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Microfinance is the provision of financial services to low-income clients, including consumers and the self-employed, who traditionally lack access to banking and related services


The concept of microfinance mainly started after the initiated by Nobel winner for peace Prof Yunus In 1974, famine struck Bangladesh. At the time, Dr. Muhammad Yunus was a professor of economics at the University of Chittagong. Disillusioned by the elegant theories of economics that could not explain the thousands of poor people dying of starvation on the streets; he was determined to find a practical way to help the poor. During a visit to the nearby village of Jorba, he was astounded to find that a sum of $27 could radically change the lives of 42 people in the village. This was the sum of money they collectively needed to buy bamboo to make the stools they sold to make a living. He took $27 from his pocket and made 42 loans to the stool makers in this tiny village. They were able to pay him back with interest and take a step towards lifting themselves out of poverty. This simple idea that the poor could use credit to lift themselves out of poverty, led Dr. Yunus to create The Grameen Rural Bank in 1983. Since its inception, it has made over $8.96 billion in loans to over eight million borrowers. its methodologies have become the cornerstone of the microfinance industry. In 2006, The Grameen Bank and Dr. Yunus were awarded the Nobel Peace Prize.


India has one of the largest networks of bank branches in the world, but the hundreds of millions of poor in the country are largely out of it. Banks were nationalized three and half decade ago with the hope and promise that their products and services would reach the poor. But that goal is not even close to being met today. With 52000 commercial bank branches, 12522 branches of regional rural banks and 100000 cooperative bank branches, the country is teeming with institutions that should be able to meet the credit needs of the people. But if you are poor, you are also probably out of luck with banks; it is tough persuading them to even let you open a bank account. The consequences have been devastating. Consider these numbers: 75 million households in India depend on money lenders to meet financial needs; almost 90 percent of the people in the rural India have no access to insurance; 50 million households are landless and need small credit to start some economic activity. And even families earning Rs 4000-5000 a month in urban areas spends huge portions of their earning to service their ever continuous debt.


NABARD Reserve Bank of India Self Help Groups Micro Finance Institutions (MFIs) NGOs

Models of microfinance

The SHG-Bank Linkage Model Partnership Model

Scenario of microfinance in India

Indias population is more than 1000 million, around350 million, are living below poverty. Only 20% access loan from formal sources and 80% from the informal sources. Out of that 20% only 10% have access to micro finance. Annual credit demand by the poor is estimated to be about rs 60000 crores. And only 12,000 crores are disbursed .(April 09) Customers of micro finance are small and marginal farmers, rural artisans and economically weaker section.

Micro-Finance reach in India

Microfinance in India through its two major channels SHG Linkage and MFIs served over 33 million Indians, up by 9 million over FY 2006-07 4 out of 5 microfinance clients in India are women. Micro-credit portfolio of India Microfinance was Rs. 22,000 crore 75% are accounted for by SHG Linkage, 20% by large MFIs and 5% by medium and small MFIs SHG Linkage reports over Rs. 3,500 crore savings, only MFI Bank, KBS Bank reports about Rs. 40 crore savings portfolio MFIs operate in 209 out of 331 districts of the country, 28% of the new clients are from Urban areas.

Demand of Micro-Finance services in India

Through all channels, reach is only 30 million 250 million people live below poverty line Rupee One lakh per individual needed for livelihood promotion, hence trillion of Rs needed Penetration of life insurance services in rural India is <10%. Asset, health, weather and other general insurance services are still nascent

Challenges in Micro Finance

High Volume of Financial Transaction but value wise very low Majority of the financial transactions are off-site in nature Geographic spread of operations and density of customers Lack of infrastructure facilities like power, broadband etc Unsecured lending and no documented financial history is available Combination of above, lead to high operating cost

Swot analysis of micro finance

helped in reducing the poverty huge networking available

not properly regulated high number of people access to informal sources of finance. concentrating on few people only and mainly in urban areas.

huge demand and supply gap. employment opportunity huge untapped market. opportunity for pvt.banks, NBFCs, foreign banks to enter this business segment.

Role in poverty alleviation

The key to alleviating poverty is how effectively the tools of food, shelter, basic education, opportunities for employment, health and medical services, financial services, infrastructure, markets and communication are deployed either singularly or severally to the poor. Poverty is a pervasive problem in our society. Spanning across the world, poverty exists in different levels and various forms. At the current threshold of $1.25 a day, the World Bank estimates that around 25% of the population in developing regions lives below the poverty line. This figure translates to 1.3 billion people living in poverty, or about 20% of the global population


One such poverty alleviation tool is microfinance, which has gained worldwide recognition since the 1990s and has been proven to have positive effects on poverty levels in developing countries. Microfinance is the provision of financial services to the poor, aiming to empower low-income populations by providing them with access to credit and other financial services. Through microfinance institutions (MFI), the poor can obtain collateral-free loans at relatively low interest rates and use the money for creating micro enterprises (small businesses owned by poor people), funding childrens education, and improving homes, among others. Aside from micro credit, MFIs have also developed numerous financial products, such as micro-insurance and micro-mortgage that are designed to accommodate the poors financial needs.