Role Of Microfinance And SHGs In India From The Post Reform Period

In a country like India where 70 percent of its population lives in rural areas and 60 percent depends on agriculture (according to the World Bank reports), microfinance can play a vital role in providing financial services to the poor and low-income individuals. Microfinance is the form of a broad range of financial services such as deposits, loans, payment services, money transfers, insurance, savings, micro-credit etc. to the poor and low-income individuals and is gathering momentum to become a major force in India. The importance of microfinance in the developing economies like India cannot be undermined, where a large population is living under poverty and a large population does not have access to formal banking facilities. The Self-Help Groups (SHG) models with bank lending to groups of (often) poor women without collateral have become an accepted part of rural finance. With traditionally loss-making rural banks shifting their portfolio away from the rural poor in the post-reform period, SHG-based microfinance, nurtured and aided by NGOs, has become an important alternative to traditional lending in terms of reaching the poor without incurring a fortune in operating and monitoring costs. The paper illustrates that, if SHG Bank Linkage is to be scaled up to offer mass access to finance for the rural poor, then much more attention will need to be paid towards: the promotion of high-quality SHGs that are sustainable, clear targeting of clients, and ensuring that banks linked to SHGs price loans at cost-covering levels and that, while microfinance can, at minimum, serve as a quick way to deliver finance to the poor and the medium-term strategy to scale-up access to finance for the poor. The paper also aims at identifying the current status and role of microfinance and discusses the state of SHG-based microfinance in India.