Microfinance Institutions in India

This paper discusses the conceptual framework for microfinance in India, drawing on the lessons learnt from the experiences of microfinance institutions (MFIs) around the world. The authors explore issues such as: 

• Prevailing paradigm for microfinance in the country;
• Methodological issues and operational imperatives;
• Involvement of the mainstream financial sector in microfinance;
• Need for a new MFI.

The authors also present characteristics of the microfinance sector in India:

• Fragmented demand addicted to subsidies;
• Supply driven by grants;
• Inadequate financial appraisal and technical analysis of loans given;
• Inappropriate regulation.

Finally, the authors identify the following options for an institutional framework suitable for a sustainable provision of financial services to the poor:

• Increasing the flow of commercial funds to the existing providers and taking advantage of their outreach;
• Formation of an institution that would combine the strengths of a NGO and the expertise of a financial institution;
• Multi-layered arrangement where the formal financial institutions lend to an Apex Community Based Financial Institution (CBFI) and these on-lend to primary CBFIs.