Navigating the Evolution of

Microfinance: One Tool to

Address Global Poverty
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MICRO
FINANCE
 Poverty- in reality!
• Half of the world’s population lives on less than $2 a day.
• 27.5 per cent of the India’s population is below poverty line (as per NSSO).
• India has 150 million poor households
• 10 million households live in extreme poverty.
• Food insecurity at 1.9 per cent continues to haunt.
• 92% of all workers in India are in the unorganised sector
• 70 % of the rural poor do not have a deposit account
• 87 % have no access to credit from formal sources.
• Less than 15 % of the households have any kind of insurance.
 What is microfinance?
• It is the provision of thrift, credit and other financial services
and products of very small amounts to the poor in rural, semi
urban and urban areas for enabling them to raise their
income level and improve living standard.
• Microfinance as a tool to address global poverty combines
the social change orientation of the not-for-profit sector with
the economic power of the private sector.
• Although it is not a panacea for the poor, it has now
developed into an important delivery mechanism for
reaching the poor and achieving financial inclusion
• The collateral used here is character.
 Grameen Banking model
• 5 members form Joint Liability Groups (JLG) or
Solidarity Groups (SG)
• 7 groups constitute a centre at the village level
• Loan disbursement is done at the centre level.
• All loans must be approved by other group
members as well as all other centre members
• Inability of a client to pay savings results in the
concerned group or centre paying up for that client
• Interest rate varies between 15-24 % p.a. on flat
basis and on a weekly basis.
 ACCION INTERNATIONAL
• In 1961, ACCION was formed in Caracas,
Venezuela as a community development program
to help the poor.
• ACCION's now extends to 24 countries in Latin
America, Africa and India and has lent more than
12 billion dollars to five million people.
• 20 to 25 million family members lives have been
significantly improved by these loans.
• They’ve partnered with banks to reach lower
income segments, mostly minorities and new
immigrants
 Major Players of microfinance in
India
• SEWA Bank which supports 1600 SHGs with 38,000 members in rural Gujarat and covers 10
districts of Gujarat.
• BASIX, the second largest MFI has financial operations in 16 states and has supported more than
40,000 livelihoods.
• SHARE Microfin Limited operates in 2990 villages in three states in India and has 100 percent
repayment rate.
• SKS Microfinance started in 1998 has more than 5 million members and a loan portfolio of more
than 30,000 million. It follows the grameen model
• National Bank for Agriculture and Rural Development (NABARD) launched a Bank Self help group
(SHG) linkage programme in a small way in 1992.
• ICICI Bank has been operating in the micro-finance space with over 100 micro finance partners.
• Later, many Non Governmental Organisations (NGOs), Community Based Organisations (CBOs)
and Self Help Groups have started micro finance delivery systems successfully in rural areas of
India.
• .
 Challenges
• Still about 56 % of the poor still borrow from informal
sources.
• Lack of funds to the MFIs.
• Small loan size and high interest rates charged by MFIs.
• Weak governance architecture of Microfinancial
Institutions leading to higher risks.
• Inadequate regulations and disclosure standards of
MFIs. No single regulator for this sector.
• SHGs linked to banks showed greater concentration in
the southern region
• Growth of urban microfinance which is riskier.
• Low penetration of micro-insurance.
 Future prospects of Microfinance
• A culture, structure, capacity and operating system that
can support sustained delivery to a significant and
growing number of poor clients.
• Better and innovative financing by MFIs.
• Flexibility in financing schemes to the needy.
• Better internal practices to be followed by MFIs.
• Regulations to improve transparency and accountability.
• The proposed Microfinance Bill 2007 when passed would
have NABARD as the single regulator for orderly growth
and development of the MFIs.
 Microfinance in India
• Microfinance has been in practice for ages ( though
informally).
• Legal framework for establishing the co-operative
movement set up in 1904.
• Reserve Bank of India Act, 1934 provided for the
establishment of the Agricultural Credit Department.
• Nationalisation of banks in 1969
• Regional Rural Banks created in 1975.
• NABARD established as an apex agency for rural
finance in 1982.
• Passing of Mutually Aided Co-op. Act in AP in 1995.
• As we all know, MFIs can be either NGOs,
Savings and loan Co-operatuves, credit
unions, banks or Non banking institutions.
• MFIs deftly balances the dual tasks of
social and financial intermediation.
Micro Finance Delivery Models in
India
• SHG-bank linkage programme
• The main advantages of the programme are timely
repayment of loans to banks, reduction in transaction
costs both to the poor and the banks, doorstep
“saving and credit” facility for the poor and
exploitation of the untapped business potential of the
rural areas. The programme, which started as an
outreach programme has not only aimed at promoting
thrift and credit, but also contributed immensely
towards the empowerment of the rural women.
• SHGs promoted by NGOs/ Government agencies and financed by
banks (Model) has emerged as the most popular model under the
SBLP programme. Commercial banks, co-operative banks and the
regional rural banks have been actively participating in the SBLP.

• the MFI model has also gained momentum in the recent past. The
MFI model in India is characterised by a diversity of institutional and
legal forms. In this model, the MFI acts as an agent – it takes care of
all relationships with the client, from first contact through final
repayment.

• The cumulative number of SHGs credit linked with banks increased

sharply from 33,000 in 1992-99 to 2,239,000 in 2005-06