Microfinance: Analytical Issues for India

This paper highlights factors that can help Indian microfinance scale up, and draws lessons from the success of microfinance in other Asian countries.

The informal sector in India is teeming with different types of lenders and mechanisms offering varying ways to save and insure. Reaching poor people on a massive scale with popular products on a continuous basis has involved rethinking basic assumptions. India’s self-help group-bank linkage model is an example of home-grown innovation, and is receiving attention at home and abroad.

Programs in Bangladesh and Indonesia provide examples of innovations and better solutions. Necessary steps include:

• Raising interest rates well above cheap credit levels;
• Clearly targeting customer groups by product design, location or explicit eligibility criteria;
• Judiciously providing non-financial inputs;
• Managing and rewarding staff according to clear, performance-based criteria;
• Avoiding an exclusive focus on credit, or on group-based solutions;
• Further de-regulation of interest rates by the government to allow a broader array of institutions to serve the poor;
• Regulation of programs that take in savings;
• Insistence on timely and transparent financial reporting.