Reaching Out - Prospects for Indian Micro Finance


Sweta Gupta
Research Associate - Finance Department
Institute for Integrated Learning in Management
Lodhi Road, New Delhi
E-mail: /

Financial services on the whole work remarkably well in developed countries, and a vast majority of people have access to interest-bearing savings accounts, mortgages at reasonable rates, abundant consumer credit, insurance at premiums that reflect the risk of losses, cheap ways of transferring money, and innumerable sources of capital for funding a business.

By contrast, financial services for poor people in developing countries—a business known as "microfinance"—have mostly been awful or absent. In India alone, over 200 million people (36% of the rural population) do not have access to a bank. Although India has more microfinance organizations than any other, these programs only reach a small percentage of needy households. The rest have no alternative but to borrow funds from the local moneylenders whose exorbitant interest rates reinforce the indebtedness that contributes to a lifetime of poverty. Basic life and property insurance is rarely available. Home loans are costly, if indeed they can be found at all.

There are various issues which scuttle the overall growth of the financial service sector. The government is often inept in maintaining the necessary legal framework for financial services. Essential property laws are absent which can help poor to borrow funds by using their assets as collateral for loans. Corruption is prevalent which raises the cost of financial transaction. Basic infrastructure and public services are not available which add to the burden on financial firms. The firms do not have any information about the financial status of their clients. Also most of the financial institutions have simply dismissed the possibility that serving the poor might be a viable business.

India and Micro financial Sector

Since long time India has been supporting social banking. Numerous policies have been made to expand rural branches, mandatory limits have been set for credit allocations to priority sectors including agriculture, a large number of subsidy oriented credit programs have been structured to serve minority communities and poor households and interest rates have been regulated  for over 35 years.

The new generation microfinance which involves small amount of money but offers all the transactions in any branch of finance like loans, deposits, money transfers and insurance was slow in coming to India. Low levels of grants to microfinance institutions (MFIs), an unfavorable policy environment, and lack of infrastructure has constrained rapid scale up.

Only a few Institutions offer the saving schemes which create a gap in service delivery. Insufficient information about the major players like investors, depositors, regulatory authorities hinders the functioning and approach of the MFIs towards the internal management and in convincing the clients.

According to the report of Micro Banking Bulletin, 63 of the world's top Micro Finance Institutions (MFIs) had an average rate of return, of about 2.5 per cent of the total assets after adjusting for inflation and taking out subsidies programs. This measure favorably with returns of the commercial banking sector and gives hope that microfinance are almost as attractive as mainstream retail banking sector. In addition to this many feel that once microfinance becomes regularized, there will be massive growth in the numbers of clients. Some of the factors as listed below needs attention.

Penetration: Micro finance institutions need to penetrate the different sectors of the society. The three basic dimensions: depth (reaching the very poor), extent (significant scale), and service quality requires the main attention. For example in Bolivia, one MFI is providing ATM-enabled banking services to Bolivians that do not have access to the traditional banking system. PRODEM FFP was established as an NGO in 1986 by ACCION International. Since 1999, it has been a regulated, privately held financial fund focused on bringing microfinance services to underserved communities, both rural and urban.

Operational Efficiency:  In order to cater a range of customer's operational efficiency requires great focus. It required training for an efficient service delivery by use of technology, information system and staff development. IT also allows microfinance organizations to increase their efficiency, thereby lowering their overhead costs, and helping them to achieve sustainability. The Dhan Foundation, for example, is streamlining its microfinance activities using a combination of handhelds and smart cards. The technology results in time savings for loan officers, while also ensuring more accurate accounting and record keeping. Because all the information is stored on a smart card, field officers can make decisions on the spot, reducing the number of visits required to complete a transaction.

BASIX, India's largest microfinance organization, is experimenting with handhelds and smart card technology to automate the loan process and keep track of repayments, in order to reduce labor and cash handling costs. BASIX's Mobile Portfolio Management System also helps to minimize accounting errors.
Swayamkrushi, a women's lending cooperative in India, has also experienced an increase in efficiency since it computerized its operations. In addition, the computers used in the microfinance operations are being used by members to access the Internet, providing additional benefits to the women.

More Value Added Products: The range of the services or the products offered by the institutions is important in both urban and rural settings. In order to reach potential customers the MFIs need to introduce new products beyond credit like insurance, deposit, remittances, securitization of the loans to join the mainstream of the global financial system. 

The long-term future of the micro-finance sector depends on MFIs being able to achieve operational, financial and institutional sustainability. The constraints and challenges vary with the different types and development stage of MFIs. Most MFIs are currently operating below operational viability and use grant funds from donors for financing up-front costs of establishing new groups and covering initial losses incurred until the lending volume builds up to a break-even level. In this background, SIDBI (Small Industries Development bank of India) has decided that need-based capacity building support in the form of grant be provided to the partner MFIs, in the initial years, to enable them to expand their operations, cover their managerial, administrative and operational costs and provide technical support besides helping them achieve self-sufficiency in due course.

References:, "The hidden wealth of the poor" November 03, 2005, "Microfinance: Banking for the poor, not poor banking" By Y.S.P. Thorat and Graham A. N. Wright, March 15, 2005.
USAID, Maximizing the Outreach of Microenterprise Finance: The Emerging Lessons of Successful Programs. 1995
Investors Guide, November 07, 2005.

Sweta Gupta
Research Associate - Finance Department
Institute for Integrated Learning in Management
Lodhi Road, New Delhi
E-mail: /

Source: E-mail March 01, 2006


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