Microfinance –A Small Idea With A Big Impact

“Growth alone is not enough if it does not produce a flow of benefits

that are sufficiently wide-spread. We, therefore, need a growth process that is much

more inclusive”

This is what our Prime Minister, Dr. Manmohan Singh proclaimed in a speech on the eve of declaring the Budget last year.

In the 21st Century, the Indian Economy is one of the fastest growing economies in the world with a growth rate of about 8%. Nations across the world have deemed India as the ‘next economic power’ of the world. There is definitely a sense of optimism and aggression that our economy is portraying.

However, this is an India which has been split into two worlds. One world, which is hungry for more and is touching the skies, whose appetite has stunned the world, and the other, in which people are committing suicide because they can’t get two square meals a day, where levels of education, sanitation and health are comparable to those of Sub Saharan Africa.

The growth rate in India has been largely exclusive and has not taken into account the state of rural areas. Ranked at 128 in the HDI index, India is a classic case of high growth and low development. In order to sustain such a high growth rate or increase it, we have to develop the roots of the country. These roots lie in the rural areas of India – amongst the millions of villages. If India truly wants to shine in the world, it will have to give importance to rural development. One of the most powerful tools to do the same is through Microfinance. Having being implemented successfully in countries like Bangladesh, Bolivia, Kenya, Latvia and many more; Microfinance has been able to change the face of the economy in these countries.

This is a concept which has been prevalent in India for quite some time but has never been given so much importance and has not been exploited enough to gain anything substantial out of it. The Government must understand that the poor stay poor, not because they are lazy but because they have no access to capital. By providing capital to them, the government can ensure rural as well as urban development.

But what is microfinance? Microfinance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance to poor people so that they can they can improve their well being.

Till date, a large number of poor people remain outside the Formal Banking System. The rural penetration in banks is less than 18% and the existing banking policies are far from meeting their needs. About 75 million households live below the poverty line and the annual credit demand by the poor exceeds Rs 70,000 crores, out of which the cumulative disbursements is about Rs. 8000 crores. Only 5 % of rural poor have access to microfinance and the share of Microfinance in total credit of Indian Banking system is less than 1%.

However, there is a growing popularity of microfinance in India with an expected growth rate of 20% in the next 5 years. All these facts and figures prove that the impact of such an ingenious tool is not even close to meeting the tremendous demand for low scale financial services.

While the Microfinance Institutions (MFIs) have shown that serving the poor is not an unviable proposition, there are issues which have constrained MFIs while scaling up. These include limited access to equity, lack of an appropriate legal apparatus and a sense of doubt and fear in the minds of private firms which believe that MF is full of risks and uncertainties.

What the Government needs to do, in this financial year, is provide incentives to firms and companies to go ahead and set up MFIs in rural India. They need to alter the entire framework so that the environment becomes more conducive to firms. Even NABARD, the apex institute for rural finance, should play a very active role in promoting such kinds of private undertakings. MFIs basically act as an intermediary between the financial institutions and Self Help Groups (SHGs). This link needs to be strengthened.

The Eleventh five year Plan aims at achieving a 4% growth rate in the agricultural sector. Even though this may seem like an uphill task, it is well within our reach if strategies like microfinance are given more importance. Microfinance as a tool is so useful that it serves more purposes than one. Apart from improving health and education standards, it also ensures gender empowerment. The latter is possible as large parts of these MF deals take place through women.

Earlier, India believed in the ‘trickle down effect’ and assumed that a very high growth rate would lead to more development and would consequently raise the standards of living. However, what has happened is quite the contrary. The Government needs to learn from its past mistakes and implement a ‘down to up’ approach which involves strengthening the base of the country by mobilizing funds in rural India.

I would want to conclude by reiterating something I had said before, “The poor stay poor, not because they are lazy but because they have no access to capital.” The flaw isn’t in the concept, but in its implementation.

Samarjit Singh Khanna