Microfinance Institutions in India (Concept Paper)

Microfinance has proved to be an effective poverty reduction strategy worldwide. This paper explores strategic options for partnerships between the formal financial sector and the microfinance institutions (MFIs), in delivering financial services to the poor in India.

The contextual issues that arise are:

• Strategic microfinance patterns across the country;
• Institutional operating framework for new institutions;
• Connectivity roles and involvement of the government, donor agencies and communities.

The paper further discusses the Indian formal and informal financial sectors, and also lists down the features of the following Asian credit and saving models:

• Grameen bank model of Bangladesh;
• Self-help groups model of Indonesia;
• Pag IBIG Fund of the Philippines;
• HDFC India.

It then attempts to critique the existing microfinance models, and comments that it is critical to link the poor to the formal financial sector for poverty alleviation.

The paper concludes with three suggestions to bridge the divide between the poor and the formal financial sector:

• Increase the flow of funds to informal lenders to supplement their own funds;
• Promote institutions with the strengths of NGOs and expertise of financial institutions;
• Provide bulk loans to community based financial institutions (CBFIs) who would bear the credit risk of smaller loans origination and servicing.