Academic journal article ASBM Journal of Management

Exclusive Banking for Financial Inclusion: A Case Study on Indian Bank's Microfinance Initiative

Academic journal article ASBM Journal of Management

Exclusive Banking for Financial Inclusion: A Case Study on Indian Bank's Microfinance Initiative

Article excerpt

Introduction

India's urban market is estimated at approximately 28% of India's total population that is about 286 million people. According to an estimate by UNDP, with the increasing trend of urbanization, urban population is expected to grow to over 575 million that is about 41 percent of its total population by year 2030 (UNDP, 2009). Indian microfinance intervention is unique having 'Rural bias' as there has been a lot of effort in promoting rural microfinance, but urban areas have been neglected in this regard.

Indian Bank is owned by the Government of India and was established on 15th August 1907 as a part of the swadeshi movement. In 100 years of its existence it has priority sector advances of 2084.6 million USD, which was 50.80% of the net credit, as against the national goal of 40% (Table 1).

In the year 1989-90, it has taken up women's development projects in four districts of Tamil Nadu in collaboration with Tamil Nadu Women's Development Corporation and the International Fund for Agricultural Development (IFAD). The major objectives of the project were to ensure the socioeconomic upliftment of women. Despite achieving a recovery rate of 95% the project had some lacuna like, groups were financed individually based on their activities and peer pressure was not up to expectations, there was lack of diversification in terms of nature of activities; risk was high and the people could not find sufficient market leading to low income from their activities and there was lack of interest and motivation for mobilizing savings. In spite of these lacunae, it brought considerable improvement in rural women's position in the family, as well as in society. Later, National Bank for Agriculture and Rural Development (NABARD) came up with the concept of SHG, with slight modifications to the IFAD concept. There were certain improvements to the SHG concept like: homogeneity and cohesiveness among the members, periodical meetings, regular savings, internal lending, skills development training and consumption loan were emphasized.

Due to its high involvement in SHG activities, in the year 2000, the bank thought of starting a separate microcredit cell at 26 selected branches. From 2000-01 till 2005-06, SHG bank linkage was increased about 10 times in terms of number, and about 25 times in terms of total amount of loan (Table 2).

This case study tries to present the facts and issues on an exclusive branch for SHGs in Chennai promoted by Indian Bank for financial inclusion of urban poor in the following sections.

Urban Versus Rural Microfinance Model

One of the most important models of microfinance in India is SHG bank linkage programme (SBLP). In India, banks have contributed indirectly to microfinance through the SBLP. However, some commercial banks have also tried their direct interventions internationally as well as in India. In their book titled "Small Customers, Big Markets' Harper and Arora (2005), have presented 18 case studies of commercial banks in microfinance from 15 different countries of which 4 case studies were from India. Case study on State Bank of India and Cañara Bank deals with their SBLP. Oriental Bank of Commerce adopted facilitators for promoting microfinance. ICICI Bank collaborated with various NGOs through portfolio buy out, partnership and on tap securitization model. The book concluded that these small customers are a large and profitable market and banks are entering this market strategically to get quick profitability. However, unlike international experience, Indian microfinance is more rural than urban. In India, 65 percent population is rural, mostly dependent on agriculture for their livelihood. However, agriculture in India is unable to provide fanners with sustainable income round the year. This has led to high need of credit and more focus of microfinance in rural areas. However, urban poor are equally needy in terms of need for financial services. But, unfortunately in India, urban areas have been largely neglected. …

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