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Wednesday, July 28, 2010

Changing face of Micro-Finance in India

(Published at Eastern Chronicle on dated 07-07-2010)

According to encyclopedia “Microfinance is the extension of very small loans to those in poverty designed to spur entrepreneurship.” Ideas relating to microfinance can be found at various times in modern history, with attention paid by economists and politicians worldwide, especially the Grameen Bank of Bangladesh in 1970 onwards for which its founder Muhammad Yunus was awarded the Nobel Peace prize in 2006.

As per the mouthpiece of Grameen Bank, in Bangladesh where 15 million families now benefit from small loans, micro savings, micro insurance and more than 40 percent of the overall reduction of rural poverty due to microfinance.

Indian Scenario
In India, a number of Microfinance institutions (MFI) were created in 1980s to provide credit facility to the poor, especially women, in both urban and rural areas. Microfinance Institutions are vital because they can speak for “Poor India” at a time when “Rich India” is getting rapidly richer.

Due to large size of population at around 100 million, India’s GDP ranks among the top 15 economies of the world. However around 300 million people are living below poverty line and only about 20 percent have access to credit from the formal sector. The challenge before Indian Microfinance Institution is to reduction poverty among people who are economically active but financially constrained and vulnerable in various states.

There are three main factors that count to the bringing up of microfinance as a policy in India. First- Indira Gandhi’s bank nationalization drive launched in 1969 which required commercial bank to open rural branches in India. Second- Introduced “Integrated Rural Development Program (IRDP) in 1978 to alleviate poverty through the provision of loans and Third- Liberalization of India’s financial system in 1990s characterized by financial policy reforms initiated by the Reserve Bank of India.

Important roles of Microfinance Institutions (MFI)

MFI have to help build grassroots movements by creating spaces for poor people to gather, mobilize and organize. To create the movements they have to support the grassroots organizations that will link poor people together and helping transform them into a movement. Encourage movements to use things like research and promote changes in the pattern of negotiations with state authorities. Enable movements with the range of other movements which will create the mass support and monitoring the relationship of the various related organizations and movement building.

Source of Funds
After the role now relevant question arise how MFI sourced the fund to keep up the movement building perspective? These funds are generally coming from three different areas, the government, public at large and foreign agencies. Government institutions like National Bank for Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), Regional Rural Bank (RRB) etc began lending to microfinance institutions in India. But sources said that the lending rates of MFI to borrowers were not cheap. For example, SIDBI lent to MFI at 9 percent and MFI in turn were allowed to charge up to 36 percent. Government initiative to bring the micro finance operations under control virtually foiled allegedly due to influence of some big Micro Finance Institutions, who are the lion beneficiary of micro finance activities. Also various studies have found that the loans are largely used by poor people to meet their daily consumption needs rather than such high interest rates funds use to undertake commercial ventures.

With liberal grants from international donor agencies like Ford Foundation, UNDP, Swiss Agency for Development and Cooperation (SDC) some micro finance operations are now being established in India. Critics said that such micro credit rather than resulting in poverty alleviation will simply bypass the poor people in favour of those who can afford credit at market rates. It is unacceptable when some NGO and MFI try to distort national image abroad for foreign help because they hardly talk about success of the country other than exaggerating their own achievements.

Finally, to enable the reach of micro finance services to the under privileged section of the society the problems associated with the legal, regulatory, organizational systems and the attitude should be addressed and the desired changes brought in these to make them more effective. The more rational way to help the poor could be the provision of sustainable economic opportunities at grass-root level especially provision of required services at competitive rates to support their investments and viable business activities.
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