International Journal of Marketing & Financial Management, Volume 5, Issue 11, Nov -2017, pp 75-82

ISSN: 2348 -3954 (Online) ISSN: 2349 - 2546 (Print)

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Cite this paper as : Neha, Bhupender & Pathak (2017) “A Conceptual Study of Micro Finance in
India” International Journal of Marketing & Financial Management, Vol. 5,(Issue 11, Nov -2017),
pp 75-82

A CONCEPTUAL STUDY OF MICRO FINANCE IN INDIA

Ms Neha Saini
Research Scholar, Institute of Engineering &Technology Alwar (Raj.)
Dr. Bhupendra Kumar
Research Supervisor Institute of Engineering &Technology Alwar (Raj.)
Dr O P Pathak
Head Department of Management Studies -Institute of Engineering &Technology Alwar (Raj.)

ABSTRACT
In a country like India where 70 percent of its population lives in rural area and 60
percent depend on agriculture (according to the World Bank reports), micro-finance can play a vital role
in providing financial services to the poor and low income individuals. Microfinance is the form of a
broad range of financial services such as deposits, loans, payment services, money transfers, insurance,
savings, micro-credit etc. to the poor and low income individuals. The importance of micro-finance in the
developing economies like India cannot be undermined, where a large size of population is living under
poverty and large number of people does not have an access to formal banking facilities. The taskforce on
Supportive Policy and Regulatory Framework for Microfinance constituted by NABARD defined
microfinance as “ the provision of thrift, saving, credit and financial services and products of very small
amount to the poor’s in rural, semi urban and urban areas for enabling them to raise their income level
and improve their standard of living.” (Sen, 2008) Micro-finance is regarded as a useful tool for socio-
economic up-liftmen in a developing country like India. It is expected to play a significant role in poverty
alleviation and development. There are two broad approaches that characterize the microfinance sector
in India is Self Help Groups (SHGs)-Bank linkage programme and Microfinance Institution (MFIs). In
India microfinance is dominated by Self Help Groups (SHGs)-Bank linkage programme aimed at
providing a cost effective mechanism for providing financial services to the unreached poor. The present
paper aims at identifying the current status and role of microfinance in the development of India.
Keywords: Microfinance; SHGs, MFIs; Status and Growth of Microfinance

INTRODUCTION

According to the International Labor Organization (ILO), Microfinance is also defined as, “an economic
development approach that involves providing financial services through institutions to low income
clients”. Alternatively, the second definition of the same stated by „The National Microfinance Taskforce,
1999‟ states that,“ it is the provision of thrift, credit and other financial services and products of very

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 Neha, Bhupender & Pathak (2017) “A Conceptual Study of Micro Finance in India”

small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income
levels and improve living standards”. An article on „Microfinance - A small ideal with a big impact‟
stated that, “The poor become poor, not because they are lazy but because they have no work to do and no
access to capital”. Alternatively, the definition of finance is simple as it simply quotes that it is the,
“management of money”. Management of money means acquiring and using money. Now microfinance
word is created from bringing the finance and money related definitions together to conclude that in
simple terms, „we are financing the micro entrepreneurs‟. As already stated microfinance is emerged in
need of acquiring special goals to empower under-privileged of the society. The underprivileged of the
society can include women, men, low caste, etc. The principles of microfinance have been established on
the philosophy of cooperation, equality, equity and self sustenance. In the heart of these underlined
principles is the concept of human development and brotherhood expressed via people working together
to live a better life for themselves and their children. It is stated that traditionally microfinance was used
to provide standardized credit to the poor. Now there is earnest longing to use microfinance as just not a
product of credit but rather a quality credit that extends good livelihood for those that have the capability
and potential to sustain their livelihood. This paper reflects microfinance as a quality measurement than
the quantity measurement. Microfinance plays a huge role in changing one persons or a family‟s life.
Further on, this research will unfold to share more secrets on microfinance in today‟s world.

OBJECTIVE OF THE STUDY

1. To study the concept of microfinance.

2. To study the importance and Role of Microfinance in north India especially in Rajasthan
3. To analyze the current status and growth of Micro Finance Institution in north India especially in
Rajasthan.

NEED OF THE STUDY

1. In the context of necessity of credit for the growth of Micro-Enterprises and realizing the
importance of
2. Microfinance Institutions, an attempt is made to study the role of Microfinance Institutions on the
growth and
3. Development of Micro-Enterprises.

RESEARCH METHODOLOGY

This is descriptive research paper based on secondary data. Data have been collected through book,
various websites, Magazines, Newspaper and publications of recent research papers available in different
websites, Research Articles, Research journal, E- journals, RBI Reports, Reports of NABARD etc.

THE HISTORY OF CURRENT MICROFINANCE

The concept of microfinance is said to have evolved in the late 1970s. Although a long history is
associated with microfinance the primary involvement or use of microfinance has been stated to start
from the beginning of the 20th century. There were numerous credit groups that were operating globally

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 International Journal of Marketing & Financial Management, Volume 5, Issue 11, Nov -2017, pp 75-82
ISSN: 2348 -3954 (Online) ISSN: 2349 - 2546 (Print)

for example the „TINY FUND‟ in India, „tonties‟ in West Africa, „susus‟ in Ghana, „pasanaku‟ in Bolivia
and etc. In addition to the mentioned, there were many credit and formal savings institutions that have
long been working throughout the world.

In the 1990s it is stated that the poor from the rural and urban Europe formed credit institutions. These
institutions were recognized as Credit Unions or People‟s Bank etc. The goal of these institutions was to
provide smooth or easy access to finance to the poor people overlooked by the huge financial institutions
and banks. It is also stated that during the early 1970s, few experiential programs on microfinance had
started in Brazil, Bangladesh and some other countries. The micro credit was based on group lending as
mentioned above where the peer group members took the responsibility of paying the loan. Some of the
banks and financial institutions pioneered the microfinance program after 1970. ACCION International is
the institution established by a law student from Latin America. The purpose of this institution was to
help the poor people residing in the urban and rural communities of the Latin America. In the year 2008,
it is marked as one of the most influential and efficient microfinance institutions of the world. Its
networking partners consist of the United States of America and Africa. The SEWA bank was established
in the year 1973 named as Mahila SEWA cooperative bank with the aim of accessing financial services
easily. The meaning of SEWA is, „The Self Employed Women‟s Association‟. As for the updates on this
bank, it is stated that the bank accommodates over 30,000 clients. The Grameen Bank was founded by
Dr.Mohammad Yunus in the year 1983 who began experimenting in lending financial services to the poor
women population in the village of Jobra, Bangladesh. He has served as a professor of economics at
Chittagong University in the 1970s. This bank is unlike the lending cooperatives and the Credit Unions 7
that have been around for years. Since the time the Grameen Bank was established, innovation in
microfinance continued and financial services to the poor never stopped. It is stated by the World Bank
that estimated number of 160 million people in developing countries are services by microfinance,
Grameen Bank in Bangladesh established by Dr. Muhammad Yunus in 1983. This bank is stated to serve
approximately more than 400,000 underprivileged populations in Bangladesh. In addition to the stated,
this bank has received Nobel Prize in the year 2006 and it has also stimulated the formation of other
microfinance institutions like PROSHIKA, BRAC and ASA.

MICROFINANCE IN THE 21 CENTURY

It is stated that over the last ten years there has been successful experiences in providing finance to small
entrepreneurs. Small entrepreneurs being the poor people where able to demonstrate that they were able to
repay their loans and in return increase their income and assets. They were productive and worked in
timely manner to meet the needed guidelines and policies of financial services. It has also been
demonstrated that Community banks, NGOs and grass root savings and credit groups around the world
have proved that these microenterprise loans are profitable for borrowers and vice versa for the lenders,
hence proving that microfinance is one of the most effective poverty reducing strategies.

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 Neha, Bhupender & Pathak (2017) “A Conceptual Study of Micro Finance in India”

CONCEPTS AND DEFINITION

MICRO FINANCE (SMALL AND TINY ENTERPRISES)

Over the last five decades Indian Tiny, Micro and Small Enterprises sector has emerged as a highly
dynamic and vibrant sector. It is not only help in industrialization of rural & backward areas but also play
a key role in providing employment opportunities. Thus, it is reduces the regional imbalances and assure
equitable distribution of national income and wealth. It is complementary to large industries as ancillary
units and it contributes immensely to the socio-economic development of India. As per the Tiny, Micro
and Small Enterprises Development Act, 2006, A Micro-Enterprise is defined as a enterprise where the
investment in plant and machinery does not exceed twenty five lakh rupees; A Small- Enterprise, where
the investment in plant and machinery is more than twenty five lakh rupees but does not exceed five crore
rupees; A Medium-Enterprise, where the investment in plant and machinery is more than five crore
rupees but does not exceed ten crore rupees‟. Accordingly, as per this definition micro, small and medium
enterprise is:

Investment in plant and machinery/ equipment

Enterprises
Manufacturing Enterprises Service Enterprises
TINY Up to 5000 Up to 1000
MICRO More than Rs. 50000 and up to 25 lakh More than Rs. 25000
SMALL Up to Rs.25 lakh Up to Rs.10 lakh

MICRO CREDIT

Credit is one of the critical inputs for economic development. Its timely availability in the right
quantity and at an affordable cost goes a long way in contributing to the well-being of the people
especially in the lower rungs of society. Much of the current interest in microcredit stems from the
Microcredit Summit (2-4 February 1997), and the activities that went into organizing the event. The
definition of microcredit that was adopted there was: Microcredit programmes extend small loans to very
poor people for self-employment projects that generate income, allowing them to care for themselves and
their families‟. Micro Credit is defined as provision of thrift, credit and other financial services and
products of very small amount to the poor in rural, semi urban and urban areas for enabling them to raise
their income levels and improvement of living standards. Microcredit is the extension of small loans to
entrepreneurs too poor to qualify for traditional bank loans. It has proven an effective and popular
measure in the on-going struggle against poverty, enabling those without access to lending institutions to
borrow at bank rates, and start small business.

MICRO FINANCE

Microfinance refers to an array of financial services to low-income individuals or to those who do not
have access to typical banking services. As per the RBI master circular on micro credit, Micro Finance is
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 International Journal of Marketing & Financial Management, Volume 5, Issue 11, Nov -2017, pp 75-82
ISSN: 2348 -3954 (Online) ISSN: 2349 - 2546 (Print)

defined as „A provision of thrift, credit and other financial services and products of very small amount to
the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve
their living standards‟. Microfinance provides the access to financial services to the low-income
individuals or to small and medium size enterprises. Microfinance is the supply of loans, savings, and
other basic financial services to the poor. Since the clients of microfinance institutions (MFIs) have lower
incomes and often have limited access to other financial services, microfinance products tend to be for
smaller monetary amounts than traditional financial services. These services include loans, savings,
insurance, and remittances. Microloans are given for a variety of purposes, frequently for microenterprise
development. As microfinance institutions focuses on the low-income group, it often uses nontraditional
methodologies, such as group lending or other forms of collateral not employed by the formal financial
sector. Microfinance is not a new concept. Small microcredit operations have existed since the mid-
1700s. However, the pioneering of modern microfinance is often credited to Dr. Mohammad Yunus, who
began experimenting with lending to poor women in the village of Jobra, Bangladesh during his tenure as
a professor of economics at Chittagong University in the 1970s. In 1983 he formed the Grameen Bank,
meaning „village bank‟ founded on principles of trust and solidarity and won the Nobel Peace Prize in
2006. Since then, innovation in microfinance has continued and providers of financial services to the poor
continue to evolve. Today, the World Bank estimates that about 160 million people in developing
countries are served by microfinance. As per Grameen Bank, Microfinance is a source of financial
services for small businesses and entrepreneurs lacking access to banking and related services of bank.

THE CLIENTS OF MICROFINANCE

This paper is reflective of the low-income and underprivileged groups that may be self employed or small
scale house hold entrepreneurs such as farmers or small industrialist from the rural settings. Microfinance
for the poor means it is for those that has limited access or no access to formal financial institutions.
Unlike, the urban dwellers like shopkeepers, artisans, providers, and street vendors etc, those that can
depend on other conventional financial institutions for the sustenance of their businesses. It is stated that
the poorer you are, it seems less likely that you have the access to the conventional formal financial
institutions. Additionally, the informal financial arrangements also seem more expensive and seem to be
unreasonable for ordinary poorer person. The strength of the microfinance therefore reflects the weaker
population of our society those that are excluded from the norms.

ROLE AND IMPORTANCE OF MICROFINANCE

According to the research done by the World Bank, India is home to almost one third of the world‟s poor
(surviving on an equivalent of one dollar a day). Though many central government and state government
poverty alleviation programs are currently active in India, microfinance plays a major contributor to
financial inclusion. In the past few decades it has helped out remarkably in eradicating poverty. Reports
show that people who have taken microfinance have been able to increase their income and hence the

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 Neha, Bhupender & Pathak (2017) “A Conceptual Study of Micro Finance in India”

standard of living. Thus Microfinance plays a major role in upliftment of Indian economy in following
ways:-

Credit to Rural Poor:-Usually rural sector depends on non-institutional agencies for their financial
requirements. Micro financing has been successful in taking institutionalized credit to the doorstep of
poor and have made them economically and socially sound.

Poverty Alleviation:-Due to micro finance poor people get employment. It also helps them to improve
their entrepreneurial skills and encourage them to exploit business opportunities. Employment increases
income level which in turn reduces poverty.

Women Empowerment: - Normally more than 50% of 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
microfinance empowers poor women economically and socially.

Economic Growth:-Finance plays a key role in stimulating sustainable economic growth. Due to
microfinance, production of goods and services increases which increases GDP and contributes to
economic growth of the country.

Mobilization of Savings:-Microfinance develops saving habits among people. Now poor people with
meager income can also save and are bankable. The financial resources generated through savings and
micro credit obtained from banks are utilized to provide loans and advances to its members. Thus
microfinance helps in mobilization of savings.

Development of Skills:-Micro financing has been a boon to potential rural entrepreneurs. SHGs
encourage its members to set up business units jointly or individually. They receive training from
supporting institutions and learn leadership qualities. Thus micro finance is indirectly responsible for
development of skills.

Mutual Help and Co-operation:-Microfinance promotes mutual help and co-operation among members.
The collective effort of group promotes economic interest and helps in achieving socio-economic
transition.

Social Welfare: - With employment generation the level of income of people increases. They may go for
better education, health, family welfare etc. Thus micro finance leads to social welfare or betterment of
society.

GROWTH OF MICROFINANCE

Microfinance is emerging as a powerful instrument for poverty alleviation in the new economy. In India,
Microfinance scene in dominated by SHGs Bank linkage programme as a cost effective mechanism for
providing financial services to the unreached poor which has been successful not only in meeting
financial needs of the rural poor women but also strengthen collective self help capacities of the poor
leading to their empowerment. Rapid progress in SHGs formation has now turned into an empowerment

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 International Journal of Marketing & Financial Management, Volume 5, Issue 11, Nov -2017, pp 75-82
ISSN: 2348 -3954 (Online) ISSN: 2349 - 2546 (Print)

movement among women across the country. The SHG - Bank Linkage Programme started as an Action
Research Project in 1989. In 1992, the findings led to the setting up of a Pilot Project. The pilot project
was designed as a partnership model between three agencies, viz., the SHGs, Banks and Non
Governmental Organizations (NGOs).The SHG Bank linkage Programme which started in 1992 has
grown exponentially over two decades and around 74.62 lakh SHGs are linked to different Banks up to
2011 of these nearly 65 per cent have direct credit link with bank. Out of these 74.62 lakh SHGs 60.98
lakh are women SHGs. The overall progress under microfinance from the period 2006-07 to 2010-11 is
presented in table-1.

2007-10 2010-13 2013-16

S. SHGs
Particulars
No SHGs (in (in
SHGs (in Lakh) Amt (Cr.) Lakh) Amt (Cr.) Lakh) Amt (Cr.)
Savings of SHGs with
50.09 3785.4 69.53 6198.71 74.62 7016.3
1 Bank
Bank Loans disbursed
2 to SHGs 12.28 8849.3 16.09 12253.5 15.86 14453.3
Bank Loans
Outstanding with 36.25 16999.9 42.24 22679.8 48.51 30395.9
3 SHGs

Conclusion

The potential for growing micro finance institutions in India is very high. Major cross-section can have
benefit if this sector will grow in its fastest pace. Annual growth rate of about 20 % during the next five
year. The loan outstanding will consequently grow from the present level of about 1600 crores to about
42000 crores Annual growth rate of about 20 % can be achieved during the next five years.
The economic development of any country is severely influenced by the availability of financial services.
Microfinance is the form of a broad range of financial services such as deposits, loans, payment services,
money transfers, insurance, savings, micro-credit etc. to the poor and low income individuals. A well
developed financial system promotes investment opportunities in an economy. Therefore it is necessary
that govt. of India have to focus on extending financial services to both rural and urban to ensure
sustainable and inclusive growth.

References

1. www.google.com
2. www.microfinanceinside.com
3. www.investopedia.com
4. www.books.google.com
5. www.theindia.com
6. www.nationalmaster.com

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 Neha, Bhupender & Pathak (2017) “A Conceptual Study of Micro Finance in India”

7. NABARD (2000): “Task Force on Supportive Policy and Regulatory framework for Micro
Finance in India”
8. NABARD (2000-10): Annual Report
9. NABARD (2010-11): Annual Report
10. NABARD (2011-12): Annual Report
11. NABARD (2012-13): Annual Report
12. NABARD (2013-14): Annual Report
13. NABARD (2014-15): Annual Report
14. NABARD (2015-16): Annual Report
15. NABARD (2016-17): Annual Report

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