The Transforming World of Indian Microfinance

This paper argues against the upscaling of the provision of microfinance, merely on the strength of its performance, without a consideration of vital development issues.

The paper cautions that upscaling may lead to increased failures and credit indiscipline. It also identifies a global trend of:

• The commercialization of microfinance;
• Non governmental organizations (NGOs) transforming themselves into regulated financial institutions or non-banking financial companies;
• Commercial banks entering the business of microfinance.

The paper discusses:

• The upscaling of microcredit, stating that:
  • There is a need to look at factors that constrain the demand for microcredit;
  • There is no evidence that microcredit infusion in rural areas leads to livelihood diversification;
  • There have been no systematic enquiries on the linkages between microcredit-supported enterprises and the larger issues of productivity and employment;
  • Growth of the non-farm sector does not depend only on the availability of credit.
• Macro trends in financial intermediation in India, highlighting the role played by the commercial banking system in rural financial intermediation and rural economic growth.

The paper concludes that convergence between formal and informal systems, the former deriving its strength form adequate financial resources, regulation and governance, and the latter from its capacity to streamline the grassroots delivery of services, appears to be the microfinance model that would eventually evolve in India.