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A Study on Microfinance in India

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 International Journal of Applied Science & Technology Research Excellence Vol. 5 Issue 3, May.- June. 2015,
ISSN NO. 2250-2718(Print), 2250-2726(Online), (Doubled Blind Peer Reviewed & Refereed Journal with Impact Factor 2.47)

A Study on Microfinance in India

Parveen Kumar#1 ,
#
Lecturer, Delhi College of Advanced Studies, Delhi
1 parveenbharat86@[Link]

Abstract— Microfinance is a source of fi nance to the poor have distributed unevenly between rich and poor nations and
segments of society. It i ncludes loans, savi ngs, credit, between rich and poor groups in individual nation. The global
insurance services, money transfer and other basic number of ext remely poor and under nourished have remained
financial services to the economically weaker section of high and in some societies it has increased. One of the major
society. Deli very mechanism incorporates the systems that negative impacts of development has been on the environment
can be used to ensure that micro finance products reach and on existing social structure. Many traditional societies and
remote area and poor. It is consi dered as an effecti ve tool villages have been devastated by development of forest, water
for eli minating poverty in Indi a. It provi des credit and system and intense of fisheries. Environmental damage of
other financial services of small amount to the development, if unchecked, may undermine the achievement
economically disadvantaged segment of society in urban as of development and even collapse of essential ecosystem. The
well as rural areas. Micro finance institutions include growing awareness of the challenges to traditional
[Link], Credit Uni ons, [Link]. Cooperati ves and banks. development thinking has led to the increasing acceptance of a
In India, the future of microfinance is largely depending new concept of development i.e. .sustainable development
upon the self-help groups (S.H.G.)
OBJECTIVES OF THE STUDY
Keywords: Microfinance, Self Hel p Group, NABARD,  To know about microfinance and role of
Microfinance Institutes. microfinance in economic development.
 To know about the history of microfinance.
 To examine the challenges of microfinance in India.
INTRODUCTION  To know about the suggestive actions to overcome
the challenges of microfinance in India.
Microfinance is one of the most visible innovations in anti-  To know about the microfinance service providers
poverty policy in the last half-century, and in three decades it and MFIs.
has grown radically. The most important benefit of
micro finance in India is that it helps long-term financial RESEARCH METHODOLOGY
independence in these poverty-stricken areas. M icrofinance
help sustained impact by educating recipients on how to create The present study is a descriptive study. This study is mainly
their own businesses and how to properly manage and grow based on secondary data only. Secondary data is collected
their money. There is a rapid growth in the strength of from various sources like journals, magazines and reports.
micro finance in India and several other countries.
Undoubtedly it has been successful in bringing formal
financial services to the poor. People believe that it has THE HISTORY OF MODERN MICROFINANCE
provided money to the poor families and it has the strength to
increase investments in health, education and empowerment In the late 1970s the thought of micro finance had evolved.
of wo men. M icrofinance institutions (MFIs) have created a Although, microfinance have a long history fro m the start of
massive social infrastructure uniquely positioned to reach the twentieth century we are going to concentrate primarily on
millions of clients on a regular basis. Micro finance is no more the period after 1960. Several cred it groups are operative in
a financing channel but it has also emerged as a strong several countries for many years, for instance, the "chit funds"
distribution channel with nu merous credit products, repayable (India), tontines" (West Africa), "susus" (Ghana), "pasanaku"
over a longer period of t ime, and solar lamps, fuel-efficient (Bo liv ia) etc. Besides, several formal saving and credit
stoves are some of them. In the last two years, many institutions are working for a long time throughout the world.
companies are manufacturing solar products with During the early and mid -1990s numerous credit institutions
micro finance distribution channel to sell their products. There had been shaped in Europe by so me organized poor
are many areas where slow or negative growth is seen individuals fro m each the agricu ltural and urban areas. These
especially in the ru ral areas. There may be improvement in institutions were named Credit Unions, People's Bank etc. the
terms of GDP and in HDI, but the overall development of the most aim o f those institutions was to produce quick access to
country is still under the curtains. The benefits of development credit to the poor people who were neglected by the massive

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 International Journal of Applied Science & Technology Research Excellence Vol. 5 Issue 3, May.- June. 2015,
ISSN NO. 2250-2718(Print), 2250-2726(Online), (Doubled Blind Peer Reviewed & Refereed Journal with Impact Factor 2.47)

financial institutions and banks. Within the early 1970s, few Microfinance Taskforce, 1999 as ―provision of thrift, credit
experimental programs had started in Bangladesh, Brazil and and different financial services and product of very small
a few other countries. The poor indiv iduals had been given amounts to the poor in rural, semi-urban or urban areas for
some small loans to invest in micro-business. This type of enabling them to boost their income levels and imp rove liv ing
small credit was g iven on the idea of solidarity group lending, standards. "The poor stay poor, not because they're lazy
that is, each member of that group warranted the however because they need no access to capital‖.
compensation of the loan of all the members. So me banks and "Microfinance is the offer of loans, savings, and other basic
financial institutions have been pioneering the microfinance financial services to the poor." As these financial services
program after 1970. usually involve small amounts of money - small loans, small
savings, etc. - the term " microfinance" helps to differentiate
These are listed below these services from those that formal banks provide‖. It is
simp le to imagine poor indiv iduals do not need financial
ACCION INTERNATIONA L services, but once you believe it they are using these services
already, though they could look a little different. ―Poor
This institution had been established by a law of Latin seldom access services through the formal financial sector.
America to assist the poor individuals residing within the rural They address their need for financial services through a
and urban areas of the Lat in A merican countries. Today, in variety of financial relationships, principally informal."
2008, it's one amongst the foremost important microfinance
institutions of the planet. Its network of lending partner Microfinance and MFIs
contains not solely geographical area however addit ionally
America and Africa. In India, a range of institutions within the public sector as
well as the private sector, offers microfinance services.
SEWA BANK These can be broadly categorized into two classes namely,
formal institutions and semi-fo rmal institutions. The previous
In 1973, the Self-employed Women's Association (SEWA) of category contains apex
Gu jarat (in India) formed a bank, named as Mahila SEWA development financial institutions, commercial banks, and
Cooperative Ban k, to access bound financial services easily. regional rural banks, and cooperative banks
Nearly four thousand wo men contributed their share capital to that give microfinance services additionally to
create the bank. their general banking activ ities and are named as microfinance
service providers. On the opposite hand, semi-
GRAMEEN BANK formal institutions that undertake microfinance services as
their main activ ity are usually named as
Cred it unions and lending cooperatives have been around micro finance establishments (MFIs). Whereas personal and
hundreds of years. However, the p ioneering of modern public ownership are found within the case of
micro finance is usually credited to Dr. mohammad Yunus, formal financial institutions providing microfinance services,
who began experimenting with lending to poor women within the MFIs are primarily within the private sector.
the village of Jobra, Bangladesh throughout his tenure as a India has several microfinance service providers like national
professor of economics at chittagong University within the bank for Agricu lture and Rural Develop ment
1970s. He would proceed to found Grameen Ban k in 1983 and (NA BARD), small Industries Development Bank
win the Nobel Peace Prize in 2006. of India (SIDBI), and Rashtriya Mahila Kosh (RMK). At the
Since then, innovation in microfinance has continued and retail level, co mmercial banks, regional rural banks, and
providers of financial services to the poor still evolve. Today, cooperative banks provides microfinance
the World Bank estimates that regarding 160 million services. nowadays there are about 60,000 retail
individuals in developing countries are served by credit outlets of the formal banking sectors in the geographical
micro finance. Grameen Ban k (Bangladesh) was formed by the region comprising 12,000 b ranches of district level
Nobel Peace Prize (2006) winner Dr Muhammad Younus in cooperative banks, over 14,000 branches of the regional rural
1983. This bank is currently serving nearly 400, 0000 poor banks (RRBs) and over 30,000 rural and semi-urban
individuals of Bangladesh. Not only that, however branches of commercial banks besides over 90,000
additionally the success of Grameen Bank has aroused the cooperatives credit societies at the village level. On a
formation of different many microfinance institutions like, mean there is a min imu m of one retail credit outlet
ASA, BRA C and PROSHIKA . According to International for regard ing 5,000 rural individuals. This physical
Labor Organization (ILO), ―Micro finance is an economic reaching out to the far-flung areas of the country to
development approach that involves providing financial provide savings, credit and different banking services to rural
services through institutions to low income clients. In India, society normally is an unequalled acco mplishment of the
Microfinance has been outlined by ―The National Indian banking system. Ho wever, discussions on microfinance

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 International Journal of Applied Science & Technology Research Excellence Vol. 5 Issue 3, May.- June. 2015,
ISSN NO. 2250-2718(Print), 2250-2726(Online), (Doubled Blind Peer Reviewed & Refereed Journal with Impact Factor 2.47)

through formal banking institutions are excluded and an Financial Stability

effort created to cope
with various aspects regarding emergence of Microfinance has also played a greatest in providing financial
the private micro finance industry within the context of stability to people which contributed to local economies in
prevailing legal and regulatory atmosphere for private sector substantial extent. Small loans have offered opportunities to
rural and microfinance operators. earn extra inco me, so that people can pay for their ext reme
necessities.

Role of Microfinance in Economic Development Credit to Rural Poor

Poverty Alleviation Usually rural sector depends on non-institutional agencies for

their financial requirements. Micro financing has been
According to World Bank report 1.4 billion popu lation in successful in taking institutionalized credit to the doorstep of
developing countries is liv ing on less than 1.25 US dollar a poor and have made them economically and socially sound.
day. That’s why to alleviate poverty by the year 2015 is one of
the major millenniu m development goal announced by UNO Economic Growth
in 2008. To eradicate poverty most of the nations have been
pursuing various policies and programs. Among these most Finance plays a key role in stimulating sustainable economic
effective policy adopted by the low income countries in the growth. Due to microfinance, production of goods and
world is microfinance because it has been found an effective services increases which increases GDP and contributes to
tool for lifting the poor by providing them financial services to economic growth of the country.
start or expand a small business that enables them to break out
of poverty. In other words, it enables them to earn an income Mobilization of Savings
so they no longer have to struggle to afford food, clean water,
healthcare and education for their children. These small Microfinance develops saving habits among people. Now poor
businesses also create employment opportunities for such people with meager income can also save and are bankable.
local co mmunit ies where jobs are rare. It helps them to earn The financial resources generated through savings and micro
extra income. credit obtained fro m banks are utilized to provide loans and
advances to its members. Thus microfinance helps in
Financial Inclusion mobilization of savings.

Microfinance has been recognized as an important tool in Mutual Help and Co-operation
connectivity the unbanked population to mainstream
institutional banking services. It has contributed to reduce Microfinance promotes mutual help and co-operation among
their dependency on informal money lenders and non - members. The collective effo rt of group promotes economic
institutional sources. interest and helps in achieving socio-economic transition.

Development of Skills Social Welfare

Microfinance has helped in identifying the potential rural With employ ment generation the level of inco me of people
entrepreneurs. SHGs encourage its members to set up their increases. They may go for better education, health, family
businesses jointly or individually. They receive training fro m welfare etc. Thus micro finance leads to social welfare or
their supporting institutions and learn leadership qualit ies. betterment of society.
Thus, microfinance helps indirect ly in the Develop ment of
Skills. Rural India and Microfinance

Global Poverty Micro financing has become important since the possibility of
a sub-Rs 1,000 mobile handset has been ruled out in the near
Financial stability to poor and lo w income families through future. Rural India can generally afford handsets in the price
small loans may b reak the poverty cycle for future generations. range of Rs 1,500-2,000. To succeed in India, agribusiness
As many of these communit ies started growing, the local must empower the farmer by making agriculture profitable,
economies are started flourishing. The g ross domestic product not by expropriat ing him foe this particular purpose the farmer
of the country started increasing and gap between the poorer should be funded for their basic and small needs. Micro
and wealthiest people has also decreased. finance is expected to play a significant role in poverty
allev iation and development. The need, therefore, is to share

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 International Journal of Applied Science & Technology Research Excellence Vol. 5 Issue 3, May.- June. 2015,
ISSN NO. 2250-2718(Print), 2250-2726(Online), (Doubled Blind Peer Reviewed & Refereed Journal with Impact Factor 2.47)

experiences and materials wh ich will help not only in population of the country but due to lack of infrastructure in
understanding successes and failures but also provide those areas it becomes tough to succeed in them.
knowledge and guidelines to strengthen and expand micro
finance programs. The development process through a typical Debt Management: clients are uneducated regarding debt
micro -finance intervention can be understood with the help of management. 70th of the clients in MFIs are unaware of the
the following Chart. The ult imate aim is to attain social and very fact that how to manage their debt.
economic empowerment.
Successful intervention is therefore, dependent on how each Negligence of Urban Poor: it has been noted that MFIs pay
of these stages has been carefully dealt with and also the more attention to rural areas and mos tly neglect the urban
capabilit ies of the imp lementing organizations in achiev ing poor. Out of more than 800 M FIs across India, only six are
the final goal, e.g., if cred it delivery takes place without presently focusing their attention on the urban poor.
consolidation of SHGs, it may have problems of self-
sustainability and recovery High Interest Rate : M FIs are charging very h igh interest
which the poor find troublesome to pay.
Women Empowerment

Microfinance is an important tool not only reducing poverty

but also empowering wo men as normally mo re than 50% ACTIONS TO OVERCOME CHALLENGES:
SHGs are formed by wo men. SHGs has proved to be strategic
tool for organizing wo men in groups and promotin g their The following are some act ions to overcome the challenges
saving habits to gain greater access to financial and faced by MFIs in providing microfinance services to possess a
economical resources. Poor wo men use small loans to start a sustainable development.
long chain of economic activity and raise their socio -
economic status in the society. Transparency of Interest Rates

CHALLENGES OF MICROFINANCE IN INDIA: As it has been observed that, MFIs are using different patterns
of charging interest rates and some are charging extra charges
Financi al illiteracy: One the foremost challenge in India and interest free deposits (a part of the loan amount is kept as
towards the expansion of the microfinance sector i.e. illiteracy deposit on which no interest is paid). All this make the pricing
of the people. This makes it tough in creating awareness of very confusing and therefore the borrower feels incompetent
micro finance and even harder to serve them as microfinance in terms of bargaining power. Therefore a common fo llo w for
clients. charging interest ought to be followed by all MFIs so that it
makes
Client Retention: client retention is a problem that makes a
haul in growing the MFIs. There is concerning 28th client Proper Regulation
retention within the MFIs.
When the microfinance was in its emergent stage and
Loan Default: Loan defau lt is a p roblem that makes a haul in individual institutions were liberal to bring in innovativ e
growth and enlargement of the organization because around operational models, the requirement for a regulatory
73 loan default is identified in MFIs. atmosphere was not an enormous concern. However, as the
sector completes nearly two decades of age with a high
Language Barrier: language barrier makes communicat ion growth trajectory, an enabling regulatory atmosphere is
with the clients (verbal and written) is a difficulty that makes required that protects interest of stakeholders as well as
a haul in growth and enlargement of the organization because promotes growth.
around 54 language barrier has been identified in MFIs.
Encourages Rural Penetration
Late Payments: Late payments are a problem that makes a
haul in growth and enlargement of the organization because It has been seen that rather than reducing the initial price,
late payments are around 70th in MFIs. MFIs are opening their branches in places that already have a
few MFIs operating. Encouraging MFIs for opening new
Geographic Factors: The Geographic factors create it branches in areas of low microfinance penetration by
troublesome to communicate with clients of far-flung areas providing financial help will increase the outreach of the
that produce a haul in growth and enlargement of the micro finance within the state and check mult iple lending. Th is
organization. MFIs are primarily aimed to facilitate the BPL will also increase rural penetration of microfinance within the
state.

[Link] Page 33
 International Journal of Applied Science & Technology Research Excellence Vol. 5 Issue 3, May.- June. 2015,
ISSN NO. 2250-2718(Print), 2250-2726(Online), (Doubled Blind Peer Reviewed & Refereed Journal with Impact Factor 2.47)

Alleviat ion. Asian Journal of Research in Business

Economics and Management, 3(2), 57-67
 RBI (2011) ―Report on trend and progress of
Banking in India 2010-11‖ June 30, 2011, Annual
Field supervision Report submitted to Govern ment of India by Reserve
Bank of India.
In addition to proper regulation of the microfinance sector,  Imhanlahimi, J. and Idolar, E.J. (2010) ―Poverty
field v isits can be adopted as a med iu m for monitoring the allev iation through micro financing in Nigeria:
conditions on ground and initiating correct ive action if Prospects and Challenges‖ Journal of financial
required. Th is will keep a watch on the performance of ground management and Analysis‖ 23(1):2010:66-82.
emp loyees of various MFIs and their recovery practices. This  Chakrabarti, Rajesh (2004) ―The Indian
will also encourage MFIs to abide by proper code of conduct micro finance experience –Accomplish ment and
and work mo re efficiently. However, the problem of Challenges‖.
feasibility and cost involved in physical monitoring of this  Ghose, Rajarshi(2010) ―Microfinance in India :A
huge sector remains a problem in this regard. critique‖.
 [Link]
Complete range of products microfinance-lending-models-types-of-mfis/
 [Link] micro
MFIs should give complete range of products including credit, finance-_devaraja.pdf
savings, remittance, financial reco mmendation and also non -
 [Link] rg/billtrack/the-micro-finance-
financial services like train ing and support. As MFIs are
institutions-development-and-regulationbill-2012-
acting as a substitute to banks in areas where individuals don’t 2348/
have access to banks, providing an entire range of products
 [Link]
will enable the poor to avail all services.
 [Link]
CONCLUSION  [Link]
 [Link]
In conclusion, I want to say that it has been an interesting  [Link]
endeavour to analysis on the Microfinance industry.  [Link]
Microfinance uses as a tool for eliminating poorness in  [Link] microfinance-in-
Republic of India and other developing nations. Microfinance [Link]
evolutionary growth has given an excellent chance to the rural  [Link] rg/uploads/media/Micro%20Fi
people to achieve affordable econo mic, social and cu ltural nance%20Institutions/SCR-
empowerment, leading to higher living standard and quality of %20Micro%20finance%20b [Link]
life. There is no doubt that this industry has nice potential  [Link]
within the future. If the plans for microfinance are executed menti_ micro finanza/ rA_Microfinance_Market_Outlo
then Republic of India will defin itely have new dimension to ok_2014_EN.pdf
that. It will increase India’s standard and build it one of the  [Link]
powerful nations of the world economically. The plans for
micro finance if imp lemented will offer an ongoing financial
stability and sustenance for the poor in both the rural and
urban area.

References:

 NABA RD (2011), ―Status of microfinance in India

2010-2011‖ Retrieved April 20, 2012, Annual Report
of Nat ional Bank for Agriculture and Rural
Development.
 Mahanta, Padamlochan, ―Status of micro finance in
India- A rev iew‖, International Journal of Marketing,
Financial Services & Management Research, ISSN
2277 3622(Vol.1 Issue 11), November 2012.
 Bhatia, A., Malik, D., & Sindhi, V. (2013).
Microfinance in India and its impact on Poverty

[Link] Page 34

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