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Executive Summary
Indian banking system, which is among the largest banking
networks in the world, did not reach most of the rural poor in
India. About 70% of the Indian population from rural areas accounted
for only 30% of bank deposits. The banks did not meet the credit
requirements of the poor and they were forced to fall back on
moneylenders for credit. Though the banks were nationalized, they
perceived rural credit to be a high risk and high cost proposition.
The rural borrowers were bogged down by elaborate procedures that
were required to obtain loans.
The central bank in India, RBI, on its part, tried to cater to the
needs of the rural poor by establishing regional rural banks and
cooperative banks, but did not meet with success. In the early
1990s, to provide credit and savings services to the poor,
microfinance was envisaged. It received further boost with
involvement of several non-governmental organizations and
microfinance institutions.
These efforts led to formation of Self Help Groups (SHGs), where
poor from homogenous background formed into groups of around 20 each
and pooled money that was lent to the needy in the group. By the mid
1990s, several mainstream banks began providing credit and savings
facilities to SHGs that built credible financial discipline. The
program was called SHG – Bank linkage program. Over the time, the
banks provided other facilities like housing loans and
microinsurance services to the poor.
There were for profit MFIs, mutual benefit MFIs and not for profit
MFIs that participated actively in spreading microfinance
initiatives across India. By 2004, there were around 1,000 MFIs in
the country. Realizing underlying potential of microfinance, several
commercial banks entered into partnership with MFIs. Both banks and
MFIs stood to benefit from this association as banks could reach the
interior part of the country and MFIs could access more funds and
thus reach more people.
The report discusses some of the leading microfinance providers in
India: National Bank for Agriculture & Rural Development, Small
Industries Development Bank of India, Rashtriya Mahila Kosh, Friends
of Women's World Banking and SHARE Microfin Limited.
With the huge potential and low NPAs, several private and foreign
banks, unveiled their plans to enter the Indian microfinance sector.
The government and the RBI announced several measures to boost
microfinance activities in the country. RBI allowed the NGOs
involved in microfinance activities to raise External Commercial
Borrowings upto US$ 5 million a year. With increase in competition
and availability of funds, the Indian microfinance sector could be
the ultimate beneficiary.
Still there are several poor, who were not under the purview of
microfinance, the number of SHGs and microfinance programs did not
have any major impact on poverty alleviation in the country. Only in
some of the well-developed states in the country, SHGs and
microfinance gained popularity. Lot of groundwork was required to
spread microfinance activities in North and North East regions of
the country.
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