Indian Microfinance: The Challenges of Rapid Growth is a comprehensive account of various components of the Indian microfinance sector, the largest in the world. After reviewing the main challenges facing the sector, it analyzes the progress of the two main delivery models, issues relating to the emerging microfinance services of micro-insurance and money transfers, ongoing efforts in training and capacity building, opportunities facing commercial financers such as bankers and social venture capitalists, the remaining need for development financing, and ongoing research in the sector. Apart from containing extensive original material, the book draws extensively on the findings of other recent studies and reports. It also identifies various requirements for policy and regulatory changes by the central and state governments and the central bank, a contribution which is particularly timely in view of the new microfinance bill under active consideration of the central government.
The main challenge facing the sector is identified as the need to enhance borrower, public, and regulatory support and understanding, by increasing transparency in dealings with borrowers, and by ‘educating’ the public on why microfinance interest rates have to higher than bank lending rates if microfinance institutions are to recover costs and attain viability. Failures in both these areas led to a highly publicized attack in 2006 on the sector by the state government of Andhra Pradesh. While the sector weathered the storm, it needs to take serious note of the lessons, which are analyzed in a separate chapter. The book will be of interest to various players in the sector including practitioners, bankers, insurance companies, venture capitalists, regulators, donors and academics. Given heightened interest in the sector with the Nobel prize awarded to Muhammad Yunus and the Grameen Bank, it will be of even greater interest than before to the intelligent layman and the development community generally.
Chapter 8: Financing: Developmental
A. Apex Financing Institutions: Growing the Seeds and Saplings
The broad division of labour that has emerged among the apexes is that National Bank for Agriculture and Rural Development (NABARD) lends to Microfinance Institutions (MFIs) (under its Model II) only in areas where bank branches are sparse on the ground and therefore unable to extend linkage loans to SHGs. Also, such lending is provided only to MFIs financing Self Help Groups (SHGs). As noted in Chapter 2, the share of NABARD lending under Model II is rapidly declining, in view of increases in bank lending, and its role will therefore not be dealt with further in this chapter.1
This section will deal with wholesale lending to MFIs by: (i) Small Industries Development Bank of ...