OVERVIEW OF MICROFINANCE

What is Microfinance
The Microcredit Summit 2007 defines microcredit as the extension of small loans to entrepreneurs too poor to qualify for traditional bank loans. The Reserve Bank of India has defined microfinance as provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards.

IS THERE A DEMAND FOR MICROFINANCE ? 75 million households in India depend on moneylenders to meet financial needs; almost 90 percent of people in rural India have no access to insurance; 50 million households are landless and need small credit to start some economic activity.

And even families earning Rs.4000-5000 a month in urban areas spend huge portions of their earnings to service their even continuous debt.

Indias demand for microfinance is Rs.500 billion,

and only Rs. 18 billion of this amount has been generated so far, there is still a long way to go.
Nearly 7.5 million poor households in India desperately want access to access to financial services to meet immediate needs.

Almost 36 percent of the countrys rural households have to look for credit outside the formal sector.

THE APPROACH The poverty lending approach concentrates on reducing poverty through credit often provided with complementary services like skill training and up gradation, literacy development, providing health, nutrition, family planning, etc. Under this approach, government funded and donor funded credit is provided to poor borrowers at below the market rate of interest. E.g. Grameen Bank. The financial system approach emphasizes large scale outreach to the economically active poor and focuses on institutional self-sufficiency. Several Nationalized Banks in India, the Private Sector Banks and the old generation Banks predominantly from the South India are at the forefront of the financial systems approach.