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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"Microfinance in India is approaching a historic 'tipping point' that could lead to a massive poverty reduction in the next five to ten years." 1

- Grameen Foundation US in 2005.

"Microfinance is not a charity. It is a way to extend the same rights and services to low-income households that are available to everyone else. It is recognition that poor people are the solution, not the problem." 2

- Kofi Annan, Secretary General, United Nations in 2004.


India has one of most extensive banking infrastructures in the world. However, millions of poor people in India do not have access to basic banking services like savings and credit. In the mid-1990s, about 70% of India's population lives in rural areas which account for only 30% of the bank deposits.

About 70% of the rural poor do not have bank accounts and 87% of them do not have access to credit from banks.3 In the same period, the share of non-institutional agencies including traders, money lenders, friends and relatives in the outstanding cash dues of rural households was 36%.4

In the past, both public and private commercial banks in India perceived rural banking as a high-risk, high-cost business i.e. a business with high transaction costs and high levels of uncertainty. Rural borrowers, on their part, felt that banking procedures were cumbersome and that banks were not very willing to give them credit.

Commenting on the problems faced by the microfinance industry in India, YSP Thorat, managing director of National Bank for Agriculture and Rural Development (NABARD), and Graham AN Wright, an international expert in microfinance, wrote, "Poor credit-deposit ratios, unsustainable lending and high-levels of non-performing assets often cripple much of this infrastructure."5

In 1954, All India Rural Credit Survey Committee recommended expansion of the cooperative credit system to cater to the credit needs of the rural poor. The regional rural banks (RRBs) were incorporated in 1976. By the mid-1970s, the banking sector was operating as a three-tier system. The first tier consisted of commercial banks, RRBs formed the second tier, and cooperative banks formed the third tier. About 49% of all scheduled commercial banks operated from rural areas. In the early 1980s, the Indian government realized the need for microfinance to provide the rural poor with savings and microcredit services. Loans available through microcredit schemes were more accessible to the poor people as compared to bank loans. It also compared favorably with non-institutional money lenders in terms of cost.

The Microfinance Industry in India - Next Page>>

1] Grameen Foundation, India Initiative, Winter 2005 Update,

2] On the launch of International Year of Microcredit, 18 November 2004,

3] World Bank - NCAER Survey.

4] All India Debt and Investment Survey, 1992.

5] YSP Thorat and Graham AN Wright, "Microfinance: Banking for the poor, not poor banking," The Hindu Business Line, March 15, 2005.


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