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The Microfinance Promise in Financial Inclusion: Evidence from India

Naveen K Shetty and Veerashekharappa

The IUP Journal of Applied Economics, 2009, vol. VIII, issue 5-6, 174-189

Abstract: : Finance is one of the effective tools in spreading economic opportunities. Wider access to adequate and timely finance helps both the producers as well as consumers in raising their welfare status. The increasing gap between demand and supply of financial services has led to the exclusion of large number of rural population from formal financial institutions. As a response to the failure of formal financial institutions in reaching the poor, the microcredit or more broadly microfinance approach was innovated and institutionalized in the Indian rural credit system. It was aimed at overcoming the twin problems of formal credit system non-availability and poor recovery performance of the existing rural credit institutions. As a result, Microfinance Institutions (MFIs) have made inroads into the rural areas to improve and extend timely, easy and adequate access to financial services. In this context, the present paper examines the nature and type of new institutions that emerged in the Indian financial system to include the excluded. The study finds that SHG-bank linkage and MFI models are the two dominating microfinance approaches in the post-financial reforms in India. The study also finds that the microfinance sector in India is growing with the genesis of new institutions on the one hand and, on the other hand, the NGOs are transforming themselves into financial institutions and entering the business of microfinance. The study concludes that the suitable regulatory environment is the prime concern for sustainable delivery of microfinance in India.

Date: 2009
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Handle: RePEc:icf:icfjae:v:08:y:2009:i:5-6:p:174-189