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-
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.