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Micro-credit in India really started in a big way in the early 90s with the recognition of self-
help groups as conduit for providing credit to the poor. In the late 90s, numerous agencies
involved in micro-credit operations in India started adding other financial services, including
micro-insurance to its micro-credit operations. Microfinance is surely coming of age in India.
The importance of microfinance must be looked against the fact that even with wide network of
banks in India, the low-income people especially in rural areas, have been largely bypassed by
the formal banking system. The government of India has been involved in its promotion in a
variety of ways. This movement needs further guidance and direction from government.

This paper presents a detailed overview of the recent trend in microfinance industry in
India. The advent of new millennium witnessed significant developments in the Indian
microfinance industry, which attracted the attention of several private sector and foreign banks.
The paper analyzes the potential of Indian microfinance industry and examines the recent
polices of Indian government to boost the growth of the industry. It describes various
microfinance models popular in India and includes a note on the leading players in the Indian
microfinance industry. Finally, the paper examines the challenges facing the industry in the
near future. The paper should be useful for all those involved in microfinance.
Keywords: Micro Finance, Trends, Challenges, Microfinance Models.


A good definition of microfinance as provided by Robinson(2001) is “small-scale financial

services primarily credit and savings-provided to people who farm, fish or herd” and adds that
it “refer to all types of financial services provided to low-income households and enterprises”.
Micro finance is recognized and accepted as one of the new development paradigms for
alleviating poverty through social and economic empowerment of the poor with special
emphasis of empowering women. In India, micro finance is generally understood but not
clearly defined.
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Microfinance started out as microcredit in the 1980s, but has quickly transformed into a full
fledge financial services platform in India. In spite of decades of attempts to reduce poverty
through government programmes and international aid, it is estimated that there are still more
than 350 million people in India living under the international poverty line. Microfinance is an
attempt to break this deadlock, by providing the poor with the financial means to engage in
new forms of economic activity, and so improve their lives. Microfinance Institutions (MFIs),
give the poor access to credit at rates that are in line with costs and in a convenient manner,
allowing them to diversify their sources of income, and so raise their standard of living.
Microfinance is also unique in that it can be operated on a for-profit business model, allowing
for sustained growth and expansion. The success of the microfinance system in both improving
the lives of the poor, and in providing a viable business model, has been acknowledged around
the world.

In the last few years, microfinance industry changed significantly due to several drivers. First,
we are witnessing an increasing degree of professionalization within the industry, often moving
from local spontaneous micro lending initiatives to better equipped and organized institutions,
characterized for a higher sustainability compared to the past. Second, a large number of global
financial intermediaries, for different reasons, are starting to be involved in microfinance, so
contributing to modify the landscape of the traditional MFIs. Third, new technologies, and
especially the web based platforms for channelling funds directly from households to
microfinance institutions and borrowers, can represent an interesting and alternative source of
funding for MFIs. These alternatives make it easier to diversify the degree of dependence of
such institutions from international donors and expensive funds’ providers. Finally, as a
consequence of the above-mentioned drivers, it is possible to witness a very significant growth
in microfinance business worldwide.




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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.


Some important features of micro finance are as follows:

Micro finance is essentially for promoting self-employment; the opportunity of

Micro finance is a tool for empowerment of the poorest women.

employment is limited in developing countries – not increases the productivity of

employment in the informal sector of the economy.

Micro finance is not just a financing system, but a tool for social change, especially for

Micro credit is aimed at the poorest, micro finance lending technology needs to mimic
the informal lenders rather than formal sector lending.
About 60 % of the MFIs are registered as societies.
About 20 % are Trusts
About 65 % of the MFIs follow the operating model of SHGs.
Large concentration in South India
600 MFI initiatives have a cumulative outreach of 1.25 crore poor households

NABARD’s bank linkage program has cumulatively reached a total of 9.4 lakh SHGs
with about 1.4 crore households.

The profile of micro finance in India at present can be traced out in terms of poverty it is
estimated that 350 million people live Below Poverty Line. The following are some
components of micro finance:
This translates to approximately 75 million households.

Annual credit demand by the poor in the country is estimated to be about Rs 60,000

A cumulative disbursement under all micro finance programmes is only about Rs. 5000

Total outstanding of all micro finance initiative in India estimated to be Rs.1600 crores.

Only about 5% of rural poor have access to micro finance.

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Though a cumulative of about 20 million families have accepted accessed. While 10%
lending to weaker sections is required for commercial banks, they neither have the
network for lending and supervision on a larger scale or the confidence to offer term
loan to big micro finance institutions.
The non poor comprise of 29% of the outreach.


Micro-credit: Micro-credit is the extension of very small loans (micro-loans) to the

unemployed, to poor entrepreneurs and to others living in poverty that is not considered
bankable. These individuals lack collateral, steady employment and a verifiable credit
history and therefore cannot meet even the most minimal qualifications to gain access
to traditional credit. Micro-credit is a part of microfinance, which is the provision of a
wider range of financial services to the very poor.

Micro savings – A possibility to save money without no minimum balance. Allows

people to retain money for future use or for unexpected costs. In SHGs the members
save small amounts of money, as little as a few rupees a month in a group fund.
Members may borrow from the group fund for a variety of purposes ranging from
household emergencies to school fees. As SHGs prove capable of managing their funds
well, they may borrow from a local bank to invest in small business or farm activities.
Banks typically lend up to four rupees for every rupee in the group fund.

Micro insurance – Gives the entrepreneurs the chance to focus more on their core
business which drastically reduces the risk affecting their property, health or working
possibilities. The is different types of insurance services like life insurance, property
insurance, health insurance and disability insurance. The spectrum of services in this
sphere is constantly expanded, as schemes and terms of providing insurance services
are determined by each company individually.

Micro leasing – For entrepreneurs or small businesses who can´t afford buy at full cost
they can instead lease equipment, agricultural machinery or vehicles. Often no
limitations of minimum cost of the leased object.

Funds Transfer: These are transfer of funds from people in one place to people in
another, usually across borders to family and friends. Compared with other sources of
money that can fluctuate depending on the political or economic climate, remittances
are a relatively steady source of funds. Remittances are also an important source of
income for many developing countries including India.
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In the face of several obstacles, there are certain encouraging trends taking place as businesses
and governments realize the importance of the development sector. Below are a few noticeable
initiatives being adopted by MFIs as they look for ways to further penetrate markets and make
their credit ventures sustainable.

Diversification of Microfinance Institutions: microfinance providers are beginning to

broaden the range of services offered under the microfinance umbrella which started
with loans, but now includes insurance, savings and money transfer facilities as well.

Specialization of Microfinance Institutions: microfinance providers are beginning to

focus on certain livelihoods such as crop insurance, loans for handicraft businesses, or
loans for fisheries, etc. As microfinance institutions study each business model, they
can design loan products that are aligned with the unique cash flow cycles or the
varying demand patters of the client’s business.

Turnkey Solutions: some microfinance institutions are beginning to provide services

other than loans and savings, to support their clients’ businesses. Such services include
assisting clients with supply chain management, or sharing ‘marketing infrastructure to
enhance these micro-businesses’.

New channels: clients no longer have to visit physical offices of microfinance

institutions in order to repay loans or acquire a new credit line. Franchise-based
business models and branchless banking are becoming effective ways of reaching
potential clients who often live in disparate rural areas. An example of this is Kiva’s
API platform called Build Kiva.

Microfinance, Macro Trends: The macro crisis in the microfinance sector may not get
resolved anytime soon. But it is a symptom of a much larger trend moving through the
country. The Indian microfinance model developed differently from that in its original
home in Bangladesh. It took root with self-help groups (SHGs) set up in Karnataka by
Myrada, with NABARD's support, back in the early 1980s. These affinity groups
created a social glue among poor women which allowed them not only to offer their
mutual guarantee as collateral against their borrowings, but enabled them to work
collectively for other causes in their communities. There are hundreds of documented
stories of how the SHG movement has generated social change and political
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empowerment, in addition to accessing more finance for the poor than ever before in
independent India.

Microlending: Current Industry Trends: In the Indian context, microfinance is no

longer the purview of development institutions. While the rhetoric of development has
been retained, banks have embraced it as an extremely profitable business, for two
reasons. First, Indian banks are required to lend a certain percentage (currently 40%)
into priority areas “ called priority sector lending” which includes agriculture, SMEs,
and government securities. Compared to returns on government bonds of 6-7%, MFI
lending provides returns of 10-14%. Banks, therefore, have expanded investments in
these areas. Second, microfinance lending – as it is currently practiced – is simply not
very risky. In the absence of individual credit assessments, MFIs lend to groups or
through referral, leading to repayment rates of 95% or more. Banks then get the best of
both worlds – higher rates of return with very low risk. The result is massive expansion
in microlending. ICICI Bank, the largest private bank in India, had 1.2 million
microfinance clients in 2005 and a portfolio of $227 million. A year later, ICICI has
multiple partnerships and 3 million clients, targeting 25 million in 3 years. Other banks,
such as ABN Amro, and YES Bank have smaller but still sizable operations that
generate goodwill benefits for their entire operations (both featured on FT’s sustainable
banking awards last year).Public sector banks usually operate as integrated micro-
lenders, creating self-help groups (SHG) to which they disburse loans directly rather
than through an intermediary. Private sector banks, by contrast, operate through a
partnership model, contracting with existing MFIs to function as the banks retail arm to
acquire and manage micro-clients. In return, MFIs retain a percentage of the interest
earned on loans. Many MFIs are now financially independent of such funds, but high
effective rates (of over 30%) have also led to a regulatory backlash.

The term “transformation,” or commercialization, of a microfinance institution (MFI)

refers to a change in legal status from an unregulated nonprofit or non-governmental
organization (NGO) into a regulated, for-profit institution. Regulated, transformed
organizations differ from nonprofits in that they are held to performance and capital
adequacy standards and are supervised by a financial authority, typically the central
bank of the country where they are registered. A transformed MFI also attracts equity
investors. The equity investors want to ensure that the values of their investments are
maintained or enhanced and elect Board members who share a common vision for the
new for-profit institution. Among transformed MFIs, varying classifications of
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regulated institutions exist, the strictest being banks — rural banks and thrift banks —
followed by non-bank financial institutions. Different countries have varied names for
these regulated MFIs.

An increasing number of microfinance institutions (MFIs) are seeking non-banking

financial company (NBFC) status from the Reserve Bank of India (RBI) to get wide
access to funding, including bank finance. In the last couple of months, the central bank
has granted fresh licenses to around 10 such organizations. MFIs such as Biswa in the
East, Grameen Koota in Bangalore, Bandhan in West Bengal have already received
NBFC licences from the RBI, while start-up institutions like Ujivan in Bangalore and
Opportunity International in Chennai have also been granted approvals.


There are a number of microfinance companies in India, which play some pivotal roles to
the development of India. India's microfinance sector is fragmented with more than 3000
microfinance companies (MGIs), NGOs and NGO-MFIs. The top 10 microfinance
companies in India are estimated to account for almost 74 per cent of the total loans
outstanding. It can be added here that the total loan outstanding of Indian microfinance
sector lies between 160-175 billion. As on March 31, 2009, almost 17 Indian microfinance
companies have more 1 million outstanding loans.

SKS Microfinance Ltd (SKSMPL), Secunderabad, Andhra Pradesh.

Spandana Sphoorty Financial Ltd (SSFL), Hyderabad, Andhra Pradesh.
Share Microfin Limited (SML), Hyderabad, Andhra Pradesh.
Asmitha Microfin Ltd (AML), Hyderabad, Andhra Pradesh.

Shri Kshetra Dharmasthala Rural Development Project (SKDRDP), Dharmasthala,

Bhartiya Samruddhi Finance Limited (BSFL), Hyderabad, Andhra Pradesh.
Bandhan, Kolkata, West Bengal.
Cashpor Micro Credit (CMC), Varanasi, Uttar Pradesh.

Grama Vidiyal Micro Finance Pvt Ltd (GVMFL), Tiruchirappalli, Tamil Nadu.
Grameen Financial Services Pvt Ltd (GFSPL), Bangalore, Karnataka.

A hierarchy of challenges:
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•At the industry level

•At the institutional level

challenges at the Industry Level

Building permanent, sustainable institutions that provide financial services to the poor
on a mass scale.
Getting established large-scale financial institutions to enter the industry.
Inducing innovations to push the frontier.
Striking a right balance between development and finance.

Reducing institutional proliferation and consolidating suppliers while preserving the

needed diversity.
Developing and strengthening appropriate supervision and regulation.
Increasing capacity of NGO MFIs and co-operatives, among others.
Challenges at the Institutional Level
Improving governance.

o Most Board members do not provide strategic vision and guidance for their
Changing institutional culture
o Shed unrealistic assumptions
Improving institutional capacity
o Getting quality and relevant technical assistance is an issue.
o Difficult to secure resources to finance TAs.
Developing high quality growing cadre of managers and professionals.
Improving financial transparency.
Getting equity capital for NGOs to enable transformation.

"Microfinance is going to put poverty into the museum“– Muhammad Yunus,

Nobel Prize Winner & Founder of Grameen Bank
Poverty is the main caue of concern in improving the economic status of developing countries
like India. A microfinance institution is an organization that offers financial services to low
income populations. Almost all give loans to their members, and many offer insurance, deposit
and other services. Creating self employment opportunities is one way of attacking poverty and
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solving the problems of unemployment. There are over 350 million people below the poverty
line in our country. The Scheme of Micro-finance has been found as an effective instrument for
lifting the poor above the level of poverty by providing them increased self-employment
opportunities and making them credit worthy. A basic effort of last decade, the microfinance
objectives in India has reached at top point similar to Bangladesh. With some effort substantial
progress can be made in taking MFIs to the next orbit of significance and sustainability. There
is a need of Designing financially sustainable models and increase outreach and scale up
operations for poor in India. People belong to villages are still unaware about banking policies
and credit system. So NGO should communicate to them and share their view with villagers.
Banks should convert and build up professional system into social banking system for poor.
The challenges lies in finding the level of flexibility in the credit instrument that could make it
match the multiple credit requirements of the low income borrowers without improving
unbearably high cost of monitoring to end use lenders. A promoting solution is to provide
multipurpose loans or composite credit for income generation, housing improvement and
consumption support. Micro finance can indeed be sustained in the long run in a profitable
manner; going by the increasing number of commercial banks that have evinced interest in this
area, the future does seem bright. Government of India and state governments should also
provide support for capacity building initiatives and ensure transparency and enhance
credibility through disclosures.


Jeyaseelan, N., 2005, Risk Management in Micro Finance, IBA Bulletin, XXVII(10):

Oct, 39-42.

Holvoet N, 2005: ‘The Impact of Microfinance on Decision-Making Agency: Evidence

from South India’, Development and Change, Vol. 36 (1). Pp.35-55

Attuel-Mendes, Laurence and Ashta, Arvind, The Truth, But Not Always the Whole

Truth, in Lending Laws (January 31, 2009). Cahiers du CEREN, Vol. 29, pp. 62-85,

2009. Available at SSRN:

Basel Committee on Banking Supervision (2010), Microfinance activities and the Core

Principles for Effective Banking Supervision, February.

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Centre for Micro Finance Research 2006, Micro Finance in India current trends and

challenges, October.

Gupta, M.S. 2008, Micro finance through SHGs – An Emerging Horizon for Rural

Development, Indian Journal of Commerce, Vol. 61, No.3, July-Sept

Centre for Micro Finance Research 2006, Micro Finance in India current trends

and challenges, October.