Microfinance in IndiaIts Challenges and Opportunity By: Sheetal Agarwal 10808702
IntroductionAccording to International Labor Organization (ILO), “Microfinance is an economic development approach that involves providing financial services through institutions to low income clients”.In India, Microfinance has been defined by “The National Microfinance Taskforce, 1999” as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards”.
When and how was it startedIt is safe to assume that current day microfinance started inIndia sometime around 1980. It started as small groupsformed to help themselves or the self help groups (SHG).Slowly the movement picked up momentum and nationalbodies like the Small Industries Development Bank of India(SIDBI) and the National Bank for Agriculture and RuralDevelopment (NABARD) jumped into the band wagon.They have been devoting significant time and financialresources to microfinance.
Its ObjectiveMicrofinance offers financial services to underprivileged people.Encourage Entrepreneurship and Self-SufficiencyManage RiskEmpower Women
Micro finance sector in 2011-12Both SHG- Bank linkage program model (SBLP) and MFIs put together, achieve an outreach of 83.4 million clientsSaving linked SHGs increased to 7.96 million with estimated member base of 104 millionCredit linked SHGs were 4.36 million - 9% less than the previous year.Client outreach of MFIs - 26.6 million (decline of 16 %) with a gross loan portfolio of Rs.209.13 billion (decline of 3%)The average loan size of SHGs- Rs.6420; an increase of Rs.1527 over last year.Average MFI loan increased by 15% over last year to Rs.7803
Development InitiativesFocus turned towards governance and responsible finance practices.Risk management becomes a post-crisis priority.Taking advantage of technological and market developments.Series of Regulatory initiatives by RBIGreater emphasis on community based organizations
Financial InclusionRBIs Financial Inclusion Plan gathers momentum (99,800 villages).103 mn No Frill Accounts – Doubled compared to previous year.Quality of inclusion a concern – compliance with RBI guidelines - not business interest, drives banks.Mobile banking gaining momentum.21.76 mn - likely to improve services on the ground.
Examples: The process of transformation: The microfinance is seen targeting the poor women whoneed the funds to establish in their chosen fields. Pottery,Agriculture and the like have women who can performbetter with a little financial assistance. They have defaultedmuch lesser than their male counterparts. In Bangladesh, for example, it has been proved thatwomen default on loans less often. The credit extended towomen has a positive impact on household consumptionthereby improving the quality of life for children.
Challenges• Perceived high risk of microfinance entrepreneurship and small business.• High cost involved in small transaction.• Lack of debt and equity funds for MFI to pass on to poor.• Difficulty in measuring the social performance of MFIs• The poor’s inability to offer marketable collateral for loans• Poor institutional viability of micro enterprises• Lack of knowledge about microfinance services• Shortage of Financial Capital – Or Misallocation?
Opportunity• BOP(Bottom of Pyramid).• Innovation.• Day to day money management.• Building long term saving.
Recommendations• Innovative saving products – location and client specific.• Awareness.• Relaxation in provisioning norms for MFIs.• Converting No Frill Account to normal banking account.• UID