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Formal Sector

The formal sector comprises of the banks such as NABARD, SIDBI and other regional rural banks (RRBs).
They primarily provide credit for assistance in agriculture and micro-enterprise development and primarily target the poor. Their deposits at around Rs. 350billion and of that, around Rs. 250billion has been given as advances. They charge an interest of 12-13.5% but if we include the transaction costs (number of visits to banks, compulsory savings and costs incurred for payments to animators/staff/local leaders etc) they come out to be as high as 21-24%.

Semi - formal Sector

The majority of institutional microfinance providers in India are semi-formal organizations broadly referred to as MFIs. Registered under a variety of legal acts, these organizations greatly differ in philosophy, size, and capacity. There are over 500 non-government organizations (NGOs) registered as societies, public trusts, or non-profit companies.

Informal Sector

In addition to friends and family, moneylenders, landlords, and traders constitute the informal sector. While estimates of their importance vary significantly, it is undeniable that they continue to play a significant role in the financial lives of the poor.

Steps taken by India to promote micro-financing

It set up development banks, such as SIDBI, NABARD which focused on rural credit and micro-financing. NGOs and SHGs were encouraged to become the govt’s arm in extending micro-credit to the poor. They were provided supplementary credit needed to fund the credit, paper work was reduced between them and the banks. Also, the govt assisted in mobilizing funds from formal financial institutions to meet the larger credit needs of these organizations.

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* Contributed by: -
Varun Ahuja,
Student Manager,
MBA (IB) - Finance,
Institute of Management Technology (IMT), Ghaziabad.