International Journal of Information Research and Review, August, 2016

International Journal of Information Research and Review

Vol. 03, Issue, 08, pp. 2681-2685, August, 2016

Research Article
CURRENT SCENARIO OF MICROFINANCE INDUSTRY IN INDIA
*Dr. Alka Mittal
Maharaja Surajmal Institute, An affiliate of GGSIP University, New Delhi, India

ARTICLE INFO ABSTRACT

Article History: The present paper highlights the microfinance & evaluates the position of micro-finance. The concept
th
of microfinance is not new in India. Traditionally, people have saved with and taken small loans from
Received 12 May 2016 individuals and groups within the context of self-help to start businesses or farming ventures. Majority
Received in revised form
of poor are excluded from financial services. Microfinance is a programme to support the poor rural
17th June 2016
Accepted 25th July 2016 people to pay its debt and maintain social and economic status in the villages. Microfinance is an
Published online 30th August 2016 important tool for improving the standard of living of poor. Inspite of many organizations of
microfinance, microfinance is not sufficient in India. The study explores some suggestions to make
Keywords: microfinance more effective. The potential for growing micro finance institutions in India is very high.
Microfinance market in India is expected to grow rapidly, supported by government of India’s
Microfinance Institutions, initiatives to achieve greater financial inclusion, and growth in the country’s unorganized but priority
Self Help Groups,
sector. Microfinance has evolved rapidly into a global movement dedicated to providing access to a
Microcredit,
MUDRA Bank. range of financial services to poor and nearpoor households. Major Cross-section can have benefit if
this sector will grow in its fastest pace. On the basis of growth and evolution related to microfinance,
the study predicts the new agenda for future. The microfinance industry being very small in terms of
value added to the Indian financial sector. It examines the experience, of India, which has one of the
largest microfinance sectors in the world. Globally, over a billion poor people are still without access
to formal financial services. Some 200 million of these people live in India. The Indian Government
should find an avenue for creation of awareness on how microfinance can benefit from loans and
monitors closely to ensure disbursement of loans and grants to entrepreneurs.
Copyright © 2016, Alka Mittal. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use,
distribution, and reproduction in any medium, provided the original work is properly cited.

INTRODUCTION Objectives of the Study

In 1976, a small experiment was conducted in the poverty-  To understand the need and evolution of Microfinance
stricken and flood ravaged Bangladeshi village of Jobra. Industry in India
Professor Muhammad Yunus, a lecturer of Economics at
Chittagong University visited the village and upon seeing the  To evaluate the success of Microfinance in providing
desperate poverty there he decided to lend about $27 (free of microcredit to poor population.
interest) as working capital to a few women he met there. To  The changing scenario of microfinance industry in India
his surprise, the women used the money productively in their  The steps taken up by the government to promote
modest commercial enterprises and repaid the loan with microfinance sector.
thanks. This small experiment was to become the basis for a
global revolution popularly known as microfinance. As the MATERIALS AND METHODS
new millennium arrived, micro credit had come to be
recognised as the ultimate panacea for endemic poverty. In It is mainly concerned with peculiar sources of secondary data
2005 the UN Secretary General Kofi Annan said it was a collection are tapped. Secondary data are collected from the
critical anti-poverty tool, emancipating women and research papers, dissertations of the scholars, books of
empowering the poor and their communities. Yunus claimed references, standard publication and reports by institutes and
that thanks to micro credit the next generation will only find organizations, magazines, periodicals, internet etc.
poverty in museums.
Evolution of MFIs Industry
*Corresponding autho: Dr. Alka Mittal
Maharaja Surajmal Institute, An affiliate of GGSIP University, Microfinance has built a solid track record as a critical tool in
New Delhi, India. the fight against poverty and has entered the financial
2682 Dr. Alka Mittal, Current scenario of microfinance industry in India

mainstream. The rapid growth of the industry over the past 15 Microfinance Historical Evolution Worldwide
years has reached approximately 130 million clients according
to recent estimates. Yet microfinance still reaches less than 20 Traditionally, people have saved with and taken small loans
percent of its potential market among the world’s three billion from individuals and groups within the context of self-help to
or more poor. Nearly three billion people in developing start businesses or farming ventures. These stages are
countries have little or no access to formal financial services. described below: The evolution of Microfinance sector can be
Financial services for poor people are a powerful instrument broadly divided into four distinct phases:
for reducing poverty, enabling them to build assets, increase
incomes, and reduce their vulnerability to economic stress. Phase 1: The cooperative movement (1900-1960)
Formal financial services such as savings, loans, and money
transfers enable poor families to invest in enterprises, better During this phase, credit cooperatives were vehicles to extend
nutrition, improved living conditions, and the health and subsidized credit to villages under government sponsorship.
education of their children. Microfinance has also been a
powerful catalyst for empowering women. The evolution of the Phase 2: Subsidized social banking (1960s – 1990)
industry has been driven by many factors which include the
transformation of microfinance providers, the sizable supply With failure of cooperatives, the government focused on
gap for basic financial services, the expansion of funding measures such as nationalization of Banks, expansion of rural
sources supporting the industry and the use of technology. As branch networks, establishment of Regional Rural Banks
the industry has developed, there has been a shift from (RRBs) and the setting up of apex institutions such as the
specialized NGOs to an increasing number of regulated and National Bank for Agriculture and Rural Development
licensed MFIs which stress that sustainability and impact go (NABARD) and the Small Scale Industries Development Bank
hand in hand. Furthermore, The World Bank Group is working of India (SIDBI), including initiation of a government
with private microfinance institutions and stakeholders to sponsored Integrated Rural Development Programme (IRDP).
incorporate responsible finance practices into all aspects of While these steps led to reaching a large population, the period
business operations. Since pioneering commercial was characterized by large-scale misuse of credit, creating a
microfinance in the early 1990s, IFC has continued to lead negative perception about the credibility of micro borrowers
innovation in microfinance, using developments in technology, among bankers, thus further hindering access to banking
financial products, and policy to help financial institutions services for the low-income people.
reach a greater number of people in a more cost-effective way.
Phase 3: SHG-Bank linkage program and growth of NGO-
IFC’s goal for microfinance is to scale up access to a range of
MFIs (1990 – 2000)
high quality financial services for underserved populations,
maximizing development impact and ensuring institutional The failure of subsidized social banking triggered a paradigm
sustainability. IFC achieves this goal by effectively combining shift in delivery of rural credit with NABARD initiating the
investment and advisory services to a range of financial Self Help Group (SHG) Bank Linkage Programme (SBLP),
intermediaries. IFC is the World Bank Group’s lead investor in aiming to link informal women's groups to formal banks. The
microfinance, and is one of the leading multilateral investors in program helped increase banking system outreach to otherwise
terms of outreach to microfinance institutions, working with unreached people and initiate a change in the bank’s outlook
more than 100 institutions in over 60 countries. Within the towards low-income families from ‘beneficiaries’ to
microfinance industry, the majority of MFIs are subsidized, ‘customers’. This period was thus marked by the extension of
either by governments or by NGOs. credit at market rates. The model generated a lot of interest
among newly emerging Microfinance Institutions (MFIs),
According to the World Bank, although there are over 10,000 largely of non-profit origin, to collaborate with NABARD
microfinance institutions (MFIs), serving over 150 million under this program. The macroeconomic crisis in the early
poor people in developing countries, they only reached 4 1990s that led to introduction of the Economic Reforms of
percent of the potential market. In the recent years there has 1991 resulted in greater autonomy to the financial sector. This
been a tremendous growth in the number of microfinance also led to emergence of new generation private sector banks
borrowers, growing over the past five years, between 25 and that would become important players in the microfinance
30 percent annually and it is expected a similar growth in the sector a decade later.
coming years18 Microfinance industry is segmented, ranging
from very small NGOs with few clients to large institutions Phase 4: Commercialization of Microfinance: The first decade
with millions of clients and it is a highly concentrated industry. of the new millennium
One need only consider that the median share of the largest
MFI in a country is one third of the entire market and the Post reforms, rural markets emerged as the new growth drivers
median share of the top ten MFIs is about 95 percent of the all for MFIs and banks, the latter taking interest in the sector not
industry19.The microfinance investment market is also only as part of their corporate social responsibility but also as a
growing in size and maturity and it is increasing the need of new business line. On the demand side, NGO-MFIs
investors for transparency through market research, data increasingly began transforming themselves into more
provider and analysis of MIFs. Transparency is encouraged by regulated legal entities such as Non Banking Finance
the launch of open data for microfinance such as Companies (NBFCs) to attract commercial investment. MFIs
MIXMarket20, which publishes data on more than 1,500 set up after 2000 saw themselves less in the developmental
microfinance institutions (MFIs) in more than 190 countries, mould and more as businesses in the financial services space,
and helps to build the information infrastructures needed in catering to an untapped market segment while creating value
developing countries. for their shareholders.
2683 International Journal of Information Research and Review Vol. 03, Issue, 08, pp. 2681-2685, August, 2016

Historical Evolution of Microfinance in India

1960 to 1980 1990 2000

Phase 1: Social Phase2:Financial Phase:3 Financial
Banking Systems Inclusion
Approach
1. Nationalization of 1. Peer-pressure 1. NGO-MFIs and
private commercial SHGs gaining
Banks 2. Establishment more egitimacy.
2. Expansion of rural of MFIs, typically 2. MFIs emerging
branch network of nonprofit as strategic
origins partners to diverse
entities interested
3. Establishment of in the low income
rural regional banks Segments
4. Establishment of 3. Consumer
apex institutions such finance emerged as
as national bank for high growth area
agriculture and rural Increased policy
development and Regulation
small industries Increasing Commercialization
development bank of India
Source: Report on “Status of Microfinance sector 2010”

This overriding shift brought about changes in institutions' which also ensured significant homogeneity among customers;
legal forms, capital structures, sources of funds, growth (ii) organising them into groups (SHGs) that effectively dealt
strategies and strategic alliances. Microfinance in India, as with the problems of information asymmetry described earlier;
elsewhere, originally began as part of a developmental and and (iii) offering standardised products based on standardised
poverty-reduction project, led by NGOs who thought this operating systems, with strict enforcement of discipline.
would be an effective way of allowing the poor to lift
themselves out of poverty by their own efforts. Many NGOs Recent Developments in India
began the process of group lending based on self-help groups
(SHGs) and the linkage with commercial banks (whereby The Government of India will setup Micro Units Development
banks were allowed to lend to groups with a proven track and Refinance Agency (MUDRA) Bank with a capital of Rs
record of repayment) further enlarged its scope. 20,000 crore which would regulate and refinance all micro-
finance institutions. The government proposes to set up
Table1. Microfinance penetration by country (and region) in 2008 MUDRA Bank through a statutory enactment. This Bank
would be responsible for regulating and refinancing all Micro-
Global Ranking Country Population
finance Institutions (MFI) which are in the business of lending
1 Bangladesh 25%
2 (Andhra Pradesh State, India) 17%
to micro/small business entities engaged in manufacturing,
Bosnia and Herzegovina 15% trading and services activities, The Bank would partner with
3 Mongolia 15% state level/regional level coordinators to provide finance to
4 Cambodia 13% Last Mile Financer of small/micro business enterprises. The
5 Nicaragua 11%
MUDRA Bank would primarily be responsible for laying
6 Srilanka 10%
7 Montenegro 10% down policy guidelines for micro/small enterprise financing
8 Vietnam 10% business, registration of MFI entities, regulation of MFI
9 Peru 10% entities, accreditation /rating of MFI entities, laying down
10 Armenia 9%
responsible financing practices to ward off indebtedness and
11 Bolivia 9%
12 Thailand 8% ensure proper client protection principles and methods of
13 India 7% recovery. It would also be responsible for development of
14 Paraguay 6% standardised set of covenants governing last mile lending to
15 EI Salvador 6%
16 Burkina Faso 5%
micro/small enterprises, promoting right technology solutions
17 Kyrgystan 5% for the last mile, formulating and running a Credit Guarantee
18 Ecuador 5% scheme for providing guarantees to the loans which are being
19 Guatemala 5% extended to micro enterprises and creating a good architecture
20 Mexico 5%
of Last Mile Credit Delivery to micro businesses under the
21 Colombia 5%
22 Morocco 4% scheme of Pradhan Mantri Mudra Yojana, A sum of Rs 20,000
Sources: Gonzalez, 2010. Rozas and Sinha, 2010 crore would be allocated to the MUDRA Bank from the money
available from shortfalls of priority sector lending for creating
SHGs and their federations became the intermediaries between a refinance fund to provide refinance to the last mile financers.
individual clients (who were mostly women) and the Another Rs 3,000 crore would be provided to the MUDRA
commercial banking system through the SHG–Bank Linkage Bank from the budget to create a Credit Guarantee corpus for
Programme (SBLP). The basic methodology being used in guaranteeing loans being provided to the micro enterprises.
commercial microfinance in India was broadly along the lines The no of people microfinance borrowers have been reduced in
innovated by Grameen Bank and later adapted by several the wake of the Andhra Pradesh (AP) microfinance crisis of
players. These involved three steps: (i) identifying potential 2009-10, triggered by a series of borrower suicides, allegedly
customers, typically on the basis of some measure of poverty, on account of unscrupulous MFI (microfinance institutions)
2684 Dr. Alka Mittal, Current scenario of microfinance industry in India

Table 2. Number of People Served by Microcredit

Minimum number Customers Serves Number of poorest in Number of women among Percentage of women
of MFIs Reporting (millions) first loan(millions) the poorest(millions) among the poorest
31 December 2003 2,931 81 55 45 82.5
31 December 2009 3,589 190 128 105 81.7
31 December 2010 3,652 205 138 113 81.9
31 December 2011 3,703 195 124
Source: State of the Microcredit Summit Compaign Report 2004, 2011, and 2012 (Daley-Harris 20042011; Maes and Reed 2012; Reed 2013).

Table 3. Number of Active Borrowers of Microcredit

Number of Microcredit Institutions Actives Borrowers(millions)

Regions
Sub-Saharan Africa 1,009 12.7
Asia and the Pacific 1,746 169.1
Latin America and the Caribbean 647 13.8
Middle East and North Africa 91 4.3
Eastern Europe and Central Asia 73 5.2
North America and Western Europe 86 0.2
Source:State of the Microcredit Summit Report 2012(Maes and Reed 2012) Astha et al

practices of charging high interest rates and excessive lending, The number of beneficiaries grew by a third to 2.88 crore with
leading to increased indebtedness among poor borrowers, and an average loan size rising to Rs 17,917 at the end of
turning to coercion to recover those loans. The industry itself December from Rs 14,409 a year ago. Microfinance player
took some hard knocks. Asset under management (outstanding Ujjivan Financial Services opened its Rs 885-crore initial
loans or gross loan portfolio) fell Rs 3,000 crore to close at Rs public float on April 28 and has fixed the price band at Rs 207-
20,500 crore in 2011-12. MFIs that had large-scale operations 210 per share. Ujjivan, which will become the second
in AP suffered the most. Non-repayment of loans by borrowers microlender to go public, is a recipient of an in-principal
(at the behest of politicians and other community leaders) approval to set up a small finance bank. The IPO, involves
resulted in AP portfolios of most MFIs declining by 35%. The fresh issuance of shares worth Rs 358 crore by the company
AP State Government Ordinance imposed stringent operating and a Rs 527-crore offer-for-sale by its overseas investors who
guidelines mainly tightening screws around lending rates and are exiting or paring their stakes in the company.The company
collection mechanisms employed by MFIs till then. has raised Rs 292 crore through a pre-IPO placement.
Meanwhile, the RBI was waiting for the 'Malegam Committee
Report on Microfinance' before listing out its own set of Microfinance has been a huge disappointment around the
guidelines. world

The regulator turned in its first set of regulations in 2011 World leaders cheered in unison, overjoyed at the discovery of
deeming for-profit MFIs as NBFC-MFIs (a new category of a market-based mechanism for eradicating poverty. Thousands
nonbanking finance companies). It also directed all MFIs to of NGOs took up micro-lending to poor communities with
maintain sufficient 'net owned funds' and structure portfolios billions of dollars in development aid flowing through them.
with 85% of lending to "qualifying assets."In subsequent The microfinance revolution had well and truly arrived. The
amendments, the regulator put in place lending limits per UN declared 2005 as the year of microfinance and next year a
borrower, capped interest rates, employed measures to reduce Nobel Peace Prize was awarded to Yunus and Grameen
excessive indebtedness, explicitly stated tenure of loans and Bank for “efforts to create economic and social development
worked out loan repayment schedules. These moves seemed from below.” Within five years, however, the gloss has started
like a bitter pill then, but were the ideal remedy for the to come off. Long-standing claims of poverty alleviation and
industry's ills. "Prior to the AP crisis, there were no rules female empowerment came to be challenged. Reports of
governing microfinance industry. Micro loans are set to usurious interest rates being charged to desperate borrowers
become cheaper with SKS Microfinance, the listed lender to came to light amidst mounting criticism of the high-handed
poor individuals, taking the lead among small lenders to cut tactics employed by loan officers to collect monthly
lending rates. SKS, which caters to about 50 lakh small instalments. Collective defaults by entire villages were
borrowers and has Rs 6,177 crore of outstanding loans at the reported around the world. Most disturbingly, in the Indian
end of December last, is the only MFI to lend at sub-20% rate state of Andhra Pradesh, a hotbed of microfinance
of 19.75%. With borrowing cost set to fall, other MFIs are lending, dozens of suicides occurred among borrowers under
expected to lower lending rates by 25-50 basis points in the pressure from large micro-lenders, forcing the state to clamp
next three to six months.Bank loans are becoming cheaper as down on the exorbitant interest rates. Microfinance has been
they moved to marginal cost-based pricing. MFIs rely on bank found to have had zero impact on poverty alleviation. While it
loans for on-lending MFIs' outstanding borrowings now stands still has a big presence in the developing world, and
at Rs 36,439 crore, representing an 86% growth, according to undoubtedly helps some entrepreneurs find their feet, the hopes
Microfinance Institutions Network (MFIN). In the third quarter and aspirations that it once aroused are no more. Yes, many
of 2015-16, micro lenders received a total of Rs 9,121 crore grassroots organisations are doing a world of good through
debt funding from banks as well as other financial institutions. embedding themselves deeply within the communities they
MFI loans grew 84% in the third quarter to Rs 42,331 crore, hope to serve. But the myth surrounding the minimalist model
MFIN said.
 2685 International Journal of Information Research and Review Vol. 03, Issue, 08, pp. 2681-2685, August, 2016

of microfinance favoured by international agencies and private provides a bandage where a major operation is needed, and at
investors, which involves only lending at the “true cost of worst, it deepens the wounds. Socially embedded microfinance
capital” with no other “intervention” has exploded rather institutions that organise entrepreneurs, provide them with
spectacularly. training and then deploy them in larger ventures are much
more effective though high cost propositions. Interest-free
Conclusion microfinance, based on charity, similarly offers much greater
relief. Ultimately, however, both are largely helpless in face of
Micro-credit could indeed provide a lifeline for desperate the neoliberal onslaught.
borrowers, if it operated at a small scale and with subsidised
interest rates. To some borrowers it could provide a crutch REFERENCES
even at relatively high interest rates, saving them from the
clutches of moneylenders. But given the huge increases in Ahmeti, F. 2014. Microfinance as a Tool for Economic
living costs and the reduced role of governments, especially Development in Transitional Countries: experience from
with respect to healthcare and education, micro credit was Kosovo. European Scientific Journal, 10(4), 269-
never going to be able to stem the tide of poverty. Healthcare is 287.Retrieved from http://eujournal.org/index.php/esj/
perhaps the number one route to bankruptcy among the poor in article/viewFile/2697 /2549
many developing countries and education takes an ever- Appiah, R. 2011. The Impact of Microfinance on the
increasing proportion of their income. Painting all the women Empowerment of Rural Women. A Case Study of
in the world as heroic entrepreneurs doesn’t actually make Asuogyaman District in the Eastern Region. (Master
them so. They are heroic all right, given the struggle they lead Thesis, Institute of Distance Learning (IDL), Kwame
against brutal poverty – but entrepreneurial ventures have Nkrumah University of Science and Technology, Kumasi,
always had a high mortality rate. And there aren’t that many Ashanti Region Ghana) Retrieved from http://dspace.knust.
which can deliver the kind of returns one requires to be able to edu.gh/jspui/bitstream/123456789/4
pay back interest rates in excess of 40%. Given that much of 203/1/Rose%20Thesis.pdf
the loaned money is actually used for consumption, the Ashraf Mohammad, A., and Ibrahim, Bt.Y. 2013. An
chances of getting into debt are always high. Realising that Investigation into the Barrier to the Rural Poor
poverty alleviation was an unsustainable and unachievable Participation in Mfis: The Case of Bangladesh.
goal, the micro-credit industry shifted the goal posts. International Journal of Research in Social Sciences, 1(2)
“Financial inclusion” was the new aspiration, which in practice K, M. R., and Osborn, A. G. 2014. Impact of Microfinance on
meant access to credit, insurance and other financial products. Economic Empowerment of Women: The Case of
The term micro-credit became microfinance and poverty Microfinance Institutions’ Clients in Narok Town. Journal
alleviation quietly moved out of the spotlight. The fact that of Global Business and Economics, 8 (1), 1-23.Retrieved
most borrowers were using the loans for consumption rather from http://www.globalresearch.com.my/journal/JoGBE_
than production was not taken as a failure to achieve the Jan uary2014_V8N1_2.pdf
original goal either. Instead, this “consumption smoothing” Kamal Munir, 2014. Microfinance Has Been A Huge
was celebrated as another achievement. Microfinance then had Disappointment Around The World; Business Insider;
two different realities. One was the global celebration of this University of Cambridge, The Conversation UK Feb. 17.
market-based model for poverty alleviation. The other was the Kumar Gauba Satish, A. 2013. A Literature Review of Micro
cruel reality of many borrowers caught up in debt cycles and Finance in India. International Journal of Management &
struggling against an oppressive neoliberal world order where Business Studies, 3(2), 86-87.Retrieved from http://www.
the proportion of incomes spent on health, education and food ijmbs.com/32/1/anshu2.pdf
kept going up. Either way, it presented an opportunity for Kumar, M., Bohra, N.S., and Johari, A. 2010. Micro-Finance
investors to “do well by doing good”. Once development As an Anti Poverty Vaccine for Rural India. International
agencies and multilateral institutions had paved the way, global Review of Business and Finance, 2 (1), 29-35.
investors piled in. Sitting far away in New York and other Kumari, P.W.N.A., and Singhe, P.J. K. 2014. Poverty
capitals of the financial world, they were attracted by the tales Alleviation and Long-term Sustainability of Microfinance
woven by microfinance providers looking to tap into global Project: with Special Reference to Matale District.
equity markets, tales of helping the poor and making a buck at International Journal of Management and Sustainability,
the same time. With international capital, however, came 3(2), 84-96. Retrieved from: http://www.pakinsight.com/
unprecedented pressure for growth and quarterly profits. Those pdf-files/ijms-si%203 (2), %2084-96.pdf
providers who tapped into the equity markets responded by MUDRA to regulate, refinance all micro-finance institutions;
seeking out more borrowers, and then when defaults loomed The Economic Times, PTI Mar 1, 2015.
they tightened the screws to keep things on track. They devised Shailesh Menon,Microfinance industry is out of an
elaborate public shaming rituals and used these ruthlessly to unprecedent crisis, thanks to regulations, diligent
destroy borrowers’ social capital. Even Yunus disapproved, borrowers; Economic Times Apr 19, 2016,
accusing them of making profits off the back of the poorest, Singla, M. L. 2014. MIcrofinance and Economic Development
neediest members of society. If the minimalist model, fuelled in India: Growth and Challenges; International Journal of
by global capital, survives today it is thanks primarily to Research in Finance & Marketing. 4(3), 1-13, Retrieved
desperate poverty that engulfs the world and to bigger loans from http://www.euroasiapub.org/IJRFM/Mar14/1.pdf
that target the not-so-poor. Growing polarisation of society that Top micro lender SKS Microfinance plans to cut rates, others
raises the cost of living for the poor, along with wholesale may follow; Atmadip Ray, ET Bureau Apr 12, 2016.
privatisation of social welfare institutions, is putting increasing Ujjivan's Rs 885-crore IPO opens on April 28; PTI Apr 21,
pressure on the poor. At best, minimalist microfinance 2016.

*******