Microfinance

A type of banking service that is provided to

unemployed or low-income individuals or groups who would otherwise have no other means of gaining financial services

Need of Microfinance
The Indian economy is the second fastest growing economy in the

world. Majority of the population in India resides in rural areas. Thus development of rural India is a key step towards economic development for a country like ours. Credit is one of the very important inputs of economic development. The timely availability of credit at an affordable cost has a big role to play in contributing to the well being of the weaker sections of the society. Proper access to finance by the rural people is a key requisite to employment, economic growth and poverty reduction which are primary tools of economic development. In spite of having a strong financial system it has been evident that financial awareness has not been able to penetrate into the rural sections of the society. Non institutional credit givers in the form of money lenders still continue to grasp the poor in their clutches. This is a matter of concern.

FEATURES OF MICROFINANCE

1) It is an essential part of rural finance. 2) It deals in small loans. 3) It basically caters to the poor households. 4) It is one of the most effective and warranted Poverty Alleviation Strategies. 5) It supports women participation in electronic activity. 6) It provides an incentive to grab the self employment opportunities. 7) It is more service-oriented and less profit oriented. 8) It is meant to assist small entrepreneur and producers. 9) Poor borrowers are rarely defaulters in repayment of loans as they are simple and God-fearing. 10) India need to establish several Microfinance Institutions.

ROLE AND IMPORTANCE OF MICROFINANCE

1. 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. 2. 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. 3. 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. 4. 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.

 5.

Mobilisation Of Savings :Microfinance develops saving habits among people. Now poor people with meagre income can also save and are bankable. The financial resources generated through savings and micro credit obtained from banks are utilised to provide loans and advances to its members. Thus microfinance helps in mobilisation of savings. 6. 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. 7. Mutual Help And Cooperation Microfinance promotes mutual help and cooperation among members. The collective efforts of group promotes economic interest and helps in achieving socio-economic transition. 8. 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.

Lessons from International Experience

Lesson 1: The Poor are Bankable The poor are capable of using credit profitably and repaying loans out of the proceeds from the use of fund. They do not compromise an extra ordinary high risk segment The participatory involvement and realization that repayment enhances their long term borrowing capacity ensures the proper attitude towards repayment.

Lesson 2: Micro-credit benefits the poor MF benefits the poor by providing them savings opportunities and credit. Borrowers often increase their incomes and improve their livelihood because of micro credit. The poor also benefit from MF a sense of involvement and dignity

Lesson 3: Penetration of the poorest of the poor is difficult While some have penetrated to poorest of the poor most MFIs have concentrated their focus on the less poor. The poorest require greater support in the form of advisory services, skill development and marketing support to make effective use of credit. This is partly due to difficulties of administering loans the needs of the poorest being mainly for consumption possibly perceived as a higher risk.

Lesson 4: A realistic Interest is vital Microcredit should not be disbursed at below commercial rates of interest. The interest rates charged by MFIs should cover their total costs, there appears to be a good case for subsidizing costs of risk, as otherwise the interest cost could be prohibited.

Lesson 5: Saving mobilization strengthens MFIs There is an indisputable evidence that MFIs which mobilize savings enhance their sustainability. Microfinance should be viewed as two complementary components, Micro-credit and savings. Savings mobilization strengthens the asset of the MFIs, provides a basis for asset based lending, reduces risk, enhance financial viability and can even provide opportunities of supplementary earnings from the investments outside.

Lesson 6: Governance and Financial systems require strengthening

When the scale of operations of the MFIs expands

there is need to ensure good governance as large sum of money is involved The issue of governance that require to be addressed including greater transparency in their activities and finances, the determination of the line of responsibility and accountability Good accounting systems especially performance accounting are essential performance accounting are essential to ensure accountability and continuous evaluation of performance.

Lesson 7: Strong Regulatory Framework

With the expansion in the number of MFIs and

many of them accepting savings, it is generally argued that MFIs should be subject to a regulatory framework in the interest of both the poor as also the long term viability and sustainability of MFIs

Lesson Eight: No single model of MFIs

The vast differences in MFIs make it very clear that

there is no single model of successful MFIs Each MFI would require to be oriented to the needs of the particular community and find ways and means of enlisting participatory involvement, develop group actins and collective responsibilities, find innovative means of reducing administration and transaction cost and increase outreach.

Lesson Nine: Most require outside funding

Experiences have shown that most MFIs would

require outside finances for commencement and a gestation period. Such assistance should be in form of seed capital, funds for expanding activities and to defray administrative expenditure.

Lesson 10: Credit alone can not achieve objectives

Micro credit attempts to address the needs of poor

people but those without capacity and to use such funds profitably would not benefit Both the expansion and effectiveness of micro-credit requires a number of other pre-requisites. These include a macro economic policy framework, improvement in physical and economic infrastructure, opportunity for education and skill development and marketing opportuties..

Microfinance products
Microcredit Micro savings Microinsurance

Micro Credit
Microcredit can be defined as as the provision of

thrift, credit and other financial services and products of very small amount to the poor in the raral areas for enabling them to raise their income levels and improve living standards

Features
Size of loan- Loan sizes are very small Target users- Self employed, micro entrepreneurs

and low income households Utilization of loan products- Loan products are provided for income generation, enterprise development and also for community use Terms and conditions- Most term and conditions for micro credit loans are flexible and easily understood and location specific.