Role of Microfinance Interventions in Financial Inclusion: A Comparative Study of Microfinance Models

Abstract

Microfinance intervention is considered an important component of development strategy to mainstream the poor rural households with the formal financial system in India. However, there is some evidence for the reverse, that microfinance may, in fact, increase informal money lending, if clients need to ‘top up’ micro-loans, or borrow to repay according to the installment schedule. The objective of this paper is to examine the relationship between the level of indebtedness to moneylenders and the type of microfinance model through a case study in Varanasi, U.P. Comparing two microfinance models prevalent in the research area, the authors conclude that the level of indebtedness to moneylenders is higher in the case of clients of Microfinance Institutions (MFI) model and without complete information on the credit-worthiness of borrowers, MFIs may contribute to the over-indebtedness of their clients as well as damage in their performance.