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Title of the paper : Significance of Microfinance in Indian Economy.Title of the paper : Significance of Microfinance in Indian Economy.Author :Author : Raj Shree Singh (Research Scholar)Raj Shree Singh (Research Scholar)University : M.G.K.V. University, VARANASI.University : M.G.K.V. University, VARANASI.Address : Brijenclave, Sunderpur, VaranasiAddress : Brijenclave, Sunderpur, Varanasi--221005, U.P.221005, U.P.Email : [email protected] : [email protected] : (0)9936506907Mobile : (0)9936506907

(0542)2316945(0542)2316945

INTERNATIONAL CONFERENCE ON MANAGING SUSTAINABLE DEVELOPMENTINTERNATIONAL CONFERENCE ON MANAGING SUSTAINABLE DEVELOPMENTOF RURAL ECONOMY & AGRI BUSINESSOF RURAL ECONOMY & AGRI BUSINESS

JANUARY 21JANUARY 21--23, 2011 BHU, VARANASI.23, 2011 BHU, VARANASI.

Significance of Microfinance in Indian Economy.Significance of Microfinance in Indian Economy.


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Micro-Finance is emerging as a powerful instrument for poverty alleviation in the neweconomy. Microfinance is defined as any activity that includes the provision of financialservices such as credit, savings, and insurance to low income individuals which fall justabove the nationally defined poverty line, and poor individuals which fall below that povertyline, with the goal of creating social value. The creation of social value includes povertyalleviation and the broader impact of improving livelihood opportunities through theprovision of capital for micro enterprise, and insurance and savings for risk mitigation andconsumption smoothing. A large variety of actors provide microfinance in India, using arange of microfinance delivery methods. At present lending to the economically active poorboth rural and urban is pegged at around Rs 7000 crores in the Indian banks creditoutstanding. As against this, according to even the most conservative estimates, the totaldemand for credit requirements for this part of Indian society is somewhere around Rs2,00,000 crores.

This paper is all about the knowledge and experience gained about the economic significanceof Microfinance industry India. This paper contains all the detail regarding the microfinanceindustry relates with the growth of it.The study helps in analyzing all the different objectivesand thus retaining a conclusion about the current situation of the microfinance industry -Current performance and market growth chances. The paper is carried out to translate thetheoretical knowledge of subject. With my best efforts, I have incorporated all the necessary

details about the significance of microfinance in Indian economy.To most, micro financemeans providing very poor families with very small loans (micro credit) to help them engagein productive activities or grow their tiny businesses.

Source: Text

ABSTRACT:ABSTRACT:


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ABOUT MICRO FINANCE

Microfinance is defined as any activity that includes the provision of financial services suchas credit, savings, and insurance to low income individuals which fall just above thenationally defined poverty line, and poor individuals which fall below that poverty line, withthe goal of creating social value. The creation of social value includes poverty alleviationand the broader impact of improving livelihood opportunities through the provision ofcapital for micro enterprise, and insurance and savings for risk mitigation and consumptionsmoothing. A large variety of actors provide microfinance in India, using a range ofmicrofinance delivery methods. Since the ICICI Bank in India, various actors haveendeavored to provide access to financial services to the poor in creative ways.Governments also have piloted national programs, NGOs have undertaken the activity ofraising donor funds for on-lending, and some banks have partnered with public

organizations or made small inroads themselves in providing such services. This hasresulted in a rather broad definition of microfinance as any activity that targets poor and low-income individuals for the provision of financial services. The range of activities undertakenin microfinance include group lending, individual lending, the provision of savings andinsurance, capacity building, and agricultural business development services. Whatever theform of activity however, the overarching goal that unifies all actors in the provision ofmicrofinance is the creation of social value.

RESEARCH METHODOLOGY:

Research Design:

DescriptiveDescriptive

Data collection Method:

Based on secondary data collection from various sources like

- Internet

- Newspapers

- Books, etc.


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The broad objective of my paper is to examine the role and significance of MICROFINANCE in Indian economy. However,the study has some specific objectives. They are:

To analyse the economic gains derived by the clients of microfinance.

To examine the social benefits derived by its clients.

To analyse the operating system of microfinance for the mobilization of saving, delivery of credit to the needy,management of group funds.

To analyse the microfinance industry in terms of its outreach in Indian economy.

To explore the future scope and possibilities for microfinance in India.

To suggest appropriate policy intervention for the effective performance of microfinance

Source: Text

RESEARCH OBJECTIVES:RESEARCH OBJECTIVES:


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MICRO FINANCE IN INDIAMICRO FINANCE IN INDIA

Evolution of Micro finance in India

Micro finance has been in practice for ages ( though informally).

Legal framework for establishing the co-operative movement set up in 1904.

Reserve Bank of India Act, 1934 provided for the establishment of the Agricultural CreditDepartment.

Nationalization of banks in 1969

Regional Rural Banks created in 1975.

established as an apex agency for rural finance in 1982.

Passing of Mutually Aided Co-op. Act in AP in 1995.

The scenario

Estimated that 350 million people live Below Poverty Line

This translates to approximately 75 million households.

Annual credit demand by the poor in the country is estimated to be about Rs. 60,000 crores.

Cumulative disbursements under all micro finance programmes is only about Rs. 5000crores.(Mar. 04)

Total outstanding of all micro finance initiatives in India estimated to be Rs. 1600 crores. (March04)

Only about 5 % of rural poor have access to micro finance


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THE STATUS OF MICRO FINANCE INTHE STATUS OF MICRO FINANCE ININDIAINDIA

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

Bankers feel that it is fraught with risks and uncertainties.

High transaction costs

Unfavourable 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 whilescaling up. These include

Lack of an appropriate legal vehicle

Limited access to equity

Difficulty in accessing low cost on-lending funds (as of now they are unable to offer savings services in a legitimate

Limited access to Capacity Building support which is an important variable in terms of quality of the portfolio, MIS, and thesustainability of operations.

About 56 % of the poor still borrow from informal sources.

70 % of the rural poor do not have a deposit account

87 % have no access to credit from formal sources.

Less than 15 % of the households have any kind of insurance.

Negligible numbers have access to health insurance


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FEATURES OF INDIAN MFFEATURES OF INDIAN MF

About 60 % of the MFIs are registered as societies.

About 20 % are Trusts

About 65 % of the MFIs follow the operating model of SHGs.

Large concentration in South India

600

MFI initiatives have a cumulative outreach of 1.25 crore poor households

NABARDs bank linkage program has cumulatively reached a total of 9.4 lakh SHGs with about 1.4

crore households.

PROJECTIONS FOR THE FUTURE :

Annual growth rate of about 20 % during the next five years.

75 % of the total poor households of 80 million (i.e. about 60 million will be reached in the next fiveyears.

The loan outstanding will consequently grow from the present level of about 1600 crores to about42000 crores


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75 million poor households in India requires credit support to sustain one or more livelihood

activities

26% of Indias population lives below the poverty line. 80% of these peoples credit needs are met byinformal sources

The annual demand for credit by the 75 million poor households works out to about US $11 billion($130/per rural HH, $197/ urban HH)

Of this demand 64% is for consumption and 36% is for production

Nearly of the consumption loan is short term loan to deal with emergencies such as illness andhousehold expenses during the lean season. The existing microfinance institutions reach out to only1.1million poor households.

There are total 30mn working poors in India out of which nearly 20mn are in demand for micro creditbut only 7.3mn are being served as microfinance clients.

Over 800 microfinance institutions are operating in India reaching out to over 7.3mn clients disbursingover rs 8000 in small loans.

The compounded annual growth rate for outreach as well as gross loan portfolio of the MFIs for last 5years ranged between 45% to 100% In the financial year 2007/08, Microfinance in India through its twomajor channels SBLP and MFIs served over 33 million Indians, up by 9 million over the previousfinancial year. 4 out of 5 microfinance clients in India are women.

Per 31st March 2008, the outstanding micro-credit portfolio of India Microfinance was about Rs. 22,000crore. 75% are accounted for by SBLP, 20% by large MFIs and 5% by medium and small MFIs.


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Our review of microfinance concludes that microfinance institutions have been effective incontributing, directly and indirectly, to all aspects of rural development. Microfinance contributes toimproving income and reducing hunger, providing children school education and training, and payingfor health services .The main beneficiaries of microfinance services are women, so MFIs contribute towomen's empowerment and gender equality. As for the environment,MFIs are increasingly combiningenvironmental programs with their financial services, although the contribution may be indirect.


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