The microfinance sector in India is still in the process of development. Though self-help groups have come up in various parts of the country, the sector is largely unorganized as of now. Both microfinance institutions and self-help groups have seen a steep growth curve in India in recent years. However, the sector’s potential remains largely untapped because of a general lack of awareness among its probable clients.

There are many misconceptions associated with the microfinance sector in India – it is often assumed that a microfinance institution (MFI) only lends money to poor people in villages. It is true that an MFI provides a suitable platform for financing the economic activities of poor people; however, an MFI can also be focused on, say, empowering working women. Also, microfinance can be availed of in villages as well as cities. Apart from providing credit, these institutions also provide facilities like insurance and savings accounts. In some cases, they also play the role of a social intermediary and help solve local disputes.

The growth of such institutions has shattered the age-old notion that the poor are incapable of repaying loans; in fact, the amount of outstanding loans in this sector has progressively reduced with time. The main aim of MFIs is to make financial services available to about four-fifths of the population of the country, which is incapable of borrowing credit from banks. There is also a growing need to reach out to states in the central and eastern regions that are currently underserved by these facilities. NGOs have played a leading role in this field.

Recently, attempts have been made to raise capital for MFIs through the stock market; initial public offerings for many MFIs have been offered. This leads to a conflict of interest in microfinance institutions. Since MFIs lend money at very low interest rates, they are largely non-profit organizations. However, once their IPOs are offered, they come under pressure from investors, who want MFIs to charge high interest rates so that shareholders reap high dividends. Sometimes, microfinance institutions form partnerships with major banks to raise capital. In this case, large banks like ICICI lend money to MFIs, which in turn lend it to poor people and collect the interest. This partnership model is gaining popularity as major banks start funding MFIs.

The microfinance sector has tried to introduce modern technology by making use of computerized information systems that can keep a record of a large number of transactions and branch accounts. It has also tried to introduce smart cards that have unique ID cards and biometric information, like fingerprints, that can be used to keep track of customers. Whether these changes can help to make loans more accessible to those in need remains to be seen. Although microfinance institutions have provided relief to the economically active poor, there is a strong need to improve the quality and spectrum of the services offered by them.

Namrata Singh


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