Dhakka Starting Microfinance in India

This paper argues that the microfinance movement in India has got stuck in a mire of legal, policy and organizational constraints and needs a dhakka (a massive push) to get along its way.

The paper recommends a three-track strategy that:

• Re-orients existing financial institutions (FIs) in favor of microfinance;
• Encourages new specialized microfinance institutions (MFIs), which see this as their business;
• Establishes a network of community-based financial institutions (CDFIs).

The paper examines:

• The demand for microfinance services in India such as credit, savings and insurance;
• The supply of microfinance services;
• The demand-supply gap and the three-track approach that uses mutually complementary strategies.

The paper argues that:

• The challenge for microfinance is that of simultaneously achieving high access by the poor, while maintaining sustainability;
• The existing policy and regulatory framework militates against sustainable provision of microfinance services, thus reducing access;
• Both mainstream FIs and MFIs face organizational constraints that block the growth of both access and sustainability.

The paper concludes that, eventually, it is the CDFIs that would ensure that both state-owned and market-oriented MFIs work for the benefit of microfinance users.