The finance and investment sector cannot justify its social and economic dexterity unless the needs of the underprivileged sections of the society are addressed to in a comprehensive and apt manner. We have been talking about poverty, discussing about the ways to overcome this curse, and adding abrupt measures as tools for betterment of the poor. To name a few of these tools, food and employment security schemes deserve a special mention. However, what purpose do these schemes solve? Ways have to be identified that are enduring and promising. Inclusion of India’s seven microfinance institutions in the list of world’s top 50 Microfinance Institutions (MFIs) is not just encouraging, this also evidences that endeavors are being made in the appropriate direction.
Banks, which serve as the backbone of any economy, procure savings from household and allocate these funds in form of credits to reliable borrowers. However, the poor and those unable to provide collateral for the credit rarely benefit. This is where the microfinance institutions step in, recognize the needs of the deprived section, and extend funds. The term ‘microfinance’ refers to relatively small credit, savings, insurance, and other financial services, which serve exclusively the economically deprived sections of community. In India, to undertake the task of attending the financial sector needs of the poor, several delivery models have emerged, though every of these have their own limitations.
Let us discuss a few. SHGs (Self Help Groups) comprise of members from similar social strata and aim at pooling small savings of the households and extending funds out of these deposits to the member/s of the group. The Federated Self Help Group model is an extension of the SHGs in a way that multiple SHGs are brought together and then pooled funds are rotated within the enlarged group. Next, are the Gramin Banks that serve the needs of rural finance with attributes like low transaction costs, no collateral, and repayment in small and short intervals. Co-operative models too contribute in a way that human and financial resources are united and the group manages its own fiscal needs.
Microfinance institutions, a source of finance for the poor are heterogeneous groups registered as NBFCs, societies, trusts, or Section 25 companies. Turning out as the most proficient source of financial inclusion of the underprivileged, MFIs too suffer from multiple drawbacks. The foremost is the restricted outreach in a manner that these institutions serve the needs of the women on priority considering them as potential and reliable borrowers and savers. Next comes the high level of interest rates that demotivate rural inhabitants to borrow. The interest rates are high owing to the fact that MFIs rarely receive any subsidized credit and hence recover their costs of operations from the borrowers. Another concern is the focus of MFIs on poor in the rural areas with almost nil measures for the urban poor.
Client retention, high costs of transactions, credit defaults, delayed payments, frauds, weak loan collection procedures, and geographical factors are some other prominent bottlenecks in the functioning. It is vital to note that studies in the MFI sector reveal that core poor are rarely being served with the any real benefits. The states of Bihar, U.P., Jharkhand, Madhya Pradesh, Orissa, Uttaranchal, and Chhattisgarh, which embrace almost 53.5 percent of poor in India, hold only 23.6 percent share of the total microfinance outreach in India. Another fact is that the average amount of funds extended to the members of MFIs and SHGs is not more than INR 4000, which rarely can serve the financial needs of the section.
The government and the authorities will have to come up with workable solutions for the sector, sooner than later. The priority task can be defined as setting up of a regulatory body for the MFIs, which currently are under the purview of state governments. Another key task is to educate the beneficiaries of the programme with regards to their prospects for credit, along with enlightening them about the repayment parameters. Plus, balance has to be ensured in terms of micro financing in rural and urban parts of the nation. It has to be realized that almost 41 percent of the population is deprived of banking facilities. Thus, measures like MFIs will have to be pushed with elevated pace and synergy. The Micro Finance Bill, which has been rotating from one department to the other for approval now calls for urgent sanction.
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