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A Study On Microfinance In India Finance Essay

research paper on microfinance in india

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The problem is not only for the rural population but also for the banking sector which again and again has failed to penetrate the rural areas and thus has failed to tap the huge market. There are many reasons for that, among which high default rate, high transaction cost, high risk are the most adverse. The government has though woken up from its slumber and has taken policy measures to promote and develop this microfinance sector. Microfinance is thus essentially to provide thrust to the rural development by proving needful financial services.

This research paper is based on this very important subject concerning the availability of financial services to the poor and needy i.e. Microfinance. The aim of this report is to understand and explore opportunities and develop strategies for its success. In this research paper. I will first talk about what is micro finance and what are the various models used in India then I will document the various successful models being used in various other countries ( Bolivia and Bangladesh) .After this I will propose a new model which can be implemented in microfinance sector in India. Report will conclude with the recommendations and findings.


The microfinance can defined as the process that provides financial services such as savings, credit, insurance and other essential financial products to low income individuals which fall above poverty line and poor which fall below poverty line. The objective of the Microfinance is to create social value. This social value consist of

Poverty alleviation

Improvement of livelihood

Provision of capital

Basically, microfinance involves savings, credit, insurance and other services provided to economically weaker section. The recent task force in India has defined microfinance as "provision of thrift, credit and other financial services" to the weaker section and hence enabling them to raise their income level and living standards.

Microfinance in


In India the Microfinance sector though has very old roots but still it is not very developed. Predominantly the microfinance sector has focused on providing only small credits and has been lacking in other financial services like insurance etc. From the very beginning the governments have emphasised the importance of finance to reduce poverty. To achieve this aim of serving the needs of rural people along with serving the urban areas, the government established a vast network of rural cooperative and credit bank. Further to fuel this the bank were nationalised in the period 1970-1980, followed by establishment of vast rural branches but despite this government failed to provide adequate financial services available to the weaker section of the society. This lead to the growth of money lenders and other informal means which further exploited the conditions of poor people.

It is in the beginning of the last decade of the 20th century that government started taking active steps to address the concerns regarding the Microfinance. It acknowledged the importance of both formal and informal medium in Microfinance to cater to the huge requirements of rural areas

Following are the institutions which are acknowledged by GOI and WB for playing active part in the microfinance sector.

Formal financial institution:

The formal institutions provide almost all of the institutional loans to the rural areas. These institutions are regulated by the RBI who has delegated the powers to the national bank for agricultural and rural development. The formal financial institutions consist of the following

Commercial banks

Reserve bank of India

Regional rural banks

Insurance companies

Section 25 companies

Cooperative banks

Semiformal institutions:

There are also several semi-formal institutions which perform the actual ground work of collection and distribution of capital. These semi formal institutions are generally incorporated with the Aim to provide financial services and develop rural areas unlike the formal institutions. The various type of semiformal institutions are

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