Evolution of Microfinance in India

State Interventions in Rural Credit

The credit demands in the rural sector were

largely met by co-operative societies till mid 1960s. All India Rural Credit Survey report of 1954 found that informal sources accounted for 70% of rural credit usage, followed by cooperatives (6.4%) and commercial banks (0.9%). The Lead Bank Scheme was introduced in 1969.

Lead Bank Scheme

The National Credit Council was set up in Dec. 1967 to

determine the priorities of bank credit among various sectors of the economy.
Under the Chairmanship of Prof. D R Gadgil, the study group

found that the Commercial Banks had penetrated only 5000 villages as of June67
Out of the institutional credit to agriculture, at 39%, the share

was negligible at 1%, the balance being met by the cooperatives.

Lead Bank Scheme (LBS) was introduced in 1969, based on

the recommendations of the Gadgil Study Group. The basic idea was to have an area approach for targeted and focused banking.

Contd...
Under the Scheme, each district had been

assigned to different banks (public and private) to act as a consortium leader to coordinate the efforts of banks in the district particularly in matters like branch expansion and credit planning.

Nationalization of Banks
With an idea to increase control over the banking

sector, 14 major banks were nationalized in July 1969. These banks contained 85% of the deposits in the country. A second round of nationalization of 6 more commercial banks took place in 1980 which further raised the control to 91%.

Government Sponsored Programmes

IRDP (Integrated Rural Development

Programme) TRYSEM (Training of Rural Youth for SelfEmployment DWCRA (Development of Women and Children in Rural Areas) -1982-83 NREP (National Rural Employment Programme) RLEGP (Rural Landless Employment Guarantee Scheme)

Integrated Rural Development Programme

Launched in financial year 1978 and extended

throughout India by 1980. It is a self-employment program intended to raise the income-generation capacity of target groups among the poor. The target group consists largely of small and marginal farmers, agricultural labourers and rural artisans living below the poverty line. Subsidy+ Bank Credit The objective of IRDP is to provide suitable incomegenerating assets through a mix of subsidy and credit to below-poverty-line families with a view to bring them above the poverty line.

Failure of IRDP
A government evaluation showed that only 15%

beneficiaries could cross the poverty line. The scope of poverty reduction through IRDP is limited both by the debt-capacity of the poor and by the high cost of appraising, monitoring and enforcing small loan agreements. Loan waiver by central government in 1989 under the Agriculture and Rural Debt Relief Scheme. Introduction of Swarnajayanti Gram Swarozgar Yojana (SGSY) in 1999.

TRYSEM
Training was imparted through formal institutions,

including industrial and servicing units, commercial and business establishments and through master craftsmen. The duration of a course did not exceed six months. The trainees were eligible for loans from the banks under the integrated rural development program The trainees are supplied free tool-kits during their training. TRYSEM is merged with a new self-employment

DWCRA
It was started in the year 1982-83, on a pilot basis, in 50 districts and

has now been extended to all the districts of the country.

The main strategy adopted under this programme is:

To facilitate access for poor women to employment, skill

upgradation, training, credit and other support services. It seeks to encourage collective action in the form of group activities It encourages the habit of thrift and credit among poor rural women to make them self-reliant. The programme also envisages that this target group would be the focus for convergence of other services like family welfare, health care, nutrition, education, childcare, safe drinking water, sanitation and shelter to improve the welfare and quality of life of the family and the community.

RLEGP
RLEGP was introduced on August 15, 1983, with

the objective of (a) improving and expanding employment opportunities for the rural landless with a view to providing guarantee of employment to at least one member of every landless household up to 100 days in a year (b) creating durable assets for strengthening the infrastructure so as to meet the growing requirements of the rural economy.

Regional Rural Banks

The Regional Rural Banks (RRBs) were

conceptualized in 1975 to augment the delivery of financial services in rural areas. Regional Rural Banks (RRBs) were initially sponsored by Syndicate Bank, State Bank of India, Punjab National Bank, United Commercial Bank and United bank of India. The equity holding of RRBs is jointly divided among the central government, the concerned state government and the sponsor bank in the ratio 50:15:35. The sponsor bank is vested with the responsibility to assist the RRB to provide financial and training aid.

SHG-Bank Linkage
In 1992, NABARD issued policy guidelines for

bank linkages with SHGs. Earlier the banks had demanded physical securities. Under the 1992 guideline, the SHG functions as a joint liability group, replacing other collateral for loans. The collateral free loans increase progressively to upto four times the level of groups savings deposits. The linkage permitted the reduction of transaction costs.

Contd...
The programme encompasses three broad

models of linkage: Model I: Bank-SHG-Members (Bank promotes and nurtures SHGs) Model II: Bank-Facilitating Agency- SHGMembers (Groups are formed and supported by NGOs) Model III: Bank-NGO-mFI-SHG-Members (NGOs act as both facilitators and micro-finance intermediaries)

Microfinance Institutions
Those institutions which have microfinance as

their main operation are known as micro finance institutions. These institutions lend through the concept of Joint Liability Group (JLG). Non-Banking Financial Companies (NBFCs), Cooperative societies, Section-25 companies, Societies and Trusts, all such institutions operating in microfinance sector constitute MFIs and together they account for about 42 percent of the microfinance sector in terms of loan portfolio.

Leading MFIs
SEWA bank in Gujarat

SHARE, BASIX, CARE and MACs in Andhra

Pradesh MYRADA in Karnataka ADITHI in Bihar The Rashtriya Gramin Vikas Nidhi in Assam and Orissa

Constraints in Mainstreaming of MFIs

To increase the outreach of micro-finance

services, the issues related to legal, regulatory and organisational systems should be addressed. Borrower-unfriendly Products and Procedures Inflexibility and Delay High Transaction Cost Social Obligation and not a Business Opportunity Legal and Regulatory Framework Financing to MFIs

Constraints Faced by Microfinance Institutions

A vast majority of MFIs function as NGOs to get

access to funds Inappropriate Forms of Organisation (Legal Constraints): Lack of Commercial Orientation Isolated and Scattered Lack of Proper Governance and Accountability

Microfinance Versus Informal Sources of Lending

A large number of people are served by informal

financial sector. The challenge is not to fill a supposed credit vacuum, but to improve on the terms of the informal sector. Informal sector includes: Interest free loans from friends/relatives Wage advances Groceries/goods on credit Loans from professional money lenders It is important for MFIs to understand each of these resources.

Choice of Lender
Volume of credit

Speed of disbursal
Flexibility of payment Convenience factors- proximity Price: interest rate and other fees