Microfinance in the India: The Changing Face of Microcredit Schemes

This paper analyzes the current microfinance scenario in India. The paper states that:

• In India, the microfinance scene is dominated by the ‘Self-Help-Groups (SHGs) – Banks Linkage Program, aimed at providing a cost effective mechanism for providing financial services to the ‘unreached poor;
• The microfinance institutional structure in India has ‘mainstream and ‘alternative microfinance institutions (MFIs):
  • Mainstream MFIs have the disadvantages of being inflexible, borrower unfriendly and late, with high transaction costs;
  • Alternative MFIs have their own set of problems, such as financial problems, lack of commercial orientation, lack of proper governance and isolation;
• A more refined model of microcredit delivery has evolved lately, which emphasizes the combined delivery of financial services along with technical assistance, and agricultural business development services.
• There is also the recent trend of larger MFIs transforming into ‘Non-Bank Financial Institutions (NBFCs).

The author proposes a new design model that combines the basic concept of a microfinance unit within the structure of an NBFC and states its main aims. The paper concludes that:

• The major constraints to microfinance in India are: lack of funding, lack of poverty impact indicators, and lack of an enabling policy environment;
• The idea of coalescing non-government organizations (NGOs) within an NBFC framework may seem detrimental to the core intention of an MFI;
• However, the changing face of microfinance in India appears to be positive in terms of the ability of microfinance to attract more funds and increase outreach.