Paper

Scaling-up Microfinance for India's Rural Poor

Is microfinance the only way to help the poor access financial services?

This paper reviews the current level, and pattern, of access to finance for India's rural poor. It examines:

  • Key microfinance approaches in India;
  • The Self Help Group (SHG) Bank Linkage Initiative.

The paper:

  • Analyzes the success of the SHG Bank Linkage in reaching the poor;
  • Examines the reason behind this, and the lessons learned;
  • Draws on a recent rural access to finance survey of 6,000 households in India.

The paper finds that:

  • India's rural poor currently have little access to finance from formal sources;
  • Microfinance approaches have tried to fill the gap;
  • The growth of SHG-Bank linkage has been remarkable;
  • However, its outreach remains modest.

The paper recommends the promotion of:

  • High-quality SHGs that are sustainable;
  • Clear targeting of clients.

It also argues that:

  • The Indian economy provides scope for the co-existence of diverse approaches to microfinance;
  • Private sector micro financiers need to acquire greater professionalism;
  • The Government can help by providing a flexible architecture for microfinance innovations, including a more enabling policy, legal and regulatory framework;
  • The medium-term strategy to scale-up access to finance for the poor should be to 'graduate' microfinance clients to formal financial institutions.

The paper concludes by offering some suggestions on what it would take to reform these institutions in order to improve access to the poor.

About this Publication

By Basu, P., Srivastava, P.
Published