1. Microfinance
in India
Its Challenges and Opportunity
By: Sheetal Agarwal
10808702

2. Introduction
According to International Labor Organization (ILO),
“Microfinance is an economic development approach that
involves providing financial services through institutions
to low income clients”.
In India, Microfinance has been defined by “The National
Microfinance Taskforce, 1999” as “provision of thrift,
credit and other financial services and products of very
small amounts to the poor in rural, semi-urban or urban
areas for enabling them to raise their income levels and
improve living standards”.

3. When and how was it started
It is safe to assume that current day microfinance started in
India sometime around 1980. It started as small groups
formed to help themselves or the self help groups (SHG).
Slowly the movement picked up momentum and national
bodies like the Small Industries Development Bank of India
(SIDBI) and the National Bank for Agriculture and Rural
Development (NABARD) jumped into the band wagon.
They have been devoting significant time and financial
resources to microfinance.

4. Its Objective
Microfinance offers financial services to underprivileged
people.
Encourage Entrepreneurship and Self-Sufficiency
Manage Risk
Empower Women

5. Micro finance sector in 2011-12
Both SHG- Bank linkage program model (SBLP) and MFIs put
together, achieve an outreach of 83.4 million clients
Saving linked SHGs increased to 7.96 million with estimated
member base of 104 million
Credit linked SHGs were 4.36 million - 9% less than the
previous year.
Client outreach of MFIs - 26.6 million (decline of 16 %) with
a gross loan portfolio of Rs.209.13 billion (decline of 3%)
The average loan size of SHGs- Rs.6420; an increase of
Rs.1527 over last year.
Average MFI loan increased by 15% over last year to Rs.7803

6. Development Initiatives
Focus turned towards governance and responsible finance
practices.
Risk management becomes a post-crisis priority.
Taking advantage of technological and market
developments.
Series of Regulatory initiatives by RBI
Greater emphasis on community based organizations

7. Financial Inclusion
RBIs Financial Inclusion Plan gathers momentum (99,800
villages).
103 mn No Frill Accounts – Doubled compared to
previous year.
Quality of inclusion a concern – compliance with RBI
guidelines - not business interest, drives banks.
Mobile banking gaining momentum.
21.76 mn - likely to improve services on the ground.

8. Examples:
The process of transformation:
The microfinance is seen targeting the poor women who
need the funds to establish in their chosen fields. Pottery,
Agriculture and the like have women who can perform
better with a little financial assistance. They have defaulted
much lesser than their male counterparts.
In Bangladesh, for example, it has been proved that
women default on loans less often. The credit extended to
women has a positive impact on household consumption
thereby improving the quality of life for children.

10. Challenges
• Perceived high risk of microfinance entrepreneurship and
small business.
• High cost involved in small transaction.
• Lack of debt and equity funds for MFI to pass on to poor.
• Difficulty in measuring the social performance of MFIs
• The poor’s inability to offer marketable collateral for
loans
• Poor institutional viability of micro enterprises
• Lack of knowledge about microfinance services
• Shortage of Financial Capital – Or Misallocation?

11. Opportunity
• BOP(Bottom of Pyramid).
• Innovation.
• Day to day money management.
• Building long term saving.

12. Recommendations
• Innovative saving products – location and client specific.
• Awareness.
• Relaxation in provisioning norms for MFIs.
• Converting No Frill Account to normal banking account.
• UID