What are the downsides of microfinance?
                     W H A T  A R E  T H E  
D O W N S I D E S  O F  
M I C R O F I N A N C E ?
What is Microfinance?
 Microfi nance is  a term for  fi nancia l  serv ices that  
are  off ered to indiv iduals  of  lower soc ioeconomic 
backgrounds or  those who lack access  to 
t radi t ional  fi nancia l  serv ices .
Source: corporatefinanceinstitute.com
Over-Indebtedness
 The microfi nance sector  deals  wi th marginal ized 
sect ions  of  Indian soc iety intending to improve 
thei r  standard of  l iv ing,  and thus over-
indebtedness poses a severe  chal lenge to i ts  
growth.
Source: finezza.in
Higher Interest Rates in 
Comparison to Mainstream 
Banks
 The fi nancia l  success of  MFIs  i s  l imi ted when 
compared to commercia l  banks in  India.  
 The centur ies-o ld banking system has a strong 
foothold in  Indian grounds and is  s lowly evolv ing 
to meet the needs of  the t imes.  
Source: finezza.in
Widespread Dependence 
on Indian Banking System
 Because most  microfi nance inst i tut ions  funct ion 
as  registered Non- Governmenta l  Organizat ions  
(NGOs) ,  they are dependent on fi nancia l  
inst i tut ions  such as  commercia l  banks for  
s tabi l ized funding to carry out  the ir  own lending 
act iv i t ies .
Source: finezza.in
Inadequate Investment 
Validation
 Investment va luat ion is  a cruc ia l  capabi l i ty  for  
the heal thy funct ioning of  an MFI .  The developing 
nature  of  the markets in  which MFIs  operate,  the  
market act iv i ty is  o ften l imi ted.
Source: finezza.in
Lack of Enough Awareness 
of Financial Services in the 
Economy
 The severe lack of  awareness about  pol ic ies and 
products  off ered by MFIs  make i t  d iffi cul t  for  
these inst i tut ions to sustain in  excessive ly  
compet i t ive environments  that  developing 
nat ions are  home to.
Source: finezza.in
Regulatory Issues
 The Reserve Bank of  India (RBI)  is  the premier  
regulatory body for  the microfi nance industry in  
India.  
 However,  RBI  more or  less  caters to  commercia l  
and tradi t ional  banks more than i t  he lps  MFIs .
Source: finezza.in
Choice of Appropriate 
Model
 Most Indian MFIs  fo l low the Sel f-He lp Group 
model  (SHG model)  or  the Jo int  L iabi l i ty Group 
model  ( JLG model )  o f  lending.  
 They hardly  se lect  the model  based on sc ient ifi c 
reasoning.
Source: finezza.in
Conclusion
 Although i t  has  come a long way,  the  
microfi nance sector  can use technological  a id to  
i ts  own advantage to advance loans to the rural  
populace of  India .
Source: finezza.in