ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Mainstreaming of Indian Microfinance

A significant feature of microfinance in India is that it has been built upon the existing banking infrastructure. In the process, it has obviated the need for the creation of a new institutional set up or introduction of a separate legal and regulatory framework. In the linkage model, the financial resources are being sourced from regular banking channels as well as members' savings. Thus the problems related to regulation and supervision of microfinance institutions (MFIs), the accessing of public deposits by MFIs and reliance on donor and grant funding are obviated. With the group acting as a collateral substitute, this model also overcomes the intractable problem of collateral provision by the poor. It has to be realised that microfinance is a means or an instrument for development, not an end in itself. To assess the extent to which Indian microfinance has been able to achieve the goal of poverty eradication and fulfil its role as a means for development, requires in-depth impact assessments on an ongoing basis.

Exploring Possibilities

Despite substantial efforts and a vast network of rural banks, the rural poor still have very little access to formal finance, and informal lending remains strong. Over the past decade new microfinance approaches designed to deliver finance to the poor have emerged and some have shown promise. However, empirical assessments of their reach or impact are still relatively few. Drawing on a recent rural access to finance survey of 6,000 households conducted by the authors, we empirically analyse the reach of the most dominant microfinance initiative, the SHG-bank linkage model. Based on this and international experience, the paper draws lessons for exploiting the potential of microfinance in India, outlines areas of concern for government policy towards this important sector, and suggests ways to scale up access to finance for the poor.

The Transforming World of Indian Microfinance

Upscaling the provision of microfinance on the strength of its performance, measured primarily in terms of the repayment rates and financial sustainability indicators of a handful of microfinance institutions and without a serious reconsideration of certain vital development issues, may prove in the long-run to be an imprudent development strategy. Any effort at upscaling thus needs to be viewed with caution as it could actually lead to increased failures and credit indiscipline in the field. In the meanwhile, globally there is a visible trend of the commercialisation of microfinance, with NGOs transforming themselves into regulated financial institutions or non-banking financial companies and commercial banks entering the business of microfinance.

Microfinance and the State

Since the early 1990s, there have been many significant state initiatives in the institutional and policy spheres to facilitate access to financial services by more poverty-stricken groups. This article reviews the performance of formal institutional channels of microfinance and discusses the emergence of new forms of collaboration in the delivery of microfinance services. However, some persistent issues in regulatory policies and institutional arrangements need to be dealt with so as to help the state leverage the resources available for the poor, effectively and in a sustainable manner.

Access, Use and Contribution of Microfinance in India

Microfinance is making a significant contribution to both the savings and borrowings of the poor in the country. The main use of microcredit is for direct investment. While the presence of microfinance has increased the borrowing options for the poorer clients, it seems not (yet) to have significantly affected the terms and conditions of different informal credit providers.

Towards Building an Inclusive Financial Sector: Lessons from South Africa

The South African case substantiates the efforts taken by an economy characterised by significant social and economic divides to bring previously excluded population segments into the mainstream financial sector. In doing so it has chosen to follow a market-led approach. Notwithstanding the differences in approaches followed by India and SA, one could identify some useful lessons from the initiatives taken by the latter.

Serving Migrants Sustainably

For historical reasons, and in order to minimise search costs, areas sending out migrants tend to specialise in particular destinations. Once the number of migrants from any particular area of origin reaches a critical minimum in a particular destination, it becomes feasible for a microfinance institution (MFI) to provide remittance services sustainably by establishing a presence in both areas.

Impact of Self-Help Groups on Formal Banking Habits

Deposits are foundations upon which banks thrive and grow. The twin objectives of a commercial bank, i e, acquiring deposits and advancing credit cannot be attained without good banking habits of the people. Therefore, people's banking habits seem to be a major factor that affects sustainability of the banks concerned. In microfinancing in India, self-help groups (SHGs), which recently came into existence as informal organisations, are linked to banks and its members are mainly women. This paper makes a modest attempt to examine whether there is any association between the growth of SHGs and the increase in female bank deposit accounts and whether SHGs have a tendency to influence account holding in formal banks. In the process, the paper tries to trace the socio-economic factors that determine deposit and credit account holdings (banking habits) in formal banks, among individuals and households.

SHG-bank Linkage

When the Self-Help Group Initiative was launched to provide the poor with access to formal financial services, it was somehow expected that cooperatives would step in to provide these services. Already existing small local level institutions with their readily available support structure as seen in the case of the agricultural credit societies were ideally placed to serve as outlets for financial services to SHGs, given their numbers and reach. Despite these advantages, agricultural credit societies and cooperative banks have thus far played a limited role in the programme of linking SHGs to formal financial institutions. This paper examines the spread of the cooperative-SHG linkage across states, the relationship between commercial success of cooperative banks, the extent of the linkage established and the impact of such linkages on performance.

Beyond Hindu-Muslim Growth Rates

It is important to go beyond the population growth rate figures of Hindus and Muslims and give a thought to other demographic, economic and social variables. From a study of the census data from 49 districts around the country with a substantial Muslim population, it appears that more than religion, it is the geographical location and economic conditions prevailing there that influence the condition of the people.

Role of Religion in Fertility Decline

The fertility of Muslims, which was about 10 per cent higher than that of Hindus before independence, is now 25 to 30 per cent higher than the Hindu rate, and the difference according to religion is larger than the difference between the forward and depressed Hindu castes and tribes. This paper subjects the micro data from the National Family Health Surveys to a multivariate analysis to assess the contribution of socio-economic factors to the fertility differential by religion. It also explores the possible reasons for the large, residual effect of religion on fertility, and causes for the religious disparities in socio-economic conditions. The paper concludes with an assessment of the implications of the current demographic trends for the future population sizes of the two religious groups.

Hindu-Muslim Fertility Differentials

Although a Hindu-Muslim differential in fertility has persisted in India, it is no more than one child, and even this gap is not likely to endure as fertility among Muslims declines with increasing levels of eduation and standards of living. While the lower level of contraceptive use among Muslims is the most important factor responsible for the fertility differentials, the use of contraceptives has increased faster among Muslims in recent times. However, the relatively higher fertility among Muslims cannot be understood independent of its socio-economic and political contexts.

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