India has supported social banking for a long time. The first breakthrough emerged from policy support to enable informal self help groups(SHG) of 15-20 members (mainly women) to transact with commercial banks. The SHG promotes small savings among its members. The savings are kept with a bank. Unlike the SHGs, which tap funds from public sector banks, MFIs draw their capital mostly from private banks, SIDBI, and foreign investors. Various models of SHG-Bank Linkages are as follows
Model I: SHGs formed and financed by banks (16% of SHGs)
Model II: SHGs formed by NGOs and formal agencies, but directly financed by banks (75% of all SHGs financed)
Model III: SHGs financed by banks using NGOs and other agencies as financial intermediaries (9%)
This cost includes the prime lending rate of nationalized banks which is around 9%. Today after a decade of implementation of the “Linkage Banking “ or “Self Help Group SHG) banking”- approach, NABARD has been able to increase the outreach of banking in rural India, substantially. The linkage banking approach of providing financial services to unbanked poor now touches 1/6th of rural poor in India.
Of the total number of SHGs financed by banks so far 90% were exclusive women groups. This has every reason for us to state that linkage banking has contributed to the feminization of microfinance banking in India. It is not only the SHG-Bank Linkage-programme of NABARD that allows the SHGs to obtain loans from formal banking institutions.
The Self Help Group promoters emphasize that mobilizing savings is the first building block of financial services.
The central bank notification that lending to MFIs would count towards meeting the priority sector lending targets for Banks offered the first signs of policy flexibility towards MFIs. Microfinance programmes have rapidly expanded in recent years. Since banks face substantial priority sector targets and microfinance is beginning to be recognised as a profitable opportunity (high risk adjusted returns), a variety of partnership models between banks and MFIs have been tested.
Ø Lending wholesale loan funds.
Ø Equity investments into newly emerging MFIs.
Ø Banks and NGOs jointly promoting MFIs.
In spite of increasing focus on Micro Finance in India, wide regional disparities are visible across country. This problem needs to be addressed .