History of Microfinance in India

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The history of microfinance in India traces back to the 19th century when informal credit systems, such as moneylenders and indigenous community-based lending practices, were prevalent. However, the modern microfinance movement, as we know it today, began to take shape in the 1970s and gained significant momentum in the 1990s.

1. 1970s: Emergence of Self-Help Groups (SHGs) The foundation of formal microfinance in India can be attributed to the National Bank for Agriculture and Rural Development (NABARD), which was established in 1982. In the 1970s, NABARD initiated the concept of Self-Help Groups (SHGs) to promote financial inclusion among rural communities. SHGs were small groups of individuals, mainly women, who pooled their savings and extended microloans to group members in need. The success of SHGs laid the groundwork for the expansion of microfinance initiatives across the country.

2. 1990s: Rise of Microfinance Institutions (MFIs) The 1990s saw a surge in the establishment of Microfinance Institutions (MFIs) in India. These MFIs were non-profit organizations, non-governmental organizations (NGOs), or specialized financial institutions focused on providing microcredit to the underserved and economically vulnerable segments of society. MFIs followed the Grameen Bank model pioneered by Nobel Laureate Muhammad Yunus in Bangladesh, which emphasized group-based lending, peer support, and the social collateral of borrowers.

3. 2000s: Evolution and Regulation The microfinance sector experienced rapid growth in the early 2000s, attracting significant investments from banks and financial institutions. The introduction of innovative products, such as microinsurance and microsavings, broadened the scope of microfinance services. However, this period also witnessed some challenges, including concerns about over-indebtedness and aggressive collection practices by certain MFIs.

In 2010, the Andhra Pradesh microfinance crisis emerged as a significant setback for the industry, leading to regulatory interventions by the Reserve Bank of India (RBI). The RBI introduced comprehensive regulations to govern the microfinance sector, which included setting interest rate caps, defining eligibility criteria for MFIs, and establishing guidelines for fair practices.

4. Post-2010: Formalization and Diversification After the regulatory interventions, the microfinance sector in India underwent a process of formalization. MFIs and SHGs continued to play a crucial role in providing microcredit to the underserved, while new players, including Small Finance Banks (SFBs), emerged as specialized institutions catering to the financial needs of low-income segments.

Today, microfinance in India has evolved into a well-regulated and diverse industry, catering to millions of individuals and small businesses. It continues to be a vital tool for poverty alleviation, women’s empowerment, and promoting financial inclusion in both rural and urban areas of the country.

Overall, the history of microfinance in India reflects a transformative journey, from informal credit practices to a formalized, regulated, and dynamic sector, playing a pivotal role in the socioeconomic development of the nation.

Arukus Technologies has been working closely with MFIs and NBFCs that are focussed on the rural sector in India, by providing technology enabled smart solutions designed to address the key pain points of microfinance institutions.