Microfinance is steadily emerging as a global movement in existing economic environment. Among all the developing countries, it is highly influential in India. Nowadays, study of microfinance is not only limited to practitioners but it also a matter of interest for governments, non profitable organizations (NGOs), commercial and national banks, societies, corporate houses, researchers, academicians and many more. Microfinance has immense growth potential, as half the world's population is insufficient in meeting their basic needs with earnings of 2 USD per day. With changes in the era, microfinance sector has also under gone several changes in terms of the services been provided by Micro Finance Institutions (MFIs). The original idea of microfinance was to develop banking habit amongst the poor people. It aimed at as a source where, the small savings of poor people could be safely kept and can be used by them as and when desired. Its motive was to provide flexibility and liquidity to the depositors. But, the idea then converted into making banking customers to borrowers to, facilitate their livelihood requirements. This was facilitated by the formation of Self Help Groups (SHGs) and by the end of last financial year (2009-10) around 97 million families covered by SHG bank linkages programmes. This paper attempts towards the non-technical overview on the growth and development of microfinance in India.
Key words: Microfinance, Government, India.
Introduction
The development of any economy is based on various factors such as income parity in the population, flow of money etc. The flow of money in any country is governed by the circular flow of a 4-tier open economy. The circular flow continues without any default and enables both the inflow and outflow of money in an economy, as and when required, with the help of government intervention. However, when issues relating to infusion of money in the economy are concerned, it's not just the big corporate or the MNC's that come into picture even firms, those owned by unorganized and micro entrepreneurs also form to be a part of the economy, which are taken into consideration for the purpose of determination of GDP. But, this sector still plays a negligent role in terms of total contribution to GDP and thus, there lies a scope to take giant steps forward in the same direction. Microfinance is steadily emerging as a global movement in existing economic environment. Among all the developing countries, it is highly influential in India. Nowadays, study of microfinance is not only limited to practitioners but it also a matter of interest for governments, non profitable organizations (NGOs), commercial and national banks, societies, corporate houses, researchers, academicians and many more.
Lending to the poor for expansion or start up of a venture, by the well established financial institutions was not common in India. One of the important reasons in this regard was the non availability of a formal source of income as the sources of income of the poor people were usually farming, fishing, animal husbandry etc. This led to a decline in the value of the skills that the poor people possessed. Instead of upgrading the standard of living and providing airs to their aims and ambitions, it prevented them from growing. It did not only stagnate the rate of growth rather a declining trend was seen in the same. This could have been avoided by providing of better assistance and guidance in their respective field of work. It would have, thus resulted in an inclusive growth of the economy. But, because the scenario was vice versa, "The rich started to become richer and the poor became poorer". As a result, to accomplish their aspirations, the poor people had the only option of approaching to the informal sources for getting loans and finances to support their business activities. The informal sources included friends, family members and local money lenders. The local money lenders in turn, took an undue advantage of the illiterate and uninformed rural public. They created a situation of monopoly and started to charge high interest rates. The poor people had no option but to act as slaves in the raj of the inhumanistic lenders. It was then that an increased need was identified for a formal body which could provide loans to the people living in rural India and is mainly involved in the informal business sector. This resulted in the introduction of microfinance not only in India but, across the world.
Evolution of Microfinance
Microfinance was proposed by Md. Yunus and has its origins from Bangladesh. Microfinance, as a concept both in theory and in practice plays a vital role for the growth of rural India or an inclusive growth of the economy. Although, microfinance showed its formal existence in late 1970s, it came into practice in India since the 1950s, by establishment of vast cooperative rural credit banks which was then, followed by nationalization of commercial banks in 1969. Also, it was made mandatory for banks to provide 40% of their loanable funds to the priority sectors which included agriculture and other rural activities. These decisions of the Government of India (GOI) enabled an early reach of banks to the rural sectors of the economy. The third phase of change in the field was in the 1990s when the country was liberalizing, globalizing and privatizing. The most important impact was that of liberalization.
With changes in the era, the microfinance sector has also under gone several changes in terms of the services been provided by Micro Finance Institutions (MFIs). The original idea of microfinance was to develop banking habit amongst the poor people. It aimed at as a source where, the small savings of poor people could be safely kept and can be used by them as and when desired. Its motive was to provide flexibility and liquidity to the depositors. But, the idea then converted into making banking customers to borrowers to, facilitate their livelihood requirements. This was facilitated by the formation of Self Help Groups (SHGs). Microfinance did not just follow the basic banking patterns that existed in the economy. Rather, it suggested lending by creation of groups of people who would collect funds within the group and the person who required the money would be lended from this fund. Both the persons those contributing to the fund and those who could obtain funds from the pool of funds were a member of the group. This not only increased their responsibility but, also their accountability and goodwill in the community they resided. As, the group members were a part of the local community. By the end of last financial year (2009-10) around 97 million families covered by SHG bank linkages programmes and around 69.53 lakh SHGs savings (amount of Rs. 6198.71 crore) are linked with banks out of which women contribution is 76.37%. Figure 1 shows the overall progress of SHGs under Microfinance during the last three years (2007-08 to 2009-10).
Data source: Status of Micro Finance in India - 2009-10, NABARD, India
Grameen Bank has proved to be the most effective institution in the microfinance segment to help the poor to grow and prosper. It has enabled in empowering people of low income groups, especially, those below the poverty line to set up their own businesses which could not only act as a self employment tool but, would also enable employment of others. Poor women entrepreneurs' were the most attractive customers which had high loan repayment rates. Education was preliminary taken as a tool to facilitate empowerment. But, when the earning potentials of women got converted into realties, the women also started to participate in the decision making process and thus were capable enough in creating a position for themselves in the society. SHGs disbursed total amount of Rs. 14,453.30 crore on account of loans during 2009-10 out of which 86% (Rs. 12,429.37 crore) was for women SHGs. This also motivated others in this category to move out of the homes and create a distinct and respectable image for themselves in the society. The MFIs also started to act as financial intermediaries and properly governed the flow of money in the rural India as records shows bank loans disbursed to MFIs during the year 2007-08 was only Rs 1970.15 crore which touched amount of Rs. 8062.74 crore in the year 2009-10 with the growth rate of 75.56%.. Thus, microfinance aims to shift the trend of the market from "Employment Requiring Population" to "Employment Generating Population".
A further improvement in the concept suggested, "Sustainable micro entrepreneurship" which, in the words of Muhammad Yunus, the father of microfinance is, a "social-conscious-driven-entrepreneurship". He provided with an idea which revolutionized the financial sector of the world and the world economy got a boost from this concept. The kind of banking been initiated by Md. Yunus suggested that the banks should move towards the customers. He recommended that no customers should visit the bank premises until very important. Else, the employees would be penalized. Nevertheless, the concept has been implemented, but not with such stringent rules and regulations in India. The whole stream of study has now come to be known as microfinanciarization. Microfinanciarization is the process of structural change that involves financial inclusion, bankarization, or the regulation of informal financial practices, and the utilization of voluntary sector
United Nations', Secretary-General Kofi Annan in 2005 said, that the group "microfinance is not charity but a way to extend the same rights and services to low-income households that are available to everyone else." Fouillet and Augsburg suggested that significant interstate variations occurred in the pace of microfinanciarization. This pattern continued till 2006 after which a convergence was been noted.
Private Commercial Banks and Microfinance
With the span of time as the segment of microfinance seemed to foster good figures of profitability, microfinance started to become more commercial. Earlier, the microfinance institutions were mainly financed by public and private donors and aid firms. But now, the commercial banks are increasingly playing dominant roles in the area by funding microfinance institutions. Studies (Lakshman, 2006 and Iyer, 2006) have shown the entry of big players like ICICI and HSBC together with private venture capital funds and social venture capitalists resulted tremendous growth of microfinance. The increasing interest of private and institutional investors for microfinance can be explained by the increased attention for socially responsible entrepreneurship. At present 14 private commercial banks (with total nos. of 133235 SHGs) are promoting SHGs savings. In the year 2009-10 SHGs saving accounts shows total savings of Rs. 3,67,389.24 lakh (women contribution of Rs. 2,90,057.64 lakh) out of which Rs. 14,049.01 lakh (women contribution of Rs. 5,649.05 lakh) and Rs. 3,53,340.23 lakh (women contribution of Rs. 2,84,408.59 lakh) deposited in private commercial banks and public commercial banks respectively. Table 1 shows detailed information of total nos. of SHGs linked with private commercial banks in India.
Table 1: Details of Nos. of SHGs Savings linked with Private Sector Commercial Banks
(Year 2009-10)
(Amount in Rs. lakh)
Name of the Private Commercial Bank
Nos. of SHGs
Name of the Private Commercial Bank
Nos. of SHGs
AXIS Bank
47
ING-Vysya Bank
12426
Bank of Rajasthan
1436
Jammu & Kashmir Bank
1127
City Union Bank
7773
Karnataka Bank
7351
Dhanalakshmi Bank
19370
Nainital Bank
680
Federal Bank
2400
Ratnakar Bank
721
HDFC Bank
45407
South Indian Bank
5245
ICICI Bank
19307
Tamilnad Mercantile Bank
9945
Data source: Status of Micro Finance in India - 2009-10, NABARD, India
Krauss and Walter (2008) significantly pointed out another reason for commercialization of microfinance. It stated that microfinance provides opportunity for portfolio diversification and thus minimization of risks. Commercialization of microfinance has been beneficial in the sense that, the concept has shifted from micro credit to microfinance. Thus, it may suffice to be a fruitful tool for the commercial enterprises after they must have analyzed from the recent meltdown that, the microfinance sector of the financial system is less sensitive to the macroeconomic fluctuations of the business cycle. This is because microfinance caters to the informal or the unorganized segment of the economy. The concept of microfinance does not just limit itself to borrowing and lending of funds but has extended towards insurance and introduction of new technology in order to improvise the functionality of the banks and facilitate the customers. Thus, the aim of corporate entering into the field of microfinance is to create a win-win situation whereby they are serving the society and thus fulfilling their corporate social responsibility (CSR). On the other hand, they are also diversifying the riskiness of their businesses and making reasonable profits to back up the operations. Thereby, managing a tradeoff between both. There still lies immense ray of hope for growth in the sector.
MFIs and Microfinance
India, has reported to have around 150 MFIs till 2009 which had contributed to a gross portfolio of 4.5 million USD. 26 million borrowers and 2 million depositors were been encountered till 2009. "The journey is as important as the destination", implies to say that, the goal of MFIs has shifted from severing the society by lending money to profit making. Witnessing this change, the government has established many institutions such as National Bank of Agriculture and Rural Development (NABARD) which cooperate with RBI to regulate the activities of MFIs. MFIs are both, profit making with attractive financial margins most of them operate on non commercial basis and serve the society in incredible ways. The basic idea of microfinance is to tap the untapped market. Microfinance is also termed as "Banking The Unbanked", "Women's Finance" or "poor man's finance". The World Development Report of 2000-01 suggested that poverty can be reduced in three ways, viz, increasing opportunity, enhancing empowerment, and improving security. Considering the growing importance of microfinance, the year 2005 was declared as the "International Year of Micro Credit". Many initiatives such as, to facilitate ease for borrowers, the collection period is scheduled as within 1-2 weeks. On one hand it reduces the default payment risk of and makes lending to poor more viable. But on the other side, it also increases the transaction cost of MFIs. During the year 2009-10, total amount of Rs. 10,72,849.35 lakh provided to 779 MFIs (including commercial, RRBs, cooperative banks and financial institutions). Table 2 given below provides detailed information about bank loans given to all MFIs.
Table 2: Details of Bank Loans provided to MFIs 2009-10
Name of the Bank
Nos of MFIs
Amount
(Rs. in lakh)
Commercial Banks
Public Sector
391
427660.14
Private Sector
220
336208.55
Foreign Banks
34
39991.95
All Commercial Banks
645
803860.64
Regional Rural Banks (RRBs)
46
2413.61
Cooperative Banks
NA
NA
All Banks {Com Banks(Public, Pvt. & Foreign), RRBs & Coop Banks}
691
806274.25
Financial Institutions
88
266575.1
Grand Total of Lending to MFIs
779
1072849.35
Data source: Status of Micro Finance in India - 2009-10, NABARD, India
The MFIs need to go macro to be able to meet their expenses and create profit margins. MFIs usually stress on borrowers for asset creation. They, then also provide assistance and training to operate these assets. As suggested by Wanchoo, the problems associated with MFIs in the main stream are enlisted as under:
Borrower Unfriendly Products and Procedures
Inflexibility and Delay
High Transaction Costs, both Legitimate and Illegitimate
Social Obligation and not a Business Opportunity
Wanchoo encountered the following problems with the alternative MFIs as:
Lack of commercial orientation
Lack of proper governance and accountability
Isolated and scattered
Tiwari and Fahad also suggested, similar issues or problems faced by the MFIs. The need was, that MFIs emerge as strong players by supplementing the formal role of financial institutions in providing microfinance services to poor. Despite of an early start in the field and achievement of various accomplishments, the Indian microfinance segment has witnessed stagnant growth. Along the same side it was also observed that, lending for poor still showed dominance from the informal sources. Considering the scenario, Mr. Vijay Mahajan, chairman of CGAP, a body set up by the World Bank has brought certain myths about the Indian microfinance sector to our notice. These myths are stated as under:
The idea that poor should be self-employed rather than work for wages. That is contrary to the whole history of successful economic development.
The idea that loans are the main financial services needed by the poor, whereas they really need savings and insurance.
The idea that credit is what builds enterprise, whereas the truth is that entrepreneurship and management are more important.
The idea that the non-poor don't need credit, whereas the truth is revealed in market-based banking: higher incomes can handle higher debt.
The idea that micro credit institutions can become self-sustaining, whereas all experience shows that new enterprises in poor areas that are built on credit alone rarely emerge from dependency.
However, the present situation witnessing sluggish growth and myths can be transformed by taking intelligent steps in the field of microfinance which also contributes to the level of financial inclusion of any country. In other words, it can be said that, microfinance is nothing but a way towards the achievement of financial inclusion. According to Collier & Batty, the factors that contributed to slow growth of medium and small scale entrepreneurs of developing countries is the less profit margin, poorly developed markets which act as hindrances rather than tools for facilitating funds for business. Other reasons are poorly developed infrastructure, low status of entrepreneurs due to social and religious beliefs and unfavorable economic and political climate.
Sinha said that financial illiteracy is a key stumbling block in furthering financial inclusion. This has led to the financial illiterate segment making negative savings in many cases. He added that banks need to view the situation as not an obligation to be met but an opportunity that is to be weaved into their business strategies. He felt that a pro-active approach will see the banking network expanding in an all-inclusive An important step observed here is the introduction of financial engineering, in the instruments through which the function of microfinance has been delivered. Mukherjee has emphasized on the need for adoption of appropriate technology for promoting financial inclusion. He urged the private sector to support the designing of physical products including devices, software and financial services, training and capacity building so as to create a large manpower pool including business correspondents, and develop a business plan to tap the local talent that exists in the rural areas, on the lines of the e-Choupal model. So, a need financial engineering seems to be apparently visible in the microfinance sector to be able to achieve targets of financial inclusion. To meet up these requirements, the GOI had taken various initiatives. There are attempts in the direction to make the Unique Identification Number (UID) or the "Aadhaar ID" as a means to support micro payments. Other such initiative being the establishment of a committee, "The Task Force on Credit Related Issues of Farmers." It was headed by U.C. Sarangi, Chairman, NABARD, this committee submitted a report to NABARD in June 2010 with so many suggestions and recommendations. Here some of the important suggestions are given below :
Widening of the definition of 'moneylender' to include all forms of for-profit, closely-held financial organizations such as non-banking finance companies,
The creation of a quasi-judicial authority for redressing grievances of farmers at either the district or appropriate lower level,
Pegging the lending rate to the prevailing bank rates
In continuation to this the most recent and valuable contribution in the area has been done by the Malegam Committee which was set in October,2010 to address the issues relating to abusive practices used by MFIs such as high interest rates, coercive recovery rates, multiple loans and other similar matters. This committee has provided new breath to the microfinance sector Indian economy by way of suggesting several important measures such as:
A borrower can be a member of only one Self-Help Group (SHG) or a Joint Liability Group (JLG)
Not more than two MFIs can lend to a single borrower
There should be a minimum period of moratorium between the disbursement of loan and the commencement of recovery
The tenure of the loan must vary with its amount
A Credit Information Bureau has to be established
The primary responsibility for avoidance of coercive methods of recovery must lie with the MFI and its management
The Reserve Bank must prepare a draft Customer Protection Code to be adopted by all MFIs
There must be grievance redressed procedures and establishment of ombudsmen
All MFIs must observe a specified Code of Corporate Governance
Critics of the report opinionated that there were still some areas which could have been dealt with in a better manner. Such as, the committee suggested fixing ceiling rates of interest rates by MFIs. This seems to bring regulations in scenario of liberalization. Another issue witnessed of multiple loan on individual, could have been resolved by extending the maximum credit limit of individuals from a single MFI. This can in turn be determined by analyzing the general borrowing amount of individuals. These limits could vary with change of geographical boundaries. Such as, Rs.10,000 income may be less for a person residing in Mumbai. But the same amount would not be sufficient for anyone living in Chhattisgarh or Jharkhand. It also needs to be adjusted against inflation and should also be revised yearly. Further, the system also needs to be made transparent.
Conclusion
Studies suggest that the impact of microfinance on the poorest is greater than on the poor. It is not yet as efficient as it will be when economies of scale are realized and a more supportive policy environment is created. Even though there have been differences on the geographical terms in India, there has been a paradigm shift in the number of people it has been able to bring up from the poverty line. It was also noticed that programmes which were specifically been designed taken into account, the geographical and social surroundings, those initiatives have been more successful than the programmes which were been conducted nationwide. Also, it has been clearly visible that microfinance has been able to reduce the gender differences by empowering the women. In fact, the MFIs have found women to be more trustworthy and punctual in terms of loan repayment in comparison to men.
The legitimacy of microfinance has been found beyond par. An important factor which also contributed to the success was the huge and positive acceptability amongst the rural India with regard to an introduction of a well established an organized financial system in the rural India. The victorious cycle been generated by the virtue of microfinance is very well comparable to that of the Keynesian model been suggested for the period of great depression. The cycle so evolved by microfinance has created a multiplier effect. Its revolutionary nature has created a way towards massive growth of the economy. In a country like India, where the social and ethical values hold dominance, by providing finances to one person in the family the family as a whole moves towards growth. It is same as the most famous slogan, "when one gets educated, it educates the whole family." Here, the analysis of the overall situation has been done in context of rural India and the impact of microfinance on urban India has remained untouched. But looking upon the other side we observe that, with the increasing pace of "Brain Drain" taking place from rural areas to the urban areas in search of jobs, acts as an indicator of greater need of microfinance in the urban areas of India, in the near future. Also, the increased rate with which urbanization is taking place also acts as a supportive indicator. A report by McKinsey Global Institute has figured out some facts which entail that by 2030, 590 million people will live in cities, which would be almost double the population of USA and would also result in generation of 70 percent of net new employment till that time. Thus, microfinance is most important from the purview of India where the members of microfinance have grown in a blindfold way from a few thousands to millions.
