India
is among the fastest growing economies in the world and boasts of one hundred ‘dollar
billionaires’ in the 2015 Forbes magazine’s list. The country’s growing middle
class is a great asset for its economic progress. But, at the same time, there
is a huge mass of poor people, too. According to different estimates, about 21%
to 29.8% of India’s population, or about 300 million people live below the
poverty line. Clearly, the gap between the rich and the poor is enormous.
Moreover, per capita income in different states
varies drastically, ranging from Goa’s Rs. 2,24,138 to Bihar's Rs. 36,143,
causing socially unhealthy disparity.
The government realizes that there is an urgent need for empowering the poor.
This can be achieved by enabling small farmers
and unskilled labourers to switch over to better paying jobs in the tertiary or
services and secondary or industrial sectors. However, the challenges are
daunting, indeed.
Over
the past 68 years, India’s mainstream banking system has been able to reach out
to less than 50% of the total population.
Only about 5% of our rural areas have a commercial bank branch. A vast majority
of savings bank accounts are dormant. About
60% of the poorest households do not have access to credit. Only 20% of poor
households have been able to make use of the formal sources of credit. According
to an estimate, only 10% of the ‘no frills’ savings bank accounts are actually
active because of widespread illiteracy and people’s hesitation in approaching
banks. They are ignorant of the way our banking system works. As a result, very
few conduct banking transactions and receive credit from formal financing
channels. This has been a major contributing factor towards social, political
and economic disempowerment of millions of people across the country. They have
not been able to avail of an opportunity to increase their earning capacity and
develop entrepreneurial talent, and continue to struggle with their limited
resources.
Apart
from creating suitable jobs, it is imperative that entrepreneurship among the
poor is encouraged and they are equipped with relevant knowledge and skills. In this context, micro-financing is proving to be an
effective tool for empowerment of the poor. The International Labour
Organisation defines micro-finance as ‘an economic development approach that
involves providing financial services through institutions to low income
clients.’ Micro-finance Institutions or MFIs streamline and monitor loan
disbursement. They provide small loans for working capital, collateral
securities such as group guarantees and compulsory savings. They also help the
deserving to access larger loans based on repayment performance.
The
concept of micro-finance had developed
in the 18th century, when the first cooperative to finance farmers
was opened in Germany. More recently, the term ‘micro-financing’ gained
currency in the 1970s, when Dr. Muhammad Yunus started the Grameen Bank in
Bangladesh. In India, micro-finance started in 1974, with the establishment of
Shri Mahila Self Employed Women’s Association, or SEWA, Sahakari Bank. Later,
in early 1980s, micro-finance evolved around Self Help Groups or SHGs. During
1992, the National Bank for Agriculture and Rural Development,
or NABARD, started linking
SHGs to banks as a pilot project. Presently, 8 million SHGs are linked to
banks, out of which 6.29 million SHGs are exclusively for women. Around 800
MFIs are active in India.
The
micro-finance system in India comprises (a) Self Help Groups-Bank Linkage Model;
(b) Micro-finance Institution Model; (c) Grameen Model; and (d) Individual
Lending. Out of these four, the Self Help Group-Bank Linkage Model and the
Micro-finance Institution Model together provide 97% of the micro-finance
business. Their beneficiaries have been increasing at an average rate of 8.80%
per annum. The Forbes magazine has named seven
micro-finance institutions in India in the list of the world's top 50 micro-finance
institutions. These are: Bandhan, Microcredit Foundation of India, Saadhana
Microfin Society, Grameen Koota, Sharada's Women's Association for Weaker
Section, SKS Microfinance Private Ltd, and Asmitha Microfin Ltd.
The
process of linking SHGs to banks is flexible. Banks may form SHGs and finance
them. Alternatively, NGOs may establish SHGs, which banks can finance. On the
other hand, NGOs and other agencies may act as financing intermediaries between
banks and SHGs. Since women have been identified as the most vulnerable group among
the poor, NGOs, as well as the government, have been encouraging women to form
SHGs. The NGOs, trusts and NBFCs or Non-Banking Financial Companies lend small
loans to individuals or SHGs. They also provide other services like capacity
building, training, and marketing of products etc.
Currently,
MFIs are playing an important role in the agricultural sector as well as in the
empowerment of women. They provide financial services to small farmers for purchase of implements and inputs, along with
services of development officers for technical assistance, capacity building
and information. The
MFIs also enable farmers to sell their produce in the market through formation
of groups and by encouraging group marketing, as well as through coordination
with local extension agencies. Micro-finance is an important tool for
empowering the rural poor women educationally, socio-economically and politically.
It has helped them to benefit from appropriate education, and develop various skills
through relevant training, which has done wonders to their self-confidence.
MFIs
play an important role in augmenting the women’s contribution to the
household’s income by facilitating their access to credit as well as knowledge
of bank transactions, by generating employment for women, and helping them have
a better control over the resources. This process enables women to gain
self-esteem and respect in the family. It also strengthens their role in the
household decision-making process. Other factors that make a significant
contribution to their empowerment include their improved ability to interact
with members of the group, as well as with outsiders, and increased mobility
within and outside their locality. Further, the MFIs help improve the literacy
level of the family members and create awareness about children’s education.
They impart training on income-generating activities, and help them gain knowledge
of maintaining financial accounts. Economic and social empowerment enables
women to participate in the political activities of local bodies like panchayats,
municipal committees etc, and get involved in their administration. Many women
have gone a step further in political empowerment by participating in larger
political campaigns at the state level.
However,
there are several problems – both structural as well as functional – facing the
MFIs that need to be resolved. The loan amounts are generally scarce. According to estimates, the annual demand for credit
by the poor is about 60,000 crores, but the disbursement is mere 12000 crores.
Interest rates charged on loans range from 12% to 36%, which most poor people
are unable to afford. Again, high illiteracy levels and lack of experience
prevent SHGs from performing more sophisticated but essential activities like financial
management and repayment monitoring. There are also reports of women taking
multiple loans and unable to repay them. All these factors add to the problem
of poor loan recovery.
However,
these are surmountable challenges. It is reassuring indeed that the Modi
government has endeavoured to plug the bottlenecks to ensure universal access
to basic services for all unbanked households. The Pradhan Mantri Jan Dhan
Yojna launched by Hon’ble Prime Minister Narendra Modi on August 28, 2014 aims
at empowerment of the poor.
Thus,
it is clear that MFIs can play a vital role in facilitating the PM’s policy of
growth with equity, economic well-being and prosperity for all.
This article was broadcast on the All India Radio World Service on 25 February, 2016
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