The Sketchy details about micro-finance are as following.

Poor people want to start some small business, but don’t have money and banks are not interested in doing lengthy paper-work to lend them small amount of money.
So poor people end up going to moneylenders, who charge 36% interest rate and then poors remain indebted forever.

To fix the problem, Government came up with a microfinance solution.
Basically Government gives money to NABARD (National Bank for Agriculture and Rural Development).
NABARD supplies it to local cooperative banks etc.
Poor ladies from village gather up and make ‘self-help groups’.(SHG)
They pool some money lets say 5000/- And NABARD gives them 20000/- on very low interest rate, so they can start some small business like wafer-chips, embroidary, greeting cards, soaps, detergent etc. As they start earning profit, they slowly start repaying the debt in small amounts like 100-200 Rs.
Since they’ve formed a group, they’re less vulnerable and more likely to repay the money back.
All sounds good on paper. Mohd.Yunus even got a Noble for this, with his Gramin bank in Bangladesh. And you can read all rosy-feel-good stories about it in The Frontline, Yojana and Kurukshetra.

But when you add corrupt politicians, indifferent-bureaucrates, crony NGOs and agents to this Microfinance equation, everything changes.

Problems in Micro-finance

1. Compare potato chips business between some poor self-help group vs. giant companies like Lays, Kurkure etc. SHG can never match in the supply-line, package quality, advertizement and retail distribution agents like them. Same about soap giants like Lifebouy or Nirma. So ultimately only a few SHG survive the competition and make some money [Generally those with traditional-handicraft stuff exporting to America]. Rest of them get disbanded after initial enthusiasm and so cannot pay back the loans. Although NABARD generally doesn’t go on tough loan recovery like those moneylenders or banks do (because that’d cost votes in elections)
2. Whatever alleged ‘2 week-business-training‘ they’re given by Government is all those namesake powerpoint dudes stuff. While you know that to compete your product against some big company like Lays, Kurkure, Nirma or Lifebouy you need lot more exhaustive and rigorous training, exposure and a mentor.
3. Sometimes before elections, big Loan-melas are held on the instance of local politicians, so every villager ends up getting some loan of small amount, but most cannot payback.
4. There are some good for nothing crony NGOs, who create ghost SHGs, get the loans sanctioned, give a share to the officers and everybody enjoys life.
5. Microfinance gives only a ‘small’ amount of loan, while for starting a business you need a little big. For example, they give 20000/- for your one project, while you need 1 lakh rupees, so either you put 4 new flimsy-projects under different categories to make up the money or go to moneylender to get the rest amount on higher interest rate.
6. the lack of entrepreneurial culture at rural level means whatever little money they make is wasted in wedding ceremony or repaying previous loans to money-lenders, instead of investing it back in their business. So money made, doesn’t bring more money.
7. In Andhra pradesh there are more than 10,000 SHGs (highest in the country), it accounts for about 40 per cent of MFI lending across the country of about Rs 30,000 crore, and is currently facing a crisis due to bad loans and MFIs using coercion to recover loans, even leading to suicides.