Microfinance in India

Microfinance can be described as an umbrella under which financial services including microcredit are provided to the low income group. The need for the unfolding of microfinance began in the developing nations more than 30 years ago. With organized financial sectors like the banks not having anything on their platter to offer the unsalaried and low income group, mushrooming of money lenders and chit fund owners was inevitable. Financial crimes and default became common place in such a scenario. While it was not always the money lenders who were at fault, the borrowers themselves had little choice in the matter. This led to a world-wide movement that culminated in the making of the Microfinance Institutions, or the MFIs.

 

The poor and needy have a frequent need for cash and hence save in highly liquid assets like jewelry, live stock, etc. These assets are both the livelihood of the poor and their savings. In times of need they are faced with a catch-22 like situation. If they do not sell the asset, they will not be able to repay the loans and if they did, they would not have a livelihood. This scenario encouraged a host of Non-governmental Organisations to start the movement which caters, in a micro level to the financial needs of the poor. The micro loans are given to these people and they are allowed the freedom to choose a livelihood.

 

The basic issue being constant, issues like size, diversity, taxation, reach and sustainability affected the transformation of Microfinance over the years. It is safe to assume that current day microfinance started in India sometime around 1980. It started as small groups formed to help themselves or the self help groups (SHG). Slowly the movement picked up momentum and national bodies like the Small Industries Development Bank of India (SIDBI) and the National Bank for Agriculture and Rural Development (NABARD) jumped into the band wagon. They have been devoting significant time and financial resources to microfinance. This has ushered in a sense of coming of age of this sector. The microfinance organizations (MFOs) in India have evolved over time and their strength lies in their diverse approach.

The process of transformation:

Though the basic aim of providing small, unsecured loan to the poor remains the same, with the advent of Microfinance the intent of such as loan has assumed a laudable intention. These types of loans therefore have lent themselves an organized and institutional connotation, erasing with it, the exploitative undertone of the previous model.

 

The microfinance is seen targeting the poor women who need the funds to establish in their chosen fields. Pottery, Agriculture and the like have women who can perform better with a little financial assistance. They have defaulted much lesser than their male counterparts.

 

In Bangladesh, for example, it has been proved that women default on loans less often. The credit extended to women has a positive impact on household consumption thereby improving the quality of life for children.

 

The operability of such a massive small scale project is always under the scanner. Though microfinance has a far greater reach than the banks, its sustainability is questionable.

For e.g. Bhartiya Samruddhi Finance Ltd. (BSFL), India’s oldest microfinance institution, promoted by Vijay Mahajan went through a rough patch when the borrowers in Andhra Pradesh refused to pay threatening to close down the MFI (BASIX, as it is known) due to bad loans.

In an enthusiasm to grow big, some of the rural poor are getting over-indebted and find it difficult to repay the loan. This was demonstrated in the recently concluded initial public offering in 2010 by SKS. This Andhra Pradesh based program, brought about serious charges regarding the borrowers taking on multiple loans, the aggressive collection strategies employed by the microfinance staff that even spurred suicides. All these have brought in major setbacks for microfinance in India.

Top Microfinance Institutions in India:

This policy of financial inclusion has seen a reasonable growth trend in the recent past with more than 3000 MFIs and NGOs sharing the market. With CRISIL coming up with the list of top 50 MFIs and organizing seminars, this sector is all set to grow in the right direction. The increasing geographic diversity in recent years is an indicative parameter of the development in this sector.