Scaling-Up Microfinance for India's Rural Poor

34 Pages Posted: 25 Jul 2005  

Priya Basu

World Bank Group - Finance and Private Sector Division (WBIFP)

Pradeep Srivastava

National Council of Applied Economic Research (NCAER)

Date Written: June 2005

Abstract

This paper reviews the current level and pattern of access to finance for India's rural poor and examines some of the key microfinance approaches in India, taking a close look at the most dominant among these, the Self Help Group (SHG) Bank Linkage initiative. It empirically analyzes the success with which SHG Bank Linkage has been able to reach the poor, examines the reasons behind this, and the lessons learned. The analysis in the paper draws heavily on a recent rural access to finance survey of 6,000 households in India, undertaken by the authors. The main findings and implications of the paper are as follows: India's rural poor currently have very little access to finance from formal sources. Microfinance approaches have tried to fill the gap. Among these, the growth of SHG Bank Linkage has been particularly remarkable, but outreach remains modest in terms of the proportion of poor households served. The paper recommends 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. At the same time, the paper argues that, in an economy as vast and varied as India's, there is scope for diverse microfinance approaches to coexist. Private sector microfinanciers need to acquire greater professionalism, and the government, too, can help by creating a flexible architecture for microfinance innovations, including through a more enabling policy, legal and regulatory framework. Finally, the paper argues that, while microfinance can, at minimum, serve as a quick way to deliver finance to the poor, the medium-term strategy to scale-up access to finance for the poor should be to 'graduate' microfinance clients to formal financial institutions. The paper offers some suggestions on what it would take to reform these institutions with an eye to improving access for the poor.

Suggested Citation

Basu, Priya and Srivastava, Pradeep, Scaling-Up Microfinance for India's Rural Poor (June 2005). World Bank Policy Research Working Paper No. 3646. Available at SSRN: https://ssrn.com/abstract=757389

Priya Basu (Contact Author)

World Bank Group - Finance and Private Sector Division (WBIFP) ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Pradeep Srivastava

National Council of Applied Economic Research (NCAER) ( email )

Parisila Bhawan
11 - Indraprastha Estate
New Delhi, 110002
India

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