India has large size and population of 1.3 billion and more than 70% people live in rural areas. More than 500 million poor people lack access to the basic financial services which are essential for them to manage their precarious lives. Demand for microfinance services in India is growing at a rapid pace. Credit on reasonable terms to the poor can bring about a significant reduction in poverty. That’s why microfinance is assuming greater significance in the Indian context.
With globalisation and liberalisation of the economy, opportunities for the unskilled and the illiterate are not increasing fast enough, as compared to the rest of the economy. This is leading to a lopsided growth in the economy thus increasing the gap between the haves and have-nots. It is in this context, the institutions involved in microfinance have a significant role to play to reduce this disparity and lead to more equitable growth.
Microfinance is one of the fastest growing sectors of India and it is spearheading intense competition among the largest players. The microfinance institutions are organised under three models: SHG, Grameen model/Joint liability groups and Individual banking groups as in cooperatives. Indian microfinance market is dominated by SHG bank linkage and MFI model.
Micro-Finance Institutional Structure:
The different organisations in this field can be classified as "Mainstream" and "Alternative" Micro Finance Institutions (MFI). Mainstream MFIs include NABARD, SIDBI, HDFC, Commercial Banks, RRBs, and the credit co-operative societies.
Alternative MFIs include
- NGOs, which are mainly engaged in promoting self-help groups (SHGs) and their federations at a cluster level, and linking SHGs with banks
- NGOs directly lending to borrowers, who are either organised into SHGs or into Grameen Bank style groups and centres
- MFIs which are specifically organised as cooperatives
- Mutually Aided Cooperative Thrift and Credit Societies (MACTS) in AP
- MFIs, which are organised as non-banking finance companies
Demand for Credit and savings
In terms of demand for micro-credit, there are three segments: At the very bottom in terms of income and assets, and most numerous, are those who are landless and are engaged in agricultural work on a seasonal basis, and manual labourers in forestry, mining, household industries, construction and transport. The next market segment is small and marginal farmers and rural artisans, weavers and those self employed in the urban informal sector as hawkers, vendors, and workers in household microenterprises.
The third market segment is of small and medium farmers who have gone in for commercial crops such as surplus paddy and wheat, cotton, groundnut, and others engaged in dairying, poultry, fishery, etc. Among non-farm activities, this segment includes those in villages and slums, engaged in processing or manufacturing activity, running provision stores, repair workshops, tea shops, and various service enterprises. These persons are not always poor, though they live barely above the poverty line and also suffer from inadequate access to formal credit.
The demand for savings services is ever higher than for credit. Studies of rural households in various states in India show that the poor, particularly women, are looking for a way to save
small amounts whenever they can. The irregularity of cash flows and the small amounts available for savings at one time, deter them from using formal channels such as banks. The poor want to save for various reasons – as a cushion against contingencies like illness, calamities, death in the family, etc; as a source of equity or margin to take loans; and finally, as a liquid asset.
Micro insurance
Micro insurance refers to protection of assets and lives against insurable risks of target populations such as micro-entrepreneurs, small farmers and the landless, women and low-income people through formal, semiformal and informal institutions. Such products are often bundled with micro-savings and micro-credit, thereby allocating scarce resources to micro-investments with the highest marginal rates of return. Micro insurance is the most underdeveloped part of microfinance. Yet various schemes exist that are viable, benefiting both the institutions and their clients. Such schemes have generally served two major purposes: (i) they have contributed to loan security; and (ii) they have served as instruments of resource mobilization. The greatest challenge for micro insurance lies in the combination of viability and sustainability with outreach.
The supply of insurance services to the poor has been increased substantially over the 1990s, and there are a large number of low premium schemes covering them against death, accidents, natural calamities, and loss of assets due to fire, theft, etc. However, the usage is limited by low awareness among the poor. Crop and livestock insurance, however, are quite expensive and their reach to the poor is negligible. Livestock and asset insurance was extended to the poor along with the IRDP subsidised loans, and thus remained scheme driven, with little awareness among the customers.
After the pioneering efforts of the last ten years, the microfinance scene in India has reached a takeoff point. With some effort substantial progress can be made in taking MFIs to the next orbit of significance and sustainability. This needs innovative and forward-looking policies, based on the ground realities of successful MFIs. This, combined with a commercial approach from the MFIs in making microfinance financially sustainable, will make this sector vibrant and help achieve its single minded mission of providing financial services to the poor.
Written By
Shivendu Kumar Singh
PGDM II
IMI, New Delhi
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