The financial sector of India is primarily based on diversified banking systems. Regarding availing of loans and other financial services, the banking sector can be divided into two basic categories: microfinance and regular-stream banks. In this article, we have mentioned the basic differences between microfinance and regular banks. Before that, let us understand what microfinance and regular-stream banks are!
What is a Microfinance Bank?
Microfinance is a financial service provider, especially for small business people and entrepreneurs. However, it could be more efficient in providing funds like banking and other associated services. Microfinance mainly includes customers looking for loans and financial services in a group-based model. Like different banking systems, microfinance also charges specific interests on loans. Getting loans from microfinance banks is a much easier process than the traditional banking system. However, the rate of interest is lower than conventional banks.
What is a Regular Stream Bank?
A regular stream bank is a traditional financial institution that handles all the finance-related activities like giving loans, operating savings accounts, checking various account services, and providing other economic benefits to small businesses. It is here where most people seek loans and use their financial activities. In regular stream banks, customers can get personal, business, and auto loans through mortgages and deposits. Interest rates are relatively higher in such banks.
Contrasting Characteristics Between Regular Stream Bank and Microfinance Bank:
These two banking networks cater to different customers to handle the economic operations of urban and rural areas. But there are some significant differences found in their operating system. Some important differences are discussed below:
- Operational Process: Operational processes of the birth of these financial institutions are different in terms of offering loans. When sanctioning loans promotes collecting loans, a sharp comparison is visible. Microfinance banks provide financial services at the doorstep of the customers. On the other hand, to get loans from the regular stream bank, customers must go to the bank to get financial assistance.
- Deposit & Withdrawal Facility: The deposit and withdrawal facilities in both of these banks also come in contrast to each other. Microfinance banks have the policy to deposit a certain amount by the group members to get the loans. However, the amount of this deposit is lower than in the modern banking system. On the other hand, regular stream banks have specific interest rates for different products for different depositors. One advantage is that the customer can withdraw the amount anytime.
- Targeted Customers: Regular stream banks operate their lending process through different sectors, like- agriculture, small and medium enterprises, micro, education, housing, export credit, social infrastructure, and renewable energy. Microfinance banks target poor households, small businesses, and entrepreneurs. The advantages of regular stream banks only sometimes cover this section of society. So both of them target different types of customers.
- Product Offering: Regular stream banks provide not only loans but also facilitate services like- insurance, locker facility, Demat services, provision of credit/ debit cards, and cash withdrawal from ATMs. Microfinance banks focus on small loans or micro-credit options to encourage micro enterprises, i.e., small businesses and entrepreneurs.
- The Difference in Mortgages for Loans: In regular-stream banks, loans are secured by depositing mortgages like vehicles, land, and other assets. If the customer fails to pay back the loans, the mortgages are secure till the warning period is not over. But microfinance banks have no such collateral system. Lending loans in such economic institutes are somewhat risky. It is because they target poor people who only have such assets sometimes.
- Regulatory Framework: The regulatory framework of regular stream banks is decided by the country’s central bank. So, they have a set of rules for the functioning activities of the traditional stream banks. On the other hand, microfinance banks, in general, don’t have any such governing body or set of rules. These are self-regulated financial institutions.
Both of these banking systems target different customers for different purposes. The concept of the microfinance industry is to uplift the rural banking systems. MFIs do not prioritise profits; instead, they lend funds to individuals, groups, or local communities. They specialise in micro-financing and don’t give customers massive loans.
