Experts and industry observers highlight some of the issues in the Indian microfinance industry which impede the ability of the microfinance model to eradicate rural poverty.
Notable among them is small size of micro credit provided by microfinance institutions (MFIs) which makes investment unprofitable. Some experts argue that unless loans are converted into investments in on-farm productive activities, rural poverty will not go away.
Industry watchers point out to the high rate of interest charged by MFIs compared to the prevailing bank rate of interest.
While interest rates have come down, the banks continue to charge high rates of interest (around 11 percent) on borrowings by the groups, who in turn levy a higher rate of interest (between 24 to 36 percent) to make profit, industry watchers feel.
Some experts feel that the loans extended by MFIs are for a very short period of time and collection is also weekly. If they invest in activities like animal husbandry, farming activities or village industry, definitely a minimum time period should be given to get return and to repay back the loan with interest from their earning, they argue.
The only viable activity for weekly repayment will be the small business which is only just a process of cash flow and earn extra money. This activity may be suitable for the semi urban areas yet for only a portion of businessmen.
Experts urge the government and industry players to address the above issues in the sector.