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The Non Government Organizations involved in promoting SHGs and linking them with the Formal Financial Agencies (FFAs) perform the various functions for economic development.

Exhibit 1 Legal Form of Microfinance Institutions in India

---------------------------------------------------------------------------------------------------------Types of MFIs Estimated Number      Legal Acts under which Registered

1 Not for Profit MFIs Societies Registration Act, 1860 or similar Provincial

a) NGO – MFIs           400 to 500   l Acts Indian Trust Act, 1882

b) Non-profit Companies     10     Section 25 of the Companies Act, 1956

2 Mutual Benefit MFIs

a) Mutually Aided Cooperative Societies 200 to 250 Mutually Aided Cooperative Societies   Act

(MACS) and similarly set up institutions enacted by State Government

3 For Profit MFIs       6 Indian Companies Act, 1956

a) Non-Banking Financial Companies (NBFCs)     Reserve Bank of India Act,1934

Total 700 - 800

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1.3 MFIs: Critical Issues

MFIs can play a vital role in bridging the gap between demand & supply of financial services if the critical challenges confronting them are rightly addressed.

Sustainability: The first challenge relates to sustainability. It has been reported in literature that the MFI model is comparatively costlier in terms of delivery of financial services. An analysis (Jindal & Sharma, 2000) of 36 leading MFIs shows that 89% MFIs sample were subsidy dependent and only 9 were able to cover more than 80% of their costs. This is partly explained by the fact that while the cost of supervision of credit is high, the loan volumes