History of Microfinance

 An ambitious credit scheme the Integrated Rural Development Programme (IRDP) with a
considerable element of subsidy was launched to alleviate poverty.
 Less than 10 per cent of them were found to be still associated with the banks after their
loan ‘repayment’ was over.
 Besides corruption, the programme was ill-conceived as it was a supplyled, not demand-led
credit programme so that the clients did not have a choice over the purpose and amount.
 backward and forward linkages were never of any concern during implementation
 All the above mentioned points only weakened the strength of the financial institutions to
serve the poor and the rural areas, and further reduced their interest in transacting such
business

The microfinance could be classified among one of the five methodologies :

1) Grameen and Solidarity Model : People form groups of three to eight persons on the
condition that each of them would be assuming responsibility for the lending and other
financial operations for the other members of the group.
2) The Group Approach: The group approach delegates the entire financial process to the
group rather than the financial institutions. Savings, loans, loan repayments are taken care
of at the group level. These groups are in turn linked to a financial or a microfinance
institution for sourcing of additional funds as well as depositing their savings. Eg SHG in india
3) Individual Credit: Credit given directly to the individuals also forms a part of the
microfinance technology
4) Community Banking: This model is to an extent an expansion of the group approach where
the basic financial necessities of the poor especially the women are met through the
community banking system.
5) Credit Unions and Cooperatives : Credit unions and cooperatives are member-owned
organisations providing credit and other financial services to their members.

Microfinance in India :
 The earliest steps in microfinance in India can be traced to this initiative undertaken
for providing banking services to the poor women employed in the unorganised
sector of Ahmedabad.
 First official interest in informal group lending in India took shape during 1986-87 on
the initiative of the National Bank for Agriculture and Rural Development (NABARD).
 NABARD initiated certain research projects on Self-Help Groups (SHGs) as a channel
for delivery of microfinance in the late 1980s.

Formation of Self Help Groups:

 SHG is a group of individual members comprising of individual members known to each

other, coming from the same village, community and even neighbourhood who by free
association pool their savings on a regular basis to form a collective fund.
 This fund is then rotated as credit amongst the members through self generated norms
  The SHG linkage programme therefore attempts to bring together four trends, and derives
strength from the positive environment created by these, independently of each other.
These trends are :
(i) the maturing and expanding SHG movement initiated by the NGO sector;
(ii) the focus on microfinance to the poor as a strategy for poverty alleviation;
(iii) the ongoing national policy commitment to improve access to finance by the poor;
(iv) the policy environment for financial sector reforms within India

RBI’s working group linkage with the NGO and SHG : The policy interest in the whole concept of
SHG linkage with banks was institutionalised with the RBI establishing in 1994 a working group on
NGOs and SHGs comprising representatives from NABARD, bankers and development practitioners.
This group noted the following advantages of SHG :

 SHGs have facilitated the rural poor in fulfilling their credit requirements, both for meeting
emergent consumption needs as well as small production requirement.
 SHGs have been able to meet successfully the requirements of credit of the rural poor as per
their choice unlike in the case of borrowing under most of the poverty alleviation
programmes implemented through formal credit institutions.
 Near cent per cent recovery rates of the SHGs are in sharp contrast to the poor recovery
performance of banks in respect of various activities under rural credit, more so under
poverty alleviation programmes.

MFIS other than SHG bank Linkage System :

1) NGO MFIs :
 NGO-MFIs There are a large number of NGOs that have undertaken the task of financial
intermediation.
 Majority of these NGOs are registered as a trust or a society.
 Many NGOs have also helped SHGs organise themselves into federations and these
federations are also registered as Trusts or Societies.

2) Non-Profit Companies as MFIs : On account of these factors, NGO-MFIs are of late

setting up separate non-profit companies for their microfinance operation. Such an MFI is
prohibited from paying any dividend to its members

3)For Profit MFIs: Non Banking Financial Companies (NBFCs) are companies registered
under the Companies Act, 1956 and regulated by the RBI. All the NBFCs accepting public
deposits are subjected to capital adequacy requirements and prudential norms

Accessing of the Public Savings by MFIs :