Microfinance has evolved as an important tool for poverty eradication and financial inclusion in India, achieving major achievements in recent decades. The concept of microfinance, which involves giving modest loans and financial services to low-income individuals and marginalized areas, has had a significant impact on the country’s socio-economic landscape. The birth of microfinance in India Microfinance in India may be traced back to the early 1970s when individuals and non-governmental organizations (NGOs) recognized the need to give access to financial services to the unbanked and underprivileged elements of society. In the 1990s, organizations such as the Self-Employed Women’s Association (SEWA) and NABARD’s SHG-Bank Linkage Programme began attempts to promote microfinance. Growth and evolution Self-Help Groups (SHGs): The promotion of SHGs was a significant development in the Indian microfinance sector. SHGs are community-based organizations in which members pool their savings and access bank credit, developing financial discipline and empowerment, particularly among women. NABARD was instrumental in connecting SHGs with mainstream financial institutions. Microfinance organizations (MFIs): As the demand for microloans increased, dedicated microfinance organizations emerged. Small loans were made available to disadvantaged borrowers by organizations such as SKS Microfinance and Bandhan Financial Services, allowing people to launch small companies and escape the clutches of moneylenders. Regulatory Framework: To promote responsible and sustainable expansion of microfinance, the Indian government established the Reserve Bank of India (RBI) as the microfinance regulatory authority. The RBI established particular criteria to control their activities, addressing concerns about excessive debt and unethical practices. Impact on Poverty Alleviation Microfinance has played a significant role in poverty eradication and economic development in India. Here are some of the most significant consequences: Women’s Empowerment: Microfinance has empowered women in rural and urban regions by allowing them to create small companies, improve their standard of living, and attain independence. Financial Inclusion: Microfinance has played a critical role in delivering banking and financial services to underprivileged people, hence fostering financial inclusion. Rural Development: Microloans have aided rural development by allowing people to invest in agriculture, livestock, and small-scale businesses, thus contributing to local economic progress. Reduced Reliance on Moneylenders: Microfinance has reduced the reliance of marginalized populations on exploitative moneylenders, resulting in better financial well-being. Current status of Microfinance in India As of March 31, 2022, the programme covered 140 million families and 11.9 million SHG groups, with a total savings of $472.4 billion. 3.4 million SHGs were credit-linked during FY 2021–22, and loans totaling $997.2 billion were given, with a total credit outstanding of $1,510.5 billion for 6.74 million SHGs (an average of $0.24 million per SHG). The E-Shakti programme digitized the data of over 1.2 million SHGs in order to improve credit linkage with banks. The figure below depicts the credit linkage status of SHGs by state as of December 31, 2022, with 57% of SHGs with deposits having loans outstanding with banks. Ultimately, the rise of microfinance in India demonstrates its ability to bring about social and economic transformation. Microfinance has improved millions of lives and contributed to India’s inclusive economic growth by giving access to modest loans and financial services. While there have been problems and controversies along the way, the sector has evolved and matured as a result of regulatory frameworks and best practices. Microfinance will undoubtedly play an increasingly important role in alleviating poverty, empowering marginalized people, and promoting financial inclusion as India develops.
Tag: financial inclusion
Financial Inclusion: Bridging the gap with fintech
Financial inclusion remains a global challenge, with a considerable section of the world’s population needing access to basic financial services. According to the World Bank, around 1.7 billion adults are unbanked, which means they need access to formal financial services. While there has been improvement in recent years, a significant gap still needs to be closed. Fintech, or financial technology, has emerged as a significant instrument for tackling this issue by offering innovative and accessible financial services. The Financial Inclusion Situation Due to limitations such as physical infrastructure, cost, and legal limits, traditional financial institutions have failed to reach disadvantaged populations, particularly in developing nations. As a result, millions remain uninsured and must be enrolled in the formal financial system. Global Advancement According to the World Bank’s Global Findex Database 2017, 69% of individuals globally have a financial institution or mobile money provider account, up from 51% in 2011. This is an encouraging development, but more work is needed to get the other 1.7 billion individuals into the fold. Regional disparities Financial inclusion is not uniform across areas. Sub-Saharan Africa, for example, had only 43% of persons having a bank or mobile money account in 2017. In high-income OECD countries, this figure topped 90%. These differences emphasize the need for global initiatives to increase financial inclusion. Gender Gap Another big issue is the gender gap in financial inclusion. According to the World Bank, women are less likely than males to access formal financial services in many developing nations, with a gender disparity of up to 9 percentage points in some regions. Fintech’s Role in Bridging the Gap Fintech firms are reshaping the financial landscape by harnessing technology to provide creative solutions that overcome the limits of traditional banking institutions. Here are some significant data and insights into how fintech is helping to close the financial inclusion gap: Mobile Money Services: Mobile money is a valuable tool for boosting financial inclusion, particularly in areas with limited banking infrastructure. As of 2021, the GSMA claimed 372 active mobile money services in 95 countries, with over 300 million registered accounts. These services enable users to keep, transmit, and receive money using mobile phones, making financial services more accessible. Digital Payments: Digital payment alternatives, such as digital wallets and peer-to-peer (P2P) payment networks, have acquired substantial acceptance. According to Statista, the global transaction value in the digital payments market is expected to exceed US$8 trillion in 2023, with a CAGR of 17.6% from 2021 to 2025. These platforms facilitate transactions and increase access to financial services for people who do not have bank accounts. Microfinance and lending: Fintech platforms make it easier for small enterprises and individuals to obtain microloans. M-Pesa, a mobile money network in Kenya, for example, provides its users with tiny, short-term loans. Ant Financial’s Alipay has provided small loans to millions of consumers and enterprises in China. These inventions enable marginalized groups to establish or expand their enterprises. Insurtech: Insurance is a critical component of financial inclusion because it provides a safety net against unforeseen financial shocks. Insurtech startups use technology to produce low-cost insurance products. Microinsurance products, for example, are becoming increasingly popular in Africa and Asia. Blockchain and cryptocurrency: Blockchain technologies and cryptocurrencies are also being investigated as tools for financial inclusion. These technologies provide secure and low-cost methods of moving and storing value, possibly reaching unbanked people. To sum up, the objective of reaching unbanked and underprivileged communities becomes increasingly realistic as technology advances and fintech businesses emerge. However, it is critical to guarantee that the growth of fintech services is carried out responsibly, with an emphasis on consumer protection and regulatory collaboration. Finally, collaboration among fintech entrepreneurs, governments, and financial institutions is critical to attaining real financial inclusion and reducing gaps in access to financial services globally.
How is the Business Correspondent model boosting financial inclusion in India?
The availability and use of inexpensive financial services by all segments of society is a major driver of economic growth and poverty alleviation. In a varied and large country like India, achieving comprehensive financial inclusion has unique problems. However, the Business Correspondent (BC) model has emerged as a revolutionary force, bridging the gap between traditional banking services and the underprivileged population by leveraging technology and creativity. Let us view how the Business Correspondent concept is helping to increase financial inclusion in India. Understanding the Business Correspondent Model The Business Correspondent model is a framework that enables banks to extend their reach and supply financial services to rural and unbanked areas through intermediaries known as Business Correspondents. These correspondents function as bank representatives and conduct various financial transactions on behalf of the bank, bringing official financial services closer to the doorsteps of those who previously had restricted access. Key Benefits of the Business Correspondent Model Improved Accessibility: The Business Correspondent approach makes use of the existing network of local agents, such as Kirana store owners, post offices, and self-help groups, to operate as Business Correspondents. These agents are integrated into the areas they serve, increasing access to financial services for rural and underserved people. Technology-Led Approach: The BC model’s emphasis on harnessing technology to deliver financial services efficiently is one of its pillars. BCs allow secure and convenient banking services in places with limited physical infrastructure by using biometric identification, mobile banking, and smart card-based transactions. Financial Education and Awareness: Business correspondents play an important role in increasing financial literacy among the unbanked. They help individuals understand the necessity of formal financial services and empower them to make informed financial decisions by guiding them through the benefits of savings, credit, and insurance products. Credit Access for the Unbanked: The BC model makes it easier to extend loans to individuals and small enterprises that were previously excluded from mainstream banking systems. Business Correspondents help financial institutions give microloans and credit facilities to the underserved by completing detailed evaluations and using digital records, thereby boosting entrepreneurship and economic progress. Government Programs and Subsidies: The BC model has proven useful in executing numerous government initiatives and ensuring the proper distribution of subsidies and benefits. Business Correspondents serve as a critical link between beneficiaries and government organizations, enabling frictionless transactions and decreasing leakages in welfare programs. Challenges and Prospects: While the Business Correspondent approach has helped increase financial access, several issues remain. Infrastructure limits, connectivity issues, and regulatory barriers must be cleared in order to fully exploit the model’s potential. To overcome these challenges, it is critical to strengthen digital infrastructure, extend internet connectivity, and streamline regulatory frameworks. Furthermore, regular training and capacity-building programs should be established to improve the abilities of Business Correspondents so that they can efficiently provide comprehensive financial services. Financial institutions, technology providers, and legislators must work together to establish an ecosystem that promotes financial inclusion. Conclusion The Business Correspondent model has emerged as a game changer in India’s quest for financial inclusion. The BC approach provides cheap banking services to historically marginalized populations by using technology, empowering local agents, and increasing financial literacy. As India continues to make strides in bridging the financial divide, the Business Correspondent model stands as a beacon of hope, paving the way for a more inclusive and prosperous future.
Financial Inclusion; the need and future
Financial inclusion refers to the process of ensuring access to affordable financial services, such as banking, insurance and credit, to all sections of society, particularly the underprivileged and low-income groups. Data Points to understand Financial Inclusion The need for Financial Inclusion Addressing poverty – Financial inclusion can help to alleviate poverty by providing access to formal financial services and promoting savings and investment habits among low-income households. Currently, India faces poverty in 75% of rural and 50% of urban households, totaling an official poverty percentage of 62.5%. Addressing the basic financial needs of the said population is the need of the hour to ensure we boost financial inclusion. Promoting economic growth – Financial inclusion can contribute to economic growth by enabling the flow of credit to small and medium-sized businesses, which are often the backbone of the Indian economy. With MSMEs contributing over 30% of the GDP, it is a pressing priority to assist them financially. Reducing income inequality – Financial inclusion can reduce income inequality by providing financial services to underserved sections of society, including rural areas and women. As per data, the pandemic has led to a further contraction of income and wealth in the bottom 50% of India. The top 30% own 90% of India’s wealth and interestingly, the top 10% own over 72% of India’s total wealth and the top 5% of the population owns nearly 62% of the wealth. Understanding the statistics makes us realize the staggering disparity in income. As per the Reserve Bank of India, only 27% of Indian adults are financially literate. This makes it easier for intermediaries and informal financial systems to defraud the illiterates. However, with educational programs, this issue can be addressed and eliminated. Promoting financial stability – Financial inclusion can help to promote financial stability by reducing the reliance on informal and unregulated financial systems that are often associated with fraud and other illegal activities. Empowering individuals – Financial inclusion can empower individuals by enabling them to make informed financial decisions, access credit, and invest in their future. The future of Financial Inclusion The future of financial inclusion in India looks promising, with significant progress made in recent years. Putting digital transformation at the forefront by the government and financial institutions has accelerated and is further expected to accelerate inclusivity in the coming years. With MSMEs and underserved individuals steadily adopting internet banking, mobile banking, etc., a digital shift can be expected. With Fintechs and NBFCs joining strengths, the collaboration has been beneficial for the financial domain. Better innovation with robust financial products and services that cater to the specific needs of the underserved has been introduced and executed in the market. This customization and personalization only seem to get better with time and adaption. However, it is important to note that financial literacy plays a very critical role in everything we have spoken of thus far. Without basic awareness and literacy to make informed decisions, every other initiative may prove futile. The government, along with several initiatives, has joined forces with financial institutions to convey awareness and literacy to the last mile. In conclusion, the future of financial inclusion in India looks promising, with the potential to improve the lives of 900 million people by providing access to formal financial services, promoting savings and investment, and reducing poverty and inequality.
The Significance of Regional Rural Banks in India
The Regional Rural Banks (RRBs) were established in India in 1975 with the objective of developing its rural economy through inclusive banking services. RRBs are jointly owned by the Government of India (GoI), the respective state government and a sponsor bank with the intention to elevate and empower the population under their governance. When the foundation of RRBs was laid by the Narsimham committee, 5 RRBs were set up with a total authorized capital of Rs 1 crore which was later increased to Rs 5 crore. The 5 commercial banks picked to sponsor RRBs were Punjab National Bank, State Bank of India, Syndicate Bank, United Bank of India and United Commercial Bank. The equities of rural banks were divided in a proportion of 50:35:15 among the Central Government, the Sponsor Bank and the concerned State Government, respectively. With a clear intention to upraise rural areas, RRBs were put in place to ensure the following responsibilities were undertaken and achieved – Taking the banking services to the doorstep of rural masses, particularly in unbanked and underserved rural areas. Identify the financial need, especially in rural areas. Making available institutional credit to the weaker section of society who had by far little or no access to cheaper loans and had been depending on informal credit sources. To enhance banking and financing facilities in backward, unbanked or underserved areas. Mobilize rural savings and channel them for supporting productive activities in rural areas. To provide finance to the weaker sections of society like small farmers, rural artisans, small producers, rural labourers, etc. To create a supplementary channel for the flow of the central money market to the rural areas through refinances. To provide finance to co-operative societies, Primary Credit societies and Agricultural marketing societies. Generating employment opportunities in rural areas and bringing down the cost of providing credit to rural areas. Enhance and improve banking facilities in semi-urban, rural and other untapped markets. If driven correctly, the elevation will also result in attaining financial inclusion since it has the capability to tap the rural population till the last mile. Apart from this, it ensures a financial safety net for the customers willing to avail of services from RRBs while increasing the supply of money and mobilizing savings in the rural market. The safety net encourages public confidence in the financial system and thus helps to increase its network so as to reach every segment and level of society. Understanding the significance of RRBs RRBs have played a pivotal role in driving financial inclusion in rural areas where the population was largely underserved. Bringing banking services to their doorstep was indeed a revolutionary step that set the rails for other financial institutions to join forces. This has further also led to the creation of employment opportunities in rural areas. With more financial service providers tapping the said market, rural individuals are able to launch and grow small-scale businesses that are leading to employment opportunities at large. Furthermore, it is a known fact that infrastructure is a challenge in rural areas and hence, many financial institutions, banks, NBFCs, etc. refrain from catering to rural needs. The acquisition cost coupled with the infrastructure cost and slow growth has forever been a hindrance. However, RRBs are bridging the gap by simply existing in rural areas and giving other banks and NBFCs a push in terms of infrastructural assistance. This has further helped in the development of industries, agriculture, small-scale businesses, etc. The entire existence of RRBs has helped in bringing financial stability to rural areas by channelizing their savings into productive investments and by also providing credit facilities to small-scale entrepreneurs. In spite of all the pros we’ve understood until now, RRBs have their own set of challenges, here’s what – Over the years, the GoI has played a significant role in involving other institutions and individuals to build on this goal. Whether it was establishing NABARD to support sustainable growth or currently formulating a roadmap to introduce 22 more RRBs, the GoI is working tirelessly to uplift the segment in conjunction with RRBs. As per data, the government has contributed Rs 4,084 crores towards RRB recapitalization in 2021-22, of which Rs 3,197 crores has been released to 21 lenders with a focus on financial inclusion by leveraging technology. Collaborating with technology has been a ‘super move’ that will take the growth trajectory at twice the speed. However, for now, RRBs have been instrumental in bringing banking services to rural areas, promoting agricultural development, creating employment opportunities, developing rural infrastructure, and providing financial stability to the rural financial system. They continue to play a significant role in the development of the rural economy in India.
Financial Literacy and the need for Financial Inclusion
Financial literacy is an extensive concept that involves several aspects like budgeting, saving, investing, debt management, financial planning, etc. It encompasses the ability to make informed and responsible financial decisions that can positively impact an individual’s financial well-being. Financial inclusion, on the other hand, refers to the accessibility and availability of financial services to all individuals, including those who are traditionally excluded from the mainstream financial system, such as low-income individuals, rural populations, women, and minorities. Financial inclusion aims to provide affordable and appropriate financial services, such as savings accounts, credit, insurance, and payment services, to empower individuals to manage their finances effectively and participate in the formal economy. Safe to say, financial inclusion and literacy work hand in hand. Each of these aspects cannot be weighed or regarded individually and must be dealt with in its entirety together. The need for financial literacy and financial inclusion is paramount for several reasons: Empowerment: Financial literacy equips individuals with the knowledge and skills necessary to make informed financial decisions, manage their money effectively, and achieve their financial goals. It empowers individuals to take control of their finances, make wise investment choices, and protect themselves from financial risks. 73% of Indians still await to be empowered as only 27% are financially literate meaning the rest have no access to financial services. Inclusivity: Financial inclusion ensures that all individuals, regardless of their socio-economic background, have access to affordable and appropriate financial services. It promotes economic participation and social mobility by providing opportunities for savings, credit, and investment, which can help individuals build assets, start businesses, and improve their standard of living. As of March 2022, the FI Index was 56.4 which fared better than the previous year’s however, given India’s 140 crore population, the efforts need to be doubled! Poverty alleviation: Lack of financial literacy and limited access to financial services can contribute to poverty and financial vulnerability. Financial literacy education, combined with accessible financial services, can enable individuals to develop sound financial habits, build savings, and make informed decisions about borrowing and investing, thereby breaking the cycle of poverty. As per a survey conducted by the Demographic and Health Survey before the pandemic struck, 16.4% of India’s population live in poverty, 4.2% live in severe poverty and roughly 18.7% fall into the vulnerable to poverty zone. This gives us a sense of how important financial inclusion is to empower the said population. Economic growth: Financial inclusion can foster economic growth by bringing more individuals into the formal financial system. Increased financial literacy and access to financial services can lead to higher savings, investment, and entrepreneurial activities, which can stimulate economic growth at both the individual and societal levels. For instance, 63 million MSMEs in India account for close to 30% of the GDP. Yet, they were severely underserved until recently. With Fintechs joining the force with banking institutions, the scenario is steadily changing. This change will reflect on the GDP too as MSMEs and the underserved population will be empowered. Consumer protection: Financial literacy equips consumers with the knowledge to understand financial products and services, compare options, and make informed decisions. Financial inclusion ensures that individuals have access to fair and transparent financial services that are suitable for their needs, protecting them from predatory practices and promoting financial well-being. For example, with 45.36 crore internal migrants in India constituting 37% of the country’s population, Domestic Money Transfer plays a significant role. Without financial literacy, a large number of this population was defrauded by intermediaries. However, with a sufficient amount of literacy, this challenge is being eliminated to a large extent. In conclusion, financial literacy and financial inclusion are essential for promoting financial well-being, economic growth, and social inclusion. By empowering individuals with financial knowledge and providing them with accessible financial services, we can foster a more financially inclusive society where everyone has the opportunity to thrive and participate in the formal economy.
Technology’s Role in Financial Inclusion
The start of the ‘technology era’ was a turning point for human evolution. The invention of ‘the wheel’ was the beginning of one of the most important eras of humankind. Over the years, technology along with its surroundings has evolved manifold and today, it is upholding several aspects that humankind as a society is striving to achieve. One very critical element in modern times is financial accessibility and inclusion. Technology plays a critical role in advancing financial accessibility and inclusion, which refers to the access and use of affordable and appropriate financial products and services by all segments of society, particularly those who are underserved or excluded from the traditional financial system. Tech elements that have furthered financial inclusion Digital payments refer to access to traditional banking services to make and receive payments. Digital payment has offered safe, convenient and cost-effective ways to conduct financial transactions, including remittances, bill payments, and peer-to-peer transfers, without needing a physical bank account. Digital payments have witnessed more than 200% growth in digital payment volume since FY18-19. Total transaction value is expected to show an annual growth rate of 15.56% resulting in a projected total amount of US $ 321.70 Bn by 2027. It is not only building a payments structure for Urban India but also for the Rural market. As per World Economic Forum, the Digitalization of small and medium businesses could add anywhere between $158-216 billion to India’s GDP by 2024. Technology has made it possible for individuals to access basic banking services through online and mobile banking and platforms. It has allowed individuals to check their account balance, make transfers, pay bills and even apply for loans, insurance and other financial services online, eliminating the need for physical visits to brick-and-mortar banks. The number of mobile banking payments across India in the fiscal year 2019 accounted for approximately 6.2 billion. This was a tremendous increase compared to the previous fiscal year. For instance, to further the use of online and mobile banking, SEWA – the largest trade union in India has trained 4,00,000 women in digital payment methods. Technology has facilitated the use of big data and alternative credit scoring models, which can assess the creditworthiness of individuals who lack a formal credit history. This enables financial institutions to extend credit to those who were previously excluded due to a lack of credit history, thereby promoting financial inclusion. Today, owing to this, 63 million underserved MSMEs in India are served with a range of customized financial services. Technology has made financial education and literacy more accessible to underserved populations through online resources, mobile apps, and educational content. This empowers individuals with knowledge about financial products, services, and best practices, enabling them to make informed financial decisions and manage their money effectively. With a rural population of 900 million, the SECC measured that 23.5% of rural households have no adults above the age of 25 who were literate. Illiteracy bars the population in question from accessing financial services since they are unable to open a basic bank account. However, to challenge this issue, biometric identification was introduced which enabled the illiterate population to open and access bank accounts with the help of their fingertips. For instance, AePS; individuals can withdraw money or enquire about their bank balance with their fingertips. This has proven to be helpful for a number of individuals and has allowed them to be included in the financial realm. Overall, technology has the potential to democratize access to financial services, reach underserved populations, and promote financial inclusion. However, it is important to ensure that technology is implemented in a responsible and inclusive manner, taking into account issues such as data privacy, cybersecurity, and digital literacy to ensure that the benefits of technology are shared widely across all segments of society.