What do you understand by micro finance? What are the problems related to the microfinance emerged in India?

Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services.

Microfinance in India started in the early 1980s with small efforts at forming informal self-help groups (SHG) to provide access to much-needed savings and credit services. From this small beginning, the microfinance sector has grown significantly in the past decades. National bodies like the Small Industries Development Bank of India (SIDBI) and the National Bank for Agriculture and Rural Development (NABARD) are devoting significant time and financial resources to microfinance. This point is to be the growing importance of the sector. The strength of the microfinance organizations (MFOs) in India is in the diversity of approaches and forms that have evolved over time. In addition to the home-grown models of SHGs and mutually aided cooperative societies (MACS), the country has learned from other microfinance experiments across the world, particularly those in Bangladesh, Indonesia, Thailand, and Bolivia, in terms of delivery of micro financial services. Indian organizations could also learn from the transformation experiences of these microfinance initiatives.

Micro finance sector emerged enormously, from merely $12 million in 2003; the market for lending tiny amounts of money mainly to groups of women has grown to more than $7 billion now. And analysts expect this to grow to a staggering $50 billion soon. It’s easy to understand why. Many people in rural India don’t have access to loans from formal banks. In any case, procedures are cumbersome, paperwork intimidating. That explains why people go to moneylenders, who charge them upwards of 50% for loans. Microfinance, based on a model borrowed from Bangladesh, was supposed to change all that. Microfinance does not directly address some structural problems facing Indian society and the economy, and it is not yet as efficient as it will be when economies of scale are realized and a more supportive policy environment is created.
Loan products are still too inflexible, and savings and insurance services that the poor also need are not widely available due to regulatory barriers. Insufficient data exists on client-level impact, though new tools such as the Poverty Progress Index of Garmin Foundation and the work of Sa-Dhan (the association of Indian MFIs) on measuring client satisfaction are addressing this gap.