Micro Finance Initiatives (Models) in India: A Performance Appraisal

Abstract

Finance is an essential ingredient of most of the economic activity for all households. The financial system serves to transfer financial resources from savers at home and abroad to borrowers. Though older institutions such as public sector banks and savings banks have participated in this process for a long time, the new institutions specialised in micro, small and medium-sized enterprises (MSMEs) finance have only begun to participate recently in the developing countries. Financial intermediation that provide vastly increased financial services for poor and low income people using domestically generated savings and recycling them within the economy is a virtuous circuit. It deserves to be a primary consideration in the context of inclusive development of financial sector. Broad based financial development means extending financial services to all segments of the population and the ability of financial service providers to access capital. J ust as financial intermediation between individual savers and borrowers benefits the accumulation of assets and investment, intermediation across the financial sector benefits the retail financial institutions broadly, including those that serve the poor and low income customers. Integrated into the domestic financial system, the micro finance institutions (MFIs) become players in the financial system, teaching the bankers how to bank with low income entrepreneurs, and helping shape financial sector policies to work for micro finance. Inclusion in financial markets takes place differently with regard to different types of institutions: whereas formal banks have access to financial markets and the inter-bank market, non-bank financial institutions with limited licence and semi-formal institutions have little or no access to funding. Thus, it is clear that linkages between market segments are weak in many countries and wide differences exist in risk adjusted returns. When financial intermediation does exist, it helps institutions to operate more efficiently and to better serve the target population.