The nuts and bolts of Microfinance

By | March 24, 2015

Indian money

In both developed and developing economies, penetration of credit facilities into the rural and semi urban set up continues to be an uphill task for government, local and social organisations.

In a populous and diverse country like India, where about 69% of the population lives in rural areas, like-minded social groups are working hard to augment the accessibility of banking and credit facilities for the lower classes in rural areas. An underlying element of this mission is to extend hassle-free loans to the masses.

The concept of Microfinance

Microfinance involves banking institutions and dedicated companies providing small value loans to the impoverished and low-income group without a collateral. In addition, ancillary banking services like deposits, money transfers and insurance for household & small enterprises are offered.

The primary motive of microfinance is to promote self-employment and improve the lifestyle of people in rural areas. The organisations and bodies working in this sphere have made massive social impact in uplifting the poor and grooming women entrepreneurs.

The idea of micro lending originated in Bangladesh around 1976. Muhammed Yunus, the father of microcredit, started Grameen Bank, a micro lending organisation aimed at providing small loans to the under-served population in the country.

This idea triggered a whole new breed of entrepreneurs, especially women. Since then, many governments and NGOs have replicated this design in their countries with an aim to bridge the wide gap between the rich and poor.

Microfinance in India

Financial inclusion has been the mantra of institutions and banks working in the microfinance space in India. With a mammoth network of public, cooperative, rural and commercial banks, micro lending in the country is largely carried out with the help of NGO’s who create and nurture SHGs (self-help groups) to maintain accountability in lending.

In India, microcredit institutions are labelled NBFC–MFI (Non-banking Financial Company – Micro Finance Institutions) by the Reserve Bank of India. With a footprint in all 29 states and over 573 districts, MFIs have tremendous reach.

These MFI’s not only furnish loans at very low interest rates but also facilitate other forms of training and assistance for MSMEs (Micro, Small and Medium Enterprises) in collaboration with various NGOs in rural areas. According to CRISIL, MFIs are well capitalized and the combined loan assets are likely to reach Rs. 35,000 crores by March 2015.

In India, M.F.I.N (MicroFinance Institutions Network) is the designated self-regulatory organisation (SRO) of NBFC-MFIs.

The other side of the picture

Although, the micro finance system has been hailed for its effort in giving impetus to the philosophy of financial inclusion in India, there is a school of thought and data facts questioning its achievements.

Extensive research studies and data analysis show that the MFIs have had little impact in poverty alleviation and empowerment of women and entrepreneurs. Fingers have also been pointed at the borrowers, questioning their utilisation of the fund money. Critics also argue that micro credits have not had much impact on bettering the living standards of the rural and semi-urban populace.

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