Microfinance - Meeting The Challenges to Realise the Potential

This paper examines opportunities and challenges in the Indian microfinance sector.

Although India has the most extensive banking infrastructure in the world, poor credit-deposit ratios, unsustainable lending and high-levels of non-performing assets pose challenges to its progress. Despite expansion of formal banking structure and pro-poor directed policies and programs, the share of non-institutional agencies in the outstanding cash dues of rural households is as high as 36 percent. Lack of human capacity remains one of the key barriers to developing a full-fledged, inclusive, sustainable financial system.

To create an inclusive, competitive and vibrant financial system that offers high quality, client-responsive products and services to all sectors of society on a commercial basis, India should build on its existing strengths that include:

• Wide range of financial institutions adapted to the local context offering a variety of financial services to the poor;
• Liberalized interest rates that encourage banks and MFIs to serve their low-income customers on a sustainable basis;
• Prowess in information technology that allows development of e-banking solutions for the poor.