While incentives to commercial banks to venture into

While each phase represents distinct featuresof its own, there are some overlaps and crosscutting themes among them. Anoverriding feature of Indian Microfinance throughout its evolution is its focuson poverty alleviation in rural areas. This focus has broadly determined theapproach and operations of microfinance in India. In addition to this Indianmicrofinance is characterized by existence of both State and Civil SocietyOrganization in delivery of microfinance services while private players joiningthe wagon during phase IV. In context of Indian Microfinance, it is importantto note that each phase was influenced not only by learning from earlier phasebut also from development discourse, government policies and international trendsin microscope eco-space among other things. The remaining section describeseach phase in detail.  Phase I: Early 1900s – 1969Credit CooperativesThe earliest phase of Indian Microfinance canbe described from early 20th century until 1969, when credit cooperativeslargely dominated as an institution in provision of microfinance services. Thisphase began with passing of Cooperative Societies Act 1904, to extend credit inIndian villages under government sponsorship.

This step was provoked byagrarian riots in the Deccan in the late 19th century that brought forth theissue of farmer indebtness to moneylender to British Government. The agrarianriots prompted the British Government to give thrust to the system of Taccaviloans to farmers, regulate money lending and promote rural credit cooperativesas an alternative to money lenders. The rural credit cooperatives in Indiabecame a means of pooling the few resources of the poor and providing them withaccess to different financial services.

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However, not much was achieved untilindependence when credit cooperatives were chosen by the government as aninstitutional mechanism for delivering credit to the farm sector. Choice ofcredit cooperatives was inevitable in immediate context of post-independence.On one hand commercial banks had very low presence in the rural areas and onthe other all commercial banks were in the private sector and political imperativeof the time did now allow government to provide an appropriate set ofincentives to commercial banks to venture into the rural areas. In such asituation, cooperatives were the only option given their spatial spread andpenetration in remote areas. In terms of finance policy the approach was supplydriven with provision of subsidized credit through state controlled or directedinstitutions to rural population.  However,rural cooperatives were riddled with plethora of problems. The 1945 CooperativePlanning Committee found that a large number of cooperatives were “saddled withthe problem of frozen assets because of heavy over dues in repayment.

” AllIndia Rural Credit Survey in 1947 brought out that only 3% of the totalborrowing of the cultivators was being met through the cooperatives. It alsorevealed that the share of Institutional agencies, comprising the government,the cooperatives and the commercial banks, in financing the borrowings of ruralhousehold was only 7.3 per cent in 1951-52 corresponding to the share ofprivate money lenders which was as high as 68.6 per cent. With large scalefailure of credit cooperatives the stage was set for some fundamental changesin microfinance institutional delivery.  5.

      Phase II: 1969 – 1991StateDriven Rural Finance through National Banks and Emergence of NGOs inMicrofinancespaceThenationalization of Banks in 1969 along with a strong political emphasis towardspoverty eradication led to a new rural finance policy that was directed atreducing the lending imbalances in particular sectors. This new policy resultedin among other things to establishment of Regional Rural Banks (RRBs) andadoption of priority sector lending by Banks under direct specifications of theReserve Bank of India (RBI). A decade later rural financial delivery gotfurther boast in 1980-81 with the government sponsored Integrated RuralDevelopment Programme (IRDP), under which loans of less than Rs 15,000 weregiven to poor. In 20 years since its implementation the financial assistance ofapproximately Rs 250 billion ($5.

6 billion) was provided to roughly 55 millionfamilies. However, under such aggregated figures, at the ground level IRDP ledto large scale misuse of credit. This created a negative perception about thecredibility of the micro borrowers among bankers further hindering access tobanking services for the low-income people. In addition to this State led largescale program, some civil society organizations successfully experimented withmicrofinance models that were more appropriate for the needs of poorhouseholds. Some prominent examples of this are SEWA Bank (Ahmedabad),Annapurna Mahila Mandal (Mumbai), and Working Women’s Forum (Chennai). Thefirst Self Help Groups (SHGs) started emerging in the country in 1980s as aresult of NGO activities such as MYRADA.

In 1984-85 MYRADA started linking SHGsto banks, when the SHGs’ credit needs increased and the groups grew largeenough for the bank to have transactions with SHGs idea was taken up on a largescale later by NABARD scaling up Indian Microfinance to new heights. 6.      Phase III: 1992 – 2000SHGs bank Linkage program and Growth of NGO-MFIsBy 1990s the problems with both Statepromoted institutional forms viz.

credit cooperative and RRBs in delivery ofrural credit were quite evident. The credit cooperatives were crippled withpoor governance, management and the poor financial health due to intrusivestate patronage and politicization. RRBs financial position deteriorated due tothe burden of directed credit and priority sector lending and a restrictiveinterest rate regime. The share of rural credit in the total creditdisbursement by commercial banks, which grew from 3.5 to 15 percent from 1971to 1991, has now declined again to 11 percent in 1998 (Sa-Dhan, 2004). For thefirst two decades of their existence, political pressure and focus on outreachat the expense of prudent lending practices led to very high default rates withaccumulated losses exceeding Rs. 3,000 crores in 1999 (Rajesh, 2004). In thisbackground various qualitative issues such as concerns about financialviability of institutions on account of high rate of loan delinquency,cornering of subsidy by well off people, continued presence of moneylenders,inability to reach the core poor came out in forefront and resulted inreorientation in thinking around the1990s.

In addition to inherent problemswith existing institution, the external factors also influenced IndianMicrofinance. The macroeconomic crisis in early 1990s that led to introductionof Economic Reforms of 1991 resulted in greater autonomy to the financialsector. This also led to emergence of new generation private sector banks viz.UTI Bank, ICICI Bank, IDBI Bank and HDFC Bank that would become importantplayers in microfinance sector a decade later. An important development in thisphase was SHG Bank linkage program by NABARD which greatly increased bankingsystem outreach to otherwise unreached people and initiated a change in thebank’s outlook towards low-income families from beneficiaries to customers.  The pioneering initiatives of MYRADAmentioned earlier, the SHG–Bank linkage program was scaled-up on a large scaleby the NABARD in the year 1992 by giving guidelines to banks for financing SHGsthrough the banking system.

With the success of this program RBI in 1996 tookthe policy decision to include financing to SHGs as a mainstream activity ofbanks under their priority sector lending. Since then the banking systemcomprising public and private sector commercial banks, regional rural banks andcooperative banks has joined hands with several organizations in the formal andnon-formal sectors to use this delivery mechanism for providing financialservices to a large number of poor.  Following such attempts the face of theIndian financial sector changed and the focus changed from excessivesubsidization of bank credit to lending at market rates. This period alsowitnessed the entry of another set of stakeholders Microfinance Institutions(MFIs), largely of non-profit origins, with existing development programs. MFIsconsist of Refinance Institutions, Banks, Non-Government Organizations (NGOs)and Self Help Groups dealing with small loans and deposits in rural, semi urbanor urban areas enabling people to raise savings, productive investments andthereby their standard of living (Nadarajan and Ponmurugan, 2006). (Jayasheelaet at, 2007). International success of Microfinance in Bangladesh, Indonesiaand in Latin America also influenced the thinking in Indian Microfinancetowards commercialization.

Another remarkable achievement during this phase wasthe creation of a new generation of cooperatives viz. “Mutually AidedCooperative Societies” (MACS), which lie outside the state control. This wasdone mainly in an attempt to reform the cooperative system. 7.

     Phase IV: 2000 – todayCommercialization of MicrofinanceSince 2000, the microfinance sector saw someradical changes in many aspects. While the prime objective remains povertyalleviation with new terms of inclusive growth or financial inclusion, sectormoved from sole social return approach to double bottom line approach of socialand financial returns. This change in approach led to many changes in thefunctioning of microfinance. The emphasis on ‘bottom of the pyramid’ and goodfinancial returns of some of leading MFIs, brought many main stream commercialentities taking interest in the sector not only as part of their corporateresponsibility but as new business line. One among prominent example in Indiancontext is ICICI Bank that adopted innovative ways in partnering with NGOMFIsand other rural organizations to extend their reach into rural markets. UNdeclaration of Microfinance year in 2005 gave further impetus towardsrecognition of microfinance as a poverty alleviation tool and was able toattract a lot interest from large commercial entities such as foreign banks,investors, pension funds etc.

This resulted in their participation in thesector for social and commercial return.  The MFIs side experienced similar appetitefor increasing commercialization to scale up its operations and profit. Thistranslated into a number of changes. Increasingly NGO-MFIs began transforminginto regulated legal formats such as Non-Banking Finance Companies (NBFCs) orsection 25 companies to attract commercial investment and become eligible fordeposit taking entity which could be an easy source of fund for lending butremains untapped. Today’s MFIs, particularly those which were founded after2000, look and think differently from those of the 1990s. Many of these “secondgeneration” MFIs are promoted by entrepreneurs with mainstream corporateexperience. Today, MFIs relate better to the market and see themselves asbusinesses in the financial services space, catering to an untapped marketsegment while creating value for their shareholders.

This overriding shift inorientation from development to social entrepreneurship has brought aboutchanges in institutions’ legal forms, capital structures, sources of funds,growth strategies, and strategic alliances. Many first generation MFIs havesubsequently transformed into regulated, for profit business models and legalstructures. With increasing out reach and focus on profit, increasingly MFIsemerged as strategic partners to banks, consumers finance, retailers interestedin reaching out to India’s low income client segments. A parallel trend is theincreased activity in the meso-level segment, which largely extends consumercredit.

Lead by pioneers such as Citi Financial and GE Money, today this spacehas players such as HSBC’s Pragati Finance, Standard Chartered’s PrimeFinancials, Fullerton India, and DBS Cholamandalam. At the policy level,government has recognized the microfinance as important player towardsachieving Financial Inclusion. In 2006, government has also table aMicrofinance Regulation and Development Bill which seek to promote and regulatethe microfinance organizations.

While the bill itself has come under severecriticism on account of some critical loopholes, this is a landmark steptowards recognition of civil society organization in microfinance space.3    

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