A Pathway for Microfinance in India


Anchal Boochra
MBA (IB) 2007-09
Symbiosis Institute of International Business

With the boon of rapid GDP growth that India has witnessed in the past decade, it has also experienced the bane of increased socio-economic inequality among different sections of the society. Thus, economic independence of the lower section is the key driver towards eradicating this inequality and establishing an inclusive growth model. In a country like India with a large rural, agro-dependant population, micro finance has emerged as a viable means of economic upliftment.

A large majority of the Asian population still lives under $2 a day and in extremely poor conditions. Sustenance of this inequality could trigger tensions among different groups and may result in armed conflicts. This section of the society urgently needs to be brought into the economic main stream to achieve inclusive growth. The role of the financial sector in achieving this inclusive growth comprises of providing financial services to this segment and this is where micro finance plays a crucial part.

Using the $2-a-day poverty line, the level of poverty has only declined from 86.5% to 79.8% between 1990 and 2005, suggesting that more than half of developing India still lives in very poor conditions, is vulnerable to shocks, and may easily slip into extreme poverty.

To address such risks, India's development agenda will need to be expanded to include not only the eradication of extreme poverty, but an inclusive growth strategy to address the legitimate concerns of this large segment of the population. The ultimate outcomes of inclusive growth are sustainable and equitable growth, social inclusion, empowerment and security.

Although the banking sector has made significant developments in many areas of their performance, there still exist large portions of the population which are yet to be brought under the umbrella of banking services. Financial inclusion efforts are essential to bring those portions of the population into the mainstream. This would enable banks to expand their market share but expand the overall market, in the process of tapping the Bottom of Pyramid (BoP).


To set up successful models for microfinance in India, experience can be drawn from the various microfinance models set up internationally.

Multiple international experiences of successful inclusive banking indicate that it is useful for banks to deal with groups of customers organized in the form of Self-Help Groups rather than trying to approach and attract customers individually. In Bangladesh, Grameen Bank offers small-sized loans to groups of customers. This helps in better recovery as the group ensures that its members maintain the credit discipline. Many other countries have adopted innovative models to achieve the same.

Credibanco, the Visa franchise holder in Colombia, has adapted its technology and service infrastructure to help the country's banks reach low-income customers and equip small merchants like grocery stores, pharmacies and gas stations with point-of-sale devices.

Tameer Micro finance Bank Limited of Pakistan, since its inception, has aimed to be a pioneer and trendsetter in terms of deploying innovative, economical and user-friendly technologies in order to provide easy access of financial services to its customer base across the country. It has installed Pakistan's first biometric ATMs.


Any robust banking model for financial inclusion in India must take into account the perceived issues in doing business with the target group. These include:

1. Small-sized transactions
2. Geographical spread of customers
3. Absence of well-defined propriety rights
4. Absence of well-defined property rights
5. Risks faced by small producers to be factored into product pricing.

The models described below can resolve the major issue of Geographical Spread of customers. The possible solutions for the same can be:

1. Taking the bank to the customers
2. Setting up proxy branches at customer locations

Taking the bank to the customers: Mobile Banking

This model proposes a commercial banking service to rural communities to enable rural people to better manage their money and to make informed choices on the best use of the new banking service.

As the name suggests, the model will comprise of a fleet of mobile banks that travel on a regular schedule to a designated set of villages within a defined geographical area. Mobile banks will essentially be large vans modified for the purpose and connected to the main bank by a satellite network. The size of the fleet should vary with the number of villages and rural population under each district.

A similar model has been very successful in penetrating the rural markets of countries like Fiji in the South Pacific. However, since India is a large country with higher degree of diversity, a more complex hierarchical system of mobile banks will emerge.

Setting up proxy branches at customer locations: Branchless Banking

This model focuses on the use of technology to set up bank terminals close to the customers. Technology infrastructure like ATMs and biometric finger print scanners are high costs solutions. However, if network infrastructure is already available at customer locations, then terminals such as bankcard readers can be set up at very low costs.

A tie-up with an organization like the ITC to leverage the strength of its rural supply chain network e-Choupal can be a viable solution for the same. Bankcard readers can be installed at e-Choupals and the choupals can work as an intermediary between the bank and the customer. The bank can pay a fee to ITC on a per transaction basis in order to utilize its network.


The move towards inclusive financing is a big challenge for the financial system. At the all India level, less than 5% of poor rural households have access to microfinance as compared to 60% in Bangladesh. The southern states account for almost 75% of funds flowing under microfinance programmes. By far the most successful model of microfinance in India in terms of outreach is SHG Bank Linkage.

However, a lot needs to be done to achieve the benchmark levels in terms of Banks' outreach and deposit ratios. Banks would need to adopt an innovative, customer-friendly approach to increase their effective reach so that share of organized finance increases.  Banks have a critical role to play in inclusive growth and thus reaching the BoP customers.

Anchal Boochra
MBA (IB) 2007-09
Symbiosis Institute of International Business

Source: E-mail October 7, 2008




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