The microfinance business model in India has rapidly expanded, linking banks with self-help groups and microfinance institutions to provide financial services to low-income households. With a focus on group loans and decentralized processes, this model addresses the needs of the underprivileged, resulting in increased repayment rates and income growth. The industry is diverse, consisting of both non-profit and for-profit entities, and has garnered interest from both domestic and international banks seeking partnerships with microfinance institutions.

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2. • Microfinance in India has grown at a
tremendous pace in recent years, achieving
significant outreach amongst the poor as
well as non-poor (but low-income)
households across the country.
• Linkages between banks and Self-Help
Groups (SHGs) supported by the National
Bank for Agriculture and Rural Development
(NABARD), on one hand, and Microfinance
Institutions (MFIs), on the other, have
emerged as the two most prominent means
of delivering microfinance services in India.
MICROFINANCE INDIA

3. • Growth in terms of outreach across
both models has been very high.
• Over the last ten years, however,
successful experiences in providing
finance to small entrepreneur and
producers demonstrate that poor
people, when given access to
responsive and timely financial
services at market rates, repay their
loans and use the proceeds to
increase their income and assets.
MICROFINANCE INDIA

4. • This is not surprising since the only
realistic alternative for them is to borrow
from informal market at an interest much
higher than market rates.
• Cost reductions can be achieved through
simplified and decentralized loan
application, approval and collection
processes, for instance, through group
loans which give borrowers responsibilities
for much of the loan application process,
allow the loan officers to handle many
more clients and hence reduce costs
MICROFINANCE INDIA

6. • The microfinance business model is
designed to address the challenges
faced by the traditional financial
services sector in fulfilling the credit
requirement of the low-income
segment at an affordable and
sustainable cost.
• A Joint Liability Group (JLG) is an
informal group comprising preferably
of 4 to 10 individuals coming together
for the purposes of availing bank loan
either singly or through the group
mechanism against mutual guarantee.
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7. Indian microfinance industry
comprises NGOs, trusts or societies
working on a not-for-profit model,
and even bigger players - like
Spandana, SKS, Basix, Share Microfin
in Andhra Pradesh, Cashpor in Uttar
Pradesh, Grameen Koota in Karnataka
-which work on a for-profit model The
microfinance industry is estimated to
cover about 10 per cent of poor
households in need of credit.
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8. • MFIs first emerged in the late 1990s
to raise social and commercial funds
for lending to the underprivileged.
• Today there are over a thousand
Indian MFIs, most of which service
the rural poor.
• Several MFIs have also discovered
the potential in lending to the urban
poor.
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9. • Uplift, an association of urban MFIs,
Society for Promotion of Area
Resource Centres (SPARC), Swadhar
FinAccess, Bandhan and Ujivan, are
among the MFIs that operate in
urban areas.
• Banks find it difficult to lend to MFIs
in the absence of sufficient
collateral.
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10. • Hence, several MFIs have
transformed themselves into Non-
Banking Finance Companies (NBFCs)
to widen their capital base.
• Adding to the appeal are interest
rates of 25% to 35% that
microfinance lenders are able to
charge borrowers;
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11. • they justify such rates by claiming high
costs in the delivery of their loans to
largely untested customers.
• As a result, in India, today both
international and Indian banks are
striking partnerships with MFIs.
• . In addition, some foreign venture
funds have also entered the
microfinance field, hoping to maximize
their returns and also benefit from the
relatively low default rate.
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