THE ROLE OF MICRO FINANCE IN INDIAN ECONOMY..

India is the land of ethnic beauty diverse culture and integration. Yet India is also about of millions of poor. India alone is said to host 1/3 of the world poor.
26% of the people of India are living under the poverty line. Today the poor wants to break out from the poverty trap. Micro finance can play a vital role to reduce poverty line Micro finance has long been taught to as a key tool in the fight against poverty.

In India micro finance can play a vital role in improving financial access particularly in rural areas that are under supplied with banks. However two MFIs in the state of Andhra Pradesh were shutdown recently by local administration for using cohesive method to cover their dues.

One of the problems with micro finance institutions is the high rate of interest that they charge which goes as high as 28 %. The poor have often no other choice since money lenders charges five times as much. But the MFI says they charge high interest rate because they borrow their funds from commercial banks and they have to incur a high rate of operating cost which goes up to 7 % to 8 %.

So let’s talk about Micro finance in Indian context……

The concept of micro-finance is not new. Savings and credit groups that have operated for centuries include the "susus" of Ghana, "chit funds" in India, "tandas" in Mexico, "arisan" in Indonesia, "cheetu" in Sri Lanka, "tontines" in West Africa, and "pasanaku" in Bolivia, as well as numerous savings clubs and burial societies found all over the world.

What is micro finance?
Micro-finance includes basic financial services - including small loans (for income generation purposes), savings accounts, fund transfers and insurance. Alongside non-financial services such as business training, micro-finance assists people living in poverty who wouldn't usually qualify for regular banking services because they have no form of collateral or formal identification.
Loans as small as Rs 5000 help people in poverty start or grow their own small business. This enables them to earn an income so they can afford food, clean water, proper shelter and an education for their children.

How it works…
?
Micro-finance institutions work through the same principles as credit unions.  They are designed to bring
maximum benefits to their customers, with their profits recycled into further loans.
A successful micro-finance institution will see both the funds and the demands for loans grow quickly, so that the benefits are felt by the entire community.
Micro finance does not believe in giving the donation, handout or gift to the poor because it may kill the pride and strong willpower to do something by their own. On the other hand  it believe in providing  small amount of loan(usually short term) so that they can earn profit and repay back to the MFI which will increase the value of their community bank and making it possible to provide further loans for themselves and others.

FOR EXAMPLE: -

Spouse by helping a mother buy a sewing machine to start a tailoring business or a father buy seeds to plant vegetable garden, small loans enable people in poverty to earn an income and provide for their families. As each business grows, loans are paid back and lent out again. With 97% of loans repaid, the cycle continues, year after year. Each successful business feeds a family, employs more people and eventually helps empower a whole community.

Micro-finance plus.

As well as micro-finance provide people living in poverty with non-financial (community development) services to strengthen their businesses and develop their communities.

The Status of Micro-finance in India

Considerable gap between demand and supply for all financial services

Majority of poor are excluded from financial services. This is due to, inter-alia, the following reasons:

1. Bankers feel that it is fraught with risks and uncertainties.
2. High transaction costs
3. Unfavorable policies like caps on interest rates which effectively limits the viability of serving the poor.

While MFIs have shown that serving the poor is not an unviable proposition there are issues that have constrained MFIs while scaling up. These include

1. Lack of an appropriate legal vehicle
2. Limited access to equity
3. Difficulty in accessing low cost on-lending funds (as of now they are unable to offer savings services in a legitimate manner. 

Growth of Micro-finance in India

                           

              Legend:Customers(millions)      Source: Mixmarket database

                                Credit portfolio (millions of US$)

The three C’s of Micro Finance Key Problem
Micro finance is certainly a novel idea and genuine innovation that helps the poor. But the critical issue whether micro finance helps to eradicate poverty.
Three major problems currently faced by micro finance:-

1. The lack of capital.
2. The lack of capacity and
3. The High cost of  doing Micro finance

What Can be done:-

1. State has an important role to play in developing a sustainable micro-finance industry.
2. State's involvement in micro-finance sector is the function of macroeconomic instability, maturity of   banking system, stage of development and structure of micro-finance sector, size of the potential micro-finance market and rural infrastructure.
3. State could have three broader roles: protector, provider and promotional role.
4. International practice highlights protector role of state as most consistently useful for developing permanent access to finance compared to providers and promotional role.
5. State should play an important role in setting a supportive policy environment
6. In the context of India, Nepal, action of the state must stimulate expansion of financial services in remote areas while protecting poor people’s savings and should concentrate at maintaining macroeconomic stability, avoiding interest-rate caps, and refraining from distorting market with unsustainable subsidized and high-delinquency loan programs.