Microfinance fosters the financial inclusion of those layers of society who have no or only insufficient access to basic financial services. Facilitating this access brings about many positive effects: assets are built up, consumption patterns are smoothened and income levels are increased. Eventually, vulnerability of people most exposed to economic stress is being reduced. In acknowledgement of these potential effects of microfinance and the prevailing challenges in the industry, the Indo-German Financial Cooperation is promoting the sector via a number of approaches and a diverse range of partners.
Microfinance are small scale financial services such as loans, savings and insurance. Usually, those financial services are offered to people who – for a variety of reasons – have no or insufficient access to basic financial services. Main beneficiaries are people how are living in poverty or in very distant regions of the country. Most of the microfinance clients in India are women. The deficit in financial inclusion in India is appalling: As of today - based on the number of bank accounts - only one-third of the adult population in India has access to financial services of the formal sector. Other parts of the society either have to turn to completely unregulated moneylenders or have no access to financial services at all. Important to notice that including the non-included can bring about many positive effects: assets are built up, consumption patterns are smoothened and income levels are increased. Eventually, vulnerability of people most exposed to economic stress is being reduced.
Microfinance in India looks back at dynamic developments. The period of rapid growth in the Indian microfinance led to substantial fissures in the sector and ended abruptly with the advent of the Andhra Pradesh ordinance in autumn 2010. These events triggered a highly controversial public debate about the impact and moral quality of microfinance and eventually paved the way for the reorientation of the industry towards its core values and social mission.
However, while these recalibrations are in the middle of the process, the impact of the microfinance crisis is still being felt by many microfinance institutions. The lack of access to external financing, the tight liquidity situation and the growing volume of bad loans have had a lasting negative impact on the performance in the sector.
In acknowledgement of the potential effects of microfinance and the prevailing challenges in the industry, the Indo-German Financial Cooperation is promoting the sector via a number of approaches (reduced interest loans, equity participations and accompanying measures) and a diverse range of partners (SIDBI, Lok Capital, Sewa Bank, MicroPensions, Rural Cooperatives).
By way of its engagement, the Indo-German Financial Cooperation seeks to support its partners in developing financial solutions to address the rising market gap with an approach to microfinance that effectively addresses the finance needs of lower income segments and that takes into consideration the key lessons of recent events: That the relationship of microfinance service deliverers vis-à-vis their highly vulnerable clientele must always remain at the centre of the business transaction and that aspects such as responsible finance and social performance are central cornerstones of all activities.