Micro Finance - An instrument for Poverty Alleviation

Abstract :: The main objective of micro-finance is to alleviate poverty and to make the poor people self dependent. Providing employment opportunities to the rural women and developing the living status of the rural folk by providing credit with less interest is the major concern of micro-finance. Rural development is the major women area for social change. Society, culture and economic development are intertwined and have relation with other social factors. Economic development and micro-finance were two major concepts on which Grameen Bank on Bangladesh was established. Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means.

This conceptual paper, traces the evolution of Micro-finance in India as a powerful tool for poverty alleviation and women empowerment. The paper also highlights the legal forms of the Micro-finance Institutions (MFI’s) in India, the contribution of self-help groups (SHGs) in India and also highlights other aspects of Micro-financing in India.

Key words :: - Micro Finance, Poverty Alleviation, Micro-credit, SHGs Introduction:

There have been notable researches in the field of finance and credit over the last two decades, however most have them have been on the main stream financing and the role of commercial banking and financing. But the most important finding did not come from the world of the rich or the relatively well off. More important than the hedge fund or the liquid-yield option note was the finding that the poor can save, can borrow (can indeed decide on loans to fellow poor), and will certainly repay loans. This is the world of microfinance.

Over the past few decades, micro-finance has evolved as a powerful mechanism to deliver financial services (particularly credit) to sections of the community that have been excluded from the services of the mainstream institutions like commercial banks as well as the Cooperative banks. This conceptual paper, traces the evolution of the Microfinance revolution in India as a powerful tool for poverty alleviation and women empowerment. Where institutional finance failed Microfinance delivered, but the outreach is too small. There is a question mark on the viability of the Microfinance Institutions. There is a need for an all round effort to help develop the fledgling Microfinance Industry while tackling the tradeoff between outreach and sustainability. The paper also highlights various aspects of Micro-financing in India viz. models of microfinance, the future prospects and the challenges it has to face in the future.

Concept of Micro-Finance:

Micro Finance can be defined as the extension of small loans to population, too poor to qualify for traditional bank loans. These schemes are characterized by relatively small loans. The repayment period is relatively short, about a year or so. Women are the major beneficiaries of these schemes and the destination of the funds primarily includes agriculture, distribution and trading, small craft, processing industries and consumption credits too. The administrative structure is generally light and the entire process is particularly in nature.

A good definition of microfinance as provided by Robinson: “Microfinance refers to small-scale financial services—primarily credit and savings—provided to people who farm or fish or herd; who operate small enterprises or micro-enterprises where goods are produced, recycled, repaired, or sold; who provide services; who work for wages or commissions; who gain income from renting out small amounts of land, vehicles, drafts animals, or machinery and tools; and to other individuals and groups at the local levels of developing countries, both rural and urban.”

Evolution and Growth of Microfinance in India:

India has supported social banking for a long time. Policy directions to rapidly expand rural branches, mandate credit allocations for priority sectors (including agriculture), deliver large subsidy oriented credit programmes to serve marginal communities and poor households and control interest rates have been tried for over 35 years.

Banking activity in rural India was not all that smooth a decade ago. Political interference, frequent policy shifts, urban bias among bankers and the lack of awareness among villagers about credit utilization are some of the major problems, which the bankers encountered in the past.

Historically, microfinance movement was started by small NGOs, grass-root level microfinance organizations and poor women themselves. Poor proved to be bankable and Government, NABARD and SIDBI came forward and helped these organizations to grow. However, the situation continued to be the same until SHG (self-help group) banking came into existence. When banks started financing SHG groups, the members learned to be more responsible in utilizing the credit. As a result the repayment started ticking to the banks. The recovery from SHG groups all over India is always above 90%. SHG or people's banking was launched by NABARD in 1992 when 500 SHGs were operational across the country on a pilot basis. As on March 31 2004, 1,079,091^[1] SHGs in 563 Indian districts have utilized bank credit of Rs 39.04 billion. More than 16 million rural households have gained access to bank credit through 60,000 retail credit outlets of the banking sector in rural India. The SHG movement in India is considered as the largest-ever social movement in the world, which has targeted one third of India’s poor. In order to take banking to the doorsteps of each rural household, selected post office branches in Kanchipuram and Pudukottai districts of Tamil Nadu have been utilized, on pilot basis, to extend credit to 200 SHGs.

The new generation microfinance was slow in coming to India. Low levels of grants to microfinance institutions, an unfavorable policy environment, substantial traditional banking infrastructure and a search for context specific solutions has constrained rapid scale up. The first breakthrough emerged from policy support to enable informal self help groups of 15-20 members (mainly women) to transact with commercial banks. These groups build up and rotate savings amongst themselves, open bank accounts and take responsibility for lending and recovering money financed by banks. With the missionary zeal of the National Bank for Agriculture and Rural Development (NABARD), insights gained by NGOs, the increasing enthusiasm of bankers and politicians and emerging successes in repayment and social impacts, this national movement now encompasses 1.4 million such groups (over 20 million members).

Highlights of the evolution of Microfinance in India:

• Microfinance has been in practice for ages (though informally).
• Legal framework for establishing the co-operative movement set up in 1904.
• Reserve Bank of India Act, 1934 provided for the establishment of the Agricultural Credit Department.
• Nationalization of banks in 1969
• Regional Rural Banks created in 1975.
• NABARD established as an apex agency for rural finance in 1982.
• Passing of Mutually Aided Co-op. Act in AP in 1995.