Microfinance institutions in India : Opportunities and challenges

Abstract

Microfinance usually refers to small scale financial services to low income households and enterprises. Some of the value attributes of microfinance as defined by Prof Sriram and Upadhyayula are as follows • Assumed to done with “good intention” • Done by “alternate sector” Neither government nor commercial sector • Exclusively or majorly targets the “poor” Banks even though have linkages to SHGs but aren’t considered as MFI • Usually started by people with “developmental credentials” • Usually extended to people with no collateral to access conventional financing India’s 30% of the population is below poverty line which doesn’t have any access to formal banking system. Although India’s banking system is pretty well developed in comparison to other developing nations, the poor are not able to access it because of firstly, illiteracy and secondly, due to lack of collateral. Since independence the Government of India is focusing on making credit available to villages which house majority of the poor. With the purpose of social banking to provide credit to previously disadvantaged group, Regional Rural Banks were established in 1969.It promoted Integrated Rural Development Program (IRDP) to support sustainable income generating activities. Co-operative banks were established subsequently but they didn’t succeed in making credit available to the poor. Use of formal banking system to increase credit availability suffered from lack of focus of the banks, high operating costs and exclusion of the worse-off poor. The origin of Microfinance can be traced to SEWA bank in Gujrat which provided banking services to women employed in unorganized sectors in 1974. In 1991-92 NABRAD launched the SHG-Bank Linkage program which brought the poor in direct contact with the banks. Huge success of this program led to formation of SIDBI, Rashtriya Mahila Kosh(RMK), Microfinance development and equity fund and Microfinance program. In India, majority of the borrowings (close to 75%1 ) are through SHG-Bank Linkage program and rest of it is given through MFI Model. In 1990s, Grameen Bank model also became famous and was adopted in India by some MFIs. To understand the basic differences in the model of MFIs we performed small study of Grameen bank and three biggest MFIs in India with different lending models and focus.