Indian economy is one of the developing economies in the world and is expected to reach new heights in the coming decades. But a sizeable population of this economy particularly the poor, underprivileged, disadvantaged and vulnerable group of people does not have access to most basic financial services. Formal lending agencies often left the poor unbanked on account of high levels of transaction cost incurred in lending to the poor. Their access to formal banking channels was constrained to their resource base as well as the nature of formal credit institutions. The demand for collateral security that a micro- borrower did not possess, the credit worthiness of the poor, high transaction cost due to difficulties in screening, and unattractive business proposition due to tiny savings and loans, were the deterrents faced by the formal lending institutions in loaning to the poor. Consequently, the poor continued to be dependent on informal sector lending, paying exorbitant rates of interest or underselling the product and their labor power to the creditor. Formal financial system was less accommodative to women.
The realization that this sort of unequitable development could not lead to the well -being of the society raised the need for financial inclusion. Financial inclusion is delivery of financial services like bank accounts, savings product, remittances and payment services, insurance, financial advisory services and micro credit to weaker sections in rural and urban areas at an affordable cost. It also involves actions to provide access to formal financial system like nationalized banks. Government of India and Reserve bank of India have taken series of measures and have experimented various alternatives to take financial services to the masses, but the task is stupendous, hence the pace of work should be accelerated and sustained. Since the formal banking system was limited to collateral based lending, there arose a need for developing a new system for financing the marginalized sections.
Microfinance by providing small loans and facilities to those who have been excluded from commercial financial services, has wider scope in the area of financial inclusion. The basic idea of microfinance is that poor people are ready and willing to pull themselves out of poverty if given access to economic inputs. The need for informality in credit delivery and easy access is denoted by the fast growth of microfinance providers in reaching out to small borrowers. The major microfinance providers in India are SHG-Bank linkage model, Non- Banking Financial Institutions and some trusts. Among these initiatives Self Help Groups have emerged out as an efficient alternative as they are uniquely positioned among the beneficiaries. Many of them operate over a limited geographical area, have a greater understanding among the rural poor, enjoy greater acceptability among the people and have flexibility in operations providing a level of comfort to their clientele. This fills the existing gap between formal financial networks and unfinanced poor weaker sections which is the intention of financial inclusion.
The SHG-bank linkage program gained extensive acceptance amongst NGO community and bankers. Establishing one million SHGs, the NABARD envisioned covering one third of the rural population in India. By the year 2002–03, promulgations were made for linking 200,000 SHGs. Visually perceiving SHG-bank linkage program emerging as a major way of banking with the poor in the ensuing years, the task force on microfinance estimated that at least 25,000 bank branches, 4000 NGOs, and 2000 federations of SHGs involving 0.10 million personnel of these institutions would scale up microfinance to a great magnitude.
For example, in Kerala, Kudumbashree Mission has emerged as one of the renowned Self-help group initiatives on a worldwide basis. Even though it was incorporated with the mission of women empowerment, it has grown out as source for economic empowerment for the marginalized sections of the society. It has outnumbered several other financial institutions in the case of provision of microfinance and has emerged out as a reliable tool for financial inclusion.