Microfinance in India A Step towards Rural Prosperity

Poverty and unemployment are the major problems of underdeveloped countries including India. The Planning Commission has estimated that 27.5 percent of the population lives below the poverty line. The criteria used for assessment were monthly per capita consumption expenditure below INR 356.35 for rural areas and below INR 538.60 for urban areas. About 71 percent of the poor are in rural areas – primarily daily wagers, self-employed and landless labourers. One of the important reasons identified for the stagnancy in the poverty line was low access to credit from the formal financial institutions.

In this scenario, microfinance has emerged as a cost-effective and efficient way for reducing poverty. Microfinance has proven to be an effective and powerful tool for poverty alleviation.

Growth and Development of Microfinance in India

Recognising the potential of microfinance through Self-Help Groups (SHGs) to positively influence the development of the poor, the Reserve Bank, NABARD and Small Industries Development Bank of India (SIDBI) have taken further fillip in microfinancing. The basic purpose of the linkage is to strengthen the financial health of SHGs by ensuring adequate flow of bank credit to these institutions.

Self-help Groups

India has been experiencing micro credit in the form of SHGs as a part of formal credit delivery system giving freedom to Non-Government Organisations (NGOs) to set up SHGs on various models. They have been recognised as useful tools to help the poor and as an alternative to meet the urgent credit needs of the poor.

SHGs go through various stages of evolution

Group Formation: At this stage, groups are formed, developed and strengthened to evolve into self-managed peoples’ organisations at the grassroots level.

Group Stabilisation: Through thrift and credit activity among the members and building their group corpus, the group undertakes internal lending to the members of the corpus.

Micro Credit: The group corpus is supplemented with a Revolving Fund. It is sanctioned as cash credit limit by the banks for livelihood.

Micro Enterprise Development: Here, the group takes up economic activity of its choice for income generation.

NGOs create a strong base for the members in forming SHGs where the members contribute their saving to a common pool and money is lent to the members on rotation basis according to their need and preference. The groups are eligible for the loans from the banks after 6 months of saving and credit operations. The opportunity provided in safe saving as well as availability of need-based credit encourage more poor people to join SHGs. The members use the credit for a variety of purposes such as small business, agriculture, health, education of children, festivals and so on.

SHGs have developed rapidly in the country due to the following reasons:

• This is a flexible system;

• The association of people in the group is based upon mutual confidence;

• Common pooling of funds;

• The common fund meets the credit need of members;

• This is a cost effective system;

• Active population of NGOs increase their strength;

• Interest rate on borrowings is comparatively low;

• Recovery is encouraging because of members’ active participation;

• SHGs help the poor villagers to free themselves from the village money lenders.

The number of poor families benefiting through SHGs increased from 9.31 lakh in 1999-2000 to 120.89 lakh on 2008-09.

SHG-Bank Linkage Programme

The SHG-bank linkage programme is the flagship microfinance intervention mechanism of NABARD. NABARD with the policy back up of the RBI, is designed to link these groups with banks to overcome the financial constraints. With the NABARD programmes on self-help groups, the emphasis shifted to loans without collateral, 100 percent repayment norms and lending to groups of people who would also invest their saving and regulate their groups and groups’ loans, thus reducing transaction costs for the borrowers and for the banks.

Under the SHG-Bank Linkage Programme as on March 2010, INR 69.53 lakh SHGs held saving bank accounts with total savings of INR 6198.71 crore as against INR 61.21 lakh SHGs with savings of INR 5545.62 as on March 2009, thereby showing a growth rate of 13.6 percent and 11.8 percent. Thus, more than 97 million poor households were associated with banking agencies under this programme.

Models of Linkage

The three broad models of linkage programmes are as follows:

First Type: Bank takes the initiative to form the groups, open their savings account and provide them credit.

Second Type: Groups are formed and developed by Government agencies, NGOs or communities.

Third Type: The NGOs that form and develop the SHGs also act as financial intermediary. The banks lend to financial intermediaries for further lending to the members of SHGs.

The second type has emerged as the most popular model accounting for over 70 percent of the total SHGs financed under their category, followed by model I and model III.

Women Empowerment

The widespread formation of the SHGs means that it has also taken the form of a movement for social development of women in India.

Issues and Challenges

Microfinance has been seen as a social obligation rather than a potential business opportunity. Sometimes, a few financial institutions charge the beneficiaries of a group high interest rate that makes the repayment difficult for the poor. In most of the cases, it has been found that members of a group take up certain economic activities for their sustenance that are not preceded by relevant training.

Financial Support and Promotional Efforts by NABARD

NABARD has been playing the role of propagator and facilitator by providing conducive policy environment, training and capacity building besides extending financial support for the healthy growth of SHG linkage programme.

NABARD Refinance Support to Banks

NABARD provides refinance support to banks to the extent of 100 percent bank loans disbursed to SHGs.

Microfinance Development and Equity Fund

The Microfinance Development and Equity Fund is being utilised for promotion of various microfinance activities such as formation and linkage of SHGs through SHPIs, training and capacity building of stakeholders, capital and soft loan assistance to MFIs, livelihood propagation, studies, documentation, etc.

Support for Partner Agencies

NABARD continued to extend grant support to NGOs, RRBs, DCCBs, FCs and Individual Rural Volunteers (IRVs) for promoting and nurturing quality SHGs.

Capability Building and Training of Partner Agencies

To fine-tune the strategies for enhancing support to the microfinance sector, NABARD conducted many awareness oriented programmes and arranged exposure visits for SHG members, NGOs, bankers, trainers, Panchayati Raj Institutions (PRIs) representatives, NABARD officials, IAS officers and micro-entrepreneurs throughout the year.

Joint Liability Groups (JLGs)

NABARD has issued comprehensive guideline on Joint Groups to banks focusing on small and marginal farmers, tenant farmers engaged in farm sector and other clients under non-farm activities.

Micro Enterprise Development Programme for Skill Development

The Micro Enterprise Development Programme (MEDP) was launched by NABARD in 2006 with the basic objective to enhance the capability of the numbers of matured SHGs to take up micro enterprises through appropriate skill upgradation/development in the existing or new livelihood activities both in the farm and non-farm sectors by way of enriching knowledge of participants on enterprise management, business dynamics and rural markets. In 2009-10, a total of 1530 MEDPs, both under farm and non-farm activities were conducted across the country covering 38,313 numbers of the matured SHGs. Cumulatively, so far covering over 93,777 participants.

Pilot Project on SHGs – Post Office Linkage Programme

NABARD sanctioned additional INR 200 lakh Revolving Fund Assistance (RFA) taking the total RFA sanctioned to INR 500 lakh.

Providing Technology Support to NGOs

The scheme of supporting NGOs for computerisation of MIS of the SHG-Bank linkage programme has been revised. NGOs promoting a minimum of 250 SHGs would now be eligible for a maximum grant assistance of INR 50,000 for hardware components.

Support to SHGs Federation

Recognising the emerging role of the SHGs Federation in nurturing of SHGs, enhancing the bargaining power of groups’ members and livelihood promotion, NABARD introduced during 2007-08, a flexible scheme to support such federations, irrespective of their model.


Microcredit and microfinance have received extensive recognition as a strategy for poverty reduction and for economic empowerment. The assumption is that increasing women’s access to microfinance will enable them to make a greater contribution to household income. This contribution and subsequent increase in status in the household will, in turn, give women the support they need to bring about wider changes in gender inequality in the community.

Dr Mohd Azam Khan is Assistant Professor, Department of Economics, Aligarh Muslim University
Tosib Alam is Research Scholar, Department of Economics, Aligarh Muslim University