Poverty, a raging economic issue, exists in most of the developing countries. The actual reason for severe poverty lies in the inequality in income distribution, which is chronic in developing countries, especially in India.
Microfinance organization is not new to the financial market in India. Due to the overwhelming poverty in India, government gave special attention to the development of rural credit.
Microfinance institutions (MFIs’) serve two major needs of the rural poor population in India. These twin needs are the financial and social support to fulfill their needs. One of the most critical salient features of Indian microfinance industry is that most players operate on the lines of Non-Government Organization (NGO) system (Mimo Finance, 2011).
With the increased usage of technology and recognition of the significance of human resources in determining enterprise success, the concept of operational risks has gained importance.
For a long time now, microfinance institutions (MFI) in India have followed the traditional operational model of procurement and distribution of money among rural people. However, during the past 10 years the industry changed radically with a new business model.
Group lending is one of the innovative tools used to mitigate credit risk. The outstanding feature of group lending is that no collateral is required to lend loans but the group is responsible for the payback of the loan (EY 2014).
Small scale microfinance institutions constitute a sizeable chunk of the entire microfinance industry in India. Microfinance institutions face large amount of credit risk today. Keeping that in mind these institutions are using different approaches and techniques.