Risk and Return in Micro Finance Institutions-A selective study of Micro Finance Institutions in Karnataka.

Suresh D. Tendulkar Committee, appointed by the Government of India, to estimate the Poverty level in India, uses monthly per capita consumption expenditure to define poverty line. Accordingly, if a person living in rural area, spending less than Rs. 816 per month and a person living in Urban area, spending less than Rs. 1000 per month (as per 2011–12 Prices) is considered to be poor. Based on this cut off point, 21.9% of the total population are poor. A recent World Bank report states that India comprises of 135 million households or 72% of the population whose average annual household income of below $1, 800. This massive wide spread social evil, poses a greater threat for the growth and development of the country. Poverty alleviation and raising the average standard of living have always been stated as the central aims of economic planning in India.

Though the robust growth was witnessed in Indian Financial System and institutions after the nationalisation of banks, process of 1969 and 1980, even today, the bank density still stands to be one bank office for every 12, 000 population on an average (according to 2012). These organised financial institutions have failed to reach the deprived segment and the poor, leaving approximately 135 million households entirely unbanked. Infact, the size of India's unbanked population is one of the highest in the world, second only to China. According to the World Bank report of 2011, there are 450 million unbanked persons in India.

In the absence of formal financial services, the low income segment has traditionally relied on local money lenders, who used to offer instantaneous credit but at 60 to 70% rate of interest and literally pushing them to a debt trap, which has only a one way entry and no exit. That's why there is a famous proverb which states that Indian poor takes birth in debt, lives in debt and also dies in debt. The credit needs of these deprived class will be very small, which most of the organised financial institutions refuse to fulfil, because of high operational cost. Hence, to the rescue of these deprived class, micro finance institutions were initiated, which appears like god gift.

Despite the fact, that these micro finance institutions were started with noval objective and initially, did wonderfully well, in due course of time, these institutions also started developing operational difficulties, due to high loan outstanding. This research aims at highlighting those difficulties and the need for structured study to overcome those difficulties.