Must follow pricing caps and income criteria of borrowers

Inclusion in Priority Sector Lending

MFIs get funding from banks under the Priority Sector Lending (PSL) mandate to support inclusive growth.

RBI Directions 2022 for Microfinance Loans

  • Interest rate deregulated but based on board-approved policy
  • No prepayment penalties
  • Total loan repayment obligations capped at 50% of household income

RBI's Fair Practices Code for NBFC-MFIs

  • Transparency in interest rate communication
  • No coercive recovery practices
  • Clear disclosure of loan terms

Non-Banking Financial Companies (NBFCs)

What is an NBFC?

NBFCs are financial institutions that provide banking-like services without holding a banking license. They can't accept demand deposits.

Evolution of NBFCs in India

NBFCs emerged in the 1960s and expanded rapidly in the 1990s due to credit demand in underserved segments.

Role in Promoting Inclusive Growth

NBFCs finance small businesses, vehicles, housing, and infrastructure projects in rural and semi-urban areas, contributing to financial inclusion.

Regulators of NBFCs

  • RBI (primary regulator)
  • SEBI, IRDAI, and others based on function

Classification of NBFCs

  • Asset Finance Companies (AFC)
  • Loan Companies (LC)
  • Investment Companies (IC)
  • Infrastructure Finance Companies (IFC)
  • NBFC-MFI, NBFC-Factor, Core Investment Companies (CIC)

Regulatory Oversight by RBI

RBI monitors registration, capital adequacy, exposure norms, fair practices, and periodic compliance.

Types of NBFCs

Based on activity: deposit taking (NBFC-D) and non-deposit taking (NBFC-ND)

Owned Funds and Net Owned Funds (NOF)

Owned Funds: Paid-up equity + reserves
NOF: Owned Funds – investments in shares/subsidiaries + accumulated losses

Example: If Owned Funds = Rs. 50 lakhs and loss = Rs. 10 lakhs, then NOF = Rs. 40 lakhs

Bank Finance to NBFCs

Banks can provide loans to NBFCs based on asset quality and creditworthiness. NBFCs lend further to final borrowers.

Fair Practices Code for NBFCs

  • Disclosure of terms and conditions
  • Reasonable interest rates
  • Grievance redressal mechanism

Ombudsman Scheme

NBFCs fall under the RBI-integrated ombudsman scheme which handles complaints regarding loans, charges, and misconduct.

Scale Based Regulation (SBR)

Introduced by RBI in 2021 to regulate NBFCs in layers:

  • Base Layer: Small NBFCs with minimal risk
  • Middle Layer: Systemically important NBFCs
  • Upper Layer: NBFCs with high interconnectivity
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Banking Regulation Act, 1949 and RBI Act, 1934 and Development Financial Institutions 		Next Chapter
Insurance Companies

Chapter List

Tags: Microfinance, Grameen Bank, SHG, JLG, NBFC, RBI Regulations, Priority Sector, Scale Based Regulation

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