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Providing the poor with easy access to credit in a sustainable manner has been the holy grail for policymakers. Despite efforts like the nationalisation of banks in 1969, the establishment of regional rural banks and the RBI drive at financial inclusion through priority sector lending by banks, the All India Debt & Investment survey of 1992 revealed wide gaps in credit availability, especially at the bottom of the pyramid.
Post 1991, coinciding with the financial sector reforms, self help group (SHG) and joint liability group (JLG) lending models were two innovations which have enabled a rapid spread of microfinance across the country. At present, microfinance meets the credit needs of nearly 12 crore families with a total lending portfolio of about ₹ 4.9lakh crore. A study by NCAER (National Council of Applied Economic Research) in 2021 estimated the contribution of microfinance to gross value added (GVA) at more than 2 per cent while generating nearly 12 million jobs.
Today, microfinance is available in nearly 85 per cent of districts of India with more than two lakh frontline employees distributing credit and associated services.
High frequency of customer interactions through weekly or fortnightly group meetings underpin sustained efforts at financial literacy as well as quick resolution of customer grievances. Since the borrowers belong to the low-income segment and often have low literacy levels, frequent face-to-face interactions are one of the reasons behind the success of the JLG model.
Group Recognition Test (GRT) conducted after the formation of a new borrower group plays an important part in promoting financial literacy. MFIs (microfinance institutions) have been increasingly adopting technology to enhance operational efficiency, improve underwriting models and reduce expenses while continuing the focus on customer centricity.
Audiovisual content in vernacular languages is widely utilised to continuously impart financial literacy. A separate credit bureau for microfinance was established about a decade back. Intense efforts by MFIs and credit bureaus have led to the development of robust databases and a credit bureau report is an essential part of underwriting now. Digitalisation initiatives have been aligned with the rapid diffusion of smartphones and the growing comfort of borrowers with digital modes of transactions.