microcred it by now and by the end of 2005 the goal of the m icrocred it sum mit campaign wou ld be

reached. As the president of the World Bank James Wolfensohn has pointed out, providing financial
services to I 00 million of the poorest households means helping as many as 500 - 600 million poor
people.

Need for Micro-Finance: The gap between Demand and Supply

Since independence, various governmen ts in lndia have cxpcri1ncnLcd \vith a J argc n urnber of grant
and subsidy based poverty alleviation programmes. These programmes were based on granllsubsidy
and the credit linkage was through commercial banks only.
Hence wa. adopted the concept of m icro-credit in India. Success stories in neighboring countries, l i ke
Grameen Bank in Bangladesh, Bank Rakiat in Indonesia, Commercial & Ind ustrial Bank in Philippines
etc, gave further boost L o the concept in India in the 1980s. India thus adopted the similar model of
extending credit to the poorest sector and took a no. of steps to promote micro-financing in the
country. Since the 1950s, various governmen ts in Ind ia have experimented with a large number of
grant and subsidy based poverty allevi ation program mes. Srudies show that these mandatory and
dedicated subsidized financia l programmes, i mplemented through bank ing institutions, have not been
fully successful in meeting their social and economic objecti ves:

The common features of these programmes were:-

• Target oricnLation
• Based on granllsubsidy, and
• Credit linkage through com mercial banks.

These programmes:-
• \Vere often not sustainable
• Perpetuated the dependent starus of the beneficiaries
• Depended ultimatel y on government employees for del i very
• Led to misuse of both credit and subsidy and
• \Vere treated at best as po,1erL}' alle,1iation inter,1entions.

Who are the clients of mic ro finance?

The typical micro finance clients are low -income persons that do not have access to formal financial
institutions. M icro finance clients arc typicall y sel f-employed, often household-based entrepreneurs. In
rural areas, they are usually small farmers and others who are engaged in small income-genera ting
acti, ities such as food processing and petty trade. In urban areas, rnicro finance acti vities arc more
1

26
di verse and include shopkeepers, servi ce providers, artisans, street vendors, etc. Micro finance cl ients
are poor and vu lnerable non-poor who have a relatively unstable source of income.
Access LO con,entional forrnal financial inslitt1tions, for many reasons, is in,ersel}' related to incorne:
1 1

the poorer you are the Jess likely that you have access. On the olher hand, the chances are that, the
poorer yot1 arc, the rnore expensive or onerous inforrnal financial arrangements. Moreover, in fonnal
arrangen1ents rnay not Sl1itably rneet certain financial service needs or may exclude you an}way . 1

Indi vid uals in this excll1ded and t1nder·scrved market segment are Lh e clicnLs of micro fi nance.
As we broaden the notion of the types of services micro finance encompasses, the poten tial market of
micro finance clients also expands. It depends on local conditions and political cli mate, acti veness of
cooperatives, SH G & NGOs and support mechanis m . For instance, m icro credit might have a far m ore
1im iLed n1arkct scope Lhan say a more di,ersifi ed range of financial services, v.,ihich includes variot1s
1

types of savings products, payn1ent and remittance services, and variol1S insurance products. For
example, many very poor farmers may not really wish 10 borrow, but rather, would like a safer place 10

sa,e Lh c proceeds from their harvest as these arc const11ned over several rnonths b)' the requirements of
1

daily Ji ving. Central government in Ind ia has established a strong & extensi ve link between NAB A R D
(National Bank for Agriculture & Rural Development), State Cooperative Bank , District Cooperative
Banks, Primary Agriculture & Marketing Societies at national, state, district and vi llage level.

The Need in Ind ia:-

• India is said 10 be the home of one third of the world 's poor; official estimat es range from 26 10
50 percent of the more than one billion popu lation.
• About 87 percent of the poorest households do not have access 10 credit.
• The demand for microcredit has been estimated at u p 10 $30 bi llion ; the suppl y is less than $2.2
billion combined by all invol ved in the sector.

Due 10 the sheer siz.e of the popu lation Jiving in poverty, India is strategically significant in the global
efforts 10 allev iate poverty and to achieve the Mi llennium Development Goal of halving the world 's
poverty by 2015. M icrofinance has been present in India in one form or another since the 1970s and is
now widely accepted as an effective poverty alleviation strategy. Over the last five years, the microfinancc
indt1stry has achieved significant gro\vth in parL due to the participation of con1 1nercial banks. Despite
this growth, the pove rt)' situation in India continues 10 be challenging.
Some principles that summarize a century and a hal f of development practice were encapsulated in
2004 by Consultati ve Group 10 Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at
the G8 Summ it on J une 10, 2004:

• Poor people need not just loans but also savings, insurance and rnone}' transfer services.

27
 • Microfinance must be useful L o poor households: helping them raise income, build up assets
and/or cushion themselves against ex ternal shocks.
• "Microtinancc can pay for itscl f."Subsidies from donors and govcrnmcn l arc scarce and
<mcerlain, and so to reach large numbers of poor people, microfinance must pay for itself.
• Microfinance means build ing permanent local institutions.
• Microfinancc a lso means integrating the financial needs of poor people into a country's
mainslrcan1 financial systcrn.
• "The job of government is to enable financial services, not to provide them."
• "Donor funds should complement private capita l , not compete w ith it."
• "The key bou lencck is the shortage of strong institutions and managers ." Donors should focus
on capacity building.
• Interest rate ceilings hurl poor people by preventing microfinance institutions from covering
their costs, which chokes off lhe suppl y of credit.
• Microfinance institu tions should measure and d isclose their performance - both financially and
socially.

Microfinance can also be d istinguished from charity. It is beuer to provide grants to families who are
destitute, or so poor they are un likel y to be able to generate the cash flow required to repay a loan. This
siruation can occur for cxarnple, in a \var zone or aficr a natt1ral disasLcr.

Financial needs and Financial services:-

In de,eloping econornics and partict1larl}' in the rural areas, rnan}' activities that \vOuld be classified in
1

the developed wor ld as financia l arc not monetized: that is, money is not used to carry them out. Almost
by definition, poor people have very liule money. But circumstances often arise in their lives in which
they need money or the things money can buy.

In Stuart Rutherford 's recen t book Tire Poor a11d Their Mo11ey, he cites several types of needs:
• Lifecycle N eeds: such as weddings, funerals, childbirth, education, homebuilding, widowhood,
old age.
• Perst> 11t1l Enr.erge11cies : Sl1Ch as sickness, injury, unc1r1ployn1ent, t}1cft, harass1r1cn1 or death .
• Disasters: such as fires, floods, cyclones and man-made events like war or bu lldozing of
d\vCllings.
• J11vestn1e111 Opport1111.i1ies : expanding a bt1siness, bu}1ing land or equipment, irnproving
housing, securing a job (which often requires paying a large bribe), etc.

28
Poor people find creative and often collaborati ve ways Lo meet Lh ese needs, pri marily through creating
and exchanging different forms of non-cash value.Common substitutes for cash vary from country to
country but typically include livestock, grains, je wellery and precious metals.
As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that
"microfinance could provide large-sca le outreach profitably," and in the 1990s, "m icrofinance began
to develop as an industry". In the 2000s, the microtinance industry's object ive is to satisfy the unmet
demand on a m uch larger scale, and to play a role in reducing povert)'. W hile m uch progress has been
made in dc1,eloping a 'iable, cornmerciaJ rnicrofinancc sector in the lasL fc\v decades, several issues
remain LhaL need LO be addressed before the indu stry will be able to satisf y massive worldwide demand.
The obstacles or challenges to building a sound commercial microfinance industry i nclude:
• Inappropr iate donor subsidies
• Poor regulation and supervision of deposit-taking M Fls
• Few M Fis that mobilize savings
• Lim ited management capacity in M Fls
• InsLitl1til)nal inefficiencies
• Need for more dissemination and adoption of rural, agriculrural microfinance methodologies

Rol e of Microfinance:-

The micro credit of microfinance progamme was first initiated in lhe year 1976 in Bangladesh with
promise of providing credit LO the poor without collateral , alleviating poverty and u nleashing human
creativity and endeavor of the poor people. M icrofinance impact studies have demonstrated that

I. Microfinan ce helps poor households meet basic needs and protects them against risks.
2. The use of financial services by low -income households leads to improvemen ts in household
econom ic welfare and enterprise stabilit y and growth.
3. B)' supporting women's economic participaLion, rnicrofinance crr1pO\vers \vomcn, thereby
promoting gender-equity and improving household well-being.
4. The level of impact relates to the length of time cl ients have had access LO financial services.

J ,l Strategic Policy Initiatives

Some of the most recent strategic policy initiatives in the area of M icrofinan ce taken by the
govern1r1cnL and regt1latory bodies in India arc:

• Working group on credit to the poor through SHGs, NGOs, NA BARD, 1 995
• The Na tional M icrofinance Taskforce, 1999
• \Vorking Group on Fi nancial Flows to the Informal Sector (set up by PM O), 2002

29
 • To acce. s to markets and infonnation.
• They become more con fident.
• They get a better control of the resources.
• They can conf ront S)1Ste1r1ic gender inequ alities

BEIJIN G CONFEREN CE 1995 HAD IDENTIFIED CERTAIN INDICATORS OF \V01"1EN

EMPO\V ERMENT

Important among them are as follows:

• Increase in self-esteem , individual and collective confidence

• lncrease in artiCl1lation, knO'A'lcdge and a'A1arcncss on healtl1, nutrition reproduct ive rights, law
and literacy

• Increase an decrease in personal leisure time and Lime for child care;
• Increase on decrease of "'O rkJoads in nc\v program1r1cs
• Change in roles and responsibility in family & community.
• V isible increase on decrease in violence on won1en and girls;
• Responses to, changes in social customs like child marriage, dowry, discri mination against
widO\VS

• V isible changes in \vomen 's participation level attending rnceting, part icipating and den1anding
participation
• Increase in bargaining and negotiating pO'A'Cr at home, in C()mmunity and the collecti ve
• Increase access to and abi lity to gather infonnation
• Forrnation of \vOrnen collectives
• Positive changes in social attitudes
• A \vareness and recognition of "'On1en's econornic contribution "'ithin and outside the
househol d;

• \Vomen' s decision rnaking over her \vOrk and incorne

\VOM EN 'S El'lPO\\I ERM ENT AN D MICRO FI N AN CE: DI FFE R ENT PA RAD IGMS
Concern with \VOmen's access to credit and assumptions abot1t contribu tions to \VOmen 's
ernpO\venncnt arc noL ne\v. Frorn the early 1970s \VOmen 's movemen ts in a nt1mber of cot1ntrics
beca1r1e increasingl}' interested in the degree to \vhich women \vcre able to access poverty·focuscd
credit programme. and cred it cooperatives. In India organ izations like Self - Employed \"/omen 's
Association (SE\¥A) among others with origins and a ffiliations in the Indian labour and women 's
move1r1ents identified credit as a 1najor constrainL in their \vOrk wilh in formal sector \V01nen \vOrkers.

so