Article By: Gaurav Kumar
Few months ago, I was having civil services coaching. After class hours, we were having tea and discussions on India’s freedom struggle and who suffered the most, the bottom class or the top ones. Someone said, “Poor people were the most exploited ones by the English and that’s why spark of Champaran satyagraha came from them”. Although he was right, but there is an anomaly in his statement. What I think is, Poor had always been at the receiving end of exploitation. Before the Britishers came and after they left, the only thing that changed was the exploiters. Exploitation had mostly been in the form of credit and loans with the concept of bondage labour deeply related to it. Money lenders charged huge interest rates, which was rarely paid back and then the exploitation began. Lenders snatched their lands or made them work as “begar”. After Independence too, we discuss the success stories of the top ones and the middle class, not about the poor ones. The growth of banking and insurance sector has been remarkable. The fruits of LPG reforms and the nationalisation of banks had been tasted by all. Nowadays, loans are easily available for everything we can think of. Even for buying a cellphone or a costly book, we have the option to pay in EMI. But, there is a catch in all these discussions. The fruits of reforms, insurance, loans, EMI etc can be tasted only by the people having some asset. Banks grant loans or issue credit cards only if they are sure of being paid back. How do they calculate the risk-reward ? The answer is assets.
So, what about the people who are at the bottom of pyramid? The people who don’t have any substantial asset to mortgage? Don’t they deserve any credit? What have they got after LPG reforms, nationalisation of banks and the growth of credit culture? Earlier also prior to independence they borrowed money from the exploiting money lenders and even now the situation is same. Financial institutions had been of no use to them. Even for starting a small business or buying an Auto-rikshaw, poor people need loans. If you are having an asset, getting loan is easy otherwise the banks are not so generous. The rich-poor divide we wanted to fill, grew bigger and bigger with the passage of time. The fruit of development has always been out of reach of the bottom of the pyramid.
Finally, this problem got solved by the Bangladeshi economist and Nobel laureate Muhammad Yunus, the founder of Grameen Bank, which is generally considered the first modern micro credit institution.
What is Micro Finance?
Micro-finance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance to the poor and low-income households and their micro- enterprises.
Micro credit and micro-finance are different. Micro credit is a small amount of money, given as a loan by a bank or any legally registered institution, whereas, Micro-finance includes multiple services such as loans, savings, insurance, transfer services, micro credit loans, etc. for poor people.
Micro Finance is working as a vital tool for socio-economic uplifting in a developing country like India. It is expected to play a significant role in poverty alleviation and development. It is not easy for poor people to have access to banking services due to their low-income and complex banking procedures and documentation.
Micro-finance institutions, through their NGOs, develop saving habits among poor people. The financial resources generated through savings and micro credit obtained from banks are utilised to provide loans and advances to the members of the Self Help Groups (SHGs). Thus, micro- finance institutions help in mobilisation of savings and using the same for the welfare of its members.
How is this different from Normal Banking?
Loans from the normal banking system require collateral or counter guarantee which poor people cannot offer and therefore, cannot get loan. Again, high interest rates and procedural and documentation formalities act as a deterrent to poor people accessing banks for loans. Micro- finance does away with all these obstacles and provides finance to rural and poor population on easy terms. It allows the poorer sections of the society to get loans at cheaper rates which helps them to start their businesses on a small-scale, grow their business and get out of poverty and be independent and self-sufficient. It helps in creating long-term financial independence among the poorer sections of the society and therefore, promotes self-sufficiency among them.
Micro Finance is provided through the intermediation of Self Help Groups (SHGs). More than 50% of the Self Help Groups (SHGs) are formed by women. Now, they have greater access to financial and economic resources. It is a step towards greater security for women. Thus, micro-finance empowers poor women economically and socially.
By providing loans to poor people, helps them to undertake their own small ventures. Such ventures also generate employment in the rural areas. It also helps them to improve their entrepreneurial skills and encourage them to exploit new business opportunities. Thus, micro-finance through self-reliance and employment generation alleviate poverty in rural areas.
How is micro Financing Changing the face of poor India?
Micro-finance is emerging as a powerful instrument for poverty alleviation in the new economy. In India, micro-finance is dominated by Self-Help Groups (SHGs) – Banks Linkage Programme, aimed at providing a cost effect mechanism for providing financial services to the “unreached poor‟. In the Indian context, terms like “small and marginal farmers”, “rural artisans‟, and “economically weaker sections‟ have been used to broadly define micro-finance customers.
A more refined model of micro-credit delivery has been evolved lately, which emphasises the combined delivery of financial services along with technical assistance and agricultural business development business.
When compared to the wider SHG bank linkage movement in India, private MFIs have had limited outreach. However, we have seen a recent trend of large micro-finance institutions transforming into “Non-Bank Financial Institutions (NBFCs)”. This changing face of micro- finance in India appears to be positive in terms of the ability of micro-finance to attract more funds and therefore increase the outreach.
What else can be done?
While micro finance has had very commendable growth and reach, there is too much difference in the interest rates charged to the members, which is a developing concern. Other suggestions are:
- The growth potential is very high as there is huge unmet demand of micro financial services in the society. legislation should be changed or modified so that the obstacles faced by the institutions gets sorted out.
- Procedural difficulties like applying, release of funds should be eased so that needy people get funds easily.
- Approaches like “One plan suits for all ” should be avoided as the requirements of urban, semi urban and rural people are different. Financial institutions should spend time with the people and understand their requirements and develop financial products according to their needs.
- Micro-financing institutions need proper regulation and operation of business transactions. Therefore, RBI, SIDBI, NABARD and other organizations should evolve proper mechanism for monitoring, supervision, direction, appraisal and evaluation of micro-financial institutions as well as self-help promotion institutions.
- Database should be prepared and IT tools like data analytics should be used to evaluate strengths and weaknesses and plan accordingly.
- More research should be carried out to assess the impact of micro-credit through SHG‟s. The impact assessment should be more focused on socio-economic empowerment of members, social change, dynamics of groups, business, leadership, promotion of viable micro enterprises, etc.
Although, we have seen tremendous growth of micro financial credit in recent years, the supply demand gap is still there. Micro finance sector is still not having an independent department under RBI. There should be proper institutionalisation, so that supply demand gap is studied in more detail and further legislative changes are brought. India is having good demographic dividend, but we are witnessing very few job creation. So, entrepreneurship should be promoted by supporting easy and effective micro financing. There is also a need for training and strengthening self-help groups (SHGs), as they are the ones providing direct linkage between the financial institutions and needy population. This process will definitely help in women empowerment, equitable and sustainable growth, minimising rich-poor divide and social uplifting of the society as a whole. That is why more funds should be released. Private sector should be encouraged more so that competition leads to decrease in interest rates. These measures will go a long way in quick and timely fulfilment of small needs of poor population.
Reference : Sai om journal of commerce and Management, 2014 issue.