ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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An Overview of Strategic Issues

Institutionalising Microfinance in India

There has been an increasing tendency to use the term microfinance - seen to be the most effective intervention towards poverty alleviation, to refer solely to formalised institutions - leaving aside a large informal section, that could include individuals and informal associations as well. Current efforts to mainstream microfinance operations in the non-financial sector of the country, while acknowledging the failure of state-owned credit institutions, should also take into account, among others, the programmatic success of several intermediary developmental institutions like the small savings and credit groups that have proved not only profitable but an effective poverty alleviation measure.

Microfinance, or, provision of financial services to low income households, has come to be accepted almost unquestioningly in the policy circles in developing countries as the most efficacious intervention to alleviate poverty, even as the role of financial markets in poverty alleviation remains as a grossly under-explored area in policy research. According to the accepted definition, microfinance institutions(mFIs) are those which provide thrift, credit and other financial services and products of very small amounts, mainly to the poor in rural, semi-urban and urban areas for enabling them to raise their income level and improve living standards. Such a definition encompasses a large variety of initiatives, ranging from individual agents in the informal sector (like moneylenders, traders, commission agents, jobbers, etc), to informal groups (chit funds, rotating savings and credit associations) and formal sector institutions. However, there has been an increasing tendency to use the term microfinance (hereafter mF) only to refer to ‘formalised’ institutions. Thus, recent the World Development Report (2000/2001) describes mF as a ‘market-based formal mechanism’ to mitigate the risks faced by poor people as against the ‘informal group-based mechanisms’ like savings and credit associations (for e g, ROSCAs).

Based on a selective literature review, this paper presents an overview of issues that are of strategic significance in the move to institutionalise mF in India. More specifically, we will be looking in to three questions: (1) measurement of success of mF interventions, (2) incorporation of gender dimension in the approach and (3) implications of developing an NGO constituency in the financial service landscape.

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