The Microfinance Industry in India

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Case Details:

Case Code : FINC042
Case Length : 23 Pages
Period : 1990-2005
Pub. Date : 2005
Teaching Note :Not Available
Organization : Microfinance
Industry : Microfinance
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Introduction Contd...

In the late 1990s, the microfinance business was boosted by the innovative initiatives take up by microfinance institutions (MFIs), non-governmental institutions (NGOs) and banks. They offered micro-credit i.e. credit provided to poor people for financial and business services and for self employment in rural areas. It fulfilled their basic needs and emergency requirements. The microfinance business had the ability to reach the most deserving people and also increased the repayment rates for banks, which were, at the time, burdened by mounting non-performing assets (NPAs) on the rural credit extended by them.

Background Note

In the early 1980s, NABARD study found that though the network of rural bank branches had been trying to create self employment opportunities by providing bank credit for over two decades, many poor people remained outside the purview of the formal banking system. The existing banking policies, procedures and systems including deposit and loan products were not tailored to the requirements of the poor. They required better access to services and products rather than subsidized credit. The study concluded that there was a pressing need to improve access to microfinance. It therefore recommended that alternative policies, systems and procedures be put in place in order to boost the growth of microfinance in India.

The Reserve Bank of India (RBI)6 and NABARD were actively involved in spreading the network of commercial banks in rural areas, especially after nationalization. RBI had made it compulsory for all private sector banks to open at least 25% of their branches in rural and semi-urban areas.

It had also stipulated that 40% of the net bank credit should be allotted to sectors categorized as priority sectors, like housing, rural development and agriculture. With these measures, commercial banks did move into rural areas but the advances given to the poor remained very low. To improve the accessibility of the existing banking network to the poor, the Self Help Group (SHG)7 - Bank Linkage Model was launched in 1992 with a pilot project for promoting 500 SHGs. The objective of the microfinance initiatives was to facilitate empowerment of the poor, while pursuing the macro economic objective of overall economic growth. In 1995, the RBI set up a working group to study the possibility of linkages between informal SHGs and banks...

Excerpts >>

6] Established in 1935, Reserve Bank of India is the central bank of India. RBI is the monetary authority, regulator and supervisor of Indian banking system, manager of exchange control and issuer of currency. RBI is also the banker to the government and banker to the banks in India.

7] SHG usually consists of 20 people belonging to a homogeneous class. These people come together to address their common problems. They voluntarily save on a regular basis and use the pooled money for lending to the members of the group at nominal interest. After the group builds up credible financial discipline and credit history, banks provide them bigger loans without any collateral security at market interest rates.


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