India, with a population of over 1.2 billion, is the second-most populous country in the world. Word Bank data from 2010 reports that around 68.8% of Indians live on less than USD 2/day and of these, 32.7% live on less than USD 1.25/day.
The Reserve Bank of India (RBI), India’s central bank, has undertaken various initiatives to promote financial inclusion such as the ‘no frills accounts’ (2005) and the business correspondent model (2010). The total number of branches of scheduled commercial banks increased from 68,681 in 2006 to 102,343 in 2013 and the number of banking outlets in villages increased from 67,694 in 2010 to 268,454 in 2013.
World Bank data shows that about 35.2% of Indians above the age of 15 have access to banking. In rural and urban areas, about 41% and 33% people have access to banks respectively. Around 43.7% of men are banked, whereas only 26.5% women have a bank account.
The microfinance sector emerged in India in the 1980s around the concept of Self Help Groups, and has witnessed significant growth over time. By the 1990s, economic reforms in India opened up the space for the private sector to play a larger role in the banking system. In response to this impetus, a new breed of private microfinance providers emerged. By 2010, there were around 30 MFIs operating as non-banking financial companies (NBFCs), and several of these were growing rapidly. In 2010, these new MFIs were expanding at an annual rate of 80% and had reached 27 million borrowers across India. The SKS initial public offering (IPO) highlighted the enormous scale and potential of the MFI model.
In October 2010, the Andhra Pradesh Microfinance Institutions (Regulation of Moneylending) Ordinance, 2010 brought an abrupt halt to this growth and triggered the microfinance crisis of 2010. Andhra Pradesh, which was widely regarded as the birthplace of private sector microfinance in India, accounted for over 40% all loans by MFIs in 2010. The state government introduced the Ordinance citing reasons of usurious interest rates and coercive means of recovery. The Ordinance, however, led to a fall in the operational self-sufficiency of MFIs, and negatively affected their portfolio quality. As a result, MFI funding dried up, and the growth rates for loan portfolios and clients in fiscal year 2010 were a mere 17%, compared to growth rates of 95% and 57% in 2009. In the last couple of years, however, the sector has been recovering, and has recorded a portfolio growth rate of 41% in 2012-13.