Microfinance: Definition and Need

Definition of Microfinance
Microfinance refers to the provision of small-scale financial services, such as savings, credit,
insurance, and payment services, to low-income individuals, marginalized groups, and micro-
entrepreneurs who lack access to formal banking systems. In India, microfinance is primarily
delivered through Self-Help Groups (SHGs), Non-Governmental Organizations (NGOs),
Microfinance Institutions (MFIs), and the SHG-Bank Linkage Programme (SBLP). It aims to
promote financial inclusion, empower the poor, and support income-generating activities,
particularly among rural women and underserved communities.
Need for Microfinance in India
Microfinance addresses critical gaps in India’s financial ecosystem and plays a pivotal role in
socio-economic development. The key reasons for its need are:
1. Limited Access to Formal Banking
o A significant portion of India’s population, especially in rural and semi-urban
areas, remains unbanked or under banked due to lack of documentation,
collateral, or proximity to bank branches.
o Microfinance provides an alternative by offering small, collateral-free loans and
savings options tailored to the needs of the poor.
2. Poverty Alleviation
o Over 20% of India’s population lives below the poverty line, relying on informal
sources like moneylenders who charge exorbitant interest rates (often 50–100%
per annum).
o Microfinance offers affordable credit (typically 12–24% interest annually) to
start micro-enterprises, smooth consumption, or meet emergencies, reducing
poverty and dependency.
3. Women Empowerment
o Women, who constitute the majority of SHG members, face systemic barriers
to financial access and economic participation.
o Microfinance enables women to access credit, start businesses (e.g., tailoring,
dairy, handicrafts), and gain financial independence, enhancing their decision-
making power within households and communities.
4. Support for Micro-Entrepreneurship
o Many low-income individuals have entrepreneurial potential but lack capital to
start or scale small businesses.
o Microfinance provides seed funding for activities like vegetable vending,
poultry farming, or retail shops, fostering self-employment and income
generation.
5. Financial Inclusion
o Despite initiatives like Pradhan Mantri Jan Dhan Yojana (PMJDY), access to
credit, insurance, and other financial products remains limited for marginalized
groups (e.g., Scheduled Castes, Scheduled Tribes, and minorities).
o Microfinance bridges this gap by linking the poor to formal financial systems
through SHGs and MFIs.
6. Addressing Regional Disparities
o Financial services are unevenly distributed, with southern states like Andhra
Pradesh and Tamil Nadu having better banking penetration than northern and
eastern states.
 o Microfinance, through models like SBLP, extends outreach to underserved
regions, promoting inclusive growth.
7. Crisis Mitigation
o Low-income households are vulnerable to shocks like medical emergencies,
crop failures, or natural disasters.
o Microfinance provides quick access to small loans, helping families avoid
distress borrowing or asset sales.
8. Complementing Government Schemes
o Microfinance aligns with programs like the National Rural Livelihoods Mission
(NRLM) and Deen Dayal Upadhyaya Grameen Kaushalya Yojana (DDU-
GKY) by providing financial support to SHGs and micro-entrepreneurs.
o It facilitates access to subsidies, skill development, and market linkages.
Conclusion
Microfinance is a critical tool for addressing financial exclusion, poverty, and gender inequality
in India. By providing accessible and affordable financial services, it empowers the poor,
fosters entrepreneurship, and supports grassroots development. Its integration with government
initiatives and the formal banking system, particularly through the SHG-Bank Linkage
Programme, amplifies its impact, making it indispensable for India’s inclusive growth agenda.

Self-Help Groups (SHGs), SHG-Bank Linkage Models, Financial Inclusion,

and Socio-Economic Development in India

1. Introduction to Self-Help Groups (SHGs)

Self-Help Groups (SHGs) are informal associations of 10–20 individuals, primarily women,
from similar socio-economic backgrounds in India. They come together to save small amounts
regularly, provide collateral-free loans to members, and promote financial discipline. SHGs are
a cornerstone of India’s microfinance and grassroots development strategy, fostering economic
empowerment and social cohesion, particularly in rural areas.
2. SHG-Bank Linkage Programme (SBLP)
The SHG-Bank Linkage Programme, initiated by the National Bank for Agriculture and Rural
Development (NABARD) in 1992, is a flagship initiative to integrate SHGs with the formal
banking system. It aims to provide affordable credit to the poor, promote financial inclusion,
and empower marginalized communities. The programme has been instrumental in bridging
the gap between the underprivileged and formal financial institutions.
Models of SHG-Bank Linkage
The SBLP operates through three distinct models, each designed to facilitate credit access and
financial inclusion:
1. Model I: SHGs Formed and Financed Directly by Banks
o Banks directly form, nurture, and provide loans to SHGs.
o Suitable for areas with strong banking infrastructure but limited NGO presence.
o Banks take on the role of facilitators, trainers, and lenders.
o Advantage: Direct linkage reduces dependency on intermediaries.
o Challenge: Limited outreach due to banks’ capacity constraints in forming
SHGs.
2. Model II: SHGs Formed by NGOs/Other Agencies and Financed by Banks
o NGOs, community-based organizations, or other agencies form and nurture
SHGs, while banks provide credit.
o Most widely adopted model, accounting for the majority of SHG linkages in
India.
 o Advantage: Leverages NGOs’ grassroots presence and expertise in community
mobilization.
o Challenge: Dependency on NGOs may lead to uneven quality of SHG
formation.
3. Model III: SHGs Financed by Banks Through NGOs as Financial Intermediaries
o NGOs act as financial intermediaries, borrowing from banks and on-lending to
SHGs.
o Used in areas with weak banking infrastructure or high-risk perceptions.
o Advantage: Reduces banks’ risk and enhances outreach to remote areas.
o Challenge: Higher transaction costs due to intermediary involvement.
3. Role of SHG-Bank Linkage in Promoting Financial Inclusion
Financial inclusion refers to the delivery of affordable and accessible financial services to
underserved populations. The SBLP has significantly contributed to financial inclusion in India
by:
 Access to Credit: SHGs provide collateral-free loans to members, enabling access to
credit for those excluded from formal banking due to lack of assets or documentation.
 Bank Account Penetration: SHGs open group savings accounts with banks,
encouraging members to engage with formal financial systems.
 Empowering Women: Over 85% of SHGs in India are women-led, promoting gender-
inclusive financial access and economic independence.
 Reducing Dependency on Moneylenders: Affordable credit from SHGs reduces
reliance on exploitative informal lenders charging high interest rates.
 Financial Literacy: SHGs conduct regular meetings to educate members on savings,
credit management, and banking processes, enhancing financial awareness.
 Supporting Government Schemes: SHGs facilitate access to schemes like Pradhan
Mantri Jan Dhan Yojana (PMJDY), micro-insurance, and pension products.
As of 2023, over 10 crore women are linked to banks through SHGs, with cumulative bank
credit disbursed exceeding ₹20 lakh crore, highlighting the programme’s scale and impact.
4. Key Features of SHGs Contributing to Grassroots Socio-Economic Development
SHGs have emerged as a powerful tool for socio-economic development at the grassroots level
in India. Their key features include:
1. Group-Based Savings and Credit Mechanism
o Members pool small, regular savings, creating a common fund for internal
lending.
o Promotes financial discipline and provides immediate access to small loans for
emergencies, consumption, or income-generating activities.
2. Women Empowerment
o SHGs primarily comprise women, enabling them to gain financial
independence, decision-making power, and leadership skills.
o Women use loans for micro-enterprises (e.g., tailoring, poultry, handicrafts),
contributing to household income and community development.
3. Social Capital and Collective Responsibility
o SHGs foster trust, mutual support, and accountability among members through
regular meetings and group decision-making.
o Collective responsibility ensures high loan repayment rates (over 95% in most
cases).
4. Capacity Building and Skill Development
o SHGs provide training in bookkeeping, financial management, and
entrepreneurship, enhancing members’ skills.
 o Many SHGs link members to government skill development programs like
Deen Dayal Upadhyaya Grameen Kaushalya Yojana (DDU-GKY).
5. Micro-Entrepreneurship and Livelihood Promotion
o SHGs support income-generating activities, such as dairy farming, vegetable
vending, and small retail, reducing poverty and improving living standards.
o Federations of SHGs often establish producer companies, enabling market
linkages and better bargaining power.
6. Community Development and Social Impact
o SHGs undertake community initiatives like sanitation drives, literacy
campaigns, and health awareness programs, addressing local challenges.
o They promote social inclusion by involving marginalized groups (e.g.,
Scheduled Castes, Scheduled Tribes, and minorities).
7. Linkage with Government Programs
o SHGs act as platforms for implementing schemes like the National Rural
Livelihoods Mission (NRLM), which strengthens SHGs through financial and
technical support.
o They facilitate access to subsidies, grants, and social security schemes.
5. Challenges and Way Forward
Despite their success, SHGs face challenges such as:
 Regional Disparities: SHG penetration is higher in southern states (e.g., Andhra
Pradesh, Tamil Nadu) compared to northern and eastern states.
 Sustainability: Some SHGs struggle with governance, record-keeping, and long-term
viability.
 Credit Access: While SBLP has scaled up credit, loan amounts are often insufficient
for larger entrepreneurial ventures.
 Digital Divide: Limited digital literacy hinders SHGs’ adoption of digital banking and
fintech solutions.
Way Forward
 Strengthen capacity building through digital literacy and advanced entrepreneurial
training.
 Expand SBLP outreach in underserved regions through targeted interventions.
 Promote SHG federations to enhance scale, market linkages, and bargaining power.
 Integrate SHGs with fintech platforms to leverage digital payments and micro-
insurance.
6. Conclusion
The SHG-Bank Linkage Programme has revolutionized financial inclusion and grassroots
development in India by empowering millions of women, fostering economic independence,
and promoting social cohesion. The three linkage models cater to diverse regional and
institutional contexts, ensuring flexibility and scalability. By leveraging their key features—
savings, credit access, capacity building, and community engagement—SHGs continue to
drive socio-economic transformation, aligning with India’s vision of inclusive growth and
sustainable development.