JAIIB Paper 1 • Indian Economy & Indian Financial System (IE&IFS)
Micro Finance Institutions (MFIs)
Small loans, big impact â how India built a credit delivery system for those with no collateral and no credit history. Covers the Evolution of Microfinance in India, the Grameen Bank Model, delivery channels, the SHG-Bank Linkage Programme, Joint Liability Groups, and the RBI's 2022 regulatory framework for microfinance loans â with 50 exam-style MCQs with hidden answers.
đ Updated: September 2026 • 28 min read
đ At a Glance
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Core Idea
Small, collateral-free loans to low-income borrowers, often through group-based lending models.
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Global Origin
Pioneered by the Grameen Bank Model (Bangladesh, 1970s-80s).
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India's Model
Dominated by the SHG-Bank Linkage Programme (NABARD-led) and NBFC-MFI lending.
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Current Regulation
Governed by RBI's Master Direction on Microfinance Loans, 2022 â activity-based, not entity-based.
Note: For the Business Correspondent/Facilitator model, PMJDY and broader financial-inclusion coverage, see our Priority Sector & Financial Inclusion guide â this page goes deeper into the microfinance-specific regulatory framework.
1 Evolution of Microfinance in India
1970s-80sGlobal microfinance pioneered abroad (notably the Grameen Bank in Bangladesh); Indian NGOs begin informal group-lending experiments.
1992NABARD launches the pilot SHG-Bank Linkage Programme (SBLP) â connecting informal Self-Help Groups directly to the formal banking system.
2000sRapid growth of dedicated NBFC-MFIs (e.g., specialised microfinance lenders) alongside the SHG model, expanding reach and scale.
2010-11The Andhra Pradesh microfinance crisis (over-lending, coercive recovery practices) exposes regulatory gaps, prompting the first dedicated RBI regulatory framework for NBFC-MFIs (2011).
2022 â Current FrameworkRBI issues a harmonised, activity-based (not entity-based) regulatory framework for microfinance loans, applicable uniformly across banks, NBFCs and other regulated lenders.
2 Grameen Bank Model
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Where Modern Microfinance Began
The Grameen Bank Model, pioneered by Prof. Muhammad Yunus in Bangladesh (starting late 1970s, formally established 1983), demonstrated that small, collateral-free loans to poor rural borrowers â especially women â could be repaid reliably when delivered through peer-group structures.
Core Features
Group-based lending: Borrowers organise into small peer groups (typically five members); the group provides social/peer pressure as an informal substitute for collateral.
No physical collateral: Loans are given purely on trust and peer accountability, not asset security.
Focus on women borrowers: The model found women had higher repayment discipline and greater household welfare impact from credit access.
Regular, small instalments: Frequent (often weekly) small repayments, matched to borrowers' cash-flow patterns.
JAIIB tip: Prof. Yunus and the Grameen Bank jointly won the Nobel Peace Prize in 2006 for pioneering microfinance/microcredit as a poverty-alleviation tool â a fact frequently tested.
3 Delivery of Microfinance
In India, microfinance reaches borrowers mainly through three delivery channels:
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SHG-Bank Linkage Model
Self-Help Groups save together, then borrow directly from banks as a group â India's dominant, largest-scale microfinance delivery channel (Section 4).
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NBFC-MFI Model
Dedicated Non-Banking Financial Company-Microfinance Institutions lend directly to individual borrowers, often organised in JLGs (Section 5).
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Bank-Led / BC Model
Banks lend directly to microfinance borrowers, often via Business Correspondents for last-mile delivery and collection.
4 SHG-Bank Linkage Programme
Launched by NABARD in 1992, the SHG-Bank Linkage Programme (SBLP) is the world's largest microfinance programme by outreach, and India's flagship model.
How It Works
A Self-Help Group (SHG) â typically 10-20 members, mostly rural women â forms and pools small regular savings.
After a period of disciplined savings and internal lending, the group opens a savings bank account with a bank/RRB/cooperative bank.
Based on the group's track record, the bank extends credit directly to the SHG, which then on-lends to individual members as it sees fit.
The group's joint liability and peer monitoring substitute for individual collateral.
JAIIB tip: SBLP is promoted and refinanced by NABARD â reinforcing the direct link between this topic and our Development Financial Institutions guide.
5 Joint Liability Groups (JLGs)
A Joint Liability Group (JLG) is an informal group of typically 4 to 10 individuals (often engaged in similar economic activities â farming, small trade) who come together to jointly guarantee/avail loans, with each member accepting joint and several liability for the group's borrowing.
Basis
SHG
JLG
Core activity
Savings-first, then credit; internal lending too
Formed primarily to avail credit; minimal/no savings function
Loan destination
Bank lends to the group, which on-lends internally
Bank/NBFC-MFI lends to individual members, jointly guaranteed
Typical size
10-20 members
4-10 members
6 Microfinance in Priority Sector Lending
Bank finance to eligible microfinance institutions (NBFC-MFIs meeting specified conditions) for on-lending to individual borrowers/SHGs/JLGs is eligible for classification under Priority Sector Lending (PSL), typically under the "Micro-credit"/relevant PSL sub-categories, provided the MFI complies with margin caps, pricing caps and other conditions specified by RBI.
JAIIB tip: This is the direct link between this page and our Priority Sector Lending guide â banks meet part of their PSL targets by on-lending through/to MFIs.
7 RBI Directions, 2022 â Regulatory Framework for Microfinance Loans
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Master Direction (Effective 1 April 2022)
RBI's "Master Direction â Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022" replaced the earlier NBFC-MFI-only regulations with a uniform, activity-based framework â applying the same core rules to all regulated entities extending microfinance loans (banks, NBFCs, NBFC-MFIs, etc.), not just NBFC-MFIs.
Key Features
Common definition of microfinance loan: A collateral-free loan to a household with annual household income up to a specified limit (revised periodically).
Removal of interest rate caps/margin caps on NBFC-MFI lending, replaced by a board-approved policy ensuring pricing is not usurious, with mandated disclosure of an all-inclusive interest rate.
Household income-based assessment: Lenders must assess repayment capacity considering the household's total outstanding debt obligations, not just the individual loan.
Cap on loan repayment obligations: Total monthly loan repayment obligations of a household, across all lenders, capped at a specified percentage of monthly household income.
Flexibility in repayment frequency â chosen by the borrower rather than fixed rigidly by the lender.
JAIIB tip: The 2022 framework's core philosophy shift is: regulate the activity (microfinance lending) uniformly, not just one type of entity (NBFC-MFIs) â a level playing field across banks, NBFCs and NBFC-MFIs.
8 RBI Fair Practices Code for NBFC-MFIs
Alongside the 2022 Directions, RBI mandates a Fair Practices Code (FPC) for all regulated microfinance lenders, covering:
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Transparent Pricing
Disclosure of all-inclusive interest rate and fees in a standardised, borrower-understandable format.
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No Coercive Recovery
Recovery practices must not involve harassment, intimidation, or visits outside reasonable hours.
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Loan Card / Documentation
Borrowers must receive clear loan documentation in a language they understand.
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Grievance Redressal
A defined grievance redressal mechanism, escalable up to RBI's Ombudsman framework.
JAIIB tip: The Fair Practices Code was significantly strengthened after the 2010-11 Andhra Pradesh microfinance crisis, which was triggered largely by coercive recovery practices and borrower over-indebtedness.
â Key Takeaways
The Grameen Bank Model (Prof. Muhammad Yunus, Bangladesh) pioneered collateral-free, group-based microlending â Nobel Peace Prize, 2006.
India's flagship channel is the SHG-Bank Linkage Programme, launched by NABARD in 1992.
JLGs (4-10 members, joint liability) differ from SHGs (10-20 members, savings-first, group on-lending).
RBI's 2022 Master Direction introduced a uniform, activity-based framework across banks/NBFCs/NBFC-MFIs, removed rigid interest caps in favour of board-approved pricing policies, and capped household loan-repayment obligations relative to income.
The Fair Practices Code â strengthened after the 2010-11 AP microfinance crisis â bans coercive recovery and mandates transparent, borrower-friendly practices.
đ Top 50 JAIIB-Style MCQs on Micro Finance Institutions
Test your understanding with these 50 practice MCQs, closely modelled on the JAIIB (IE & IFS) exam pattern. Each question has 5 options â the correct answer is hidden by default; tap "Show Answer" to reveal it along with a short explanation.
đ°ī¸ Evolution of Microfinance
1 Modern microfinance is generally considered to have been pioneered in:
A. USA
B. Bangladesh
C. United Kingdom
D. Japan
E. Germany
Answer: B. Modern microfinance was pioneered in Bangladesh via the Grameen Bank.
2 NABARD's pilot SHG-Bank Linkage Programme was launched in the year:
A. 1982
B. 1990
C. 1992
D. 2000
E. 2011
Answer: C. SBLP was launched by NABARD in 1992.
3 The 2010-11 microfinance crisis that exposed regulatory gaps in coercive recovery originated in the state of:
A. Bihar
B. Andhra Pradesh
C. Punjab
D. Kerala
E. Gujarat
Answer: B. The 2010-11 crisis originated in Andhra Pradesh.
4 RBI's first dedicated NBFC-MFI regulatory framework, prompted by the AP crisis, was issued in:
A. 1992
B. 2000
C. 2011
D. 2016
E. 2022
Answer: C. RBI's first dedicated NBFC-MFI framework came in 2011.
đž Grameen Bank Model
5 The Grameen Bank was pioneered by:
A. Amartya Sen
B. Muhammad Yunus
C. Raghuram Rajan
D. Y.V. Reddy
E. Nandan Nilekani
Answer: B. Muhammad Yunus pioneered the Grameen Bank.
6 Muhammad Yunus and the Grameen Bank were jointly awarded the Nobel Peace Prize in:
A. 1983
B. 1992
C. 2006
D. 2011
E. 2022
Answer: C. They won the Nobel Peace Prize in 2006.
7 The Grameen Bank Model substitutes for lack of physical collateral primarily through:
A. Government guarantees
B. Peer group pressure and joint accountability
C. High interest rates
D. Mandatory insurance
E. Gold pledges
Answer: B. Peer/group pressure substitutes for collateral in the Grameen model.
8 The Grameen Bank Model found that repayment discipline and welfare impact were generally strongest when lending to:
A. Large corporations
B. Women borrowers
C. Government employees only
D. Foreign nationals
E. Urban stockbrokers
Answer: B. Women borrowers showed higher repayment discipline and welfare impact.
đŦ Delivery of Microfinance
9 India's largest-scale microfinance delivery model by outreach is the:
A. NBFC-MFI model
B. SHG-Bank Linkage model
C. Foreign bank direct lending model
D. Stock market-based model
E. Insurance-linked model
Answer: B. SBLP is India's largest microfinance delivery model.
10 Which of the following is NOT a common microfinance delivery channel in India?
A. SHG-Bank Linkage
B. NBFC-MFI direct lending
C. Bank-led BC model
D. Stock exchange listing
E. Joint Liability Groups
Answer: D. Stock exchange listing is not a microfinance delivery channel.
đĨ SHG-Bank Linkage Programme
11 The SHG-Bank Linkage Programme was launched and is promoted by:
A. SIDBI
B. NABARD
C. EXIM Bank
D. NHB
E. SEBI
Answer: B. NABARD promotes the SHG-Bank Linkage Programme.
12 Under the SHG model, banks typically extend credit to:
A. Each individual member directly, bypassing the group
B. The group as a whole, which then on-lends to members
C. Only the group's designated leader personally
D. The state government
E. A third-party NBFC only
Answer: B. Banks lend to the SHG as a group, which on-lends internally.
13 A precondition before a bank typically extends credit to an SHG is:
A. A public listing on the stock exchange
B. A track record of regular savings and internal lending discipline
C. Government equity infusion
D. RBI's direct approval for every group
E. A minimum group size of 100 members
Answer: B. Banks generally require a demonstrated savings/internal-lending track record first.
14 SHGs under the SBLP model typically comprise how many members?
A. 2-3
B. 4-10
C. 10-20
D. 50-100
E. Over 200
Answer: C. SHGs typically have 10-20 members.
đ Joint Liability Groups (JLGs)
15 A Joint Liability Group typically comprises how many members?
A. 4 to 10
B. 10 to 20
C. 20 to 50
D. Over 100
E. Exactly 2
Answer: A. JLGs typically have 4-10 members.
16 Under a JLG, each member accepts:
A. No liability for other members
B. Joint and several liability for the group's borrowing
C. Liability only for their own physical collateral
D. Liability limited to the group leader alone
E. No formal liability structure at all
Answer: B. JLG members accept joint and several liability.
17 Unlike SHGs, JLGs are primarily formed for the purpose of:
A. Collective savings only, with no credit function
B. Availing credit, with minimal/no savings function
C. Political representation
D. Stock trading
E. Insurance underwriting
Answer: B. JLGs are formed mainly to access credit, unlike savings-first SHGs.
18 Under a JLG, loans are typically disbursed to:
A. The group as a single pooled account only
B. Individual members, jointly guaranteed by the group
C. Only the government
D. Only NBFCs, never individuals
E. A registered trust
Answer: B. JLG loans go to individual members, jointly guaranteed.
đ¯ Microfinance & Priority Sector Lending
19 Bank finance to eligible NBFC-MFIs for on-lending to individual/SHG/JLG borrowers can be classified as:
A. Non-priority sector lending only
B. Priority Sector Lending, subject to specified conditions
C. Capital market exposure
D. Foreign exchange exposure
E. Real estate exposure
Answer: B. MFI on-lending finance can count toward PSL, subject to conditions.
20 For bank finance to an NBFC-MFI to count toward PSL, the NBFC-MFI must typically comply with:
A. No conditions whatsoever
B. Margin caps, pricing caps and other RBI-specified conditions
C. Only stock exchange listing requirements
D. Only foreign ownership limits
E. Only GST registration
Answer: B. Compliance with RBI-specified margin/pricing conditions is required.
đ RBI Directions, 2022
21 RBI's harmonised Master Direction on the Regulatory Framework for Microfinance Loans took effect from:
A. 1 April 2011
B. 1 April 2016
C. 1 April 2022
D. 1 April 2024
E. 1 January 2020
Answer: C. The 2022 Master Direction took effect from 1 April 2022.
22 The defining feature of the 2022 microfinance framework is that it is:
A. Entity-based, applying only to NBFC-MFIs
B. Activity-based, applying uniformly to all regulated lenders offering microfinance loans
C. Applicable only to banks, excluding NBFCs
D. Applicable only to foreign lenders
E. Voluntary, with no binding force
Answer: B. The 2022 framework is activity-based, covering all regulated microfinance lenders.
23 Under the 2022 framework, a "microfinance loan" is defined mainly with reference to:
A. The lender's total balance sheet size
B. A collateral-free loan to a household within a specified annual income limit
C. Loans exceeding âš1 crore
D. Loans secured by immovable property
E. Loans to listed companies
Answer: B. A microfinance loan is collateral-free, to a household within a specified income limit.
24 The 2022 framework replaced earlier rigid interest rate/margin caps on NBFC-MFIs with:
A. No pricing regulation at all
B. A board-approved pricing policy, ensuring rates are not usurious, with mandated disclosure
C. A single fixed national interest rate for all lenders
D. Rates set directly by NABARD for every loan
E. Rates linked only to the repo rate
Answer: B. Rigid caps were replaced by board-approved, disclosed, non-usurious pricing.
25 Under the 2022 framework, lenders must assess a borrower's repayment capacity based on:
A. The individual loan alone, ignoring other debts
B. The household's total outstanding debt obligations across all lenders
C. The borrower's caste or religion
D. The lender's own profit targets
E. The stock market index that week
Answer: B. Assessment must consider the household's total debt, not just the one loan.
26 The 2022 framework caps a household's total monthly loan repayment obligations (across all lenders) at a specified percentage of:
A. The lender's total capital
B. The household's monthly income
C. The national GDP
D. The RBI's repo rate
E. The bank's branch count
Answer: B. The cap is expressed as a percentage of household monthly income.
27 Under the 2022 framework, the choice of loan repayment frequency should primarily be determined by:
A. The lender's convenience alone
B. The borrower's preference/cash-flow needs
C. RBI, fixing a single frequency for all loans nationally
D. The Finance Ministry
E. The stock exchange calendar
Answer: B. Repayment frequency flexibility should favour the borrower's choice.
đ¤ Fair Practices Code
28 The RBI Fair Practices Code for microfinance lenders primarily governs:
A. Stock exchange listing procedures
B. Transparent pricing, fair recovery practices and grievance redressal
C. Foreign investment limits
D. Currency issuance
E. Export documentation
Answer: B. The FPC covers pricing transparency, fair recovery, and grievance redressal.
29 Which practice is explicitly prohibited under the Fair Practices Code for microfinance recovery?
A. Sending a payment reminder by SMS
B. Coercive recovery, harassment or visits outside reasonable hours
C. Accepting early loan repayment
D. Offering a grace period
E. Issuing a loan card
Answer: B. Coercive/harassing recovery practices are prohibited.
30 A borrower's ultimate escalation route for an unresolved microfinance grievance is:
A. The stock exchange
B. RBI's Ombudsman framework
C. SEBI
D. The Ministry of External Affairs
E. There is no escalation route
Answer: B. Grievances can ultimately be escalated to RBI's Ombudsman framework.
𧊠Mixed / Comprehensive
31 Which of the following best distinguishes an SHG from a JLG?
A. SHGs are savings-first and lend internally; JLGs are credit-first with joint guarantees on individual loans
B. SHGs never involve women; JLGs are only for men
C. JLGs are always larger than SHGs
D. SHGs are regulated by SEBI; JLGs by IRDAI
E. There is no meaningful difference
Answer: A. This is the core structural distinction between SHGs and JLGs.
32 Which institution is the primary refinancing agency behind India's SHG-Bank Linkage Programme?
A. SIDBI
B. NABARD
C. NHB
D. EXIM Bank
E. NaBFID
Answer: B. NABARD is the primary agency behind SBLP.
33 Which of the following is a reason the 2022 framework moved away from an entity-based approach?
A. To create an unlevel playing field favouring banks
B. To ensure consistent borrower protection regardless of which type of regulated entity extends the loan
C. To eliminate all microfinance regulation
D. To transfer regulation to SEBI
E. To abolish NBFC-MFIs entirely
Answer: B. Activity-based regulation ensures consistent protection across lender types.
34 A microfinance loan, as generally understood under RBI's framework, is characterised by:
A. Large-ticket, collateral-backed corporate lending
B. Small-ticket, collateral-free lending to low-income households
C. Loans exclusively for real estate purchase
D. Loans exclusively to listed companies
E. Loans with no defined borrower eligibility
Answer: B. Microfinance loans are small, collateral-free, targeted at low-income households.
35 Which of these best captures why group-based microfinance models emerged rather than pure individual lending?
A. Groups reduce the lender's need for physical collateral through peer monitoring/pressure
B. Groups are legally required by the Companies Act
C. Groups eliminate all credit risk entirely
D. Individual lending was banned by RBI
E. Groups are cheaper to advertise
Answer: A. Group models substitute peer monitoring for formal collateral.
36 NBFC-MFIs are a subset of:
A. Scheduled Commercial Banks
B. Non-Banking Financial Companies (NBFCs)
C. Payment Banks
D. Regional Rural Banks
E. Insurance companies
Answer: B. NBFC-MFIs are a category of NBFC.
37 Which factor is most directly associated with triggering the Andhra Pradesh microfinance crisis of 2010-11?
A. Excess RBI regulation
B. Over-lending and coercive recovery practices by some MFIs
C. A stock market crash
D. A currency devaluation
E. A change in the repo rate
Answer: B. Over-lending and coercive recovery triggered the 2010-11 crisis.
38 Which of the following is an accurate statement about microfinance loan pricing under the current (2022) framework?
A. There is a single fixed interest rate mandated for every lender nationwide
B. Pricing must be board-approved, non-usurious, and disclosed transparently to borrowers
C. No interest can be charged on microfinance loans at all
D. Only the government can set microfinance interest rates
E. Interest rates are unregulated with no disclosure requirement
Answer: B. Pricing must be board-approved, reasonable, and transparently disclosed.
39 A key motivation for capping household loan-repayment obligations as a share of income (2022 framework) is to prevent:
A. Borrower over-indebtedness from multiple concurrent loans
B. Lenders from earning any profit
C. Banks from ever lending to MFIs
D. SHGs from forming
E. NABARD from operating
Answer: A. The cap protects borrowers from over-indebtedness.
40 The term "microfinance" in the Indian context most commonly refers to financial services aimed at:
A. Large corporates and multinational companies
B. Low-income individuals/households, often without access to formal collateral-based credit
C. Only urban high-net-worth individuals
D. Foreign institutional investors
E. Government departments
Answer: B. Microfinance targets low-income, typically collateral-less borrowers.
41 Which regulator issues the Master Direction governing microfinance loans in India?
A. SEBI
B. RBI
C. IRDAI
D. PFRDA
E. NABARD alone
Answer: B. RBI issues the Master Direction on microfinance loans.
42 Which of the following is generally true of the interest rate charged on microfinance loans compared to typical retail bank loans?
A. It is generally lower, due to zero risk
B. It tends to be higher, reflecting higher servicing costs and credit risk for small, collateral-free loans
C. It is always exactly the repo rate
D. It is legally fixed at 0%
E. It is identical to home loan rates always
Answer: B. Microfinance rates tend to run higher due to servicing costs/risk on small unsecured loans.
43 Business Correspondents assisting with microfinance loan delivery/collection are most closely linked to which delivery model?
A. SHG-Bank Linkage only
B. Bank-led / BC model
C. Stock exchange model
D. Insurance-linked model
E. REIT model
Answer: B. BCs support the bank-led delivery model for last-mile microfinance.
44 Which of the following is an accurate historical sequence for India's microfinance regulation?
Disclaimer: This article is prepared for educational and exam-preparation purposes only, summarising RBI's Master Direction on microfinance loans as of September 2026. Candidates should cross-check the latest official IIBF syllabus and RBI's current Master Directions before the exam.