Volume 1, Issue 1 (January, 2014)

Online ISSN-2347-7571

Published by: Sai Om Publications

Sai Om Journal of Commerce & Management

A Peer Reviewed International Journal

ROLE OF MICRO FINANCE IN INDIA CHANGING FACE OF

POOR POPULATION
Dr. Neelam Arora
I/C Principal and Head of Department, Lala Lajpatrai College of
Commerce and Economics, Mumbai, India
Email: neelamkill19@yahoo.com
ABSTRACT
The importance of micro-finance in the developing economies like India cannot be undermined, where
a large population is teeming under poverty and equally large number of people does not have an
access to formal banking facilities. Micro-finance means providing loans to the disadvantaged groups
through the intermediation of the registered Self Help Groups, who intermediate between the banks
and needy population to fulfill their financial needs.

Keywords: Micro Finance; Self-Help Groups; NBFCS; Economically Weaker Section

INTRODUCTION
Micro-finance is the provision of a broad range of financial services such as deposits, loans, payment
services, money transfers and insurance to the poor and low income households and their microenterprises.
Micro-finance is defined as financial services such as savings, insurance, fund, credit etc., provided to
poor and low income clients so as to help them raise their income, thereby improving their standard of
living.
According to the National Micro-finance Taskforce constituted in 1999 the poor stay poor, not
because they are lazy but because they have no access to capital.
Micro-finance means provision of thrift, credit and other financial services and products of very small
amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels
and improving living standards The National Micro-finance Taskforce, 1999 (India)
OBJECTIVES
The present paper seeks to achieve the following objectives:
1. To understand the nature and scope and significance of micro-finance and its significance for
the developing economy like India.
2. To understand the present status of micro-finance in India and its impact on beneficiaries.

3. To make suggestions for ensuring effective implementation of the micro-finance system in

India.
Important Features of Micro-Finance
1. Micro-finance is an essential part of rural finance.
2. It mainly deals in small loans and basically caters to the poor households.
Available online on www.saiompublications.com

24

Sai Om Journal of Commerce & Management

A Peer Reviewed International Journal
3. It is provided through the NGOs, generally referred to as Self Help Groups (SHGs).
4. It is one of the most effective and warranted Poverty Alleviation Strategies.
5. It provides an incentive to poor people grab self-employment opportunities.
6. It is more service-oriented and less profit-oriented.
7. It is meant to assist small entrepreneurs and producers.
8. Poor borrowers are rarely defaulters in repayment of loans as they are simple and God-fearing.
9. India needs to establish several micro-finance institutions.
Mohammed Yunus was awarded the Noble Prize for application of the concept of micro-finance, with
setting up of the Grameen Bank in Bangladesh. Micro-financing is regarded as a tool for socioeconomic upliftment in a developing country like India. It is expected to play a significant role in
poverty alleviation and development. Micro credit and micro-finance are different. Micro credit is a
small amount of money, given as a loan by a bank or any legally registered institution, whereas,
Micro-finance includes multiple services such as loans, savings, insurance, transfer services, micro
credit loans, etc. for poor people.
Role and Significance of Micro-finance
Micro-finance contributes to social and economic development of the nation in the following ways:
1. Poor people cannot access banking services due to their meagre income and inability to handle
banking procedures and documentation. It is through micro-finance that a wide range of
financial services such as deposits, loans, payment services, money transfers and insurance can
be provided to the poor and low income households and their micro-enterprises.
2. Micro-finance institutions, through their NGOs, develop saving habits among poor people. The
financial resources generated through savings and micro credit obtained from banks are utilised
to provide loans and advances to the members of the Self Help Groups (SHGs). Thus, microfinance institutions help in mobilisation of savings and using the same for the welfare of its
members.
3. Loans from the normal banking system require collateral or counter guarantee which poor
people cannot offer and therefore, cannot get loan. Again, high interest rates and procedural and
documentation formalities act as a deterrent to poor people accessing banks for loans. Microfinance does away with all these obstacles and provides finance to rural and poor population on
easy terms.
4. Micro-finance allows the poorer sections of the society to get loans at cheaper rates which
helps them to start their businesses on a small scale, grow their business and get out of poverty
and be independent and self-sufficient. It helps in creating long-term financial independence
among the poorer sections of the society and therefore, promotes self-sufficiency among them.
5. Micro-finance is provided through the intermediation of Self Help Groups (SHGs). More than
50% of the Self Help Groups (SHGs) are formed by women. Now, they have greater access to
financial and economical resources. It is a step towards greater security for women. Thus,
micro-finance empowers poor women economically and socially.
6. Usually, rural sector depends on non-institutional agencies for their financial requirements
whereby they are exploited in numerous ways. Micro-financing has been successful in taking
VOL. 1, ISSUE 1 (January 2014)

25

Online ISSN 2347-7571

Sai Om Journal of Commerce & Management

A Peer Reviewed International Journal
institutionalised credit to the doorstep of poor in rural areas and have made them economically
and socially sound. This has led to the development of rural population and rural areas.
7. Micro-finance, by providing loans to poor people, helps them to undertake their own small
ventures. Such ventures also generate employment in the rural areas. It also helps them to
improve their entrepreneurial skills and encourage them to exploit new business opportunities.
Thus, micro-finance through self-reliance and employment generation alleviate poverty in
rural areas.
8. Micro-finance also contributes to the national objectives of economic growth and social justice.
Due to micro-finance, production of goods and services increases, which in turn increases GDP
and contributes to the economic growth of the country. It also reduces inequalities in the
distribution of income and wealth and thereby contributes to the goals of social justice.
Micro-Finance Changing the Face of Poor India
Micro-finance is emerging as a powerful instrument for poverty alleviation in the new economy. In
India, micro-finance is dominated by Self-Help Groups (SHGs) Banks Linkage Programme, aimed at
providing a cost effect mechanism for providing financial services to the unreached poor. In the
Indian context, terms like small and marginal farmers, rural artisans, and economically weaker
sections have been used to broadly define micro-finance customers.
A more refined model of micro-credit delivery has been evolved lately, which emphasises the
combined delivery of financial services along with technical assistance and agricultural business
development business. When compared to the wider SHG bank linkage movement in India, private
MFIs have had limited outreach. However, we have seen a recent trend of large micro-finance
institutions transforming into Non-Bank Financial Institutions (NBFCs). This changing face of microfinance in India appears to be positive in terms of the ability of micro-finance to attract more funds and
therefore increase the outreach.
In terms of demand for micro-credit or micro-finance, there are three segments, which demand funds.
They are as follows:
1. At the very bottom in terms of income and assets, are those who are landless and engaged in
agricultural work on a seasonal basis and manual labourers engaged in forestry, mining,
household industries, construction and transport. This segment requires, first and foremost,
consumption credit during those months when they do not get labour work and for
contingencies such as illness. They also need credit for acquiring small productive assets such
as livestock, using which they can generate additional income.
2. The next segment is small and marginal farmers and rural artisans, weavers and those selfemployed in the urban informal sector as hawkers, vendors and workers in household microenterprises. This segment mainly needs credit for working capital, a small part of which also
serves consumption needs. This segment also needs term credit for acquiring additional
productive assets, such as irrigation pumpsets, borewells and livestock in case of farmers and
equipment (looms, machinery) and worksheds in case of non-farm workers.
3. The third market segment is of small and medium farmers who have gone in for commercial
crops such as surplus paddy and wheat, cotton, groundnuts and others engaged in dairying,
poultry, fishery, etc. Among non-farm activities, running provision stores, repair workshops,
tea shops and various service enterprises. These persons are not always poor, though they live
barely above the poverty line and suffer from inadequate access to formal credit.
Well these are the people who require money and with micro-finance it is possible. Right now, the
problem is that, it is SHGs which are doing this and efforts should be made so that the big financial
institutions also turn up and start supplying funds to these people. This will lead to a better India and
VOL. 1, ISSUE 1 (January 2014)

26

Online ISSN 2347-7571

Sai Om Journal of Commerce & Management

A Peer Reviewed International Journal
will definitely fulfil the dream of our late Prime Minister, Mrs. Indira of reducing poverty. In the
words of Adam Smith:
When you have got a little, it is often easy to get more but the greatest difficulty is to get the little.
Today, India is facing a major problem in reducing poverty. About 25 million people in India are
under below poverty line. With low per capita income, heavy population pressure, prevalence of
massive unemployment and underemployment, low rate of capital formation, misdistribution of wealth
and assets, prevalence of low technology and poor economic organisation and instability of output of
agriculture production and related sectors have made India one of the poor countries of the world.
Vital Statistics on Micro-Finance
The SHG-Banks linkage programme which commenced as a pilot programme during 1992 to link 500
SHGs with banks, has grown exponentially during the last two decades and over 97 million rural
households have now access to regular savings through 74.62 lakh SHGs linked to different banks.
Table 1. Progress of Micro-Finance in India (Amount Rs. In crore /Number in lakhs)

SHG Savings with

Banks as on 31st March

2008-2009
No. Of Amount
SHGs
61.21 5545.62

2009-2010
No. Of Amount
SHGs
69.53 6198.71

2010-2011
No. Of Amount
SHGs
74.62 7016.30

Source: Report on Micro-finance, 2010-2011.

The above table indicates that the micro-finance loans have increased leaps and bound in recent years
from merely 61.21 lakh borrowers with total disbursement of Rs. 5545.62, the number of borrowers
has increased to 74.62 lakh with total disbursement of Rs. 7016.30 lakhs.
2022649

6098034

7461946

SGSY SHGs

Total SHGs

Women SHGs

Fig. 1. Savings Linked SHGs as on 31 March 2011

SUGGESTIONS
Micro finance institutions have expanded the frontiers of institutional finance and have brought the
poor, especially poor women, into the formal financial system and enabled them to access credit and
fight poverty. Though some significant strides have been made in upscaling the purveyal of micro
finance, it is observed that microfinance has had an asymmetric growth across the country with diverse
rates of interest being charged to the members, which are areas of concern. The research has sought
opinions from a number of persons, such as bank managers and officers, members of the SHGs and
NGOs and also some scholars from education field. The views expressed by these people have been
condensed in the form of recommendations for the improvement of the scheme:
(a) There is considerable scope for development of microfinance in India since there is enormous
unmet demand for financial services in this sector. Therefore, enacting fresh legislation or
VOL. 1, ISSUE 1 (January 2014)

27

Online ISSN 2347-7571

Sai Om Journal of Commerce & Management

A Peer Reviewed International Journal
appropriate amendments in the existing legislation related to Micro-financial institutions is
needed.
(b) There is an urgent need to streamline the procedure for applying, seeking and releasing of microfinance. The procedural difficulties are one of the major problems, which have denied the needy
groups, the financial benefits of the banks.
(c) In order to ensure proper utilisation of the credit, there is an urgent need to introduce
availability of consumption credit from the formal channel. The need is to sensitize bank staff
towards the needs, constraints and inhibitions of the micro-finance clients.
(d) There is a need to evolve new products by the banks to commensurate with the requirements
of rural, semi-urban and urban people. The customer-contact programmes especially for the
people living below poverty line be organised to disseminate the information of various
schemes and financial needs of these groups.
(e) Micro-finance as a permitted activity for societies, NGOs and voluntary organizations may be
ensured through amending the existing Indian Income Tax Act, 1956 [Section 2(5), Section
11(5)], Societies Registration Act, 1860, FCRA and RBI Act.
(f) Micro-financing institutions need proper regulation and operation of business transactions.
Therefore, RBI, SIDBI, NABARD and other organizations should evolve proper mechanism
for monitoring, supervision, direction, appraisal and evaluation of micro-financial institutions
as well as self help promotion institutions.
(g) A proper mechanism should be evolved to prepare database on SHGs, SHPs, MFIs etc.
Moreover, MIS with good management backing needs to be developed to achieve
sustainability of micro-financing institutions.
(h) The factors responsible for poor performance of microfinance and functioning of SHGs should
be investigated, examined and analyzed scientifically and systematically to resolve the emerging
problems, difficulties and challenges being faced.

(i) More research should be carried out to assess the impact of micro-credit through SHGs. The
impact assessment should be more focused on socio-economic empowerment of members, social
change, dynamics of groups, business, leadership, promotion of viable micro enterprises, etc.
CONCLUSIONS
Although micro-finance industry has grown rapidly in India in recent years, the supply of micro-finance
has failed to match with the needs and demand for it in India. There is an urgent need for a formal
institutionalization of micro-finance sector under independent department under Reserve Bank of India
(RBI) to assess the demand for micro-finance in India and take effective steps for meeting such demand
on time. For this purpose, there is a need for training and strengthening the Self-help Groups (SHGs),
which acts as facilitators between the financial institutions and the needy population. These measures
will go a long way in quick and timely fulfillment of small needs of poor population.
REFERENCES
1. Draft Report of the Internal Group to examine issues relating to Rural Credit and Microfinance,
Reserve Bank of India, June 2005.
2. Robinson, Marguerite S, Microfinance: the Paradigm Shift From credit Delivery to Sustainable
Financial Intermediation, Strategic Issues in Microfinance, Ashgate Publishing: Aldershot.
3. Sinha, S and F. Sinha (2002): Sustainability and Development: Evaluating the Performance of
Indian Micro-Credit, Vistaar Publications, New Delhi.
4. Stiglitz. J., Peer Monitoring and Credit Markets. World Bank Economic Review 4(3):351-366,
1990.

VOL. 1, ISSUE 1 (January 2014)

28

Online ISSN 2347-7571