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K.V. Kamath
Introduction
The delivery of financial services to lower income households in rural areas, how-
ever, presents a unique set of challenges. This customer segment has a high volume
of low value transactions and requires doorstep services, flexibility in timing as well
as simple procedures and documentation . These require a set of skills completely
different from those deployed by mainstream financial intermediaries. At the same
time, traditional modes of outreach, like physical branch networks, prove to be inap-
propriate because of their high costs. Microfinance is a model which seeks to pro-
vide financial services to the rural population in a viable and sustainable manner.
86 K.V. Kamath
Microfinance
With a population of over 1 billion and estimates of the number of poor people
ranging from 300 to 400 million, India is one of the largest markets for microfi-
nancial services. It is estimated that a large part of the demand for credit in this
stratum is currently met by informal sources.
The twentieth century saw large-scale efforts to improve the quality of life in
rural India. Different approaches were adopted by government agencies and non-
government organisations (NGOs) to improve the condition of the rural popula-
tion. These included land redistribution, building economic and political aware-
ness, technology transfer and delivery of a variety of services. Credit in the rural
sector was largely supplied by co-operative societies till the mid-1960s with the
commercial banks’ rural operations centered around agri-businesses and market-
ing. One of the objectives of bank nationalisations in 1969 and 1980 was to in-
crease the flow of rural credit. However, merely expanding physical presence in
rural areas did not achieve the desired results, given the need to overlay main-
stream financial service delivery models with the social mobilisation skills that
were essential to meet developmental objectives.
The self-help group (SHG)-bank linkage programme was the initial microfi-
nance initiative launched by the National Bank for Agriculture and Rural Devel-
opment (NABARD) in 1992. While this model of partnership between the banking
sector and voluntary organisations achieved reasonable success, it continued to
depend on the creation of an extensive banking network. Challenges in scaling up
this model led to the introduction of financial intermediation by microfinance
institutions (MFIs) that provide microfinance services to the poor, especially in
rural areas.
Microfinance Institutions
the transition to commercial funding. While much of the growth in the initial years
was financed by concessional loans from funding agencies, this was followed
from 2001 onwards by raising equity from domestic as well as international agen-
cies and by borrowings from the banking sector.
MFIs have been observed to administer risks better than the traditional banking
sector. There may be two explanations for this:
Summary
In every country, development takes place over time, but its level and pace may
not be adequate to maintain a satisfactory standard of living for the less advan-
taged. In such situations, intervention is in order to speed up the natural pace of
development.
Microfinance is an intervention which tries to speed up this process in a two-
pronged manner – improving household income by providing timely and adequate
support for economic activities, and sharing the responsibilities of the government
and of the mainstream financial sector. In India, microfinance is at a nascent stage
with a vast potential for growth. While the sector has begun to grow, challenges
must be addressed to make this growth both effective and sustainable. Microfi-
nance needs to become more accessible, more customised and more comprehen-
sive. To scale up activity in this area, we must build financial skills in microfi-
nance institutions and establish linkages to the debt and equity capital markets.
Microfinance can then truly contribute to transforming rural India into an engine
of economic growth.