Microfinance institutions (MFIs) had arisen to provide financial services,

including credit, savings, and insurance, to those people whom the formal
banking system traditionally did not serve. Microcredit, a subset of
microfinance, referred to the extension of small loans to the poor to help
them establish or expand small businesses. MFIs also granted loans for
purposes other than income-generating activities, such as for education,
housing repair or construction, and debt consolidation.
MFIs typically targeted poor women as their clients. The worlds poorest
households tended to rely more heavily on income generated by women, and
research had shown that female microfinance clients were more inclined
than men to repay their loans and invest their earnings in their families
health and education.
Microfinance institutions have given out small loans to the worlds poor
mostly womenand amassed hundreds if not thousands of case studies
showing that the loans help alleviate poverty, improve health, increase
education and promote womens empowerment. While microcredit succeeds
in affecting household expenditure and creating and expanding businesses, it
appears to have no discernible effect on education, health or womens
empowerment,
Another feature of Indias microfinance market was its fragmented and
relatively nontransparent nature.
In general, there were multiple barriers that prevented poor people from
accessing formal financial institutions. First, many of these individuals had
low literacy rates and so had difficulty completing the required loan
application documents. Second, the loan amounts required by the poor were
typically small, which made them unprofitable to service for banks with
traditional infrastructures. Third, the poor have been perceived as not
bankable because they lack collateral and the cost of monitoring the
performance of their loans could be excessive.

1. MFIs provided service to many individuals beyond its actual clients. An

MFI formed SHGs that included many potential borrowers, but only a
small percentage of those group members could take a loan from the
organization at any given timeroughly 5 of 20 members. The group
provided the social collateral (peer pressure) to get the loan recipients
to make payments. However, if they failed to repay the loans, the other

group members became ineligible to receive new loans (i.e., become

clients). This could result in a higher than average expense ratio.
2. While there seemed to be benefits associated with commercialization,
the rate at which Indian MFIs were transitioning to this model was
slower than in Latin America and other Asian nations such as
Bangladesh and Indonesia. Moreover, the movement had spawned
something of a backlash from the development sector among those
advocating for the poverty lending approach. HiH was among the chief
critics of the commercialization approach, preferring poverty lending
targeted exclusively at reaching the poorest of the poor. HiH believed
the interests of the poor could be compromised if MFIs placed too
much emphasis on profit motives or operational sustainability metrics.
3. Microfinance institutions charged higher interest rates than retail banks
charged on other loans to small businesses, they also had significantly
higher expenses for servicing clients. The higher interest rate was due
to the high operational costs of reaching people in remote areas, the
support services provided through the group structure, and the high
operational costs of providing loans on a much smaller scale than
typical banks.
HiH offered the lowest rates available to the members of these groups. Not
only did HiH extend loans to these clients at an affordable rate, it also
provided supplementary business development services. Barnevik explained
HiHs integrated approach: Microcredit without massive effort to prepare the
ground, coach, and train is nothing. Credit without training and other support
leads to consumption. This moves consumption forward but doesnt increase
the standard of living.
Recognizing the limitation of providing only microcredit to its borrowers, HiH
also offered its SHGs training in how to operate as a group and instruction in
basic literacy and finance principles.
Hand in Hand ("HiH") is a large non-governmental organization engaged in
livelihood promotion activities in India. HiH was founded in the state of Tamil
Nadu in 2002. HiH's Mission is to "work for the economic and social
empowerment of women, and thus of society, by creating enterprises and
jobs." HiH seeks to provide "an integrated development program that creates
sustainable communities." To accomplish these objectives, HiH operates a
five-pillar programme to provide education, information, healthcare and a
clean environment to the poor, along with access to jobs. During 2010, HiH

was able to reach more than 600,000 women in Tamil Nadu, Karnataka, and
Madhya Pradesh.