Today microfinance has become a familiar term that many associate with financially sustainable poverty reduction. Others, on the other hand, argue that it make poor people’s lives even more rigid by making them slaves of debt. Seeing that no country in the world has more clients associated with its microfinance sector than India, there is a need for examining the quality of the growth in the Indian microfinance movement. What lead me to focus on the quality of the sector’s outreach is that the sector now counts more clients than there are poor households in the country. If providers of microfinance truly direct their services toward the poor the dependence on informal sources of credit could be expected to have declined, and the “Report of the Committee on Financial Inclusion” (2008) should not have documented that exclusion from formal financial services in general is large, and that the poorer the group, the greater is the exclusion. The aim of this thesis is to challenge the argued outreach by considering the quality of it.
The paper accounts for why microfinance in India is needed, how the microfinance approaches aim to reach the people that traditionally are excluded from formal financial services, and it explores strengths and weaknesses in banking poor through the microfinance approaches. The thesis will discuss the group lending approach, the relationship between the size of microloans and the impact it has on the lives of poor persons, the problems associated with low quality self help groups, and it takes a closer look at the competition that is going on between the providers of microfinance and the effects this competition might cause. The reason why I use the word ‘might’ is because even though my informants expressed to witness the effects documented in this thesis, their statements alone does not allow me to argue that the effects are universal trends applying to the sector as a whole. However, the concerns raised in this thesis are in my view worrisome developments (though to greater or lesser extent), and I believe that it needs to be raised awareness of them. The concerns raised by my informants also led me addressed the Andhra Pradesh Ordinance. The ordinance came be in order to regulate the microfinance institutions as some of them allegedly charge extortive interest rates and redeem loans through coercive methods which cause poor clients to commit suicides. This thesis suggests that the ordinance might be a blessing in disguise more than it is an actual blessing for the sector.