Definition
Microfinance Institution (MFI)
A Microfinance Institution provides small, collateral-free loans to low-income borrowers, typically women in groups, for income-generating activities.
MFIs, many registered as NBFC-MFIs, extend tiny loans through joint-liability groups, relying on peer accountability rather than collateral. They serve borrowers excluded from formal banking, charging higher rates that reflect high operating and credit costs.
The RBI's 2022 microfinance framework removed the interest-rate cap but imposed a borrower-level limit on loan repayment as a share of household income, to curb over-indebtedness. Microfinance is also counted toward banks' priority sector lending when routed appropriately.
Related terms
- Credit CostCredit cost is the provisioning a bank or NBFC books for bad and doubtful loans during a period, usually expressed as a percentage of average advances.
- Non-Banking Financial Company (NBFC)An NBFC is an RBI-registered financial company that lends and invests but cannot accept demand deposits or offer cheque facilities like a bank.
- Joint Liability Group (JLG)A Joint Liability Group is a small group of borrowers who collectively guarantee each other's microfinance loans, substituting peer pressure for collateral.
- Priority Sector Lending (PSL)Priority Sector Lending norms require banks to direct a minimum share of their credit to sectors such as agriculture, MSMEs and weaker sections.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.