Types of Microfinance
The microfinance models are developed in order to cope with the financial challenges in financially backward areas. There are various types of microfinance companies operating in India.
Joint Liability Group (JLG)
Joint Liability Group can be explained as the informal group consists of 4-10 individuals who try to avail loans against mutual guarantee from banks for the purpose of agricultural and allied activities. This category generally consists of tenants, farmers and other rural workers. They work primarily for lending purposes, although they also offer the savings facility. In this type of institution every individual of a borrowing group is equally liable for the credit (Singh, 2010). This kind of institution is simple in nature and requires little or no financial administration (UBI, no date).
However, one of the serious problems of this structure is personal preferences in lending credit which resulted in a partial failure of the system. Of late due to various promotional initiatives taken by banks such as Indian bank, Karur Vysya Bank and Indian Overseas Bank, the credibility of Joint Liability Group model has received a boost (The Hindu, 2016). It still remains a landmark movement in the area of protection of farmer’s land ownership rights.
Self Help Group (SHG)
Self Help Group is a type of formal or informal group consisting of small entrepreneurs with similar kind of socio-economic backgrounds. Such individuals temporarily come together and generate a common fund to meet the emergency needs of their business. These groups are generally non-profit organizations. The group assumes the responsibility of debt recovery. The advantage of this micro-lending system is that there is no need for collateral. Interest rates are also generally low and fixed especially for women (Chowdhury, 2013; Business Standard, 2017). In addition various tie-ups of banks with SHGs have been implemented for the hope of better financial inclusion in rural areas (Jayadev and Rao, 2012).
One of the most important ones is NABARD SHG linkage program where many self-help groups can borrow credit from bank once they successfully present a track record of regular repayments of their borrowers. It has been very successful especially in Andhra Pradesh, Tamil Nadu, Kerala and Karnataka and during the year of 2005-06. These states received approximately 60% of SGH linkage credit (Taruna and Yadav, 2016).
The Grameen Bank Model
Grameen Model was introduced by the Nobel laureate Prof. Muhammad Yunus in Bangladesh during 1970s. It has been widely adopted in India in the form of Regional Rural Banks (RRB). The goal of this system has been the overall development of the rural economy which generally consists of financially backward classes. But this model has not been fully successful in India as rural credit and system of recovery are a real problem. Huge amount of non-performing assets also led to failure of these regional banks (Shastri, 2009). Compared to this model Self Help Groups have been more successful as they are more suited to the population density of India and far more sustainable (Dash, 2013).
Rural Cooperatives in India were set up during the time of independence by the government. They used the mechanism to pool the resources of people with relatively small means and provide financial services. Due to their complex monitoring structure, their success has been limited. In addition, this system only catered to the credit-worthy individuals of rural areas, not covering a large part of the country’s financially backward section (Rajendran, 2012).
|Joint Liability Group||Self Help Group||Grameen Bank Model||Rural Cooperatives|
|Size||5-10 members per group||10-20 members per group||Starts with only 2 members per group in a village, eventually increased after loan is successfully repaid||70-80 members per group|
|Services||Generally lending only, irrespective of savings amount||Regular savings in deposit accounts with the financial institutions.||Savings and deposits to extremely poor sections of the society for business, health and housing||Primarily lending services for agricultural purposes|
|Model||Members invest loan amount for different purposes, but are guarantors of each other||All individuals of group work together on the same activity||Field Manager visits villages to form groups of 5 and lends to 2. Amount recovered is reinvested in further lending and infrastructure development in villages||Cooperative society consisting of members are formed for a singular purpose; such as real estate, agriculture, infrastructure, etc.|
|Structure||All members interact with the financial institution individually||More formal with defined positions in each group like treasurer and secretary||Formal structure consisting of Unit Manager, Field Manager, etc. Who interact with every family in a village||All members interact with the financial institution jointly|