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     CIN NO = U65910RJ1996PTC046219

The Micro Finance Sector: An overview

Microfinance refers to small scale financial services for both credits and deposits- that are provided to people who farm or fish or herd; operate small or micro enterprise where goods are produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and local groups in developing countries in both rural and urban areas.

- Marguerite S. Robinson

It is well known that in the development paradigm, micro-finance has become an integral part as a need-based policy and program to cater to the so far neglected target groups (women, poor, rural, deprived, etc.). Micro finance is a participative model that can address the needs of the poor especially women members. It envisages the empowerment of the members by promoting their saving habits and extending bank loans to them. When women become economically self-reliant and contribute directly to the well being of their families, they play a more active role in decision making and are able to confront systematic gender inequalities.

Some important features of micro finance are as follows:
a) Micro finance is a tool for empowerment of the poorest women
b) Micro finance is essentially for promoting self-employment; the opportunity of wage employment is limited in developing countries – not increases the productivity of employment in the informal sector of the economy
c) Micro finance is not just a financing system, but a tool for social change, especially for women
d) Micro credit is aimed at the poorest, micro finance lending technology needs to mimic the informal lenders rather than formal sector lending

Microfinance in India is a growth industry with vast open spaces to expand and the mainstream financial sector’s recognition has opened many more avenues of expansion. New micro finance approaches have emerged in India over the past decade, involving the provision of thrift, credit and other financial services and products, with the aim to raise income levels and improve living standards.

Indian Microfinance can be chronologically classified into four phases. The four stages are:
Phase I: 1900s – 1969 Cooperative Movement 
Phase II: 1969 - 1991 State Driven through National Banks and emergence of
Phase III: 1992 – 2000 SHGs Bank Linkage program and Growth of NGO-MFIs
Phase IV: 2000 – today Commercialization and Regulation of Microfinance

In the fourth phase, the MF sector has moved from sole social return approach to double bottom line approach of social and financial returns. This change in approach led to many changes in the functioning of microfinance. The emphasis on ‘bottom of the pyramid’ and good financial returns of some of leading MFIs, has brought many mainstream commercial entities taking interest in the sector not only as part of their corporate responsibility but as new business line, through both the linkage-banking program, as well as the "alternate" channel.

Today, we relate better to the market and see themselves as businesses in the financial services space, catering to an untapped market segment while creating value for their shareholders. This overriding shift in orientation from development to social entrepreneurship has brought about changes in institutions' legal forms, capital structures, sources of funds, growth strategies, and strategic alliances

While these organizations have demonstrated convincingly that poor people are creditworthy, the high costs of administering small debts, especially with high-frequency small-installment repayment plans, mean that sustainability without continuing external subsidies is a critical problem for microfinance organizations. However, recourse  to  mass  violence  and terrorism  from  the  poorest  segments  of  our  society -  the  tribal population and the poor minorities – underlines the pressing need for  financial inclusion for equity and progress of our country.

In the wake of the Andhra debacle, initiatives, private and government, have focused around means of financing, interest rates, social obligations, transparency in working, code of conduct and self regulation, innovation, technological interventions, alternates such as micro-insurance and savings, alternate business models, etc. The following is the need of the hour in Indian microfinance:

  • An ingrained understanding of the skill and livelihoods of the clients in order to design relevant products and services
  • Appropriate legal structures for the structured growth of microfinance operations
  • Finding adequate levels of equity for the new entities to leverage loan funds
  • Ability to access loan funds at reasonably low rates of interest
  • Ability to attract and retain professional and committed human resources
  • Design of apt MIS including user friendly software for tracking accounts and operations
  • Ability to innovate, adapt and grow
  • Bring out a compendium of small and micro enterprises for microfinance clients
  • Identify and prepare a panel of locally available trainers and train them
  • Capacity to provide backward linkages or create support structures for marketing
  • Need for greater ethical approach in our operations
  • An urgent need to focus on improving the financial literacy
  • A single all-encompassing legislative framework to cover all institutions and models of microfinance
  • Technological interventions to develop efficacy and transparency

If we ensure that right financial solutions along with its knowledge reach the right beneficiaries, then protections of the stakeholders is ensured, along with maximized social returns that emerge out of transparent, ethical and sustained performances.  

All said and done, Micro finance remains a powerful tool for development, in its role as a catalyst for rural development. It may not be a panacea, but it has brought a sea of change in the lives of many. Reinvention and transparency is the only key to ensure that the benefits reach the needy. Speedy actions are needed to remove the obstacles to microcredit's development.