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9. Microfinance can facilitate the achievement of national policies that target poverty reduction, empowerment of women, assisting vulnerable groups, and improving standards of living. Elucidate. (250 words)
Reference: The Hindu
Introduction
Micro financing is the delivery of financial services to poor and low income households with limited access to formal financial institutions. It can also be described as banking for the underprivileged. Microfinance institutions (MFIs) came into being in the 90s as banks’ reluctance to lend to those without credit history provided an opportunity to those willing to take risk and organize rural communities. According to Mohammed Yunus (founder of Grameen Bank in Bangladesh) access to credit was a human right, essential for the poor to create self-employment and income.
The Reserve Bank of India (RBI) recently allowed microfinance institutions the freedom to set interest rates they charge borrowers, with a caveat that the rates should not be usurious.
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Microfinance can facilitate the achievement of national policies targeting vulnerable sections
- Empowerment of women: About 95 percent of some loan products extended by microfinance institutions are given to women, as well as those with disabilities, those who are unemployed, and even those who simply beg to meet their basic needs.
- Poverty alleviation: They provide easy credit and offer small loans to customers, without any collateral.
- Microfinance disrupts the cycle of poverty by making more money available. It creates the possibility of future investments.
- Savings in rural households: It helps the poor and marginalised section of the society by making them aware of the financial instruments available for their help and also helps in developing a culture of saving.
- Families benefiting from microloans are more likely to provide better and continued education for their children.
- Creating employment: Microfinance is also able to let entrepreneurs in impoverished communities and developing countries create new employment opportunities for others.
Benefits from MFIs:
- It allows people to provide for their families. Through microfinance, more households are able to expand their current opportunities so that more income accumulation may occur.
- It gives people access to credit. “By extending microfinance opportunities, people have access to small amounts of credit, which can then stop poverty at a rapid pace,”
- It serves those who are often overlooked in society. About 95 percent of some loan products extended by microfinance institutions are given to women, as well as those with disabilities, those who are unemployed, and even those who simply beg to meet their basic needs.
- It creates the possibility of future investments. Microfinance disrupts the cycle of poverty by making more money available.
- It can create jobs. Microfinance is also able to let entrepreneurs in impoverished communities and developing countries create new employment opportunities for others.
- It encourages people to save. “When people have their basic needs met, the natural inclination is for them to save the leftover earnings for a future emergency,”
Issues with microfinance institutions
- According to World Bank’s Global Financial Inclusion Survey (2012), only 35% of adults in India had access to a formal bank account and only 8% borrowed from institutional and formal sources.
- As per Census 2011, only 58.7% of households are availing banking services in the country.
- However, as compared with previous Census 2001, availing of banking services increased significantly largely on account of increase in banking services in rural areas.
- At present, only about 5% of India’s 6 lakh villages have bank branches.
- There are 296 under-banked districts in states with below-par banking services.
- In a diverse country like India, financial inclusion is a critical part of the development process. Since independence, the combined efforts of successive governments, regulatory institutions, and the civil society have helped in increasing the financial-inclusion net in the country.
- Thus, there exists both a great need and the potential to tap into the unbanked population and bring them into the financial net.
- Microfinance institutions are a way to do the same.
Way forward:
- There is a need for MFIs to consider adopting more flexible operating models, providing skills training and offering services such as portability of accounts to provide greater access for a longer duration of time.
- A diversified menu of micro loan products linked to sustainable income generation activities via micro enterprises or a creation of community-based pooled enterprise could possibly make it more attractive and compatible with the requirements of women.
- In addition, linking such developmental initiatives to an institution to nurture, monitor and handhold those activities in the formative stages is crucial for sustainability.
Conclusion
As per the World Bank estimates, more than 500 million people have improved their economic conditions via microfinance-related entities. Strengthening the credit check and debt collection processes and educating the villagers about products and consequences is important. A model to retain and recycle within the target population could possibly lead to a sustained route for poverty alleviation.
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