Microfinance best describes the idea of inclusive finance.
The methodology of microfinance owes its genesis to
global efforts to address the apparent imperfections in the
financial services markets that particularly constrained
poor households from fully participating in its function-
ing. Microfinance experiments in India had evolved
through several phases over the past quarter of a century
and have resulted multiple institutional models. SHGs,
JLGs, federations, for-profit non-banking companies,
non-profit NGOs and trusts, and mutually aided thrift
and credit societies and all part of the microfinance sec-
tor in the country. While each such model has distinct
working principles, they overlap each other in most of
the markets. Collectively they have helped extend the
reach of basic financial services to segments of popula-
tion who were historically treated as outsiders to the
mainstream financial markets. The savings-led model
of SHGs and credit-led model of MFIs have both tar-
geted these excluded sections served otherwise by high
cost and exploitative informal agencies. Several enquiries
have proven that microfinance has helped the poor build
assets, enhance incomes and seek protection from exter-
nal shocks.
As discussed in the introductory chapter microfinance
is yet to be formally incorporated as part of the main-
stream policy discourse on financial inclusion. If the
omission of SHGs is justified on the ground of their lack
of focus on individuals, the MFIs are excluded because
they can offer only one product, i.e., credit. Such strict
application of definitional boundaries, however, has
seriously distorted the understanding of the nature and
extent of inclusive financing in India, to the growth of
which banks and formal financial institutions have con-
tributed significantly.
This chapter is an attempt to amend this anomaly
by mapping the microfinance sector in India by focus-
sing on the two major components—SHGs and MFIs.
The chapter is organized in two parts. Part 1 contains a
detailed analysis of the growth performance of the SBLP
during recent years and how it extended financial services
to the financially excluded. It undertakes an analysis of
lending and savings operations under SBLP, its regional
4
Building an Inclusive Financial
Sector in India
Status and Contribution of Microfinance
