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Microfinance institutions (MFIs) had arisen to provide financial services

including credit, savings, and insurance, to those people whom the formal
banking system traditionally did not serve. Microcredit, a subset of
microfinance, referred to the extension of small loans to the poor to help
them establish or expand small businesses. MFIs also granted loans for
purposes other than income-generating activities, such as for education,
housing repair or construction, and debt consolidation.
MFIs typically targeted poor women as their clients. The world’s poorest
households tended to rely more heavily on income generated by women, and
research had shown that female microfinance clients were more inclined
than men to repay their loans and invest their earnings in their families’
health and education.
Microfinance institutions have given out small loans to the world’s poor–
mostly women–and amassed hundreds if not thousands of case studies
showing that the loans help alleviate poverty, improve health, increase
education and promote women’s empowerment. While microcredit succeeds
in affecting household expenditure and creating and expanding businesses, it
appears to have no discernible effect on education, health or women’s
Another feature of India’s microfinance market was its fragmented and
relatively nontransparent nature.
In general, there were multiple barriers that prevented poor people from
accessing formal financial institutions. First, many of these individuals had
low literacy rates and so had difficulty completing the required loan
application documents. Second, the loan amounts required by the poor were
typically small, which made them unprofitable to service for banks with
traditional infrastructures. Third, the poor have been perceived as not
bankable because they lack collateral and the cost of monitoring the
performance of their loans could be excessive.

1. MFIs provided service to many individuals beyond its actual clients. An
MFI formed SHGs that included many potential borrowers, but only a
small percentage of those group members could take a loan from the
organization at any given time—roughly 5 of 20 members. The group
provided the social collateral (peer pressure) to get the loan recipients
to make payments. However, if they failed to repay the loans, the other

HiH operates a five-pillar programme to provide education. Barnevik explained HiH’s integrated approach: “Microcredit without massive effort to prepare the ground." HiH seeks to provide "an integrated development program that creates sustainable communities. preferring poverty lending targeted exclusively at reaching the poorest of the poor. healthcare and a clean environment to the poor. the support services provided through the group structure. the movement had spawned something of a backlash from the development sector among those advocating for the poverty lending approach. 2. and train is nothing.. coach. HiH was among the chief critics of the commercialization approach. 3. Moreover. This could result in a higher than average expense ratio. by creating enterprises and jobs. become clients). HiH's Mission is to "work for the economic and social empowerment of women." To accomplish these objectives.” Recognizing the limitation of providing only microcredit to its borrowers. and the high operational costs of providing loans on a much smaller scale than typical banks. the rate at which Indian MFIs were transitioning to this model was slower than in Latin America and other Asian nations such as Bangladesh and Indonesia. The higher interest rate was due to the high operational costs of reaching people in remote areas. During 2010. While there seemed to be benefits associated with commercialization. HiH was founded in the state of Tamil Nadu in 2002. and thus of society. HiH offered the lowest rates available to the members of these groups. Credit without training and other support leads to consumption. HiH also offered its SHG’s training in how to operate as a group and instruction in basic literacy and finance principles. Not only did HiH extend loans to these clients at an affordable rate. along with access to jobs. HiH believed the interests of the poor could be compromised if MFIs placed too much emphasis on profit motives or operational sustainability metrics. it also provided supplementary business development services. This moves consumption forward but doesn’t increase the standard of living. Hand in Hand ("HiH") is a large non-governmental organization engaged in livelihood promotion activities in India. Microfinance institutions charged higher interest rates than retail banks charged on other loans to small businesses. HiH . they also had significantly higher expenses for servicing members became ineligible to receive new loans (i. information.e.

was able to reach more than 600. and Madhya Pradesh. Karnataka. .000 women in Tamil Nadu.