People in India residing in rural areas have been prey to greedy moneylenders since a long time. These private money lenders have been charging interest as high as 36% for loans given to these poor people.

To bring an end to this antisocial practice and to provide fair borrowing channels to the people, several microfinance institutions have been operating in the country; penetrating aggresively into rural and slum loan markets. These institutions like SKS, Basix and Spandana have been receiving liquidity from Indian commercial banks.

The outstanding loan amount for microfinance institutions has shown 65% annual growth since the past three years, says World Bank data. The interest rates stand at around 28% which although lesser than that charged by money lenders is far more than the rates charged by commercial banks in India.

"A large portion of the loans are put towards paying off higher interest rate loans to loan sharks," says Venky Natarajan, managing director of Lok (People's) Capital, a specialised private equity fund that has so far invested in nine Indian microfinance institutions.

According to World Bank estimates, Indian microfinance institutions are in immediate need of around $294m in equity, and may require up to $1.3bn in fresh equity, or quasi-equity over the next four years.

RBI has directed that lending to microfinance sector is one of the priority sector lending segments for banks and that lending to this sector should amount to 40% of the total annual lending of commercial banks.