An Analysis of the Role of Microfinance in Promoting Financial Inclusion in India

Abstract

The thesis defines financial inclusion as ongoing access to a range of financial services in an affordable and convenient manner. As low income groups are often among those lacking such access, microfinance programmes providing financial services to them have emerged as a public policy instrument to promote financial inclusion. This thesis evaluates the contribution of microfinance programs in promotion of financial inclusion in India. The research framework and research questions in the thesis were informed by the relevant literature, particularly relating to microfinance, financial inclusion and their links with broader development goals. The research questions relate to how the two major microfinance models in India, the self help group bank linkage program (the SBLP) and the microfinance institution (MFI) model, address barriers to financial inclusion, and facilitate expected outcomes. To sustain financial inclusion, group microfinance members should graduate to individual financial services. The thesis therefore also explores the environment in which such graduation could take place. A research design based on case studies and qualitative research methods was adopted. The lines of enquiry followed were at the sector level, at the microfinance provider level and at the microfinance member level. For the provider and member levels, primary data were collected in the State of Tamil Nadu. At the provider level, one organization associated with each model was studied, including interviews of senior officials and 103 MFI field staff. At the member level, 34 low income women were interviewed. The enquiry enabled the development of an explanatory framework for financial inclusion through microfinance. The research at the sector level led to understanding of the following: factors influencing microfinance penetration; requirement for improving availability of financial services other than microcredit; need for creating a sector wide credit bureau; benefits of unique identification numbers for residents to facilitate development of credit histories for microfinance members; and the importance of a systematic approach to graduation of group members to individual financial services. The findings from provider and member level research included barriers to microfinance membership; the requirement for a wider range of financial services particularly savings services; and the need for enhanced financial literacy and financial management skills among members. Distinct categories of MFI and SBLP members also emerged. ?Effective utilizers? who build up individual repayment capability during group membership, enabling them to graduate to individual loans later, were common to both models. In addition, in MFIs, there were ?ineffective utilizers? who fail to adequately build up repayment capacity. In the SBLP, there were ?cashflow smoothers? and ?consistent savers?. While the first do not receive adequate finance in order to invest substantially in their enterprises, the second group uses the SBLP primarily to save. The thesis analyzed appropriate regulatory framework for the microfinance sector. The study has implications for policymakers at the national and state level, microfinance providers, members and funding agencies. The thesis findings also suggest that there is considerable scope for policy relevant empirical research on microfinance in India.