The historical and current climate of

microfinance in India
InForm
In the developing world, India presents a branches nationwide.5 The expansion of
unique opportunity and need for poverty commercial banking has also led to a more
alleviation. India’s stable political favourable financial environment for the poor
environment and strong economic growth in India. It was following these reforms that
over the last 10 years have put the country the “Self-Help Groups (SHGs)–Bank Linkage”
in a position to become the third-largest model grew to become a key part of finance
economy in the world by 2050.1 At the for India’s poor.
same time, India accounts for the largest
share of the world’s poor with over 860 Self Help Groups (SHGs) are informal
million people in 2006 living on less than associations of up to 20 women. The groups
US$2 a day2 and economic development provide an opportunity for individuals to
characterised by a widening income gap pool money, and then use these funds to
between the rich and poor parts of the lend small amounts to each other with
country.3 interest. Through the SHG Bank Linkage
Program, established groups can apply for
The vast numbers of poor people, combined loans through their local bank branch, limited
with an increasingly favourable economic in size to a ratio of the group's own funds.
climate in India, presents a great opportunity This limit may be increased over time as
to expand microfinance and alleviate poverty previous loans are successfully repaid. This
on a large scale. model of finance – an Indian innovation – has
been very successful, increasing from just 500
Development of the microfinance SHGs linked to banks in the early 1990s, to
environment over one million at present.6
Since Indian independence in 1947,
successive governments have emphasised However, outreach of the SHG Bank Linkage
the link between improving access to finance Program remains limited. The program has
and reducing poverty. provided savings account facilities to about
12 million women, and credit accounts to an
The creation of a nationwide network of rural estimated two to four million women.7 The
cooperative banks in the 1950s was an program remains concentrated in south
attempt to improve financial access for India, with nearly 75% of funds flowing to
India’s poor, 75% of whom are concentrated SHGs in the four southern states.8 The SHG-
in rural areas.4 This was followed by further Bank model has also had mixed success in
measures aimed at increasing financial access targeting the poorest. For example, in Andhra
- the nationalisation of commercial banks in Pradesh – one of India’s poorest states – less
the late 1960s, and an aggressive drive than half of SHG members are from the
through the 1970s and 1980s to expand rural poorest groups (as defined by size of land-
banking. holding).9

In 1991, government reforms allowed for an There are also limitations in the way the
increase in commercial banking in India. The model operates. SHGs are required to
country now has a wide-spread and efficient demonstrate an ability to save, learn
banking set-up with around 100,000 bank bookkeeping skills and act as a cohesive

InForm: Industry information for Opportunity Australia supporters

 group before they are permitted to borrow people, particularly for the purpose of
and because of this it can often take a year meeting unforeseen expenses or
before groups are allowed to receive their emergencies. Difficulty in accessing formal
first loans. finance has resulted in a heavy reliance on
informal finance.
In recent years, other institutional structures
for microfinance have emerged: notably, Access to other financial services, such as
independent specialised microfinance insurance, also remains limited among the
institutions (MFIs). The success of MFIs in poor. A 2003 survey showed that 82% of
India has also attracted several new private households surveyed had no insurance, with
sector banks, notably ICICI Bank, UTI Bank access particularly limited for the poorest
and HDFC Bank. Some of these newer banks households.13
are pursuing innovative approaches to
microfinance. They view microfinance as a Significant obstacles to expanding the
potential business rather than simply a social commercial sector are likely to persist in the
objective or priority sector lending short to medium term. These obstacles arise
obligation. from government imposed restrictions, and
from the commercial sector’s own policies,
While the SHG Bank model is defined by the such as limited numbers of rural branches
links between SHGs and the rural branches and employing few staff with local
of commercial or cooperative banks, MFIs are knowledge.
typically independent of the existing rural
banking network. This allows MFIs to take a As a result of such obstacles, most
more flexible approach to lending. However, microfinance institutions have been very
as with the SHG model, most MFIs provide region-specific, small in size and their
financial services to groups collective outreach has been limited. By
The vast majority of individuals and therefore 2004, the microfinance sector, as a whole,
face many of the same had outstanding portfolios of around A$150
of India’s rural issues around the cost and million, reaching less than two million
poor still do not time required to promote people.14 In comparison, MFIs in Bangladesh
and manage these groups. are reported to reach more than 60% of the
have access to poor in the country, with the larger programs
formal finance. Currently, 75% of the total - such as Grameen Bank, BRAC, Proshika and
supply of microfinance ASA - all reaching well over one million
credit is via the Self Help clients each.15
Group-Bank linkage route, largely financed
by the National Bank for Agriculture and Though India has experienced strong
Rural Development (NABARD). The rest economic growth at the national level in
comes from MFIs, increasingly backed by recent years, that growth has been uneven in
commercial banks.10 its geographical distribution. Despite recent
progress, India’s lower-income regions have
The need for a new microfinance not seen growth accelerate. Bihar (a state in
initiative north India) averaged 2.2% growth between
In spite of the success of the SHG model in 1980 and 2004, compared to 7.2% in
the 1990s and continued growth of MFIs, the Karnataka (a southern India state).16
vast majority of India’s rural poor still do not
have access to formal finance.11 This skewed distribution of growth is
mirrored in the extent and availability of
The rural poor face severe difficulties microfinance across regions. India’s lesser
accessing savings and credit from the formal developed and low-income eastern, central,
sector. Even where finance is available, it and north-eastern regions account for 54% of
takes, on average, 33 weeks for a loan to be the population, but only 20% of outstanding
approved by a commercial bank.12 This makes credit and 29% of deposits.17
formal credit an unrealistic option for poor

InForm
Slower economic growth in
the central, eastern, and
north-eastern states has
also resulted in little
demand for credit among
subsistence poor people.
This has been matched by
an absence (for historical
reasons) of good quality
NGOs willing to initiate
microfinance programs in
these states.

Some 60% of the increase

in India's population
between now and 2050 is
expected to come from four of India’s most Accordingly, retail sales from these small
populous and poorest states where financial businesses are expected to grow by A$77
access for the poorest people is less billion in the next three to four years (from
prevalent.18 Extending the scope and A$370 billion to A$447 billion).22
availability of microfinance is therefore
particularly important given the population India’s fiscal budget for 2007 has been
growth expected in India’s poorest states depicted by the government as a budget for
over the medium to long term. relieving poverty through ‘inclusive growth,
equity and social justice’.23 Boosting farm
An opportunity for a new microfinance output and raising spending on education
initiative and health are two of the key measures in the
India’s recent economic history is one of budget.
sustained and rapid growth. India's real GDP
grew by 9.2% in 2006 and by just over 8% in The Indian government has also given
the three years before that. This compares approval for enactment of legislation on the
with a figure of around 6% in the 1980s and microfinance sector in India. The Micro
1990s, and 3.5% in the three decades before Financial Sector (Development and
1980.19 Though the economy remains mostly Regulation) Bill, 2006 will provide a legal
agricultural, business processing, information framework for entities engaged in
technology, telecoms and manufacturing microfinance. The intention of the Bill is to
have boomed in recent years. Looking facilitate greater transparency, more effective
forward, the government's five-year plan to management and better governance of the
2011/12 is based on a target of 9% average microfinance sector.24
annual growth. The consensus of economic
forecasters in India is for growth of at least The entrepreneurial environment for poor
8% over the next five years. However, there is families in India has also improved in recent
also a broad consensus that weak years. For example, the availability of
infrastructure investment and bureaucratic telephone and internet services has
red-tape present risks to India’s economy. improved significantly in rural areas in the
The government must address these issues to past five years. These services give instant,
ensure sustained future growth.20 low-cost information on the relative prices of
products and services in different market
In the short term, growth is forecast to towns greatly improving an individual’s
moderate slightly in 2007/08 and 2008/09 bargaining power relative to more powerful/
but domestic demand is expected to remain wealthier traders. The internet has also made
buoyant. This will provide a positive crucial information available to individuals
environment for business start-ups, as 97% of that would previously have taken time and
retail sales are made from microbusinesses.21 expense to access – for example, land records
and passport application forms.
 Conclusion References
There is an enormous continued need for 1.World Bank, 2006 World Development Indicators
microfinance for the poorest people in India. database, April 2006
India has been, for many years, a ‘global 2. Jim O’Neill et al, How Solid are the BRICs?, Global
laboratory’ for anti-poverty programs. The Economics Paper No:134, Goldman Sachs, December
political, regulatory and economic 2005
environment for microfinance has been
3. Haruhiko Kuroda (President, Asian Development
steadily improving for many years now. Bank) – cited in: Asia faces growing poverty gap, BBC
News online, February 2007
Recent strong growth in microfinance – albeit
from a low base – suggests that the 4-9, 11-15, 17. Priya Basu, Improving Access to Finance for
environment is favourable and demand for India’s Rural Poor, World Bank Publications, 2006
financial services is strong. However, 10. Prabhu Ghate, Microfinance in India – A State of the
coverage continues to be partial, with a huge Sector Report, Care/Ford Foundation, 2006
number of poor households in India still
unable to access finance. 16. Praful Patel, India: Shining India’s Light on all Citizens,
www.worldbank.org.in 2007
Recent rapid growth in the east, continued 18. The Economist, Survey: Business in India – Still in the
deregulation and the current strong Way, print edition, Delhi, June 2006
economic environment all suggest that there
has probably never been a more favourable 19, 20. The Economist, India on Fire, print edition, Delhi,
February 2007
time for an initiative to increase the
availability of microfinance across India. 21. The Economist, India’s economy,
www.economist.com February 2007
Opportunity International Australia has
22. The Economist, Setting up shop in India, print edition,
developed a strategy for a national Delhi, November 2006
microfinance and enterprise development
program in India which aims to reach millions 23, 24. New Age Press, India steps up war against poverty
of clients in the coming years. This strategy in fiscal budget for 2007, Dhaka, March 2007
includes extension of microfinance to many
areas in the north and northeast of India,
where demand for financial services grossly
outweighs supply.

Opportunity International is a global leader and pioneer with over 35 years experience in providing microfinance and enterprise
development to the working poor in developing countries. Microfinance includes the provision of collateral-free loans, savings,
insurance and money transfers. Enterprise development incorporates a variety of training and support services for establishing
and growing small businesses. Our desire is to see clients, their families and their communities transformed with dignity,
empowerment and hope. Opportunity is inspired by Jesus Christ’s call to serve the poor without regard to ethnicity, gender or
religious affiliation. We are guided by four core values: respect, commitment to the poor, integrity and stewardship.

Opportunity International Australia Limited Level 4, 220 George Street, Sydney NSW 2000 GPO Box 4487,
Sydney NSW 2001 Tel + 61 2 9270 3300 Fax + 61 2 9270 3399 opinfo@opportunity.org.au www.opportunity.org.au
ABN 83 003 805 043