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Introduction

The rural India had not been getting as much attention as warranted from the banking sector. Majority of the Indian population resides in rural areas, hence, it was essential to bring the rural into formal banking system.
Initiatives were taken in 1992 when NABARD, in collaboration with RBI, launched the SHG (Self-Help-Group) - bank linkage program as a Pilot Project for linking 500 SHGs. The program envisaged organizing the rural poor into small groups (SHGs), building their capacities to manage their own finance and, then, negotiating bank credit on commercial terms. The SHGs were supported by public sector banks, regional rural banks and co-operative banks. The target-group broadly comprises small and marginal farmers, landless agricultural and non-agricultural laborers, artisans and craftsmen, and other rural poor engaged in small businesses such as vending and hawking. Urban poor too come under the purview of microfinance. The program as of March 2006 boosts 2.2 million SHGs and total Rs. 1.14 billion bank loans disbursed.

In the late 90s, the success of Grameen Bank model in Bangladesh and similar models around the world caught the eye of many commercial banks in India. With rule of 3:1 for setting up bank branches being scrapped, the new private banks do not have the outreach as compared to the regional rural banks. Microfinance initiatives were recognized as a cost effective and sustainable way of expanding outreach of the banking system to the rural poor.

Micro credit is now recognised by RBI as priority sector lending and banks have good reason to tap the BOP market. Commercial banks now lend to MFIs, partner with MFIs like the ICICI model, securitize the loan portfolio and/or source venture capital funding. In addition to capital, banks cross sell different financial products through MFIs. The slow pace of MFI expansion was attributed to the lack of capital; however, with commercial banks stepping in, the problem of capital may not last for long. With capital flowing into microfinance, the MFIs are getting rated by MFI rating agencies like M-CRIL. In short, microfinance is growing at fast pace, viz., loan outstanding, client outreach, product and service diversification, etc.

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* Contributed by: -
Raghavendra Badaskar,
PGP II,
T. A. Pai Management Institute, Manipal.