Scope and growth of Microfinance in India

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Today, you will read General Awareness Topic:
"Scope  and growth of Microfinance in India"
Nobel Laureate Muhammad Yunus is credited with laying the foundation of the modern MFIs with establishment of Grameen Bank, Bangladesh in 1976. 
Microfinance in India started in the early 1980s with small efforts at forming informal self-help groups (SHG) to provide access to much-needed savings and credit services to the marginal population more importantly in rural areas.
From this small beginning, the microfinance sector has grown significantly in the past decades. National bodies like the Small Industries Development Bank of India (SIDBI) and the National Bank for Agriculture and Rural Development (NABARD) are devoting significant time and financial resources to Microfinance sector. 
The World Bank has called South Asia the “cradle of microfinance.” Statistics indicate that some 45% of all the people in the world who use microfinance services are living in South Asia. However, the overall percentage of the poor and vulnerable people with access to financial services remains small, amounting to less than 20 % of poor households in India.
With financial inclusion emerging as a major policy objective in the country, Microfinance has occupied centre stage as a promising conduit for extending financial services to unbanked sections of population The microfinance sector has emerged as one of the most promising tool for ameliorating poverty in India. The microfinance in India involves forming self help groups, usually a group of 5 to 20 persons and providing them credit through bank linkage. Therefore in India, it is often called as SHG Bank linkage programme.
NGOs in microfinance sector, also called as microfinance institution provide that linkage between banks and self help groups. With the help of credit and guidance from NGOs, the SHGs strive to come out of the quagmire of poverty. Another advantage found in Indian SHG movement is that most of the beneficiaries are women and thus it is becoming an important instrument of bridging the gulf of gender inequality. 
With the growth of microfinance industry many small and large Microfinance Institutions (MFI) had emerged in India and the largest MFI is SKS Microfinance Ltd which is also listed in the stock market, only such institution in India. 
The microfinance sector is having a healthy growth rate and it is currently a Rs.20,000 Cr. industry. The SHG-Bank Linkage Programme and the Microfinance Institutions put together achieved a growth in their customer base by about 10.8 percent. The combined borrowing customer base increased to 93.9 million from 86.3million in the previous year. 
Despite of healthy growth over the years, there number of concerns have emerged related to the sector, like regulation, transparent pricing, low financial literacy etc. In addition to these concerns there are a few emerging concerns like cluster formation, insufficient funds, multiple lending and over-indebtedness which are arising because of the increasing competition among the MFIs. 
On a national level there has been a spate of actions taken to strengthen the regulation of MF sector including, enactment of microfinance regulation bill by the Government of Andhra Pradesh, implementation of sector-specific regulation by Reserve Bank of India and most recently, release of Draft Microfinance Institutions (development and regulation) Bill.RBI credit policy capped household income at Rs. 120000/- and credit limit at Rs. 50000 for all MFI customers. This is to better target the beneficiary population to the bottom quartile population.  
Major challenges faced by microfinance in India are challenges related to access to finance, governance and management, demand for low interest rates and managing competition. It further adds that:
• The single biggest challenge for microfinance lies in the area of training and capacity development;
• On the supply side, there is a lack of service providers and comprehensive, integrated and relevant training modules
• Limited reach in the northern and eastern parts of the country
• Range of products tends to be limited to simple credit offerings
• On the demand side, not enough attention is being paid to training for senior management
• Absence of social audit in many cases
For the improvement of MF in India, Malegam Committee recommended measures to improve functioning of MFIs regarding the prevalent practices of MFIs in regard to interest rates, lending and recovery practices to identify trends that impinge on borrowers’ interests, to delineate the objectives and scope of regulation of NBFCs undertaking microfinance by the Reserve Bank and the regulatory framework needed to achieve those objectives. Few recommendations were accepted by the government but more reforms are needed in the sector to assure sustainable and pro-poor growth of the industry.
International Finance Corporation has itself launched an MFI namely Utkarsh in Uttar Pradesh and Bihar for the development of the MF in two of the most poor states in India. It is poised to to increase access to finance and microfinance services in relatively under-served areas. With IFC’s support, Utkarsh is working to diversify its products, develop sound internal systems and processes, and introduce a system of social audit. The company aims to reach an estimated 250,000 women borrowers by June 2013.
The potential of microfinance to ensure financial inclusion and thereby inclusive development is not hidden from anybody and therefore aforesaid challenges must be redressed on urgent basis. a better understanding of the diversity of women’s livelihood and a better understanding of the range of constraints, motivations, skills and capabilities of women through the livelihood framework might help in better operation of microfinance services.
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