Mi­cro Fi­nance for Fi­nan­cial In­clu­sion and Sus­tain­able Ru­ral Devel­op­ment

Economic Challenger - - CONTENTS - - Dr.S.K. Sharma & Dr. R.P. Sa­haria


In­dia's prob­lems are di­verse , per­va­sive and mul­ti­di­men­sional. Fur­ther mi­cro fi­nance bris­tles with prob­lems , dif­fi­cul­ties and con­straints . Be­ing sin­gle in­stru­ment , it may not be able to solve the prob­lem of ab­ject poverty merely by dis­tribut­ing loans to cer­tain sec­tions of the pop­u­la­tion .Next level of eco­nomic devel­op­ment re­quires our growth model to bring in in­clu­sive growth so that the world be­comes a bet­ter place to live, in at­tain­ing the ob­jec­tives of in­clu­sive growth a coun­try has to nec­es­sar­ily pay at­ten­tion the so­cial , eco­nomic and po­lit­i­cal in­clu­sion. De­vel­op­ing mi­cro en­trepreneur­ship with or­ga­ni­za­tional and com­mu­nity based sup­port is one way of strength­en­ing in­clu­sive growth .


Ac­cord­ing to Amartya Sen lack of ca­pa­bil­ity and op­por­tu­nity are ma­jor fac­tors for poverty and hunger in the de­vel­op­ing na­tions like In­dia . His stud­ies on famine in In­dia (Ben­gal 1943 ) , Bangladesh ,Ethiopia and Sa­har­ian coun­tries found short­age of food was not al­ways the cause of such catas­tro­phe .He ar­gues that it is a set of so­cial and eco­nomic sit­u­a­tions that de­prives peo­ple of pur­chas­ing power and leads them to poverty and hunger .

The role of fi­nan­cial sec­tor in the process of eco­nomic devel­op­ment has been well rec­og­nized. The role played by fi­nance in stim­u­lat­ing sub­stan­tial eco­nomic devel­op­ment has been em­pha­sized by the em­i­nent econ­o­mists like Amartya Sen and Mohd Yunus.

Erad­i­ca­tion of poverty has been an im­por­tant is­sue be­fore the de­vel­op­ing coun­tries of the world . This is a big chal­lenge for South Asian na­tions , as about half of the world's poor live in this re­gion . Again the in­ten­sity of poverty is high in In­dia .One of ev­ery three per­sons in In­dia is of­fi­cially poor .and two of ev­ery three are ei­ther un­der­nour­ished or mal­nour­ished .

Mean­ing & Na­ture of Mi­cro Fi­nance

The con­cept of mi­cro fi­nance can be de­scribed as small, short, un­se­cured lend­ing of money and pro­vi­sion of very small loans that are re­paid within a short pe­riod of time. It is es­sen­tially used by the low in­come in­di­vid­u­als and house­holds to em­power them eco­nom­i­cally and en­able them fi­nan­cially . The mi­cro fi­nance is used as a sus­tain­able tool to com­bat poverty. Mi­cro fi­nance can lead to mi­cro so­lu­tions to poverty. It can be de­fined as a set of ser­vices com­pris­ing the fol­low­ing features: 1 It is a tool for em­pow­er­ment of the poor­est. 2 Mi­cro Credit is de­liv­ered nor­mally through

Self-Help Groups . 3 It is es­sen­tially for pro­mot­ing self em­pow­er­ment and pro­duc­tiv­ity in the for­mal sec­tor of the econ­omy . 4 It is gen­er­ally used for di­rect in­come

gen­er­a­tion and con­sump­tion smooth­ing. 5 It is not just a fi­nanc­ing sys­tem but, a tool for so­cial and eco­nomic change, es­pe­cially for women . 6 It pro­vides for sea­son­al­ity al­low re­pay­ment flex­i­bil­ity and avoid bu­reau­cratic and le­gal for­mal­i­ties . 7 It as­sists the women to per­form tra­di­tional roles bet­ter and to take up mi­cro en­trepreneur­ship .

Mi­cro Fi­nance is a term hav­ing a broad mean­ing and it cov­ers all types of mi­cro prod­ucts

and mi­cro ser­vices tar­geted at the poor pop­u­la­tion of any coun­try , re­gion ,state, province and so­ci­ety . It refers to loans , sav­ings, in­surance trans­fer ser­vices and other fi­nan­cial prod­ucts to low in­come clients . Among all th­ese fi­nan­cial ser­vices mi­cro credit is more pop­u­larly used in dif­fer­ent parts of the world as an in­ter­ven­tion , em­ploy­ment, gen­er­a­tion and small en­ter­prise cre­ation .

Mi­cro credit gives more em­pha­sis on loans, while mi­cro fi­nance in­cludes sup­port ser­vices where chan­nels for thrift, mar­ket as­sis­tance, tech­ni­cal as­sis­tance, ca­pac­ity build­ing in­surance, so­cial and cul­tural pro­grammes are opened. Thus where mi­cro fi­nance is credit plus. Mi­cro credit is only credit.


In­dian econ­omy in gen­eral and bank­ing ser­vices in par­tic­u­lar have made rapid strides in the re­cent past. How­ever, a siz­able sec­tion of the pop­u­la­tion par­tic­u­larly the vul­ner­a­ble groups such as weaker sec­tions and low in­come groups con­tinue to re­main ex­cluded from even the most ba­sic op­por­tu­ni­ties and ser­vices pro­vided by the fi­nan­cial sec­tor.

The var­i­ous fi­nan­cial ser­vices in­clude sav­ings, loans, in­surance pay­ments, re­mit­tance fa­cil­i­ties and fi­nan­cial coun­sel­ing or ad­vi­sory ser­vices by the for­mal fi­nan­cial sys­tem. An open and dy­namic so­ci­ety is al­ways char­ac­ter­ized by the un­re­strained ac­cess to pub­lic goods. Fi­nan­cial in­clu­sion should there­fore be viewed as avail­abil­ity of the en­tire pop­u­la­tion with­out dis­crim­i­na­tion of any type.

The term fi­nan­cial in­clu­sion is per­ceived in dif­fer­ent con­text. There is a view that only ac­cess to credit is treated as fi­nan­cial in­clu­sion whereas the other view is that in­clu­sion in­cludes all the ser­vices ex­tended by the fi­nan­cial in­sti­tu­tions, banks and other in­sti­tu­tions which must be tar­geted, apart from per­sonal or pri­vate in­vest­ment of in­di­vid­u­als and groups. The uni­ver­sal pub­lic in­vest­ment re­quire­ment of in­di­vid­u­als and groups is nec­es­sary for devel­op­ment of in­fra­struc­ture, so­cial sec­tor ser­vices, pub­lic util­i­ties and pro­duc­tive forces’ ca­pac­ity build­ing ef­forts and so on. Thus fi­nan­cial in­clu­sion may well be all about money and fi­nance but with the ul­ti­mate ob­jec­tive of di­rectly abol­ish­ing the state of so­cial ex­clu­sion in the econ­omy .

In or­der to ad­dress the is­sues of fi­nan­cial in­clu­sion the Government of In­dia con­sti­tuted a Com­mit­tee on fi­nan­cial in­clu­sion un­der the chair­man­ship of Dr. C. Ran­gara­jan. The Com­mit­tee submitted its fi­nal report to Union Fi­nance Min­is­ter on 4th Jan­uary 2008. The com­mit­tee has de­fined fi­nan­cial in­clu­sion as the process of en­sur­ing ac­cess to fi­nan­cial ser­vices and timely and ad­e­quate credit where needed by vul­ner­a­ble groups such as weaker sec­tions and low in­come groups at an af­ford­able cost .

Open­ing a bank ac­count for a large part of the pop­u­la­tion liv­ing on low in­comes, is rather dif­fi­cult. Whether it's the maid ser­vant, the sweeper in apart­ment build­ing, the veg­etable vender or a con­struc­tion worker- a bank ac­count is sim­ply out of reach.

Hold­ing a bank ac­count it­self con­fers a sense of iden­tity, sta­tus and em­pow­er­ment and pro­vides ac­cess to the na­tional pay­ment sys­tem. There­fore, hav­ing bank ac­count be­comes a very im­por­tant as­pect of fi­nan­cial in­clu­sion apart from open­ing and pro­vid­ing easy ac­cess to a no frill ac­count. It should also pro­vide ac­cess to credit, per­haps in the form of a gen­eral credit card. It should en­com­pass ac­cess to af­ford­able in­surance and re­mit­tance fa­cil­i­ties. It should also in­clude credit coun­selling and fi­nan­cial ed­u­ca­tion lit­er­acy. While fi­nan­cial in­clu­sion, in the nar­row sense, may be achieved to some ex­tent by of­fer­ing any one of th­ese ser­vices, the ob­jec­tive of "com­pre­hen­sive fi­nan­cial in­clu­sion" would be to pro­vide a holis­tic set of ser­vices en­com­pass­ing all of the above.

A vast seg­ment of In­dia's pop­u­la­tion ex­ists on the mar­gins of In­dia's fi­nan­cial sys­tem. Whilst the per capita sav­ing of this class may not to be very high, their sheer num­ber means that taken to­gether their sav­ings are of a con­sid­er­able amount. If their en­try in the for­mal fi­nan­cial sec­tor is made eas­ier, th­ese sav­ings can be canal­ized for the for­mal econ­omy. Also sav­ing cum risk prod­ucts that are pri­mar­ily needed can be struc­tured for them once they are part of the for­mal bank­ing sys­tem.


Mi­cro­fi­nance is a hard term to de­fine pre­cisely. If a self Help Group gives money to some­one to buy a cy­cle rick­shaw. It is con­sid­ered mi­cro fi­nance, if a com­mer­cial bank does the same thing, it is not con­sid­ered mi­cro fi­nance. In In­dia, the term is gen­er­ally un­der­stood to mean a loan given to the poor by the NGOs to start small busi­ness. The world over, mi­cro­fi­nance is syn­ony­mous with the grameen bank in Bangladesh. Mi­cro fi­nance arose in di­rect re­sponse to the fail­ure of the na­tion­al­ized com­mer­cial banks to cover to the needs of the poor and marginal­ized.

In In­dia, mi­cro­fi­nance is dom­i­nated by self help groups-bank link­age pro­gramme aimed at pro­vid­ing fi­nan­cial ser­vices to the un­reached poor. Mi­cro fi­nanc­ing has turned out to be an ef­fec­tive strat­egy for in­sti­tu­tional fi­nanc­ing agen­cies. Through group ap­proach, small loans can be made avail­able to the poor, cre­ate sav­ing habits and min­i­mize ex­trav­a­gancy.

Self help groups dom­i­nate the mi­cro fi­nance sce­nario and they are fo­cus­ing more on poor women. Hence mi­cro fi­nance is emerg­ing as a pow­er­ful in­stru­ment for em­pow­er­ment of poor women both so­cially and eco­nom­i­cally. It aims at pro­vid­ing cost ef­fec­tive mech­a­nism for fi­nan­cial ser­vices to the de­tached poor women.

Em­pow­er­ment is a process of change by which in­di­vid­u­als or groups gain power and abil­ity to con­trol their lives. It in­volves in­creased well­be­ing, ac­cess to re­sources, rais­ing self­con­fi­dence. in­creas­ing par­tic­i­pa­tion in de­ci­sion mak­ing and con­trol­ling re­sources and liveli­hood.

The women em­pow­er­ment has re­ceived ex­ten­sive re­or­ga­ni­za­tion as a strat­egy of growth and poverty re­duc­tion. Be­fore 1990, credit schemes for ru­ral women were al­most neg­li­gi­ble. The con­cept of women's em­pow­er­ment was rec­og­nized by women in­for­mal sec­tor.

In mod­ern econ­omy the mi­cro credit ap­proach for women is con­sid­ered as the best strat­egy to em­power women eco­nom­i­cally. Through mi­cro credit the poor women can ro­tate their funds to build eco­nomic ca­pac­i­ties.

The co- re­la­tion be­tween credit em­pow­er­ment is al­ways pos­i­tive which has been es­tab­lished in all re­search stud­ies. Prof. Amartya Sen in his book "Pub­lic Ac­tion to rem­edy hunger " in 1991 has also rec­og­nized the role of mi­cro fi­nance in women em­pow­er­ment and poverty re­duc­tion.


The re­gional devel­op­ment of mi­cro credit pro­grammes un­der self-help groups has vide vari­a­tions in terms of growth and per­for­mance among the sta­tus of In­dia. The per­for­mance of south­ern re­gion, es­pe­cially Tamil Nadu, Andhra Pradesh has been the best in the pro­mo­tion of SHGs re­ceiv­ing loans through bank link­age. Sur­pris­ingly Andhra Pradesh has 53 per­cent of to­tal SHGs due to more women en­ter­prises, higher level of lit­er­acy and strong co­op­er­a­tive in­sti­tu­tions. The south­ern states have the best per­for­mance where Rs. 5242.42 mil­lion are dis­trib­uted among the SHGs. The east­ern re­gion has the sec­ond best per­for­mance where cu­mu­la­tive num­ber of SHGs bank loan up to 31st march 2010 was Rs 123256 mil­lion. Or­risa is one of the poor­est states in In­dia but the per­for­mance of SHGs is re­mark­able which is much bet­ter then many other large states.

The states of west­ern and cen­tral re­gion have not en­rolled suf­fi­cient SHGs. The costal state near the Bay of Ben­gal is per­form­ing well in mi­cro credit through SHGs, which are pro­moted by in­te­grated child devel­op­ment project func­tionar­ies.

It is ob­served in many stud­ies that SHGs are gen­er­ally not com­posed of mainly the poor­est fam­ily's rather fi­nan­cial well of peo­ple is sig­nif­i­cant hav­ing con­sis­tent eco­nomic im­pact. The fi­nan­cial skills of group mem­bers have not devel­oped in SHGs as planned. There­fore, there is an ur­gent need for the Government ini­tia­tive into SHGs. The mem­bers should be pro­vided train­ing in mi­cro en­ter­prises so that the credit availed by them can be used pro­duc­tivly.

The com­mer­cial banks must pro­vide a greater link­age to SHGs in pro­vid­ing them higher amount of bank loans. The non government or­ga­ni­za­tions and bank of­fi­cials as well as pri­mary school teach­ers should be en­gaged in for­ma­tion and devel­op­ment of SHGs in ru­ral In­dia.


The so­cio-eco­nomic land­scape of In­dia has un­der gone tremen­dous changes with vis­i­ble signs of growth mo­men­tum in all sec­tors. In­dian econ­omy has shown an av­er­age growth of 8.1per­cent in the last three years, the ben­e­fits have not equally per­co­lated to the dif­fer­ent seg­ments of our econ­omy es­pe­cially to th­ese in the lower rungs in the so­cio-eco­nomic lad­der thus negat­ing the trickle down the­ory of growth. The ru­ral agri­cul­ture sec­tor in par­tic­u­lar has not gained the de­sired mo­men­tum of growth and devel­op­ment.

In spite of so many devel­op­men­tal strate­gies un­der taken by the government of In­dia, poverty ra­tio is 28 per­cent, which sub­sists on less than US$1 a day, of th­ese, 74.9 per­cent live on US$2 per day. Of th­ese 75 peo­ple live in ru­ral ar­eas with most of them com­pris­ing daily wage-earn­ers, self em­ployed house­holds and land­less la­bor­ers and a stag­ger­ing 214 mil­lion peo­ple are chron­i­cally food in­se­cure.

About 50 per­cent of chil­dren are un­der nour­ished and 68 out of 1000 die be­fore the age of one year, scarce sources and lack of proper in­sti­tu­tional and le­gal sup­port have re­sulted in the un­der priv­i­leged sec­tion be­ing used not of the main stream and de­riv­ing of the ben­e­fits of the growth.

De­spite spend­ing enor­mous funds, government has failed dis­mally to pro­vide ev­ery vil­lage with the five ne­ces­si­ties of growth - all weather roads, elec­tric­ity, tele­phones, func­tion­ing tools and pri­mary health cen­ters. Large funds have been spent on em­ploy­ment pro­grammes for three decades, which were sup­posed to cre­ate durable ru­ral as­sets, but in re­al­ity not hap­pened. Many farm­ers com­mit sui­cide due to var­i­ous fac­tors. In In­dia ev­ery thing is in a mess. There is no proper plan­ning. If there is plan­ning, there is no co­or­di­na­tion.


In­dia's prob­lems are di­verse, per­va­sive and mul­ti­di­men­sional and mi­cro fi­nance bris­tles with prob­lems, dif­fi­cul­ties and con­straints. Be­ing sin­gle in­stru­ment, it may not be able to solve the prob­lems of ab­ject poverty merely by dis­tribut­ing loans to a cer­tain sec­tion of the pop­u­la­tion.

The mi­cro fi­nances and the self help group move­ments are in there in­fancy but are gath­er­ing force now. More in­no­va­tion in the form of busi­ness fa­cil­i­ties and cor­re­spon­dents will be needed for banks to en­sure fi­nan­cial in­clu­sion. New en­trants to the bank­ing sys­tem need house­holds at their doorstep.

To con­clude, mov­ing to the next level of eco­nomic devel­op­ment re­quires fast growth, so that the world be­comes a bet­ter place to live in. De­vel­op­ing mi­cro en­trepreneur­ship with or­ga­ni­za­tional and com­mu­nity based sup­port is one way of strength­en­ing in­clu­sive growth. Ca­pac­ity build­ing among the mi­cro en­ter­prises needs to be done through train­ing and tech­ni­cal as­sis­tance in co­or­di­na­tion with pro­mo­tional agen­cies spe­cial­iz­ing in train­ing and tech­ni­cal as­sis­tance. Re­searchers ought to fo­cus their at­ten­tion to de­velop such a plan frame which is both prag­matic and com­pre­hen­sive to work against a kind of law of in­dif­fer­ence that is ob­served to op­er­ate in ru­ral In­dia.


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