Microfinance and the State: Exploring Areas and Structures of Collaboration

Analyzing the evolution and present status of microfinance, this paper examines the areas where government can provide support to encourage the development of microfinance in India. The foremost area where state intervention is crucial is the development of general infrastructure for the poor. This entails:

• Collaboration of the government machinery with the non government or private sector organizations;
• Enhancing role of the elected representatives in planning and prioritizing infrastructure development activities;
• Using local area development funds for creating the necessary infrastructure.

The paper makes the following recommendations regarding the support of the state to beneficiaries:

• Targeting of beneficiaries for state support should be transparent and professional;
• Intermediary institutions such as the Regional Rural Banks (RRBs) should bear part of the risk inherent in lending activities to encourage professional ethos;
• Incentives and subsidies should be directed towards reducing transaction costs and not towards write-offs.

The paper concludes by making policy recommendations for the state:

• Revitalizing the cooperative movement to leverage this vast network;
• Encouraging the setting up of Local Area Banks;
• Rationalizing prudential norms RRBs;
• Allowing not for profit entities to undertake micro financial activities without prejudicing their present tax status.