MICRO FINANCING IN INDIA

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 MICRO FINANCING IN INDIA


Micro Finance is a basis of financial services for entrepreneurs and small business deficient in contact with banking and associated services. The two key systems for the recess of financial services to such customers include ‘relationship-based banking’ for individual entrepreneurs and small businesses along with ‘group - based models’ where served entrepreneurs come together to apply for loans and other services as a group.


Similar to banking operation traditions, microfinance entities are supposed to charge their lender’s interest on loans. In most cases the so called interest rates are lower than those charged by normal banks, certain rivals of this concept accuse microfinance entities of certain gain by manipulating the poor people’s money.

As per the world bank estimates, more than 500 million people have improved their economic conditions via micro-finance related entities.


BACKGROUND


  • The term ‘microfinancing’ was first used in the 1970s during the development of ‘GRAMIN BANK OF BANGLADESH’, which was founded by the micro- finance pioneer Muhammad Yunus.

  • IN 1976, Yunus institutionalized the approaches of micro- finance along with the foundation of Gramin Bank in Bangladesh.

  • Since , in the developing countries a large number of people still depend largely on subsistence farming or basic food trade for their livelihood, therefore small-holder agriculture in these developing countries has been supported by the significant resources.


MICRO FINANCING IN INDIA

Micro finance refers to the provision of financial services as loans, savings and insurance  to low- income individuals and households who traditionally lack access to formal banking systems. In India, micro finance has emerged as a powerful tool to help alleviate poverty and promote economic development, particularly in rural areas.


Objectives:


  • Financial Inclusion: Microfinance has helped to bridge the gap between the unbanked and underserved population and formal financial institution. By providing financial services to low- income individuals and households , microfinance has helped to promote inclusion and empower marginalized communities.

  • Poverty Alleviation: Access to credit and other financial services has enabled low-income households to invest in income generating activities and small businesses. This has helped to generate employment opportunities , increase household income, and lift people out of poverty.

  • Women Empowerment: Micro finance has been particularly effective in empowering women by providing them with access to credit and other financial services. Women who are often excluded from the formal banking system can use micro finance to start businesses, generate income and improve their economic and social status.

  • Rural Development: Micro finance has played a crucial role in promoting rural development by providing access to credit and other financial services to farmers, artisans and small businesses in rural areas. This has helped to stimulate economic growth, reduce rural poverty and improve living standards in rural communities.


Government’s Initiatives:


  • To impose micro financing in India, the Government of India is being instrumental through various schemes and initiatives with an aim to create financial inclusion and equality.

  • SEWA Co-Operative Bank was initiated in 1974 in Ahmedabad, Gujrat, by Ela Bhatt which is now one of the first modern day microfinance institutions of the country.

  • The National Bank for Agriculture and Rural Development (NABARD) offered financial services to the unbanked people, especially women and later decided to experiment with a very different model, which is now popularly known as Self- Help groups. (SHG)

  • The SHGs Bank linkage programme in India has saving accounts with 7.9 million SHGs and involves the participation of regional rural banks (RRB), commercial Banks and Co-operative Banks in its operation . The origin of SHGs in India can be traced back to the establishment of the self- employed women’s association (SEWA) in 1972.

  • In 2013, a loan of 144 million USD was provided by Grameen Capital India to the micro financing groups. Apart from the Gramin Bank, another microfinance named Equitas was developed in Tamilnadu. The southern and western states of India are the ones attracting the greatest number of microfinance loans.

  • MUDRA: The central Government has introduced the Micro Units Development Refinance Agency (MUDRA) , where the schemes aim to refinance collateral free loans of upto RS. 10 lakhs granted by lending entities to non-cooperative small borrowers for revenue growth action in the non- farm sectors.

  • Currently, loans granted under this scheme falls under three categories namely, Shishu loans upto Rs. 50000; Kishore loans ranging Rs.50000- Rs. 5 lakhs and Tarun loans ranging from 5 lakhs- Rs. 10 lakhs. As a way to make the Mudra scheme popular the government aims to set up Rs. 3000 cr Credit guarantee fund to back these loans.

  • NRLM:  It is a poverty alleviation mission launched in 2011 which provides financial support and capacity building to rural households through SHGs. As of 2022, NRLM had formed over 91 lakh SHGs and provided loans worth 3.54 lakh cr to over 4.1 cr households.

  • STAND- UP INDIA SCHEME:  Launched in 2016, this scheme aims to promote entrepreneurship among women and SC/ST communities by providing loans between INR 10 lakh and INR 1 cr. for setting up greenfield enterprises. As of 2022, over 1.7 lakh loans have been sanctioned under this scheme. 



Benefits of the micro financing


  • According to RBI, the number of microfinance borrowers in India has increased from 5.34cr in March 2015 to 10.38 in March, 2022.

  • According to the World Bank Report, MFIs in India provide around 80% of the total microfinance loans to micro enterprises.

  • As per RBI, the average income of microfinance borrowers in India increased by 57 % after taking a loan, and the percentage of households living below the poverty line decreased from 56% to 28% after accessing micro-finance.

  • According to RBI, the GNPAs of MFI in India was 2.2% as of March 2022, which is significantly lower than the GNPAs ratio of the banking sector in India.


Challenges


  • Inadequate Data: While overall loan accounts have been increasing the actual impact of these loans on the poverty level of clients is sketchy as data on the relative poverty- level improvement of MFI clients is fragmented.

  • Impact of COVID-19:  It has impacted the MFI sectors with collection having taken an initial hit and disbursals yet to observe any meaningful thrust.

  • Social Objective overlooked :  In their quest for growth and profitability, the social objective of MFIs - to bring in improvement of the society seems to have been gradually eroding.



Way Forward:


  •  RBI should encourage all institutions to monitor their impact on society by means of a social impact scorecard.

  • MFI should ensure that the stated purpose of the loan that is often asked from customers at the loan application stage is verified at the end of the tenure of the loan.


In conclusion, micro finance has emerged as a crucial tool in India’s quest for inclusive growth. It has not only provided financial assistance to millions of individuals but has also helped in creating livelihood opportunities and reducing poverty.

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