Microfinance: implementation

and policy challenges

Thought Paper

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Introduction
Microfinance is to entail the provision of
financial services to micro-entrepreneurs and
small businesses, which lack access to banking
and related services due to the high transaction
costs associated with serving these client
categories Wikipedia

Institutions (MFIs) are:

According to Consultative Group to Assist the

Poor (CGAP), the main objectives of Microfinance

To provide self-employment opportunities,

especially to women

To help the poor and needy meet their basic

requirements and reduce risks
To improve their economic condition through
small loans and savings products

Microfinance Can Reach the Lower Income Levels

100 Million
People
>520,000 yr.

Commercial
Bank

Credit
Unions

1.7 Billion People

51,500-520,000yr

Microfinance

5730-51,500yr

or
r Po
r
Nea
Poo
per
Up

4 Billion People
5360-5730yr

r
Poo

<5360yr

Destitude

* Sources VISA information World Bank, CK xxxxxxxxx

This paper provides an overview of the

microfinance business in general, the models

practiced in many countries and their challenges,

as well as some ideas for improvement.

Evolution of MFIs

02

Between 1950 and 1970, the Indian Government

focused on reaching out to the unbanked with
subsidized agricultural credit and small loans. It
also launched many initiatives including the
Lead Bank Scheme, Priority Sector Advances,
JRY (Jawahar Rozgar Yojana) and PMRY (Prime
Ministers Rural Employment Scheme) to benefit
unbanked and underdeveloped regions; however,
these did not penetrate as deeply as intended.

the poor at subsidized interest rates. This paved

the way for the entry of MFIs in the 1980s.

In order to address this issue, the Government

proposed the introduction of MFIs, to be regulated
and supervised by the RBI, which would lend to

Although credit unions, co-operative societies

Thought Paper

In time, micro enterprise credit organizations

financing small businesses run by women
evolved into Non Governmental Organizations,
and in the 1990s transformed themselves into
formal financial institutions with the express goal
of creating inclusion.
and banks have existed for ages, Dr. Mohammed
Yunus is credited with pioneering microfinance in

the 1970s, for giving small loans to the women of

Jobra village in Bangladesh. He went on to found
the Grameen Bank in 1983.

the Poverty Line, most of whom are unable to

avail of Government benefits because of collateral,
documentation and legal stipulations.

The World Bank says that MFIs serve around 160

million people in developing countries. India has
approximately 350 million people living below

In the late 1990s, institutions such as SIDBI and

NABARD entered the arena to assist the ailing
microfinance business.

Growth of MFIs in India

Mocrofinance Saving 2009-10

in Rs. crores
Saving by Women SHGs
Saving by SG SY SHGs

Loans Disbursed by MFIs Yr 2009-10

in Rs. crores
Loans Disbures to Women SHGs*
Loans disbursed SG SY SHGs

SGSY (Swarnajayanti Gram Swarojgar Yojana)

SGHs Self Help Groups

Loans Disbursed by MFIs Yr 2009-10

Thought Paper

03

Microfinance models in India

SHG-Bank Linkage Model: This model involves
Self Help Groups (SHGs), which are financed
directly by the Commercial Banks in the Public
and Private Sector, Regional Rural Banks (RRBs)
and Co-operative Banks (State Co-operative
Banks, NABARD, District Co-operative Banks
etc.). The SHGs create the corpus, which is
supplemented by revolving cash credit from
the banks.
MFI-Bank Linkage Model: In this model, the
MFIs banking agencies receive financing
for onward lending to SHGs and other small
borrowers in the microfinance sector. Here,
MFIs act as the banks guarantors, and thereby
bolster the creditworthiness of the poor.
New models which can be implemented in India

care of all the relationships with the bank

and the borrowers, from end to end. This
model enables them to operate with a
relatively small equity base and increase the
disbursement of loans significantly.
Banking Correspondent Model: This model
evolved to increase the savings in MFIs. The
agents collect the savings from the poor on
behalf of the banks; however, one drawback is
that they are not allowed to collect money for
Term Deposits.
Service Company Model: This model,
developed by ACCION, was used in some
Latin American Countries. In it, banks form
their own MFIs and work together to provide
loans and other services.

Bank Partnership Model: In this model, the

MFIs act as agents and custodians who take

Challenges
While microfinance has no doubt added to the
economic, social and financial empowerment
of the poor, it has not managed to free
them entirely from the clutches of informal
moneylenders.
There is skewed distribution of MFIs, with
about 60% being located in the Southern
states. The reasons for this include state
government support, NGO concentration, and
public awareness.
Self Help Groups, which play a pivotal role
in microfinance are beset by problems, such
as poor accounting. NGO employees earn
low salaries and are not given any incentives
or recognition.
Government programs such as SGSY
(Swarnajayanti Gram Swarojgar Yojana), which

04

Thought Paper

are linked to specific states, have led to the

migration of people to those regions in order
to avail of subsidies, and diverted interest
from self-help schemes.
The current policies of SHGs are outdated and
in need of overhaul.
The cost of delivery of financial services
requires a relook. An analysis of 36 leading
MFIs by Jindal and Sharma showed that 89%
were subsidy dependent and only 9% were
able to cover more than 80% of their costs,
thanks to the high cost of supervision and
small ticket size of loans.
MFIs do not have adequate access to financial
capital unlike the rest of the financial sector,
and as a result are burdened by high debt
equity ratios and equity shortfall.

Global success stories (CGAP research)

Bangladesh Rural Advancement Committee
(BRAC) clients increased household expenditure
by 28% and assets by 112%. The income of
Grameen members was 43% higher than that
of non-program villages.
In El Salvador, the weekly income of FINCA
clients increased by 145% on average.
In Ghana, 80% of Freedom from Hunger clients

had secondary income sources, compared to

50% of non-clients.
In Lombok, Indonesia, the average income
of Bank Rakyat Indonesia (BRI) borrowers
increased by 112%, and 90% of households
moved out of poverty.
n Vietnam, Save the Children clients reduced
their food deficit from three months to one.

Conclusion
Microcredit Summit News Release Jan 2012
says Microfinance is a vital weapon in the fight
against poverty, but so is health protection.
Now, through a new partnership between
Freedom from Hunger and the Microcredit
Summit in India, 700,000 microfinance clients
plus their family members will soon be able
to protect their health as well as their finances .
There is an increased need for microfinance
in rural India, a need for at least 20% annual
growth in MFIs and a target to cover 75% of
households in the next five years (i.e. 60
million households). Outstanding loans are
likely to rise from Rs. 1,600 crores to Rs. 42,000
crores. Existing MFIs should also start looking
at other initiatives, such as
Insurance and pension schemes
Larger loans for different segments
Technology advancement and professional
processes and systems
Ownership among MFIs and banks
Financially sustainable features and models
Empowerment of staff through better salaries,
infrastructure, technology etc.
Greater participation by Private Sector Banks

Other possible measures, which can help society

include:
Greater Government participation
Better monitoring and control by the authorities
to ensure that the funds reach the needy
The society can introduce liberal and transparent
policy along with a guideline document which
can reach all segments of society
Awareness building through media
Classification of MFI loans under the priority
sector
Soft loans for MFIs
Smoother loan
documentation

policies,

processes

and

The main objective of any MFI is to enhance

the economic health of the rural poor through
affordable credit. Federations, such as Micro
Finance Development Equity Fund (MFDEF)
recently set up by NABARD, are expected to
play a vital role in meeting the equity needs
of MFIs. More such agencies are required
to support the Government in making
microfinance a success.

Reduction of outstanding loans

Thought Paper

05

References
www.mixmarket.org

www.nabard.org

www.microcapital.org

www.india.gov.in

www.legatum.org

www.kiva.org

www.microfinanceindia.org

www.zidisha.org

www.Wikipedia.com

Issues in Sustainability of MFIs, Jindal & Sharma

Jayanthi. K. J
Principal Consultant, Finacle, Infosys LTD

06

Thought Paper

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