IIBF Microfinance key terms

Provision of small loans, savings, insurance and other financial services to low-income households and microenterprises that are usually excluded from mainstream banking because they lack collateral or formal income proof.

A narrow form of microfinance consisting mainly of small-ticket loans for income-generating activity, often disbursed without collateral and repaid in frequent small instalments over a short tenure.

The process of ensuring that households and enterprises can access and actively use affordable, appropriate financial services, including credit, savings, insurance and payments, from formal providers.

A small group of borrowers, typically five members, who mutually guarantee one another's loans; if one member defaults, the group is expected to make good the shortfall, creating peer pressure to repay.

A voluntary group of about 10 to 20 poor members, usually women, who pool small regular savings, lend internally from that corpus, and later become eligible for bank credit based on their track record.

A delivery model in which banks lend directly or through a facilitating agency to self help groups, using the group's savings record and internal discipline as a substitute for individual collateral.

An arrangement under which members of a borrower group accept collective responsibility for repayment of each member's loan, so that the group's access to future credit depends on the repayment record of all members.

The informal social control within a borrower group that encourages timely repayment and discourages wilful default, because a member's failure to pay affects the standing and credit access of fellow members.

Any mechanism used instead of physical security to secure a microloan, such as joint liability, group savings, character references, psychometric scoring or a pledge of movable assets like gold.

An entity whose main business is providing microfinance services; it may operate as a non-profit society or trust, a for-profit non-banking finance company, or a division of a bank.

A company registered with the central bank to carry on microfinance business as an NBFC, subject to minimum net owned funds, qualifying assets and other prudential conditions specific to the microfinance category.

A loan or investment that meets the regulator's conditions for recognition as microfinance business, typically a small-ticket loan to a low-income household, used to determine whether an entity qualifies as an NBFC-MFI.

The maximum annual household income, fixed by regulation and often differentiated between rural and urban areas, below which a borrower is treated as eligible for regulated microfinance loans.

The defined population that a microfinance programme is designed to serve, usually low-income households lacking formal credit history, and often specified in regulation as the eligible customer base.

A regulatory ceiling on the interest rate or margin that a microfinance lender may charge, intended to protect borrowers with weak bargaining power from excessive cost of credit.

The true annualised cost of a loan after taking into account interest, processing fees and other charges, and the effect of declining balances under frequent instalment repayment.

A method of charging interest on the original loan amount throughout the tenure, which produces a much higher effective cost than the same nominal rate applied to the reducing balance.

Disclosure of all charges in a standard, comparable format so that a borrower can see the all-in cost of credit before signing, including the annualised percentage rate and any contingent fees.

A widely adopted set of conduct standards for microfinance providers covering avoidance of over-indebtedness, transparent pricing, appropriate product design, fair treatment and responsible collection practices.

An agent appointed by a bank to deliver financial services on its behalf at locations away from branches, enabling low-cost outreach in unbanked areas while the bank remains responsible for the service.

Collection and disbursement of cash at the borrower's home or workplace by field staff or agents, a delivery feature that reduces the time and travel cost borne by low-income clients.

A delivery method in which loans are made to individuals who are members of a group, with the group's structure used for screening, monitoring and enforcing repayment rather than physical collateral.

A microfinance delivery method in which the loan is underwritten on the borrower's own cash flows, business assessment and credit history, with group membership not required.

The assessment a lender carries out before sanction to judge whether a prospective borrower can and will repay, covering income, repayment capacity, existing obligations and willingness to pay.

Assessment of repayment ability from the borrower's actual business and household inflows and outflows, rather than from audited financial statements or formal income documentation.

The surplus income a borrower can realistically devote to loan instalments after meeting business costs and essential household expenses, used to set a sustainable loan size and tenure.

The proportion of a borrower's periodic income absorbed by loan instalments, used to test affordability; a high ratio signals vulnerability to income shocks and a higher risk of default.

A situation in which a borrower's total debt obligations exceed sustainable repayment capacity, often caused by multiple lenders lending to the same household without a shared view of its exposure.

A repository that collects and shares borrower credit histories among lenders, enabling a microfinance lender to check existing debt and repayment record before sanctioning a new loan.

The agreed plan of instalment amounts and due dates over the life of a loan, typically weekly, fortnightly or monthly in microfinance to match the borrower's cash flow cycle.

A loan that is past its due date but not yet written off, measured in days or instalments overdue; it is an early warning indicator of deteriorating portfolio quality.

The outstanding principal of all loans with any overdue instalment, expressed as a percentage of the total outstanding portfolio; a stricter quality measure than simple arrears ratios.

A loan classified as impaired because principal or interest has remained overdue beyond the period specified by the regulator, requiring provisioning and cessation of income recognition.

An amount set aside from earnings to absorb expected credit losses on the loan portfolio, sized according to the ageing and risk classification of overdue accounts.

The risk of loss from failed internal processes, people or systems, or from external events, and in microfinance particularly from cash handling, fraud and field-level control weaknesses.

The exposure of a microfinance lender to deliberate misrepresentation by staff or borrowers, such as ghost loans, forged documents, diverted collections or collusion between field staff and clients.

The frontline staff member who recruits and screens borrowers, forms groups, collects instalments and monitors clients, and whose conduct is central to both client protection and fraud control.

A secured microfinance product in which the borrower pledges gold ornaments as security, allowing quick disbursement of a loan sized to a fraction of the pledged metal's value.

The loan amount expressed as a percentage of the value of the asset pledged as security, used to keep a cushion against price falls and the cost of realising the security.