Introduction

Microfinance is described as any activity that includes giving low-income people who earn just enough to qualify for public assistance and impoverished people who are below the poverty line financial services including credit, savings and insurance intending to generate social value. The reduction of poverty and the wider effects of bettering livelihood chances through the provision of capital for micro-business, insurance and savings for risk mitigation and balanced consumption are all included in the development of social value. In this light, this article works on the macro and micro challenges involved in the delivery of microfinance services in rural India and at the same time suggests workable strategies to counter these challenges of delivery.

In the modern financial world, microfinance has become a discipline of great importance. It has grown in significance as a key area of concern for the Indian government and other governments worldwide. As it concentrates on assisting the poorest of the poor, who were beyond the periphery of funding of any type, microfinance has altered the concept of lending. One of the major challenges for banks was to establish a network of agents that can provide reliable services to lower-income people (Sharma, 2011). The idea of micro-credit came from Asia, which faced dire poverty spread over rural areas of India and Bangladesh. A wide range of players in India who employ various microfinance delivery techniques offer microfinance. Since Bangladesh’s Grameen Bank was established, several actors have worked to find innovative ways to give the poor access to financial services. Governments have experimented with national schemes, non-governmental organisations (NGOs) have raised donor money for on-lending services, and a few banks have teamed up with NGOs or made modest inroads towards offering such services themselves. With maturing microfinance, NGOs were evolving rapidly and were testing with several forms of contributor-sponsored capital share ownership to become an acceptable substitute for privately owned organisations (Mishra & Chandra, 2010). The largest emerging market for microcredit is considered to be India. Over the past few decades, it has expanded steadily. Microfinance is the most efficient way to achieve financial inclusion, according to the Government of India, and this thriving sector displayed a variety of business models. In India, which has a population of over 1 billion, almost 400 million people live below the poverty line. This meant that 75 million households would require microfinance; of whom more than 60 million were in rural India and the other 15 million lived in urban slums. It is important to note that the same households’ expected current annual credit utilisation is ₹495,000 million.

Overall, there were troubles and difficulties with the microfinance institution (MFI) of India channel. They were struggling with continuity issues, so they looked for different ways to recreate themselves. After suffering a huge shock during the Andhra Pradesh (a State in India) crisis, the MFI channel is working feverishly to rebuild and get back on the path to legitimacy. Even the massive financial inclusion drive launched by the Indian government had no positive impact on the MFI channel. The inclusion process presented numerous difficulties in terms of bringing a sizable number of inaccessible families into the conduits for formal finance. But the policymakers were not interested. Coming to the formal banking sector, which had impressive coverage, it had an impact that was limited as far as lending to poor households was concerned. Throughout its existence, India’s official rural banking sector had difficulty striking a balance between the twin goals of outreach and financial performance. As a result, a new type of financial intermediary was required, one that would be affordable for banks and convenient for the unreachable poor. They would be able to relate to banks better in this fashion, and the banks would view doing business with the poor as a healthier commercial prospect. However, the difficulty lay in finding a sustainable and cheap way to connect a sizable number of economically disadvantaged households to the official banking sector (Reddy & Noorbasha, 2013).

As far as the concept is concerned, the Reserve Bank of India (RBI) believes that microfinance is an essential tool for achieving financial inclusion. What exactly is financial inclusion, then? According to the RBI, it is the ‘offering of cheap financial services’ to the underprivileged that have been shunned or ignored by Indian financial institutions. According to the RBI, financial services include ‘payments and remittance facilities, savings, loans and insurance services’. Microfinance is ‘the provision of a broad variety of services such as savings, deposits, loans, payment services, money transfers and insurance to poor and low-income households and their micro-enterprises’, according to the Asian Development Bank (2000). Low-income households and individuals living below the poverty line (BPL) are both included in this definition from ADB (2000). Microfinance is defined by the Micro Financial Sector (Development and Regulation) Bill, 2007, as the provision of financial assistance and insurance services to an individual or an eligible client either directly or through a group mechanism for an amount, not exceeding ₹50,000 in aggregate per individual for small and tiny enterprise, agriculture and allied activities (including for such individual’s consumption purposes). Migrant and/or landless labourers, craftsmen, micro-entrepreneurs, underprivileged cultivators and farmers with up to 2 ha of land were all eligible for the credit. The National Microfinance Taskforce (1999) has defined microfinance as the ‘provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards’. As a result, microfinance has come to be defined very broadly as any business that provides financial services to those who are poor or have low incomes.

Review of Literature

MFIs of India are using a range of legal structures and procedures. MFIs have been authorised as NGOs in India. Refinancing MFIs involves commercial banks, regional rural banks, cooperative societies, non-banking financial companies (NBFCs) and others. In contrast, banks have used the self-help groups (SHGs) as a lever by giving such borrowers direct credit.

According to Kothari and Gupta’s (2008) research, MFIs were structured using three different models: SHGs, the Grameen model/joint liability groups and individual banking groups similar to cooperatives. Group lending is the practice of giving loans to a group, which then lends to its members. When one of its sub-borrowers missed a payment, the group assumed responsibility for repayment. Individual borrowers received credit through group-guaranteed lending because each would be responsible for the other’s repayment. If one member defaults, the remaining members will no longer be able to borrow money. There could be collateral security or not in this kind of lending. There would not even be a group guarantee. Take note that the SHGs were also known as ‘group lending’. Fifteen to 20 women from comparable socioeconomic backgrounds would make up each group. They interacted frequently with each other, serving as a financial middleman. They would determine how much they would each put towards the common pool during their regular meetings. Every time there was a meeting, the donation was made. Due to internal elections within the organisation, the SHGs had a president, secretary and treasurer. Even the minutes were kept up to date by these elected officials. The contributions, after some months, were converted to a reasonable amount, and from there on lending was carried out to a/some needy member(s). Of course, before lending, a collective decision was taken by the members as to the availability of funds and repaying capacity of the member borrower. There were times when a fund crunch was experienced in the group. This happened when the required funds exceeded the amount accumulated. In this case, they scout external sources of funding that may be specialising in microfinance funding such as NABARD, SIDBI and the Social Welfare Department of the government, DRDA, commercial banks or NBFCs.

In their thesis, Palmkvist and Jun Lin (2015), stated that in addition to non-financial services such as literacy instruction, business training and skills development, MFIs also offered financial services such as micro-credit, micro-savings and micro-insurance. MFIs established the microfinance delivery technique of SHGs to reach the poorest and most isolated women. SHGs were given access to both financial and non-financial services based on joint liability and shared knowledge. MFIs, through SHGs, typically targeted women since they were more productive borrowers of loans, and rising research had shown that giving women access to financial and non-financial services helped empower them. The accomplishment of gender equality required the empowerment of women.

In his study, Ghosh (2005) claimed that microfinance encompassed a variety of financial services, the majority of which were credit and savings. It also included additional services, such as insurance, that were intended to ultimately help the underprivileged or poorer members of society, particularly those who were struggling financially. This was frequently supported by a range of support services, such as organising and inspiring the poor and assisting them in creating connections both backward and forward with other support institutions. The goal was to offer the underprivileged the tools they needed to become self-sufficient. They lacked the means to support themselves financially, let alone satisfy their bare necessities of consuming.

In their article, Mishra and Chandra (2010) made an effort to comprehend microfinance in India as well as to conduct a comparison of public and private sector banks’ microfinancing practices. The study identified a few issues with microfinance and its programmes that constantly changing. Finding a cost-effective organisational structure to integrate microfinance in an environment where it was ‘inherently ill-suited to adapt to the cultural world’ of regular microfinance consumers was the first difficulty. The second issue was finding an organisational structure that was more suitable as ‘former financial service NGOs’ became banks. Commercial banks were concerned about the emergence of hybrid organisational structures that incorporated microfinance programmes. In order to take the place of privately-owned organisations, maturing microfinance NGOs were ‘experimenting with numerous kinds of donor-sponsored capital share ownership’. These ownership and governing arrangements were developed with ‘micro-enterprise clientele’ in mind. Whatever strategies were used to address the two issues in the commercial banking sector, they will shape the direction of microfinance.

The establishment of a network of agents that can offer trustworthy services to lower-income persons and other groups that do not have access to other banking facilities, according to Sharma (2011), was one of the primary obstacles for banks. Banks aimed to increase lending opportunities through the agents while also extending a wide range of services. However, this hinged on the MFIs that were familiar with this group of people.

Microfinance is a tool for financial inclusion, according to the literature on the ‘Status of Microfinance in India’ (NABARD, 2012). With 103 million families reached by the SHG–Bank linkage programme in 2012, financial services have advanced significantly. Out of the 7,960,000 SHGs connected to banks in total for the year 2012. Of that, 6,299,000 were exclusively women SHGs and out of the total credit disbursed, nearly 86% was disbursed to exclusive women SHGs. With almost 8 million savings linked SHGs, it has more than 103 million poor households. Over 70% of the savings were internally loaned within the group and at the same time, the balance in the savings bank account was maintained. The most notable aspect of microfinance in the nation was that over 79% of SHGs affiliated with banks were exclusive women’s organisations. This means that the working balance in the Savings Bank account for all 8 million SHGs was over ₹65.50 billion. According to estimates, banks have already used over ₹220 billion in savings, of which more than ₹150 billion went towards internal loans. More than 4.4 million SHGs have received regular bank loan disbursements.

On the other hand, the SHG programme has begun to lose momentum and hope, according to the Microfinance State of the Sector Report (2013). The National Bank for Agricultural and Rural Development (NABARD) initiative, which was started 20 years ago, prospered with continuous expansion. But it has slowed down over the previous 3 years. With the National Rural Livelihood Mission (NRLM) in the picture, things got worse with no clear agreement between NABARD and NRLM on how the SHG program would develop in the future. The NRLM is a poverty alleviation project initiated by the Ministry of Rural Development, Government of India. According to the Microfinance State of the Sector Report (2013), microfinance is no longer alien to the country’s financial system, as it had acquired a unique method of delivering limited finances. Thus, the microfinance system in India was a combination of diverse organisations that were dependent on financial institutions so they can sustain themselves.

Reddy and Noorbasha (2013) in their analysis stated that the world’s poorest villages now had access to the dynamism of the market economy thanks to micro-credit programmes. Millions of people have been able to earn their way out of poverty with dignity because of this business-based approach to poverty reduction. The main criticism of micro-credit is that it does not help the poorest of the poor. It is commonly recognised that the poorest are excluded. The assumption is frequently made that persons who are moderately impoverished default less frequently than those who are acutely poor. Lack of understanding, the social isolation of the poor and official collaboration between micro-credit institution officials and non-poor households are some significant reasons contributing to this exclusion. The poor may be discouraged from participating in a micro-credit programme or their participation may be short-lived if there is too much financial discipline or stringencies, such as severe payback criteria and penalties for late payments. Moving forward with caution is necessary to prevent micro-credit from acquiring the negative traits of the formal credit distribution system.

The primary service is the SHG–Bank Linkage Programme. A significant advancement in banking with the poor might be attributed to NABARD’s engagement in microfinance, which was introduced as a trial initiative on 26 February 1992. Under the pilot phase, the informal thrifty and credit groups of the poor started to be recognised as bank clients. After the pilot phase, the Reserve Bank of India established a working group on NGOs and SHGs in 1994. The managing director of NABARD led the group, and it produced a wide range of recommendations on how to internalise the SHG concept as a ‘potential intervention tool in the area of banking with the poor’.

Nair and Tankha (2013) in their study state that in the past couple of years the ‘Client’ has emerged as the main character that revolved around microfinance. The fundamental focus of each self-regulatory endeavour has been to improve the methods for acquiring data on individual clients. The concept of responsible microfinance is supported by several tools, including the client protection principles, the code of conduct and the fair practices code. There are lending institutions who want the MFIs to join ‘credit bureaus’ in order to prevent repeated lending.

Methodology

Objective

• To study the macro and micro challenges in the delivery of microfinance services in rural India.
• To suggest workable strategies to tackle delivery challenges.

Study Methodology

For the examination of macro and micro issues faced by the various microfinance organisations in providing microfinance, secondary data were used as the technique. The information was taken from the RBI, NABARD, Microfinance State of the Sector Report (2013) and author-led research that was cited throughout the article. The strategies for overcoming the delivery difficulties were based on secondary data, as previously mentioned, as well as informal interviews with SEWA Bank and its numerous microcredit trusts, microcredit associations and microcredit organisations, all of which engaged in extensive microcredit activities, and ICICI Bank, Rural Operations—Rural Operations Group, Central Operations, Mumbai. (The interviewees want to remain anonymous.)

The following is the organisation of the article. The literature review discussed the theoretical aspect of the study by talking about microfinance in India, their role in financial inclusion, the variety of delivery methodologies used in the nation, the various delivery challenges they faced, and some potential solutions to the delivery challenges. The delivery challenges addressed the macro and micro-obstacles that various MFIs encounter when distributing microfinance. strategies for macro challenges highlighted practical, easy-to-implement solutions that can be used by a variety of microfinance organisations to address both macro and micro delivery issues.

General Discussion

It is clear from the literature review that microfinance in India is a very effective way to achieve financial inclusion and alleviating poverty in the country. It has made significant strides in up-scaling the microfinance industry but it still deals with some major, macro and micro challenges limiting its access to the client. The challenges, which needed the attention of the stakeholders and the policymakers, are the macro and micro challenges.

Macro Delivery Challenges

Assumptions in Conduct and Delivery of Microfinance. The major challenge to the delivery and conduct of microfinance is the set of assumptions related to this activity. These assumptions are as follows:

1. Self-employment is what the poorest wish for: Those who support the strategy of eradicating poverty through micro-credit assumed that the poor would prefer to be employed on their own. To supplement their income from wage-earning jobs, they would engage in ‘micro-scale farming’, processing or even trading. The vast majority of the poor, particularly landless labourers, would prefer a consistent pay wherever they may work.
2. The poor require credit as main financial service: Most microfinance organisations believed that credit was the only thing the poor needed, although this was not totally accurate. For instance, SEWA Bank’s experience demonstrated that women favoured to stash their assets in a secure location. Savings helped to cushion unforeseen financial needs and also built up ‘equity’ for borrowing.
3. Not appropriate to target anyone just above the Poverty Line for Micro-credit: This came from the ‘Grameen Bank experience’, which has demonstrated how providing micro-credit can benefit the most vulnerable. However, access to micro-credit ‘by those who are not among the poorest is not necessarily better than the poorest’ despite programmes helping the poor rise above the poverty line. Additionally, individuals above the poverty line who were assisted by microfinance created the critical wage employment prospects for the most vulnerable. It was evident that individuals who lived over the poverty level required micro-credit.
4. Financially self-sustaining is possible for all micro-credit institutions: Overall self-sustainability was supported, but presuming that all microfinance organisations could achieve it was unwise and needed further research.

Microfinance as a Savings and Credit Movement

Understanding the case of Andhra Pradesh, a southern State of India, in this context will shed light on savings and credit management of microfinance. The women’s anti-arrack movement was fuelled by the organisational zeal that grew with the complete literacy campaign. Locally produced alcohol is called arrack. Later, this effort was redirected to become the savings and credit movement, in which the government, NGOs and many other groups took part. The ‘thrift and credit’, which produced many groups, was founded and organised by a large number of women. Although these actions in other states did not take the form of a movement, they did provide financial aid to reduce poverty.

Access and Sustainability Challenge

It was difficult for mainstream financial institutions to enter the microfinance market as well. Historically, microfinance has been viewed more as a social duty than as a potential commercial opportunity. Even legislative barriers prevented refinancing. For instance, the NABARD law restricted refinancing to private sector financial institutions. After the catastrophic Andhra Pradesh microfinance crisis, which led to the introduction of the Microfinance Bill in 2012, the organisations had to register and comply with all of the RBI’s and the bill’s requirements for conducting business, which presented additional hurdle. At a later stage shall understand in detail the Andhra Pradesh microfinance crisis as it saw women SHGs as vote banks for political parties.

Capital Sufficiency

Ironically, NGOs were not the most effective organisations over the long term, despite the fact that they invented microfinance. This is a result of the NGOs’ funds, which are typically very small handouts. NGOs were also prohibited from lending because doing so could violate Section 11(4) of the Income Tax Act. They risk losing their ‘charitable status’ in accordance with Section 12 of the Income Tax Act if they do this. Because of this, Section 2(15) of the Income Tax regulations states that microfinance cannot be considered a benevolent activity, to whomever it may concern. The other issue was that NGOs as a whole lacked the proper financial framework for carrying out microfinance programmes. The concept of capital sufficiency or adequacy was not applicable to them as they were registered as societies or trusts with no equity capital.

Not Easy to Bring Millions of People Under Microfinance

In a survey by the National Council of Applied Economic Research (NCAER) for the year 1994–1995, indicated the ‘bottom three income categories with per capita income of up to ₹250 per month and accounted for 31.7% of all rural households that declared incomes less than expenditures’. Such people scarcely qualify as savers. This indicated that these people lacked sufficient possibilities for a living, which was the main issue. The survey revealed that agricultural and non-agricultural wage workers made up the entire 32% of poor rural households. This made it significantly more challenging to convince them to accept micro-credit, making it a significant obstacle to be overcome.

Gap in Demand and Supply

The government and financial organisations’ numerous measures to help the rural poor raise their standards of living and establish welfare have not been successful. When considering the availability of rural credit, there seemed to be a significant disconnect between rural residents’ requirements for savings and credit options and what was being offered by various lending organisations. Only 18.4% of the rural population has access to banking services through savings accounts, according to the RBI Banking Statistics (2003) and the Rural Population Census India (2001). At 17.2%, rural residents were still underserved by the availability of loans. It was clear that there was a significant shortage of savings and credit options available to the rural people. This was necessary to cover the MFIs.

Women were Hardly Oriented in Evaluation, Marketing and Microfinance Delivery

Long-term research has shown that rural women were typically the main customers of micro-credit and micro-savings. The rural Indian social structure and culture was one of the causes of this. In rural India, men typically did not go to SHGs or NGOs for a small loan or savings. And another thing is that the guys did not have time to visit a SHG/MFI because they were too busy with their agricultural businesses. MFIs required including women in their loan and savings programmes as a result. The status of women in rural areas had to be taken into consideration throughout their credit rating procedure. Micro-funding might benefit from a marketing strategy that prioritises women. The only approach that can connect with women who can take part in development is microfinance. Realisation has dawned on this by international donors, scholars, governments and other related experts who have been focusing on microfinance. The microfinance sector has gone through leaps and bounds finding barriers affecting women’s access to financial services. Today 14.2 million of the world’s poorest women have access to financial services from MFIs, NGOs, Banks and other NBFCs (Cheston & Kuhn, 2002).

Microfinance Under Vote-bank Politics: Crisis in Andhra Pradesh (India)

The simultaneous expansion of the SHG–Bank linkage model advocated by the State and the MFI by private operators is to blame for the microfinance problem in Andhra Pradesh. By 2010, it was expected that the State had 19.11 million SHG–Bank linkage members and 6.25 million MFI borrowers. Bank loans to MFIs had been expanding more quickly than bank loans to SHGs in terms of percentage growth. MFI's rapid growth allowed it to overtake SHG as the most widely used microfinance model. This was the catalyst for a crisis because the political establishment found it intolerable and feared losing control of a significant voter base. Even the civil employees agreed with the political authorities because if MFIs took over the dominating position, they would lose control of a significant programme and its associated funding.

This fear was a major motivator for the personnel of the government-sponsored Andhra Pradesh Society for Elimination of Rural Poverty (SERP) to be hostile towards MFIs. In Andhra Pradesh, microfinance had a growing influence on electoral politics. Women’s SHGs were viewed by Telugu Desham Party (TDP), a local political party, as a possible vote source and political constituency. Before the 1999 elections, banks were convinced to reduce interest rates on loans to women’s SHGs from 12% to 9%. A national political party (the Congress Party) promised women the Pavala Vaddi programme, which contained loans with 3% annual interest; this promise helped the Congress Party win the 2004 elections and put them in power.

Interest rates were reduced to zero (interest-free loans) with a ceiling loan amount, which was offered in the 2009 elections as a means of gaining the support of women voters. The recovery rates of bank lending to SHGs decreased during this time. While the recovery rate was over 95% in 2007–2008, by 2010–2011 it had significantly decreased to a reported 60–70%. As the conflict between the TDP and the Congress Party in the state raged on, micro-credit borrowers felt tremendously tormented and some even committed suicide. At that time, the MFIs received covert support from the state’s Congress government, whereas SHGs received minimal attention.

The statements made by political party leaders in October 2010 when media criticism of MFIs was at its height had an impact, forcing the Congress administration in Andhra Pradesh to pass a law restricting MFIs. The Andhra Pradesh MFIs (Regulation of Money Lending) Ordinance, 2010, was introduced by the state government and eventually became the Andhra Pradesh MFIs (Regulation of Money Lending) Bill, 2011. Multiple provisions of this statute effectively prevented MFIs from operating in the state. For instance, MFI workers had to wait in a busy public area for borrowers to arrive and pay rather than going to the borrower's home or place of employment for recoveries. Without the government’s prior consent, no further loans were allowed. Although the law’s stated purpose was to shield MFI borrowers from coercion and excessive debt, it made it impossible for MFIs to operate in the State. This significantly slowed recovery times. However, opposition leaders from the TDP and Communist Party of India (CPI) seized the chance to gain popularity by claiming that the law had not gone far enough and advising people not to pay back MFI loans, which caused a widespread default on repayments. Up till April 2012, 90% of delinquent loans totalling over 9.2 million valued at ₹72,000 million remained unpaid. In India as a whole, banks panicked and stopped providing loans to MFIs.

People ceased making MFI loan repayments after adopting the practical view. Bank loan flows to SHGs in the State also decreased. This prompted the Andhra Pradesh government to establish the Stree Nidhi special institution. To give interest-free loans to women, this was an apex cooperative credit society. It provided loans of ₹66 million to members of women's SHGs through a high-tech platform. But because bank credit became scarcer and money lenders remained to be the main source of funding at interest rates ranging from 5% to 10% per month (60–120% annually), this had little effect on the general availability of credit. Thus, the Andhra Pradesh Government issued vaddi leni runam, or an interest-free loan, in a final act of political desperation to make it seem like the champion of the poor.

Micro Delivery Challenges

This referred to operational factors that impeded the extension of rural credit with high transaction costs. In rural places, the quantity needed to be saved or conserved was frequently very little. It had not shown to be cost-effective to provide it through the traditional banking system or other financial organisations.

Document-based Lending

Documentary proof of identification and sources of money served as the foundation for mainstream finance. However, the impoverished in rural regions did not typically have access to either of these. In conventional banking, the lender is required to hold certain assets as collateral. This made guaranteed the debt would be paid back. The lender had the right to amortise the asset in order to recoup its losses in the event of a default. Rural people rarely had assets (land, jewellery), and as a result, they were excluded from the traditional banking system.

Repayment Issues

Because micro-credit was not supported by documentary evidence, tracking repayment became a major operational challenge. Additionally, the financial institutions (FIs) were forced to write off the entire portfolio in times of crises such as natural catastrophes that affect the entire rural economy because there are no other options for risk mitigation. Cash management is a significant issue for MFIs, particularly when it comes to paying the EMI on a microcredit. Due to the organisations' reliance on field officers to collect payments, particularly MFIs and NBFCs, any cash theft by them worsens the organisation’s situation.

Discussion on the Strategies

Macro-level Challenges

It was crucial to make MFI activities more accessible and reachable to rural poor people in general and the poorest among them in particular. Therefore, by involving the State apparatus, the task of turning this activity into a savings and credit movement can be met. Along with affording it the essential independence, the polity not only supported the movement but also engaged the bureaucracy in it. It could strengthen the movement and lend it legitimacy because the State has control over both financial and non-financial resources.

Using the paradigm of banks–NGO–SHG linkage, where banks both public and private lend capital to the NGOs, capital adequacy challenges encountered by NGOs can be resolved. These NGOs actively participate in funding SHGs and other organisations that offer micro-credit by lending money to them. Additionally, money can be raised through organisations that lend money for the same goal on a national and international level. Leading companies such as BASIX, which borrowed from banks such as HDFC, ICICI and SIDBI as well as developmental organisations such as the Swiss Agency for Development Corporation and Shorebank Corporation of the USA, have successfully used this strategy. For offering micro-credit, the same money has been given to NGOs and SHGs in Andhra Pradesh and other southern States. Today, it is possible to raise private funding to support outreach initiatives. MFIs could employ the private capital as part of their equity.

Programs for micro-credit can be redesigned to focus on the poor and micro-entrepreneurs that do not fit the definition of ‘poor’. This is because commercial farmers and micro-entrepreneurs both run enterprises that provide the poor with much-needed wage-related employment possibilities. Before becoming self-employed, the poorest need support through wage work. As soon as they start working for a wage, they begin micro-saving and may later apply for micro-credit. Additionally, MFIs and banks operating under the NGO–SHG linkage model may provide funding to NGOs to expand their initiatives relating to the provision of chances for wage employment or for starting micro-businesses.

Micro-level Challenges

Some strategies can be used for micro-challenges in terms of recovering transaction costs. As a physical touch point, the Post Office can be crucial in the distribution of microfinance. Every Post Office may have a nodal organisation that can help the rural residents organise an SHG in order to obtain micro-credits. In addition, the network of Post Offices and Post Office employees can perform the function of providing banking services through Banko Postal. The efficiency of empowering the participants and the administrators would increase with technological advancement in the micro and small-scale sectors’ activities.

Recovery of transaction costs may come from the usage of ATMs for payment, account opening, small deposit collecting, microcredit providing, sale of savings bonds and insurance. In addition, gradual automation will help the financial sector experience faster and greater development across the board. Microfinance transactions can now be completed via mobile banking, which has increased its clientele. The availability of mobile banking around-the-clock is one factor in its appeal. The reduced transaction costs of mobile devices and the access they enable MFIs to remote markets are advantages.

The creation of the Business Correspondence Model is another significant achievement in solving the difficulties of microfinance distribution. In order to increase their reach, banks were given permission by the Reserve Bank of India to name ‘Business Correspondents’ in January 2006. Business Correspondents (BCs) carry out all transactions on the bank’s behalf and serve as the institution’s ‘tellers’. Banks compensate BCs with commissions for the services they provide. Initially, NGOs, MFIs, NBFCs and Post Offices served as BCs; however, the laws have since altered to accommodate people, local businesses and corporations.

Further collaborations with NGOs and SHGs operating in rural areas could lower transaction costs by requiring them to provide the financing. These organisations will be efficient providers of micro-credit thanks to their database and consumer history of the region. This will increase micro-credit and reach for the MFIs while at the same time reducing the direct cost of lending. Lending needed to be coupled with insurance and other services such as training and marketing support, government subsidies and others.

Conclusion

In India, microfinance is essential to achieving financial inclusion for the underprivileged in both urban and rural areas. It was crucial to make MFI activities more accessible and reachable to rural poor people in general and the poorest among them in particular. The macro-challenges that the MFIs faced were the poor’s lack of access to microfinance services, inadequate capital, a mismatch between the demand and supply of micro-credit and savings, and the lack of awareness among women about evaluation, marketing and microfinance delivery, besides the politicisation of women SHGs by politicians that triggered the battle for the vote bank. The battle for vote banks not only downplayed the MFIs but also eroded bank credit flow to SHGs.

When it came to micro-challenges, MFIs were unable to lower the skyrocketing transaction costs associated with providing microfinance; there was also the issue of documentary evidence and collaterals with the majority of the poor; and of course, there was the issue of tracking repayments when there was no documentary evidence of money lent.

Innovation in operational techniques addressing these macro and micro-challenges can help to overcome the main obstacles to the successful delivery of microfinance. As reflected in the study, innovative practices such as tying up with local NGOs and SHGs would help in the successful delivery of microfinance. Also, to address the delivery issues, the possibility of using the local Panchayat and post office branches as nodal entities for microfinance delivery should be investigated. Future microfinance activity’s success would depend on how actively MFIs, NGOs, SHGs and banks participated. These institutions must integrate and link together in order to share and transmit information, among other types of resources. The role of microfinance as an effective tool for poverty alleviation is being seriously considered and with the success of SHGs and other micro-credit delivery models in selected places of the country has created a favourable reputation for the micro-credit sector (Das, 2005).

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The author received no financial support for the research, authorship and/or publication of this article.

ORCID iD

Siddharth Das  https://orcid.org/0000-0002-5814-5574