Microfinance in India: SHG-Bank Linkage Program

Abstract

Microfinance, a provision of small loans (mostly without collateral) to poor people and accepting tiny savings deposits, has existed in different forms for a long period of time across the world. Modern microfinance was born in Bangladesh in the 1970s, when Professor Muhammad Yunus, an economics professor at University of Chittagong, Bangladesh, and the Nobel Peace Prize Laureate in 2006, began an experimental research project providing credit to the rural poor by establishing Grameen Bank. Today, Grameen Bank is replicated in five continents and microfinance has shaken up the world of international development. Many banks or banking institutions are now specializing comprehensively on microfinance. In 2005, the UN designated the year as the “International Year of Micro-credit.” The critical device that has brought the success in microfinance is group-lending: this has achieved very high rate of repayment rates, thus, has made the lending sustainable. It also transfers the responsibility from bank staffs to borrowers, making lenders feel free from taking high risks. The most common group-lending model in India is “SHG (self-help group)-bank linkages” and it is primarily providing small loans from banks to groups of SHGs. Micro-saving is also its important target. Beside borrowing and saving, SHGs in India play additional roles in spheres of local politics, social harmony, social justice and its contribution to community. While the SHG model and bank-linkage program continue to be popular, many commercial and cooperative banks are now entering into the microfinance market, and there is an India-wide trend towards the formal registration of MFIs (Mocrofinance institution) as For-profit Non-bank Finance Companies (NBFCs). It also diversifies its activities into the micro-insurances and remittances. The growth of India's microfinance over the past 16 years is remarkable - and it has been accelerated for the last three years, being improved both qualitatively and quantitatively.