India: Microfinance FIN 680V/ FIN 360 P.V. Viswanath

Microfinance Lack of rural development was thought to be due to lack of production assets and credit. The government introduced easy credit programs through Regional Rural Banks. These banks improved access to credit of better-off farmers, but failed to reach the vast numbers of landless people, microentrepreneurs, agricultural labourers and illiterate women. Cheap credit skewed development to richer farmers.

Microfinance Early Rural Credit programs failed because: procedures of rural banks were unduly complicated and costly the sole emphasis on production loans was ill-guided the poor were able to save, but had no opportunity of depositing their savings transaction costs were prohibitive financial products were unsuitable

Microfinance in India National Bank for Agriculture and Rural Development (NABARD) concluded from a study that: Microfinance programs have to be savings-led, not credit-driven. The poor have to have a say in their design. The NABARD program with the help of the RBI based itself on the work of self-help groups (SHGs).

SHGs SHGs are successful because they are self-directed, largely homogeneous in terms of caste and activity, build a common fund from very small regular savings and interest income lend to their members for periods of 1-3 months at an interest rate of 2-3% per month.

SHG Banking The NABARD program piggy-backs on the work of established SHGs by providing them refinance. This program works because India already has in place a network of rural banks. By March 2005 SHG banking reached 1.6 million savings-based groups with 24 million members, covering over 120 million people from the lowest strata of the rural population. The program is in the hands of local agencies, driven by local SHG ownership.

Microfinance Why does it work? Incentives Group Monitoring