MBA Aspirants are expected to know and understand the current scenario of economic conditions of Indian rural market. This general awareness will help you in GD/WAT and PI.
Read: Does Microfinance in India serving to poor?
Microfinance is a source of financial services for people who do not have access to banks and other financial institutions. Generally, banks do not provide financial services such as loans to people with little or no income. This is where microfinance comes in to save the day. Those who promote micro financing believe that the provision of financial services to those with little or no income will help the poor out of poverty.
The history of micro financing can be traced back to the 1800s, when theorist Lysander Spooner wrote about the benefits of small credits to farmers and budding entrepreneurs and showed how microfinance could help people from low-income families escape the vicious cycle of poverty. Today, we have Muhammad Yunus, who pioneered the modern concepts of microfinance and microcredit and founded the Grameen Bank in 1983, which provides small loans to the poor without any deposit.
In India, microfinance operates through two channels, namely Self Help Groups – Bank Linkage Programme (SBLP) and Micro Finance Institutions (MFIs). The Self Help Groups-Bank Linkage Programme is a bank-led microfinance channel, initiated by the National Bank for Agriculture and Rural Development in 1992. Under the Self Help Groups (SHGs) model, members are encouraged to form groups of around ten or fifteen and contribute their savings to the group on a regular basis. From these savings, small loans are provided to the members.
At a later stage, these SHGs are given bank loans for the purpose of income generation. This model, where members bring their savings to the group and past loans are recovered and new loans are disbursed to the members, has been successful in India and it is becoming popular too. In fact, once the SHGs become stable, they start working on their own, with little or no help from non-governmental organisations, the Small Industries Development Bank of India and the National Bank for Agriculture and Rural Development.
The other channel through which microfinance operates in India is MFIs. These institutions have microfinance as their main operation and they lend money through the Joint Liability Group (JLG) concept. A JLG is essentially a group comprising five to ten people that seeks bank loans against a mutual guarantee. Organisations that fall under the category of MFIs are non-banking financial companies, Section-25 companies, societies and trusts, and they constitute around 42% of the microfinance sector with regard to loan portfolio in India.
In December 2013, Rural Development Minister Jairam Ramesh stressed the need to overhaul the business and regulatory structures of India’s microfinance institutions with focus and emphasis on increasing financial inclusion and building social capital as opposed to the profit driven models. He mentioned that the bank-linked SHG model is by far the most successful Indian innovation in the microfinance sector. In fact, the Self-Employed Women’s Association, SEWA, has been successful because it employs the SHG model.
The microfinance sector in India is thriving and has empowered lakhs of poor and underprivileged people in India. In fact, reports claim that banks in the public sector have managed to disburse close to Rs 20,000 crores through self help groups in 2012-2013. And it is hoped that through micro financing, more Indian men and women will be able to break free from the vicious cycle of poverty, which has been haunting the country for centuries.