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The Microfinance in India- an Overview

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The Microfinance in India- an Overview ISSN: 2347-3215 Volume 1 Number 1 (2013) pp. 78-83 www.journals.excellentpublishers.com The microfinance in India- An overview M.Kannan1 and A. Panneerselvam2 1Research Scholar, Poompuhar college Melaiyur, Sirkali, Nagapattinam, Tamil Nadu, India 1Department of Commerce, King Nandhivarman College of Arts and Science, Thellar, T.V.Malai, Tamil Nadu, India. 2Principal and Research Supervisor, Poompuhar college Melaiyur, Sirkali, Nagapattinam, Tamil Nadu, India *Corresponding author e-mail: [email protected] KEYWORDS A B S T R A C T Microfinance is a form of financial services for entrepreneurs and small Microfinance; businesses lacking access to banking and related services. The two main entrepreneurs; mechanisms for the delivery of financial services to such clients are: (1) Microcredit; relationship-based banking for individual entrepreneurs and small businesses; Informal financial; and (2) group-based models, where several entrepreneurs come together to NGOs; apply for loans and other services as a group. In some regions, for example financial institutions; Southern Africa, microfinance is used to describe the supply of financial Financial system. services to low-income employees, which is closer to the retail finance model prevalent in mainstream banking.Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients.Microcredit is one of the aspects of microfinance and the two are often confused. Critics may attack microcredit while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Introduction Microfinance is a form of financial to apply for loans and other services as a services for entrepreneurs and small group. businesses lacking access to banking and related services. The two main mechanisms For some, microfinance is for the delivery of financial services to such a movement whose object is a world in clients are: (1) relationship-based banking which as many poor and near-poor for individual entrepreneurs and small households as possible have permanent businesses; and (2) group-based models, access to an appropriate range of high where several entrepreneurs come together quality financial services, including not just 78 credit but also savings, insurance, and fund world, it has proved difficult to replicate transfers. Many of those who promote this success. In nations with lower microfinance generally believe that such population densities, meeting the operating access will help poor people out of poverty. costs of a retail branch by serving nearby For others, microfinance is a way to customers has proven considerably more promote economic development, challenging. Hans Dieter Seibel, board employment and growth through the member of the European Microfinance support of micro-entrepreneurs and small Platform, is in favour of the group model. businesses. This particular model (used by many Microfinance institutions) makes financial Microfinance is a broad category of sense, he says, because it reduces services, which includes microcredit. transaction costs. Microfinance Microcredit is provision of credit services programmes also need to be based on local to poor clients. Microcredit is one of the funds. aspects of microfinance and the two are often confused. Critics may attack The history of microfinancing can be microcredit while referring to it traced back as far as the middle of the indiscriminately as either 'microcredit' or 1800s, when the theorist Lysander 'microfinance'. Due to the broad range of Spooner was writing about the benefits of microfinance services, it is difficult to small credits to entrepreneurs and farmers assess impact, and very few studies have as a way of getting the people out of tried to assess its full impact. Proponents poverty. Independently of Spooner, often claim that microfinance lifts people Friedrich Wilhelm Raiffeisen founded the out of poverty, but the evidence is mixed. first cooperative lending banks to support What it does do, however, is to farmers in rural Germany. The modern use enhance financial inclusion. of the expression "microfinancing" has roots in the 1970s when organizations, such History of Micro finance as Grameen Bank of Bangladeshwith the microfinance pioneer Muhammad Yunus, Over the past centuries, practical were starting and shaping the modern visionaries, from the Franciscan monks industry of microfinancing. Another who founded the community- pioneer in this sector is Akhtar Hameed oriented pawnshops of the 15th century to Khan. the founders of the European credit union movement in the 19th century (such Micro Finance in India as Friedrich Wilhelm Raiffeisen) and the founders of the microcredit movement in Loans to poor people by banks have many the 1970s (such as Muhammad limitations including lack of security and Yunus and Al Whittaker), have tested high operating cost and so Microfinance practices and built institutions designed to was developed as an alternative to provide bring the kinds of opportunities and risk- loans to poor people with the goal of management tools that financial services creating financial inclusion and equality. can provide to the doorsteps of poor people. While the success of the Grameen Muhammad Yunus a Nobel Prize winner, Bank (which now serves over 7 million introduced the concept of Microfinance in poor Bangladeshi women) has inspired the Bangladesh in the form of the "Grameen 79 Bank".NABARD took this idea and started poor people in developing world today. It is concept of Micro Finance in India. also rooted in an increasing awareness of diversity of the financial service needs of Micro Finance is defined as, financial the world s poorest people, and the diverse services such as Saving A/c, Insurance settings in which they live and work. Fund & credit provided to poor & low income clients so as to help them to rise Brigit Helms in her book 'Access for All: their income & there Building Inclusive Financial Systems', by improve their standard of living. distinguishes between four general categories of microfinance providers, and From this definition it is clear that argues for a pro-active strategy of main features of Micro Financing: engagement with all of them to help them 1) Loan are given without security achieve the goals of the microfinance 2) Loans to those people who live movement. BPL (Below Poverty Line) 3) Even members of SHG enjoy Micro Informal financial service providers Finance 4) Maximum limit of loan under micro These include moneylenders, pawnbrokers, finance 25,000/- savings collectors, money-guards, 5) The terms and conditions given to poor ROSCAs, ASCAs and input supply shops. people are decided by NGOs Because they know each other well and live in the same community, they understand 6) Micro Finance is different from Micro each other s financial circumstances and Credit- under Micro Credit, small amount can offer very flexible, convenient and fast of loans given to the borrower but under services. These services can also be costly Micro Finance besides loans many other and the choice of financial products limited financial services are provided such as and very short-term. Informal services that Savings A/c, Insurance etc. Therefore involve savings are also risky; many people Micro Finance has wider concept as lose their money. compared to Micro Credit. Member-owned organizations Inclusive financial systems These include self-help groups, credit The microcredit era that began in the 1970s unions, and a variety of hybrid has lost its momentum, to be replaced by a organizations like 'financial service 'financial systems' approach. While associations' and CVECAs. Like their microcredit achieved a great deal, informal cousins, they are generally small especially in urban and near-urban areas and local, which means they have access to and with entrepreneurial families, its good knowledge about each other's progress in delivering financial services in financial circumstances and can offer less densely populated rural areas has been convenience and flexibility. Grameen slow. Bank is a member-owned organization. The new financial systems approach Since they are managed by poor people, pragmatically acknowledges the richness of their costs of operation are low. However, centuries of microfinance history and the these providers may have little financial immense diversity of institutions serving skill and can run into trouble when the 80 economy turns down or their operations increasing use of alternative data in credit become too complex. Unless they are scoring, such as trade credit is increasing effectively regulated and supervised, they commercial banks' interest in can be 'captured' by one or two influential microfinance.With appropriate regulation leaders and the members can lose their and supervision, each of these institutional money. types can bring leverage to solving the microfinance problem. For example, efforts NGOs are being made to link self-help groups to commercial banks, to network member- The Microcredit Summit owned organizations together to achieve Campaign counted 3,316 of these MFIs economies of scale and scope, and to and NGOs lending to about 133 million support efforts by commercial banks to clients by the end of 2006. Led 'down-scale' by integrating mobile banking by Grameen Bank and and e-payment technologies into their BRAC in Bangladesh, Prodem in Bolivia, extensive branch networks. Opportunity International, and FINCA International, headquartered in Problems Associated with Micro Credits
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