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: microfinance
The importance of Micro Insurance and the Low-Income Group
Microinsurance is a type of insurance designed to cater to the needs of low-income individuals and households, who often face financial insecurity due to a lack of access to formal financial services. It provides a safety net against unexpected events such as illness, accidents, and natural disasters, which can cause significant financial strain for those living in poverty. For low-income groups, micro-insurance can be crucial in providing financial stability and protection against risks that could lead to financial ruin. Many individuals in this group have little to no savings and live pay check to pay check, making them particularly vulnerable to financial shocks. Microinsurance plays a critical role in promoting financial inclusion and economic empowerment for low-income households. By providing access to insurance, these individuals can begin to build assets and investments, which can help break the cycle of poverty. In addition, it also promotes social welfare by reducing the burden on public services and resources, particularly in developing countries where government resources may be limited. By providing access to affordable insurance, the need for government assistance in the event of a crisis can be reduced, freeing up resources for other needs. Healthcare is a basic yet expensive necessity and microinsurance allows individuals from the poorer section of society to access it. Currently, individuals limit themselves to only government healthcare offerings, therefore, barring them from better healthcare facilities. Microinsurance cannot offer them the best of the facilities however, it has the capacity to elevate them from the basic healthcare offerings. This also reduces the government’s assistance and allows them to use resources for other needs. Last but not the least, a very significant aspect of microinsurance is its ability to build creditworthiness among the individuals who avail of it. It gets them introduced to the financial database thereby helping them to avail of larger financial services in the future that otherwise could be unavailable to them. Overall, microinsurance can help low-income groups build financial security, protect against unexpected events, and improve their access to healthcare and other essential services. This can help them break the cycle of poverty and achieve greater economic empowerment. How can Microinsurance be offered to low-income groups? A number of methods have been set up to reach the underserved segment to offer them microinsurance and bring them to the base of financial products. As stated in the figure above, commonly used methods to offer microinsurance are Microfinance institutions, Community-based organizations, Mobile network operators, Public-Private Partnerships, Innovative Business models, etc. Community-based organizations find it easier to tap this segment as there’s a trust factor already imbibed between them. Nonetheless, all methods to reach the said segment have proven to be effective and slowly yet steadily, the financial domain is getting to the low-income group.