International Journal of Research and Development - A Management Review (IJRDMR)

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Micro Finance in India- for Poverty Reduction

Priyanka Ramath & Preethi

M.Phil Research Scholars
Nirmala College for Women

Abstract -Microfinance is generally defined as financial INTRODUCTION

services for poor and low-income clients. Micro finance is emerging as a powerful instrument for
Microfinance is a source of financial services for poverty alleviation in the new economy. Beyond the
entrepreneurs and small businesses lacking access to direct linked with poverty reduction, it is an indirect link
banking and related services. The two main mechanisms to address the issues of health, education and gender.
for the delivery of financial services to such clients are: (1) Micro finance cover not only consumption and
relationship-based banking for individual entrepreneurs production loans, but will also include other credit needs
and small businesses; and (2) group-based models, where
such as housing and shelter improvements. Women
several entrepreneurs come together to apply for loans and
other services as a group. constitute a vast majority of users of micro-credit and
savings
In some regions, for example Southern Africa,
microfinance is used to describe the supply of financial services. The different organizations in the field of
services to low-income employees, which is closer to the micro finance can be classified as “Mainstream” and
retail finance model prevalent in mainstream banking. “Alternative” Micro Finance Institution. National
Microfinance is a broad category of services, which Agricultural Bank for Rural Development (NABARD),
includes microcredit. Microcredit is provision of credit Small Industries Development Bank of India (SIDBI),
services to poor clients. Microcredit is one of the aspects of Housing Development Finance Corporation (HDFC),
microfinance and the two are often confused the Commercial Banks, Regional Rural Banks, the credit
Microfinance revolution in India as a powerful tool for cooperative societies etc., are some of the mainstream
poverty alleviation. Where institutional finance failed financial institutions involved in extending micro
Microfinance delivered, but the outreach is too small. finance. On the other hand, institutions have come up to
There is a question mark on the viability of the fill
Microfinance Institutions. There is a need for an all round
effort to help develop the fledgling Microfinance Industry the gap between the demand and supply for micro
while tackling the trade-off between outreach and finance. Microfinance in India can trace its origins back
sustainability. The paper argues for mainstreaming impact to the early 1970s when the Self Employed Women‟s
assessment in evaluation of programmes for realizing the Association (“SEWA”) of the state of Gujarat formed an
full potential of microfinance in achievement of
urban cooperative bank, called the Shri Mahila SEWA
Millennium
Sahakari Bank, with the objective of providing banking
Development Goals (MDGs). Government of India services to poor women employed in the unorganised
considered micro finance is the major tool for reducing the sector in Ahmadabad City, Gujarat. The microfinance
poverty and support to the lower income people for self sector went on to evolve in the 1980s around the concept
employment.
of SHGs, informal bodies that would provide their
Microfinance in India- for Poverty Reduction clients with much-needed savings and credit services.
From humble beginnings, the sector
has grown significantly over the years to become a
multi-billion dollar industry, with bodies such as the
Small Industries Development Bank of India and the
National Bank for Agriculture and Rural Development
devoting significant financial resources to microfinance.
Today, the top five private sector MFIs reach more than
20 million clients in nearly every state in India and
many Indian MFIs have been recognized as global
leaders in the industry.

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Indian microfinance sector is expected to grow nearly economically and socially. It has been an accepted
ten times by 2011 to a size of about Rs250 billion from premise that women were not given enough
the current market size of Rs27 billion, at a compounded opportunities to involve themselves in the decision
annual growth rate of 76%. Microfinance in India started making process of the family as well as in the society.
evolving in the early 1980s with the formation of Hence, women were the main target groups under SHG
informal Self Help Group (SHG) for providing access to programme. Microfinance can provide an effective way
financial services to the needy people who are deprived to assist and empower poor women, who make up a
of credit facilities. National Bank for Agriculture and significant proportion of the poor and suffer
Rural Development, the regulator for microfinance disproportionately from poverty.
sector, and Small Industries Development Bank of India
3. Development of the overall financial system
are devoting their financial resources and time towards
the development of microfinance. Without permanent access to institutional microfinance,
most poor households continue to rely on meagre self-
Government, NGOs and other financial institutions
finance or informal sources of microfinance, which
have introduced various welfare schemes and activities
limits their ability to actively participate in and benefit
to reduce poverty. Microfinance, by providing small
from the development opportunities. Microfinance can
loans and savings facilities to those who are excluded
contribute to the development of the overall financial
from commercial financial services has been developed
system through integration of financial markets.
as a key strategy for reducing poverty throughout the
Microfinance institutions (MFIs) can be small and
world. In India, a substantial microfinance system based
medium enterprises at the heart of rural sustainable
on self help groups (SHGs) was developed. It allows
development. Their development positively correlates
poor people to protect, diversify and increase their
with rural business development.
sources of income, the essential path out of poverty and
hunger. As a developmental and economic tool it has 4. Self Employment
caught the imagination of banks, financial institutions
Poverty reduction through self employment has long
and NGOs in India.
been a high priority for the Government of India.
ROLE OF MICRO FINANCE Microfinance is an experimental tool in its overall
INSTITUTIONS strategies. Most of poor people manage to optimize
resources over a time to develop their enterprises.
1. Poverty reduction tool Financial services could enable the poor to leverage
Microfinance can be a critical element of an effective their initiative, accelerating the process of generating
poverty reduction strategy. Improved access and incomes, assets and economic security. However,
efficient provision of savings, credit, and insurance conventional finance institutions seldom lend down-
facilities in particular can enable the poor to smooth market to serve the needs of low-income families and
their consumption, manage their risks better, build their women-headed households. Therefore fundamental
assets gradually, and develop their microenterprises. approach is to create the self employment by financing
Microfinance is only a means and not an end. The the rural poor through financial institutions.
ultimate goal is to reduce poverty. Government, NGOs Microfinance, thus, creates the hope and increases the
and other financial institutions have introduced various self-esteem of the poor by giving the opportunities to be
welfare schemes and activities to reduce poverty. employed.
Microfinance, by providing small loans and savings 5. SHG-bank linkage programme
facilities to those who are excluded from commercial
financial services has been developed as a key strategy Indian micro finance is dominated by the operational
for reducing poverty throughout the world. approach Self-help Groups (SHGs). The approach is
popularly known as SHG-Bank linkage model. This
2. Women Empowerment model is the dominant model, initiated by the NABARD
In rural areas women living below the poverty line are in the early 1990s. Today the SHG model also links the
unable to realize their potential. Microfinance informal groups of women to the mainstream system
programmes are currently being promoted as a key and it has the largest outreach to micro financial clients
strategy for simultaneously addressing both poverty in the world. SHGS comprise a group of 15-20
alleviation and women„s empowerment. The self help members. The groups begin by savings that are placed in
groups (SHGs) of women as sources of microfinance a common fund. In a way, SHGs are co-operative
have helped them to take part in development activities. (credit) societies linked to a commercial bank rather
The participation of women in SHGs made a significant than an apex cooperative bank. Once linked to the bank,
impact on their empowerment both in social and the SHGs may access a given multiple of the pooled
economic aspects. Vast sections of the rural poor are savings for disbursement to its members. The SHG-bank
even now deprived of the basic amenities, opportunities linkage programme was conceived with the objectives of
and oppressed by social customs and practices. Several supplementary credit delivery services for the un-
programmes were implemented by various governments reached poor, building mutual trust and confidence
and nongovernmental organizations to uplift them both between the bankers and the poor and encouraging

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banking activity both on thrift as well as credit and (iii) It operates in market basis charging market
sustaining a simple and formal mechanism of banking interest rates and fees, and
with the poor. The linkage programme combines the
(iv) It strives to recover the costs of the loan.
flexibility, sensitivity and responsiveness of the informal
credit system with the technical and administrative Role of Microfinance in Poverty Reduction:
capabilities and financial resources of the formal
Microfinance is about providing financial services to the
financial sector which rely heavily on collective strength
poor who are not served by the
of the poor, closeness of effective social mobilization
functions contributing to an overall empowerment conventional formal financial institutions - it is about
process. extending the frontiers of financial service provision.
The provision of such financial services requires
MICROFINANCE AND POVERTY innovative delivery channels and methodologies. The
REDUCTION IN INDIA needs for financial services that allow people to both
Microfinance is the provision of financial services to take advantage of opportunities and better management
low-income clients, including consumers and the self- of their resources. Microfinance can be one effective
employed, who traditionally lack access to banking and tool amongst many for poverty alleviation. However, it
related services. More broadly, it is a movement whose should be used with caution -despite recent claims, the
object is “a world in which as many poor and near-poor equation between microfinance and poverty alleviation
households as possible have permanent access to an is not straight-forward, because poverty is a complex
appropriate range of high quality financial services, phenomenon and many constraints that the poor in
including not just credit but also savings, insurance, and general have to cope with. We need to understand when
fund transfers.” Those who promote microfinance and in what form microfinance is appropriate for the
generally believe that such access will help poor poorest; the delivery channel, methodology and products
offered are all inter-linked and in turn affect the prospect
people out of poverty. The dynamic growth of the and promise of poverty alleviation.
microfinance industry has been promoted not only by
market forces but also by conscious actions of national Access to formal banking services is difficult for the
governments, Non-Governmental Organizations (NGOs) poor. The main problem the poor have to take when
and the donors who view microfinance as an effective trying to acquire loans from formal financial institutions
tool for eradicating poverty. The powerful push behind is the demand for collateral asked by these institutions.
this huge and increasing support for microfinance In addition, the process of acquiring a loan entails many
indicated that national economic and social impacts are bureaucratic procedures, which lead to extra transaction
significant and it needs to be examined more closely costs for the poor. Formal financial institutions are not
motivated to lend money to them. In general, formal
Sustainable Micro Finance-features and Principles: financial institutions show a preference for urban over
Microfinance is considered to be an adequate tool for rural sectors, large-scale over small scale transactions,
financing small scale activities/technological and non-agricultural over agricultural loans. Formal
applications in the rural areas because of the following financial institutions have little incentives to lend to the
features. rural poor for the following reasons.

(a) Provide credit for investment in small scale Administrable difficulties

activities chosen by the poor people. Small rural farmers often live geographically scattered,
(b) Empower the poor to build self confidence that I in areas with poor communication facilities, making
can do something. loan administration difficult.

(c) Can pay for itself with the interest earned. Systematic risks

(d) Allow to develop opportunities for self Agricultural production is associated with some
employment to the underserved people. systemic risks, such as drought and floods, which is
reflected in a high covariance of local incomes.
(e) Have the broadest utility and the least cost per
beneficiary. Lack of information

The principles of sustainable micro-financing are as The absence of standardized information, Standard
follows: lending tools, such as financial statements or credit
histories, do not exist in these areas.
(i) It offers flexible customer friendly services
preferred by low-income group, Repayment problems
The repayment of working capital may be required only
(ii) It has opportunities for streamlining operations and
reducing costs (standardized simple lending once a year for example during the harvest season. On
the other hand, access to informal loans is relatively
process, decentralized loan approval, inexpensive
offices, and use staff from local communities)easy, convenient, and available locally to low income
households for the following reasons:-
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 Informal moneylenders use interlinked credit c) Budgetary Provision for the Scheme During 10th
contracts to reduce default risk such as plan
development of business relationship with the
There was a budgetary provision in 10th five year plan
clients.
and hoping more funds in next plan.
 Informal moneylenders have local information
which helps them to appraise credit needs and CONCLUSION
credit worthiness of the client.
 Informal moneylenders are considering the Microcredit and microfinance have received extensive
needs and requirements of clients even for recognition as a strategy for poverty reduction and for
small amount of loan. economic empowerment. Microfinance is a way for
 Informal moneylenders will profit from social fighting poverty, particularly in rural areas, where most
sanctions such as those that may exist among of the world‟s poorest people live rural development and
members of a family. These sanctions may poverty reduction are commonly related to the issue of
serve as a substitute for legal enforcement. rural employment. Rural households livelihood
 Informal moneylenders use specific incentives strategies comprise several options, including farming
to stimulate repayment, such as repeat lending and non-farm activities, local self-employment and wage
to borrowers who repay promptly, with employment, and migration. Microfinance has proven to
gradually increasing loan size. be an effective and powerful tool for rural development
and poverty reduction.
Despite the fact that many rural poor acquire their loans
from the informal financial sector in rural areas of Like many other development tools, it has sufficiently
developing countries; the sector has some basic penetrated the poorer strata of society. The poorest form
limitations. Common feature of many rural communities the vast majority of those without access to primary
is that much of the local information does not flow health care and basic education; similarly, they are the
freely; it tends to be segmented and circulates only majority of those without access to microfinance. Micro-
within specific groups. finance is one of the ways of building the capacities of
the poor and developing them to self-employment
Salient Features of Micro-finance Programme of activities by providing financial services like credit,
Government of India: savings and insurance. To provide micro-finance and
a) Arranging Fixed Deposits for MFIs/NGOs other support services, MFIs should be able to sustain
themselves for a long period. There are so many
Under this scheme government of India arrange money schemes for the development of poor In India. Creating
to MFI/NGO like SIDBI for micro credit to poor. self employment opportunities through micro finance is
b) Training and Studies on Micro-Finance Programme one way of attacking poverty and solving the problems
of unemployment.
Government of India would help SIDBI in meeting the
training needs of NGOs, SHGs, intermediaries and REFERENCES :
entrepreneurs and also in enhancing awareness about the [1] Aryeetey, E. (Summer 2005), “Informal Finance
programme. Institution building for „intermediaries‟ for for Private Sector Development in Sub-Saharan
identification of viable projects: The Government of Africa”, Journal of Microfinance, Vol. 7, No. 1
India would help in institution building through
identification and development of „intermediary [2] Ghalib, Asad K. (2007), “Measuring the Impact of
organization‟, which would help the NGOs/SHGs in Microfinance Intervention: A Conceptual
identification of product, preparation of project report, Framework of Social Impact Assessment”, The
working out forward and back ward linkages and in Singapore Economic Review Conference
fixing marketing/ technology tie-ups. The SISIs would
help in the identification of such intermediaries in
different areas.
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