IIBF Microfinance cheat sheet

Microfinance is the provision of small-ticket financial services (credit, savings, insurance, remittance) to low-income and unbanked households and micro-enterprises, typically without collateral.

Core clients are households below or near the poverty line and micro-enterprises with working capital needs; loan sizes are small relative to per-capita income and repayment is usually in frequent small instalments.

Key distinguishing features versus mainstream banking: no or substitute collateral, high transaction costs per rupee, door-step delivery, cash-based operations and relationship-intensive appraisal.

Group lending relies on joint liability or peer pressure; individual lending relies on cash-flow appraisal and character assessment. Group liability is not legally enforceable in all jurisdictions.

Double bottom line: financial sustainability (return on assets, operational self-sufficiency) and social performance (outreach, poverty targeting, client protection).

Operational self-sufficiency = operating income ÷ (operating expenses + loan loss provision + financing cost); a ratio of 1.0 means the MFI covers costs from operations.

Financial self-sufficiency adjusts for subsidies and cost of capital; an MFI is financially self-sufficient when adjusted income covers adjusted costs (ratio ≥ 1.0).

Portfolio yield = interest and fee income on loans ÷ average gross loan portfolio; it must exceed the cost of funds plus operating and provisioning costs for sustainability.

Social performance indicators include outreach breadth (number of active borrowers), depth (average loan size relative to GDP per capita) and quality of service (retention, dropout rate).

Group lending (Grameen-style): 5-member groups, joint liability, sequential lending, weekly meetings; group savings and centre meetings reduce screening and monitoring costs.

Self-help group (SHG)–bank linkage: 10–20 members save regularly, lend internally, and later obtain a bank loan in the group's name; the bank deals with the group, not individuals.

Joint liability group (JLG) model: 4–5 members with individual loans but group guarantee; used widely by banks and NBFC-MFIs for collateral-free lending.

Individual lending suits larger micro-enterprises; appraisal uses household cash flow, business cash flow, repayment capacity and character, often with a guarantor.

Typical products: working capital loans, micro-enterprise term loans, emergency/consumption loans, micro-savings, micro-insurance (life, health, asset), remittances and pension products.

Loan sizing rule of thumb: instalment should not exceed a prudent share of the household's monthly net surplus; repayment frequency should match income frequency.

Delivery channels: branch-based field officers, group meetings, business correspondents, mobile money, agent banking and digital lending platforms.

Digital delivery lowers transaction cost but shifts risk to credit scoring, data quality, fraud and over-indebtedness; KYC and consent remain mandatory.

Product design must align with client cash flows (agriculture: harvest-linked repayment; petty trade: daily or weekly collections).

Microfinance regulation typically covers three pillars: prudential (capital, asset quality, provisioning), conduct (client protection, pricing, recovery practices) and enabling rules (legal form, funding access).

In India, NBFC-MFIs are regulated by the RBI under the Master Direction on Regulatory Framework for Microfinance Loans (2022), which applies to all regulated entities making microfinance loans.

Definition rule: a microfinance loan is a collateral-free loan to a household with annual household income within the threshold set by the regulator; the household is the unit of assessment, not the individual.

Pricing rule: the interest rate is not capped by a numeric ceiling but must be board-approved and disclosed; there is no prepayment penalty, and charges must be transparent.

Repayment rule: the borrower must be given flexibility in repayment frequency (weekly, fortnightly, monthly or as per cash flow) and the repayment obligation cannot exceed 50% of the household's monthly income.

Multiple lending rule: a borrower cannot be a member of more than one SHG/JLG; regulated entities must check and report borrower indebtedness to credit information companies.

Client protection standards: fair treatment, transparency, responsible pricing, privacy of client data, grievance redressal and ethical recovery without coercion.

Recovery must be conducted at a designated place and time, without public shaming or physical coercion; regulators may penalise coercive collection practices.

Legal forms include NBFC, bank, cooperative society, trust, society and Section 8 company; each has different capital, governance and supervision requirements.

Financial inclusion means access to and usage of affordable, appropriate financial services by all segments, including savings, credit, insurance, payments and pensions.

Supply-side barriers: distance, documentation, collateral requirements and product mismatch; demand-side barriers: low literacy, irregular income, trust and behavioural biases.

MFIs contribute to inclusion through last-mile reach, collateral-free credit, financial literacy and linkage to formal financial institutions.

SHG–bank linkage is a large-scale inclusion channel: groups build savings discipline, then graduate to bank credit and other services.

Business correspondends and agent banking extend formal financial services to unbanked locations at lower cost than brick-and-mortar branches.

Inclusion metrics include account penetration, active usage, credit-to-GDP depth, share of women borrowers and share of first-time borrowers.

Over-indebtedness risk rises when multiple lenders lend to the same household without credit information sharing; credit bureaus and borrower-level data are the main mitigants.

MFIs should be assessed on both outreach (who is reached) and outcomes (whether services improve income, resilience and financial capability).

Deposit-taking MFIs need stronger prudential regulation than credit-only MFIs because they hold public savings.

Main risk categories: credit risk, operational risk, liquidity risk, market/interest-rate risk, strategic risk, reputational risk and social/mission drift risk.

Credit risk drivers: borrower over-indebtedness, weak appraisal, multiple borrowing, income shocks, group contagion and political interference in repayment.

Portfolio-at-risk (PAR) is the standard asset-quality measure: PAR 30 = outstanding principal of loans overdue more than 30 days ÷ gross loan portfolio.

Loan loss provisioning should follow ageing buckets; write-offs are an accounting action and do not by themselves recover cash or stop collection.

Liquidity risk is managed by matching asset and liability maturities, holding cash buffers and diversifying funding sources; MFIs rarely have lender-of-last-resort access.

Operational risk controls: segregation of duties, dual custody of cash, field officer rotation, receipt-based collections, reconciliation and internal audit.

Concentration risk: cap exposure by branch, sector (e.g., agriculture), geography and borrower; single-borrower limits are set by the board and regulator.

Client protection risk: mis-selling, hidden charges and coercive recovery create reputational and regulatory risk; grievance redressal data is an early-warning signal.

Risk governance requires board-level risk appetite, a risk committee, independent risk function and periodic stress testing of the loan portfolio.

Appraisal steps: client identification and KYC, household income-expense assessment, business cash-flow analysis, repayment capacity, credit bureau check and reference/guarantor verification.

Repayment capacity rule: total monthly repayment obligation should not exceed a prudent share (regulatorily, 50% in India for microfinance loans) of monthly household income.

Character and willingness to pay are assessed through residence stability, group/community reputation, past repayment history and field officer judgment.

Collateral substitutes: joint liability, group guarantee, guarantor, post-dated cheques, hypothecation of stock/assets and compulsory savings.

Loan utilisation checks and post-disbursement visits reduce diversion; diversion to consumption or another lender is an early default signal.

Early warning signals: delayed instalments, missed group meetings, repeated rescheduling, business slowdown, family illness, and borrowing from multiple sources.

Recovery tools: reminder calls and SMS, field visits, restructuring or rescheduling, group mediation and, as a last resort, legal action; coercive recovery is prohibited.

Restructuring should be based on a revised cash-flow assessment and documented; repeated restructuring without provisioning masks portfolio deterioration.

Collection efficiency = amount collected ÷ amount due in the period; combined with PAR and arrears ageing it distinguishes temporary delay from true default.