Microfinance institutions in India: An overview

Most poor people manage to mobilize resources to develop their enterprises and their dwellings slowly over time. Financial services could enable the poor to leverage their initiative, accelerating the process of building incomes, assets and economic security. However, conventional finance institutions seldom lend down-market to serve the needs of low-income families and women-headed households. They are very often denied access to credit for any purpose. More than subsidies poor need access to credit. Absence of formal employment makes them ‘non-bankable’. Therefore the fundamental problem is not so much of unaffordable terms of loan as the lack of access to credit itself (Kim, 1995). This forces them to borrow from local money lenders at exorbitant interest rates. Many innovative institutional mechanisms have been developed across the world to enhance credit to poor even in the absence of formal mortgage. The lack of access to credit for the poor is attributable to practical difficulties arising from the discrepancy between the more of operation followed by financial institutions and the economic characteristics and financing needs of low-income households. For example, commercial lending institutions require that borrowers have a stable source of income out of which principal and interest can be paid back according to the agreed terms. However, the income of many self employed households is not stable, regardless of its size. A large number of small loans are needed to serve the poor, but lenders prefer dealing with large loans in small numbers to minimize administration costs. They also look for collateral with a clear title – which many low-income households do not have. In addition bankers tend to consider low income households a bad risk imposing exceedingly high information monitoring costs on operation. Presently (2009), there are about 150 micro-finance institutions (MFI) in India, with a gross loan portfolio of USD 4.5 billion, 26.6 million active borrowers, 144.4 USD average loan balance per borrower, 204.9 million USD deposits, 5.1 billion USD total assets and 2 million depositors.