Microfinance
Microfinance
Microfinance is a basis
of financial services for entrepreneurs and small businesses deficient in
contact with banking and associated services. The two key systems for the
release of financial services to such customers include ‘relationship-based
banking’ for individual entrepreneurs and small businesses along with
‘group-based models’ where several entrepreneurs come together to apply
for loans and other services as a group. Similar to banking operation
traditions, microfinance entities are supposed to charge their lender’s
interests on loans. In most cases the so-called interest rates are lower than
those charged by normal banks, certain rivals of this concept accuse
microfinance entities of creating gain by manipulating the poor people’s money.
History of Microfinance
The history of microfinance
can be traced back to the middle of the 1800s. During the 1800s, the benefits
of small credits to entrepreneurs and farmers was written by Lysander Spooner,
the theorist, as a way to get people out of poverty. Later, the first
cooperative lending bank was founded independently by Friedrich Wilhelm
Raiffeisen to support the farmers in rural Germany.
The term “microfinancing” was
first used in the 1970s during the development of Grameen Bank of Bangladesh,
which was founded by the microfinance pioneer, Muhammad Yunus. In 1976, Yunus
institutionalized the approaches of microfinance, along with the foundation of
Grameen Bank in Bangladesh. Since, in the developing countries, a large
number of people still depends largely on subsistence farming or basic food
trade for their livelihood, therefore, smallholder agriculture in these
developing countries has been supported by the significant resources.
Microfinance
in India
Lack of security and
high operating costs are some of the major limitations faced by the banks while
providing loans to poor people. These limitations led to the development of
microfinance in India as an alternative to provide loans to the poor with an
aim to create financial inclusion and equality.
SEWA Cooperative Bank
was initiated in 1974 in Ahmedabad, Gujarat, by Ela Bhatt which is now one of
the first modern-day microfinance institutions of the country. The National
Bank for Agriculture and Rural Development (NABARD) offered financial services
to the unbanked people, especially women and later decided to experiment with a
very different model, which is now popularly known as Self-help Groups
(SHGs). The SHG-Bank linkage programme in India has savings accounts with
7.9 million SHGs and involves the participation of regional rural banks (RRBs),
commercial banks and cooperative banks in its operations. The origin of
SHGs in India can be traced back to the establishment of the Self-Employed
Women’s Association (SEWA) in 1972.
In 2013, a loan of $144 million was provided by
Grameen Capital India to the microfinance groups. Apart from the Grameen Bank,
another microfinance organization named Equitas was developed in Tamil Nadu.
The Southern and Western states of India are the ones attracting the greatest number
of microfinance loans.
What is MUDRA?
The central government had
introduced the Micro Units Development Refinance Agency (MUDRA) where the
scheme aims to refinance collateral-free loans of up to Rs 10 lakh granted by
lending entities to non-corporate small borrowers, for revenue growth actions
in the non-farm sector. Currently, loans granted under this system have
falls under three categories namely, Shishu loans for up to Rs 50,000, Kishor
loans in a range between Rs 50,001 to Rs 5 lakhs and Tarun loans ranging from
Rs 5 lakhs to 10 lakhs. As a way to make the MUDRA scheme popular, the
government aims to set up a Rs 3000-crore Credit Guarantee Fund to back these
loans.
Micro Finance Associated
Challenges
- Inadequate
Data: While overall loan accounts have been increasing the actual
impact of these loans on the poverty-level of clients is sketchy as data
on the relative poverty-level improvement of MFI clients is fragmented.
- Impact of COVID-19:
It has impacted the MFI sector, with collections having taken an initial
hit and disbursals yet to observe any meaningful thrust.
- Social Objective
Overlooked: In their quest for growth and profitability, the social
objective of MFIs—to bring in improvement in the lives of the marginalized
sections of the society—seems to have been gradually eroding.
- Loans for
Conspicuous Consumption: The proportion of loans utilized for non-income
generating purposes could be much higher than what is stipulated by RBI.
These loans are short-tenured and given the economic profile of the
customers, it is likely that they soon find themselves in the vicious debt
trap of having to take another loan to pay off the first.
Benefits
of Microfinance
- As
per the World Bank estimates, more than 500 million people have improved
their economic conditions via microfinance-related entities.
- Also, the International Finance
Corporation (IFC) estimated that, as of 2014, over 130 million people were
directly benefited from the microfinance-related operations.
- But, approximately only 20% of the
three billion people who fall under the category of the world’s poor can
avail these microfinance operations.
- IFC also helped in establishing or
improving the credit reporting bureaus in 30 developing nations.
- Microfinance is also a source of
capital for the people. It also empowers women in particular, which may
lead to more stability and prosperity for families.
Way Forward with Microfinance
- RBI should encourage all institutions
to monitor their impact on society by means of a ‘social impact scorecard’
- MFIs should ensure that the ‘stated
purpose of the loan’ that is often asked from customers at the
loan-application stage is verified at the end of the tenure of the loan.
- The customer data in a scorecard
that is verified and captured digitally can be used to evaluate the impact
of each loan in the lives of the clients, subsequent improvement in their
earning capacity over the years, other direct/indirect benefits rendered from
loan utilization and finally how soon MFI customers are able to transition
out of the MFI fold.
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