Financial
inclusion is the
delivery of financial services at affordable costs to sections of disadvantaged
and low income segments of society. Unrestrained access to public goods and
services is the sine qua non of an open and efficient society. It is argued
that as banking services are in the nature of public good, it is essential that
availability of banking and payment services to the entire population without
discrimination is the prime objective of public policy. The term
"financial inclusion" has gained importance since the early 2000s,
and is a result of findings about financial exclusion and its direct
correlation to poverty. Financial inclusion is now a common objective for many
central banks among the developing nations. Microfinance is one of the tools of
financial inclusion in India.
India
has been placed at the 50th spot, much above Russia but below China, in the
index of financial inclusion (IFI) prepared by the Indian Council for Research
on International Economic Relations (ICRIER).
The financial inclusion index, which gives the extent of availability and usage
of banking services in key nations of the world, is based on indicators like
number of bank accounts per thousand adults, number of ATMs and bank branched
per million people and amount of bank credit and deposit.
Self Help Groups are
playing a very important role in the process of financial inclusion. SHGs are
usually groups of women who get together and pool money from their savings and
lend money among them. Usually they are working with the support of an NGO. The
SHG is given loans against the group members’ guarantee. Peer pressure within
the group helps in improving recoveries. Through SHGs nearly 40 million
households are linking with the banks. Micro finance is another tool which
links low income groups to the banks.
Microfinance
is
the provision of financial services to low-income clients, including consumers
and the self-employed, who traditionally lack access to banking and related
services. More broadly, it is a movement whose object is "a world in which
as many poor and near-poor households as possible have permanent access to an
appropriate range of high quality financial services, including not just credit
but also savings, insurance, and fund transfers." Those who promote
microfinance generally believe that such access will help poor people out of
poverty.
Microfinance
in India has had a significant shift from the days when microfinance was being
discussed as the next big innovation to address the poverty issues in India to
being discussed in terms of the next big investment opportunity. The language
of microfinance has undergone a fundamental change in the two decades of its
evolution.
Microfinance
started with the recognition that poor people had the capability to lift
themselves out of poverty if they had access to affordable loans. High
repayment rates in the industry have changed the perception that the poor are
not credit worthy. With the right opportunities, the poor have proved
themselves to be productive and capable of borrowing, saving and repaying, even
without collateral.
Microcredit
or Microfinance is the process of granting small loans to poor people,
primarily to women, who have no collateral and are marginalised. These women
tend to use their income to benefit their households and children. The process
is accomplished through a microfinance institution.
Functions of a Microfinance institution:
1.
To create an accepted regulatory structure for promoting,
regulating, and developing the micro finance sector.
2.
To provide the section of Indian population, which does not
have access to banks, the ability to avail proper financial services.
3.
To assist with the consistent growth of the sector.
Examples of enterprises
established include, buying a buffalo to sell its milk; starting a kirana
store; manufacturing sweets; selling soft drinks; grinding spices; sewing;
candle making; collecting fallen hair for wigs and extensions; repairing
watches; tea or petty shops; vegetable stands; bicycle repair; carpentry and
welding shop or an auto rickshaw.
Structures of a Microfinance Institution
Microfinance institutions broadly operate under a
wide range of legal structures. They could be registered as-
1. NGO,
2. Trusts,
3. Sec 25
Companies,
4. Cooperative
Societies,
5. Cooperative
Banks,
6. Regional Rural
Banks,
7. Local Area
Banks,
8. Public and
Private Sector banks,
9. Business
Correspondents and
10. Non-Banking Finance Companies
For
instance, SKS Microfinance is registered with the RBI as a non-deposit taking
NBFC and is regulated by the RBI.
Who are
the clients of micro finance?
The typical micro finance clients are low-income
persons that do not have access to formal financial institutions. Micro finance
clients are typically self-employed, often household-based entrepreneurs. In
rural areas, they are usually small farmers and others who are engaged in small
income-generating activities such as food processing and petty trade. In urban
areas, micro finance activities are more diverse and include shopkeepers,
service providers, artisans, street vendors, etc. Micro finance clients are
poor and vulnerable non-poor who have a relatively unstable source of income.
India has 800 million poor people who live on the
brink of subsistence. This is one of the largest populations of poor in the
world. The bottom 5% of India’s poor, considered “ultra poor”, face even deeper
levels of chronic hunger, persistent poor health and illiteracy.
To
cope with their vulnerability, the poor have no choice but to take loan for
consumption and income generation from money lenders that charge exploitative
rates of interest. This can put the poor in a debt trap. If poor people can
access loans with fair interest rates, they could break out of the cycle of poverty.
Bureaucracy, corruption, illiteracy and challenging logistics prevent the poor
from accessing loans from banks and the government.
Microfinance itself is a credit lending model, and within this lending
model exist several subcategories, i.e. microfinance lending models, which
differ in terms of where their
funds are sourced from, and how the money is governed. This post briefly mentions
each lending model (explained in detail at GDRC’s website) and lists
microfinance providers that follow these models.
The four most important Micro Finance models prevalent in India
are:
Model I - Individuals or group borrowers are
financed directly by banks without the intervention/facilitation of any
Non-Government Organisation (NGO).
Model II - Borrowers are financed directly with
the facilitation extended by formal or informal agencies like Government,
Commercial Banks and Micro-Finance Institutions (MFIs) like NGOs, Non Bank
Financial Intermediaries and Co-operative Societies;
Model III - Financing takes place through NGOs
and MFIs as facilitators and financing agencies;
Model IV - Is the Grameen Bank Model, similar to
the model followed in Bangladesh.
In India, Model II of MF constitutes three-fourths of total
micro-financing where activity/joint liability/Self-Help Groups are formed and
nurtured by facilitating agencies and are linked directly with banks for the
purpose of receiving credit.
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