Investigation of the slow growth rate of the microfinance industry of India

By Priya Chetty on September 13, 2016
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Owing to the increase in the economic development and growing Gross Domestic Product (GDP) of India, there is an increasing demand for financial assistance, especially in microfinance. This demand is not only from corporations and financially stronger groups but also from the lower sections of the society. The delivery of financial services to lower sections of the society is called financial inclusion. Most commercial banks in the country cater to the financial needs of people. The poor section of the society is deprived of financial assistance due to the absence of collateral/ financial security. For meeting the requirements of this segment, microfinance institutions (MFIs) were set up that acted as a provider for the underprivileged section of the society.

Growth of microfinance institutions in India

Microfinance in India finds its roots in the early 1970s’ in Gujarat when the Self Employed Women Association formed a group in order to provide banking services to the poor women of unorganized sector. This concept is called ‘Self-Help Groups’ (SHG). The program which links the Self Help Group and the banking sector was initiated in India in 1989, under National Bank for Agriculture and Rural Development (NABARD). The banks that are associated with the this program aid in capacity building and empowerment of the group.

Total number of self help group in India (Source: NABARD, 2014)
Total number of self help group in India (Source: NABARD, 2014)

The total number of Self Help Groups stood at 74.30 lakhs in 2014 (NABARD, 2014). However the growth rate of such groups in India has slowed with time. The main reason behind this decline is because most of the Self Help Group lack the homogeneity between the members of the group and the lack of unity in the group (Tiwari & Arora, 2015).

Introduction of microfinance institutes in India

On the other hand, microfinance institutions  were introduced later than Self Help Group in the country. However, the growth and total turnover of the former has been greater than latter. Various schemes introduced by the present government like Micro Units Development and Refinance Agency (MUDRA) bank and Jan Dhan Yojna has aided in the growth of the micro finance institutions. Both of them target the same poor segment of the society.

Total amount disbursed through microfinance industry in India (Source: Microfinance Institution Networks, 2015)
Total amount disbursed through microfinance industry in India (Source: Microfinance Institution Networks, 2015)

The growth of microfinance industry is above 23%. Its loan portfolio has jumped by 42% in the financial year 2014. As per the reports released by India Ratings and Research (2015), the sector is expected to grow at an average rate of 24% annually from the year 2015 to 2019. The major factors that have fuelled the growth of micro finance in India are:

  • rapid growth in the Business Correspondent (BC) model,
  • introduction of differentiated bank license and
  • rising participation of the current central government in financial inclusion

Micro finance institutions in India are expanding with time due to the financial benefits provided to the unprivileged people of the country. Loans granted by microfinance institutions in 2012 stood at Rs. 51 billion higher than in 2011 (Tripathi, 2014).

Types of microfinance institutions in India

Microfinance institutions are mainly of two types; ‘for profit’ and ‘not for profit’ institutions. The second category institutions are usually the trusts and societies that operates with the help of grants. These institutions are either registered under the Societies Registration Act, 1860 or the Indian Trust Acts, 1882.

On the other hand, the ‘for profit institutions’ are either the co-operative societies or the Non Banking Financial Company. In the recent period many small financial institutes are turning into Non-Banking Financial Institutions by obtaining a license from the Reserve Bank of India (RBI). For the purpose of obtaining the license, the minimum funds requirement is Rs. 5 crore. Also, the institution may purchase the already existing license of the defunct company.

As per the 2015 report of Reserve Bank, there were only 69 Non Banking Financial Company and microfinance institutions registered with the apex banks. However, majority of them belonged to the capital city of Karnataka, Bangalore (IRAR, 2015). On the other hand, the remaining banks were non-licensed small scale microfinance institutions. Some of the biggest and most organized small scale financial institution in India include SKS, Bandhan, Ujjivan, Janalakshmi, Basix, Spandana and Satin. The state of Andhra Pradesh presently has the most number of such institutions  as well as borrowers.

Challenges and the road ahead

Microfinance institutions in India has to face a large number of challenges which acts as a barrier to their success. There are some disadvantages in the functioning of these financial institutions such as:

  • high interest rates,
  • no variety in the products offered to the customers and
  • lower risk mitigation measures and many such others (Nasir, 2013).

Apart from these other challenges include:

  • not covering the urban poor in its reach,
  • high non-performing assets (NPAs),
  • poor credit appraisal system,
  • lack of awareness,
  • poor debt management and
  • weak loan collection system.

Despite the disadvantages they form a very important part of the functioning of many industries due to easy loans given to those who otherwise cannot afford better facilities. However, the industry functions imperfectly as it was evident from the 2010 Andhra Pradesh microfinance crisis.


  • Dwijesh Awasthy. (n.d.). SELF HELP GROUP – BANK LINKAGE PROGRAMME.
  • India Ratings and Research. (2015). Microfinance: Strong Comeback.
  • Microfinance Institution Networks. (2015). Annual Report of Microfinance Institution Network. Gurgaon. Retrieved from Report -2015.pdf
  • NABARD. (2014). Self Help Group in India. Retrieved September 5, 2016, from
  • NABARD. (2014). Status of Micro Finance in India.
  • Nasir, S. (2013). Microfinance in India: Contemporary Issues and Challenges. Middle-East Journal of Scientific Research, 15(2), 191–199.
  • Tiwari, A., & Arora, J. (2015). Why are the Self Help Groups (SHGs) in Decline? A Case Study of SHGs in Gurgaon. Research on Humanities and Social Sciences, 5(1), 77–84.
  • Tripathi, V. K. (2014). MICROFINANCE – EVOLUTION, AND MICROFINANCE-GROWTH, OF INDIA. International Journal of Development Research, (1134-1154).

Priya is the co-founder and Managing Partner of Project Guru, a research and analytics firm based in Gurgaon. She is responsible for the human resource planning and operations functions. Her expertise in analytics has been used in a number of service-based industries like education and financial services.

Her foundational educational is from St. Xaviers High School (Mumbai). She also holds MBA degree in Marketing and Finance from the Indian Institute of Planning and Management, Delhi (2008).

Some of the notable projects she has worked on include:

  • Using systems thinking to improve sustainability in operations: A study carried out in Malaysia in partnership with Universiti Kuala Lumpur.
  • Assessing customer satisfaction with in-house doctors of Jiva Ayurveda (a project executed for the company)
  • Predicting the potential impact of green hydrogen microgirds (A project executed for the Government of South Africa)

She is a key contributor to the in-house research platform Knowledge Tank.

She currently holds over 300 citations from her contributions to the platform.

She has also been a guest speaker at various institutes such as JIMS (Delhi), BPIT (Delhi), and SVU (Tirupati).