Micro, Small and Medium Enterprises (MSMEs) account for a whopping 30% of India’s economy. Generating more than 120 million employment opportunities, the MSME sector, with around 65 million businesses, is ranked second in creating job opportunities in India. Owing to their contribution to GDP growth and employment generation, MSMEs are key contributors to India’s socio-economic growth.
But one of the major concerns that affect the growth prospects of these micro, small and medium enterprises, is funding. Recognizing this problem of difficulty in getting financial assistance, mostly due to tight lending standards, the Government of India has initiated several schemes, each designed to provide financial assistance to potential or existing MSMEs.
One such scheme is the Micro Finance Programme that aims to promote the growth of small-scale industries and MSME businesses.
What is Micro Finance?
Microfinance is a banking service that is targeted at small businesses and individuals who do not have access to conventional banking services.
- Provision of savings and checking accounts complete with payment functions
- Provision of loans to economically weaker section clients
Some of the key advantages of Microfinance include providing small business owners and individuals access to credit in order to meet their business requirements with a better loan repayment rate as compared to traditional banking products.
The Micro Finance Programme
The microcredit programmes that were in operation in India before the Micro Finance Programme was launched, had a limited reach. The earlier programmes were able to fulfil a mere 10% credit requirements of MSMEs.
It was because of this that the Government of India launched the Micro Finance Programme in 2003-04. This programme contributes security deposits that are required to be made by formal Micro Finance Institutions (MFIs) like rural and co-operative banks, or semi-formal institutions like Non-Governmental Organisations (NGOs) to Small Industrial Development Bank of India (SIDBI) to avail loans.
Let us understand what this means in detail.
How does it work?
Any MSME that is engaged in industrial activities can avail micro-credit facilities from SIDBI through MFIs or NGOs. However,
to get a loan from SIDBI, MFIs or NGOs have to make a security deposit of 10% of the loan amount applied for as SIDBI provides only secured loans.
This is where the Micro Finance Programme steps in to help. The Government of India, through this programme, provides funds to cover the security deposit to be paid to SIDBI. Hence, MFIs and NGOs are able to take loans.
Key features of the Micro Finance Programme
- The Government of India provides funds, called the ‘Portfolio Risk Fund’ (to be used as security deposits) to SIDBI for loans issued to MFIs/NGOs.
- The security deposit, which is 10% of the loan amount, is shared between the Government of India (7.5%) and the MFIs/NGOs (2.5%)
- Monitoring the Micro Finance Programme and recovery of the loan granted to MFIs/ NGOs is the responsibility of SIDBI.
- Following loan recovery, the Government’s contribution of 7.5% of the loan along with the interest earned is to be used for future loans.
Who are the beneficiaries?
- Any MFI or NGO which is entitled to provide loans to MSMEs can avail the benefits of the Micro Finance Programme.
- Small and medium businesses which are engaged in the services and manufacturing sectors can avail loans from the NGOs/MFIs under this scheme.
In addition to providing financial assistance to MSMEs, to promote the growth of micro, small and medium enterprises, the Government of India, under the Micro Finance Scheme, also assists SIDBI in arranging training programmes for entrepreneurs, self-help groups and NGOs.
The Micro Finance Programme has enabled SIDBI to offer Rs 80 crore to MFIs and NGOs which in turn has benefitted 1.6 lakh small businesses and individuals across the country.