Conditions in Which Microfinance has Emerged in Certain Regions and Consequent Policy Implications

This paper looks at the macro data on the availability of infrastructure, economic growth, density of population and the availability of formal financial services, to examine if any of these factors explain the growth of microfinance in certain regions, while others lag behind. The study examines data from four southern states and three western states of India and finds that:

• Most of the indicators are not significant enough to explain the regional disparity in the growth of microfinance;
• Anecdotal evidence and a perusal of the state policy pronouncements explain that the role of the state could be significant in promoting some of these initiatives;
• In the case of Karnataka, the banking system seems to have played an additional role in the supply of microfinance services.

As per the paper:

• Possibly, the sector is still insignificant in the rural economy to establish causality with micro-variables;
• However, there could be possibility of growth in states like Rajasthan where most of the factors that could foster microfinance seem to exist;
• Policy interventions on the routing of developmental projects could give the movement a big boost.

The paper concludes that the existing network has the potential of unleashing more finance and financial products, and recommends that the initiative be seized immediately.