Why microfinance is fading out

Why microfinance is fading out: MFIs are unable to address the needs of self-help groups. They have been hit by the falling growth of SHGs

March 20, 2016
Revamp cooperatives
This refers to the article “Why microfinance is fading out?” (The Hindu Business Line, March 19, 2016). Between village money lenders and the mainstream institutional system represented by commercial banks and cooperative banks(which were brought under the purview of the Banking Regulation Act in 1966), we had small village cooperatives (primary agricultural credit societies and multi-purpose cooperatives) which catered to a variety of needs of the rural and farm sectors. Since early 1980’s, perhaps from the time when National Bank for Agriculture and Rural Development (NABARD) was established, the primary cooperatives became a neglected lot.
Non-Governmental Organisations which could get funding from various sources started organising Self-Help-Groups (SHGs) which were financed by commercial banks. This affected the business potential of primary cooperatives and many of them became sick or extinct. In the Indian situation, where commercial banking system cannot reach, the best suited institutional system is cooperatives. In smaller countries like Bangladesh, where banking itself was yet to penetrate to rural areas, with limited scope for village-level activities, initially the SHG model might have succeeded. In India, economic development itself is at different stages in different geographical areas and the role of state governments in supporting rural development and farm sector is of a higher level. Developing cooperative financial intermediation at village level would be of advantage in such a situation.
M G Warrier, Mumbai


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