The document discusses problems and prospects of microfinance in India. Some key problems are that the poorest households are not being reached, coverage is lower in poorer states, and interest rates are still high. Prospects for microfinance include expanding to reach the 58 million underserved households, reducing regional disparities, and regulating microfinance institutions. New schemes could also support microfinance institutions and the use of insurance products and flexible programs.

1. Microfinance
PROBLEMS AND PROSPECTS

2. A Presentation by Akash Saha
2

3. PROBLEMS

4. Deserving Poor are Still not Reached
The microfinance delivery models are not exclusively focused on those who
are below the poverty line or very poor. Though the programme is spreading
rapidly but with a slow progress in targeting the bottom poor households.
About 50 per cent of SHG members and only 30 per cent of MFI members are
estimated to be below the poverty line. According to Ghate (2008),
approximately 75 million households in India are poor and about 22 per cent
of these poor households (i.e. 16.5 million) are currently receiving
microfinance services.

5. Regional Disparity
It has been observed that the microfinance programme is mainly run by
formal financial institutions with the help of SHGs. As a result, microfinance
programme is progressing in those areas of the country where there is
tremendous growth of formal financial institutions. Microfinance institutions
were expected to reach those areas where the formal banking system failed
to reach and the poor people have to depend on the money-lenders in order
to meet their financial requirements.

6. Limited Spread in Poorer States
The coverage of microfinance programme is comparatively low in the states
which have a larger share of the poor. Unfortunately, these seven states, i.e.
Orissa, Bihar, Chhattisgarh, Jharkhand, Uttaranchal, Madhya Pradesh (MP)
and Uttar Pradesh (UP) are lagging behind in microfinance programme.

7. High Interest Rates
Affordability of loan is equally important to the access of financial services to
the poor. Economic fundamentals exhort that every borrower is interest
sensitive and the capacity of borrowing decreases with increase in interest
rates. High interest rates may prove to be counterproductive, and weaken the
social and economic condition of poor clients. The high interest rate charged
by the MFIs from their poor clients is perceived as exploitative.

8. Low Depth of Outreach
Another problem faced by the microfinance programme is the depth of
services provided. Though the outreach of the programme is expanding, large
number of people are provided with microfinance services but the amount of
loans is very small. The average loans per member in both MFIs and SHGs are
between Rs. 3,500 and 5,000. This amount is not sufficient to fulfil the
financial needs of the poor people. The duration of the loans is also short.

9. Unregulated Microfinance Institutions
In India, micro finance is provided by a variety of institutions. These include
banks (including commercial banks, RRBs and co-operative banks), primary
agricultural credit societies and MFIs that include NBFCs, Section-25
companies, trusts and societies. But only the banks and NBFCs fall under the
regulatory purview of the Reserve Bank of India. Other entities, e.g., MFIs are
covered in varying degrees of regulation under their respective State
legislations.

10. Lack of Insurance Services
Poor people are vulnerable to financial shocks. A small change in their
earning patterns due to natural calamities, health problems, death of earning
member etc. can push them to destitute. So, a provision of insurance under
the microfinance programme is very essential to help the poor to cross the
poverty line. But, in reality, the current microfinance programme in India is
just focused on regular saving and micro-credit.

11. Binding of Saving, Meetings and Regular Payments
The uniqueness of the SHG-BLP is the fundamental requirements of the
programme, such as compulsory savings, group meetings, regular repayments
etc. But these requirements also lead to the exclusion of the core poor from
joining the 95 microfinance programme. Poor people who generally do not
have a regular source of income are required to save before getting a loan.
These loans are to be repaid regularly in fixed instalments. But due to their
irregular and seasonal nature of jobs, poor people face difficulties while
repaying the loans.

12. PROSPECTS

13. Growth Prospects
Microfinance programme has a wider prospect to expand both the outreach
and depth of services provided. According to Ghate (2008), microfinance
programme has covered just 16.5 million of the total 75 million poor
households. So, there is an ample scope to cover these unreached poor
people. Also, the average loans provided to the SHG members under both the
SHG-BLM and MFI models range between Rs. 3,500 to 5,000 which can meet
the liquidity requirements only and are not sufficient to help a member to
start productive activities.

14. Reducing Regional Disparity
As discussed in the problems, the spread of microfinance programme is
unequal among various regions of India and there is limited spread in the
poorer states. So, there is ample scope to spread microfinance programme in
the unreached areas including the poorer states. However, taking a step in
this direction NABARD has recently identified 13 states to scale up the
microfinance programme in these states in order to reduce the regional
disparity. These priority states are Assam, Bihar, Jharkhand, Gujarat, Himachal
Pradesh, Maharashtra, Madhya Pradesh, Chhattisgarh, Orissa, Rajasthan,
Uttar Pradesh, Uttaranchal and West Bengal.

15. Schemes to Support MFIs
MFIs are meant to play an important role in reaching the poor people who
are not served by the formal financial institutions. But most of these
institutions are restricted by 97 RBI to collect savings from their members and
raise public funds. As these institutions do not publish their annual financial
reports, it is difficult to determine their financial health. Therefore, the formal
financial institutions also hesitate to provide loans to these institutions. As a
result, they face paucity of funds which becomes a hurdle in expanding the
microfinance programme. To tackle this problem, some schemes may be
adopted to provide support and help for the capacity building of MFIs for the
expansion of microfinance programme.

16. Regulation of MFIs
Currently, various entities such as co-operative societies, mutual benefit
societies or mutually aided societies etc. are engaged in the activity of
microfinance. They are guided by different laws under which they are
registered. Lack of a single regulatory authority restricts the orderly growth of
microfinance sector. Keeping in view all the regulatory problems, the
Government of India has proposed legislation and formulated a bill for the
development and regulation of microfinance sector.

17. Insurance Services
In India, the penetration of insurance services among rural poor people is
very limited and there is a great potential for the same. Moreover, poor are
very much vulnerable to the natural uncertainties and insurance is necessary
for them. The network used for microfinance programme can be used to tap
the potential of insurance in rural markets. Non-Government Organizations,
Microfinance Institutions and Self-Help Groups can be used as micro-
insurance agents. They can offer target specific insurance products at a
relatively lower cost, for a lower coverage of amount.

18. Flexibility in the Programme
Some main features of the microfinance programme include compulsory
savings, regular group meetings, record maintenance etc. These bindings lead
to the exclusion of 98 core poor from joining the microfinance programme.
Therefore, in order to expand the outreach of the programme to the poorer
people, there is a need to introduce more flexible system such as the one
adopted in Bangladesh, where even the beggars are provided with micro-
loans by the Grameen Bank.

19. Technical Innovations
In order to improve the quality of microfinance services some technical
innovations may be introduced. A number of electronic devices are being
used in different countries to expand the outreach and to improve the
microfinance functioning. Some of these devices are mobile phones, ATMs,
processor cards, computers etc.