Microfinance has been a tool of change for years, particularly for rural women, who are the primary recipients of micro-loans, but it is not just a tool to alleviate poverty. For years, microfinance has been a catalyst towards individual development and has registered a noticeable growth towards promoting entrepreneurial activities in poor, and primarily rural, areas. Microfinance has been an agent of socio-economic change for the last few years, helping not just to rejuvenate rural communities but also to break social barriers by reaching lower castes.

While, for decades, the formal banking channels have not been able to meet the credit needs of the poor, the growth of MFIs has helped in successfully scaling up of the rural economy by preventing exploitation of the rural poor from money lenders, who called the shots for almost three centuries. MFIs have not only opened up the rural credit sector but also helped in substantially increasing the ambit of employment and poverty eradication. Whatever shortfalls the formal banking channels had come across in the financial inclusion of a large section of the populace, MFIs have mitigated that in terms of their services to the poor.

Sa-Dhan, the self-regulatory organization of MFIs, noted that MFIs have been successful in bringing together microfinance and livelihood in order to provide a better life for their clients, most of who come from rural areas of the country. Going through operational models in states like West Bengal and Odisha, Sa-Dhan noted that even extremely poor people, including traditional artisans and agricultural workers, who hardly had a say in the rural economy, did not just have access to MFI loans but also productively use these loans in a manner that provide livelihood to people other than only their family members.

In one of its recent reports, the ADBI found that microfinance “effectively generates employment and sustains the income of the rural households by giving them often opportunity of work”. Even though both Sa-Dhan and the ADBI found that efforts need to be extended further in order to extend microfinance services, MFIs have already emerged as the right platform to optimize credit needs and help the rural poor in their fight against poverty.


The success of microfinance in India, a proven fact over the last few years, clearly reveals the viability of the business model followed across the country. Additionally it also has the ability to reach out to a large percentage of the populace that has remained out of the purview of formal banking channels for decades. The importance of MFIs, working in tandem with banks, as an important conduit towards providing financial services to ‘unbanked’ millions, is reflected in a concept note from Sa-Dhan, the self-regulatory organization of MFIs.
Sa-Dhan finds that, if more than 22 lakh clients from self help groups are linked by credit to banks under the SHG-bank linkage programme, an additional 1 crore clients receive service through MFIs. This goes to show that not only has microfinance seen unprecedented growth over the last few years, the sector has securely established itself as a significant contributor to the government’s agenda of ‘financial inclusion’. Moreover, this sector can go a long way to pursue the government’s agenda of a cashless economy, thus, not only empowering people from far-flung parts of the country but also creating a significant social impact.
With microfinance in India standing at a crucial juncture, a 2016 report from the Asian Development Bank’s think tank, ADBI, finds that the country’s financial inclusion is undergoing a tectonic shift, with the focus being more on finance services instead of on credit. Under these changing circumstances, it is only natural that MFIs, which mostly serve low-income households through their women members, will go a long way in extending their agenda of including more and more people into the financial mainstream.
Moreover, for a country like India, where around 26 percent of the population lives below the poverty line, MFIs have come across as an alternative for the rural poor to get out of the clutches of loan sharks. In this context, it is significant to mention that unlike commercial banks, where large scale defaulting has become a crisis, in microfinance, the default rate is found to be less than 10 percent.



It is important that the banking system understands how to provide microfinance without making it look like something short of charity. Not only has microfinance proved it is viable as a business model, it has also shown its capacity to reach out to those who need to be brought into the financial mainstream. But for MFIs it has become clear that for microfinance to penetrate further into the rural population, who has hardly any access to banks, one of the key factors behind its success is the ability to go around traditional tools like credit history checks and need for collateral for the former banking network.

MFIs traditionally provide loans to women from rural areas, who barely have any collateral to offer and often do not even have proper identity documentation. In such a scenario formalities would have prevented MFIs from running their vast network of loan-seekers. Hence, such tools when it comes to microfinance loans has been proven unnecessary over the years. The fact has further been validated by the high repayment volume from its debtors.

Since, MFI loans are usually small amounts provided to women with an entrepreneurial streak, they will continue to remain a crucial channel of providing financial services to a large section of the population, acting in complement to banks. Although, for banks, a microfinance customer seems inherently vulnerable, it is imperative to understand that MFIs have plans for risks, without slowing down the access to regulated credit lines for those who have remained underserved by formal banking channels.

While MFIs have worked on strengthening their position of viability and legitimacy in places where banks are not present, the need of the hour is to further strengthen credit discipline and culture of repayment among its customers. The system can be made more durable by optimizing on operational costs through IT-enabled services, more stringent self-regulatory norms for stakeholders in the sector, and by safeguarding the business model from what can be loosely termed as ‘acts of God’.



The fact that the country’s financial scene has changed since November 2016 is plain for all to see, since the government demonetized two high denomination notes and has been working on a digital India.
With the focus more on cashless economy, MFIs, which have access to the bottom of the economic pyramid much more than the formal banking sector, have a major role to play in pushing the government’s agenda of minimizing the use of paper currency and bring about more transparency through digital transfers and transactions.
A World Bank survey reveals that while slightly over 50 percent Indians had bank accounts in 2014, only about 12 percent had any sort of cashless transaction since last November. Experts believe that these idle bank accounts can be turned active and individuals can be encouraged to indulge in cashless transactions if it can be ensured that all sorts of payments are directly made into bank accounts, and not just returns on subsidies and other payments from the government. While over the years, India’s approach to financial inclusion mostly meant providing access to bank accounts for people in distant parts of the country, just doing that will not serve the purpose. Several experts have admitted that a cashless economy, backed by a stable digital infrastructure, could be the answer to increased financial inclusion in India.
Microfinance, which has played a remarkable role towards financial inclusion of people living outside the purview of formal banking channels, is a sector that has the potential to create significant impact and empowerment by pursuing the government’s cashless agenda, which will also work towards helping the other goal of financial inclusion.
While the cost of providing services to ‘unbanked’ millions continue to present a challenge even for MFIs, the ‘last mile access’ to financial services is undergoing a major change in India due to with digital technologies in play. If the trinity of Jan Dhan, Aadhaar card and mobile phones has created an ecosystem to empower people in rural areas, a variety of digital payment platforms, both government and private, have made it imaginable to have nearly 5 crore users receive and repay loans through bank accounts, leading to what could be more than 100 million cashless transactions every month.



The primary clientele of MFIs like VFS are women. In fact, MFIs like us provide credit only to women because women, when empowered, have the capacity to improve the financial condition of not just their immediate family but also other women around them. With data revealing that even now only around 26 percent women in India are employed, particularly when most women in rural areas cannot even think of stepping out of the house, MFIs like us have worked to change the situation substantially. Several studies and surveys by leading consultancy firms and financial institutions have pointed out that while as much as 99 percent of MFI borrowers are women, more than 90 percent of them showed signs of improved financial condition after they got associated with a MFI and launched their enterprise.

Over time, they have not just improved things for themselves but also for their families, particularly for their daughters, but also for women in the neighbourhood. Statistics reveal that following their association with a MFI, the resulting combination of enhanced income and improved decision-making helped them to access better amenities at their households. Access to toilet facilities at home jumped, as did other modern tools of communication like television and cell phones.

Almost all these women showed an increase in confidence they had never thought would be possible, otherwise. In fact, most of them started receiving better treatment and even respect within the family. As women turned entrepreneurs, they helped uplift other women around them by providing them with employment, who in turn, started having better access to healthcare for their family, started speaking up in favour of better education for their daughters instead of getting them married off at an early age, and most of them devised a financial road map to identify how much they can earn and spend, making their financial literacy complete.

Studies by Sa-Dhan, the self-regulatory body in India for microfinance, found that annual savings of women associated with MFIs showed a marked improvement, even after factoring in an annual rate of inflation. If MFIs helped women in rural areas to change their own lives and provide some kind of upward mobility to both their own families and also to other women around them, then this was also possible because a large percentage of women started their own business after joining a MFI.


Bankers, policy-makers and analysts have all accepted the need for financial literacy and its significance in the road towards wider financial inclusion. The practicalities of this belief have been further reinforced by studies on financial literacy initiatives and the financial needs of poor households at different points in time. The Reserve Bank of India, which has declared June 5 to 9 as ‘Financial Literacy Week’, with its announcement stressed on the need for financial literacy, which it admits, will bring forth financial inclusion for larger sections of the population.
While it has received a near-universal nod that MFIs make the perfect conduit in the process of financial inclusion, particularly in rural areas, microfinance providers have gained a position of prominence in policy documents and has gained more legitimacy with the government in their role as a pioneering force for providing financial inclusion. While this has found reflection in MFIs getting more mention in important policy documents, MFIs have also achieved success in initiating a form of social engineering that is not always noticed.
MFIs like VFS play three important roles in the process towards financial inclusion — helping impoverished households to meet basic needs, working on improving the overall economic situation of the household, and helping to empower women by supporting their entrepreneurial efforts with easy loans — that help create access to productive capital. This, when put together with human capital and mixed with education and proper training, can enable people to move out of poverty. MFIs also help in social engineering because simply by providing capital to a woman, her sense of dignity is strengthened and encourages them to empower others like themselves in turn, playing a positive role in the economy and society.
While this has received wide acclaim that spreading financial literacy is the first step towards wider financial inclusion, microfinance institutions have shown that in India, microfinance is not just a tool for financial inclusion. Even though the mission started off as one to include those people who are not serviced by commercial banking channels by providing them with unsecured loans, over time MFIs have turned out to be a conduit for social change, particularly in a country like ours, where a large percentage of the population live in poverty. VFS, being a leading MFI, runs several financial literacy programs, using these platforms to help individuals become self-sufficient so that they can have financial stability even in interior-most rural areas.


For India, a country of 1.3 billion, financial inclusion can be a difficult job but the idea of loan waiver following natural calamities do not always seem prudent and could cause a drain to the nation’s funds. Instead, the government could seriously explore having financial inclusion as a fundamental right, and like every right, should come along with a duty for citizens receiving its benefits. Despite the Central government’s best efforts, nearly 50 percent Indians still do not have bank accounts and only around 15 percent have access to formal credit lines, the need for wider financial inclusion has become imperative.

The RBI itself has recognised the need for financial literacy and its importance in the process of financial inclusion, following a number of studies by several top notch institutes. The Asian Development Bank Institute, the top financial institution’s research wing, has found in a 2016 study that “despite the existence of a large and well-regulated financial system dominated by commercial banks”; India’s record of financial inclusion is poor. According to data quoted by the ADBI, India is lowest in the region when it comes to the ratio between household debt and GDP.

The ADBI further noted that the lack of inclusion is particularly noticeable in rural India, where nearly 60 percent Indians live. Data from 2013–14 revealed that deposit per head was around Rs 9,200, with credit standing at about Rs 6,000 per head. This is primarily due to underrepresentation of formal banking channels in rural areas, even though experience has demonstrated that the rural poor repay “uncollateralized loans reliably and are willing to pay the full cost of providing them” because to them “access is more important than cost”. Interestingly, despite being part of the urban population, groups like migrant labourers do not have access to the formal financial sector.

The ADBI found that lack of inclusion is also noticed in the inadequate number of bank branches and ATMs in rural areas, where number of bank branches per 100,000 people is around one-third of that in urban areas and just around one-tenth when it comes to ATMs. Analysts and experts, however, noted that in recent times, with proliferation of mobile telephony and cheaper access to data plans is spearheading a tectonic shift in India, in terms of last mile access to financial services. While the trinity of Jan Dhan accounts, Aadhaar cards and mobile telephones has created an ecosystem that is gradually empowering people in rural areas to have better access to basic financial services, the cost of providing services to these areas come with significant challenges for financial institutions.



Over the last few decades that microfinance has been involved with raising awareness about financial transactions and proper savings, particularly among the mostly uneducated rural populace, MFIs have become an integral and crucial part of India’s growth story. Not only have MFIs helped in reaching people in the most interior parts of the country, the ease of formalities has also given microfinance an edge over formal banking channels.

Now that microfinance has proven its viability as a business model, besides its ability to reach out to a significant section of the population, who have been left out of the financial mainstream for years, the financial platform has emerged as a relevant and important catalyst for providing financial services to those who have been hitherto overlooked by former banking channels. While the Central government’s thrust on including almost every Indian within the ambit of banking has helped increase financial literacy, much still needs to be done, given the size of the land and its large population.

While microfinance has a crucial role to play in this, MFIs have already been helping to take formal credit support to rural people, particularly women. In most cases, banks have tended to bypass this population for decades because of the inherent vulnerability of the customer base, with a number of risks involved, including natural calamities. MFIs, however, have addressed these risks head on and have reached households, which were hitherto deprived of a formal credit line. With MFIs mostly dealing with women, either with existing enterprise or with skills to launch their own enterprise, the rate of return is often much higher than even in formal banking channels.

Financial analysts believe that the key areas where MFIs should focus in order to have a stable and prudent growth of the overall sector is to continue playing its role as an agent of change by further pushing for financial inclusion, besides strengthening credit discipline and repayment, making more out of its operational costs through use of technology, and by strengthening its commitment towards self-regulation. Taking care of these issues, which are already being addressed by those in the sector, can lead to the inclusion of every Indian, who needs financial services. Instead of just resting on their laurels, MFIs should continue to take steps that would help them become a significant force within the financial sector, in the process helping the nation to decrease economic disparity and move towards further development.


Microfinance in India, like in many other parts of the world, is not just a tool for financial inclusion, as has been noticed through thousands of case studies. Even though the mission started off as one to include those people who are not serviced by commercial banking channels by providing them with unsecured loans, over time MFIs have turned out to be a conduit for social change, particularly in a country like India, where a large percentage of the population live in poverty.
At the policy level, MFIs have emerged as more legitimate with the government in terms of being an important platform that provides financial inclusion and spreads financial literacy. While this has found reflection in MFIs getting more mention in important policy documents, MFIs have also achieved success in initiating a form of social engineering that is not always noticed.
Keeping in mind that in India, still only around 26 percent women are employed, even till a few years back a large number of women from rural areas hardly ever stepped out of the house, the thought of starting their own business being a far cry.
MFIs have substantially changed the situation, with 99 percent of loans having gone to women. A number of surveys, conducted by leading firms such as PWC, have revealed that over 90 percent borrowers recorded improved financial condition, not just for them but also for their families, particularly for their children.
The money these borrowers earned through their MFI-backed enterprises led them to not just significantly higher income but also better decision making processes. Nearly 60 percent borrowers got access to proper toilet and sanitation facilities at home, along with other modern day amenities like ceiling fans, cell phones, television sets and refrigerators. Almost all the women also admitted to having increasedtheir confidence after getting associated with MFIs, besides showing an increase in their standing within the family.
Micro-loans do not just help create a livelihood for the whole family of a borrower but the impact of the decision is reflected even in other aspects of their lives. Almost all women who started businesses with loan from MFIs also admitted to having access to better healthcare for their families and better education for their children, with the latter helping to substantially bring down underage marriages for girls, whose mothers have been associated with MFIs. 

The surety of a better life, brought forth by loan from a MFI for an economically backward rural household, is usually guaranteed, when mixed with the enterprise and hard work of a budding entrepreneurial woman. But even best-laid plans sometimes face severe obstacles in the form of natural disasters like flood, drought or cyclone. The impact of a natural disaster, however, is rarely the same across households even in the same locality. Natural disasters impact the finances of poor households in a harsh manner, even more so in the case of a borrower’s family, who has been working hard to uplift the household to a stronger financial situation.
While all households are affected by a flood or a devastating cyclone, the one that has borrowed MFI money and is working towards a goal, is often more severely impacted because the stakes are higher for them than a family with no loan to see through or take care of a business.
The first and most tangible effect of a disaster is the household’s inability to generate income while surviving the disaster. This is simply because under such circumstances or even during the aftermath, it is difficult, and sometimes even impossible, to get in touch with customers.
There are also chances of a reduced demand for the product or service the entrepreneur offers. Destruction of trading stock is another body blow, replacement for which could be unavailable due to the existing conditions and even due to lack of funds. Disasters usually lead to increased expenditure for most households due to higher prices of essential commodities like food and fuel, owing to a disruption in the demand-supply chain. Finances are also affected due to injuries or sickness of the entrepreneur or someone in the family could have suffered due to the disaster, besides undergoing destruction or damage to assets like tools of the trade, a workshop, or a shop.
We have noticed that while most poor households make adjustments to cope economically after a natural disaster, those running businesses with loan from MFIs, suffer more because they usually have more to lose, in terms of not just assets and capital but also confidence and energy.
However, even under these circumstances, what surprises us is the intention of repayment of loans that the suffering entrepreneur has borrowed from us. As a token of appreciation from Village Financial Services, we make it our priority to support our borrowers who has suffered loss of productive assets leading to a long-term impact on the ability of the entrepreneur to generate income.
The microfinance market in India, whose curve is moving upwards, is estimated to be growing at an average annual rate of nearly 80 percent for the last three years. This steady growth has attracted the attention of private equity firms to move in and invest in MFIs. The latest figures from Venture Intelligence revealed that since 2015, MFIs have accounted for almost 40 percent of all Indian private equity deals.
With things standing at such a strong place, the scenario would improve further if the government took an initiative to support with the creation of an equity fund, which will support MFIs to provide proper capital requirement for women entrepreneurs. While an equity fund of Rs 100 crore was set up under SIDBI since 2012, given the capital intensive nature of the business, the sector needs to have continuous access to more debt and equity capital, in order to reach out to more clients and bridge the financial inclusion gap that still exists in the country.
With a stronger regulatory system in place, MFIs are drawing the confidence of private banks as credible investment options, and with the microfinance sector showing steady growth, besides some of the larger MFIs receiving banking license from the RBI, leading private banks have become more liberal in providing funds to small and medium MFIs, understanding their accessibility as a platform to sell other products like health insurance.
While an MFI can provide loans up to a certain amount, if banks come forward to help us, it would be of greater help to budding women entrepreneurs from poor families, particularly in rural areas. If the government expands its equity portfolio for MFIs beyond the existing Rs 100 crore, a lot more MFIs can be included in the plan, and backing in the form of equity investment from the government will make lenders further comfortable to lend.
The need of the hour is for the government to create a large equity fund in order to support the capital requirement for women enterprises.

Providing such women with special tax benefits for the first five years of business and lending them money at special rates would also go a long way to further improve the scenario. The success of MFIs have also proven that the model is viable and worth replicating, providing enough reasons for commercial banks to support the sector even more, and help a larger number of women drive towards financial independence and empowerment.
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