A 13th century Telugu quatrain from Sumati Satakam mentions, “One should live in a village, where there is a lender, doctor, flowing river and righteous people reside”, in that order. Microfinance is ever important!

Growth becomes inclusive and sustainable only when ‘financial inclusion’ is integral to public policy. Inclusive growth, necessitated bank nationalisation. The government is now deepening, widening and sharpening inclusive growth through several programmes including Jan Dhan Yojana, livelihood, social pension, insurance, DBT, and microfinance programmes.

Microfinance, began with Self Help Group Bank Linkage Programme (SHG-BLP), which emanated from MYRADA’s action research project commissioned by Nabard in 1989. SHGs primarily (90 per cent) consist of women (10-12) members. The RBI’s initiative of linking informal groups with banks for micro deposits and loans made SHG-BLP a reality.

What started with a humble target, linking 500 SHGs to banks, is now the world’s largest microfinance programme — 129 lakh bank linked SHGs with loan outstanding of about ₹1,81,500 crore. SHG-BLP combines the strengths of community, NGOs, government and banks, empowering women, creating social capital, enriching livelihoods and creating sustainable businesses to banks. The Southern and Eastern States lead SHG-BLP.

Under SHG-BLP, average per member loan outstanding is about ₹21,600 with 8.4 crore borrowers. If we exclude the five Southern States, the per member loan outstanding reduces to ₹12,300, exposing the regional disparities in the programme.

Microfinance changed its complexion in the early 2000s, starting from southern India, where SHG-BLP began and is still vibrant, with the arrival of a new players, primarily Microfinance Institutions (NBFC-MFIs). The gross loan portfolio of all microfinance providers is about ₹3.2-lakh crore with 6.4 crore borrowers and per member loan outstanding of about ₹50,000.

Under the SHG-BLP members can access loans from banks only after individual savings, regular group meetings and inter-lending amongst members. MFIs usually give loans through joint liability groups (about five borrowers per group), who are jointly and severally responsible for repayment.

Many development professionals opine SHG-BLP is the appropriate model for India, because of interest subvention provided by government(s) and moderate interest rates charged to borrowers. But under SHG-BLP per borrower loan amount has been small and the loaning process a tad longer, as compared to quicker and bigger loans from MFIs. Hence borrowers are gradually opting for MFIs.

While SHG-BLP movement started with social objectives for accessing formal finance, MFIs gradually transformed the movement into an efficient commercial operation. One shouldn’t take any stand, either way, because access to credit was always the objective.

Poverty, climate change and overexploitation of natural resources threaten sustainable development and SDGs. Microfinance has the potential to provide solutions. Its future is bright and still unexplored.

India is a vast country and many microfinance models are required. Efficiency and flexibility to meet clients’ needs must be the differentiators. An oversight on SHG-BLP, higher tier structures like federations, gradual withdrawal of interest subventions can make SHG-BLP resilient. When MFIs focus on the the client, with capacity building, advisories, usage of technology, issuing more productive loans, alongside compliance with regulatory norms, it will drive book size and profits.

Microfinance contributes about 130 lakh jobs and 2 per cent of our GVA, per a NCAER study. It has the potential to reach all the 6.3 crore unincorporated and non-agricultural enterprises. The RBI recently defined microfinance as collateral free loans given to households having annual income up to ₹3 lakh. The future of microfinance hence hinges on: ‘Moving all Microloans to Formal Sector’ either through banks/MFIs and that is possible.

The writer is Deputy Managing Director, Nabard. Views are personal