Financial Inclusion Through Microfinance

Vineeta Agrawal
Dr. Sanjay Baijal
#
Applied Sciences Department, KIIT College of Engineering

1
vini2710@gmail.com

Introduction— Since 1950s Financial Inclusion has hungry for action and not for words.” Nelson
been the focus of Indian Government. Mandela
Nationalization of Banks in 1969, formation of
several Regional Rural Banks, and Scheduled India has the largest number of poor people in the
Commercial Banks were some of the steps to world (The World Bank estimates that near about
enhance the process of financial inclusion. one-third of the global poor now reside in India) of
Unfortunately the expansion has not brought about its 1 billion habitants, an estimated 350-400 million
the necessary change in the backward and rural are below the poverty line, 75% of them in rural
areas as financial services are yet to reach a vast areas.
majority of the population. Almost 40% of the
Indians don’t have a bank account and this situation Percentage of People below Poverty Line- 1951-52
is particularly poor in rural areas. If India is serious to 1999-2000
about building a more inclusive financial system
that works for the poor, it must re-think its rural Year Rural Urban All India
finance strategy. Development leads to all inclusive 1951-52 47.4 35.5 45.3
financial system, so talking about growth figures 1977-78 53.1 45.2 51.4
and statistics is useless for the data does not belong 1983 45.7 40.8 44.5
to most of the people of India. Microfinance is 1993-94 37.3 32.4 36.0
being seen as a tool to reach the masses that are 1999-2000 26.8 24.1 26.1
excluded. With the growth rate it has achieved in
the past years, and the growing popularity of the It has been observed that poverty is linked to
concept around the world, it can be one of the financial exclusion. It is estimated that half of the
methods to solve the problem of financial world’s population does not have access to financial
exclusion. This paper considers a number of services. In developing countries, over 70% of the
alternative initiatives to increase access to population is excluded. Of the estimated 2.6 billion
institution’s financial services for the under-served people living on less than $2 per day (almost 40%
people. of the world’s population), less than 10% have
access to formal savings products.According to
NSSO 2003 survey 51% of the Indian population
does not have access to financial servies. Access to
Keywords— Microfinance, Women Empowerment, Self-help financial services is a potential means of alleviating
Groups,NABARD, Formal source of Financing
poverty especially when combined with other
I. INTRODUCTION support for poor households. UN Secretary General
Overcoming poverty is not a gesture of charity, it is Kofi Annan has very truly said that it is a stark
an act of justice. It is the protection of a reality that most poor people in the world still lack
fundamental human right, the right to dignity and a access to sustainable financial services, whether it
decent life. I say to all leaders don’t look the other is savings, credit or insurance. The great challenge
way, don’t hesitate, recognize that the world is before us is to address the constraints that exclude
people from full participation in the financial
sector. In the last five years GDP growth rate of
India has been 8-9%(most of this growth figures
relate to manufacturing and industrial sector while
agriculture growth is as low as 2%) only
comparable with China in the world. Though India
is growing but this growth is not inclusive. The gap
between Bharat and India is widening. The Gini
index1 shows that the gap between rich and poor
households keeps on increasing.
II. FINANCIAL INCLUSION DEFINED-
“Financial inclusion may be defined as the process
of ensuring access to financial services timely and
adequate credit where needed by vulnerable groups
such as weaker section and low income groups at an
affordable cost.”Report of the committee on
Financial inclusion constituted by government of
India (chairman : Dr. C. Rangarajan) Jan’2008
Number of Savings Account to Adult Population –
90
80
70
60
50
40
30
20
10
0
The above mentioned chart shows that 59% of the
adult population is covered by banking services in
India. The situation is particularly grim in North
Eastern and Eastern region of India. The first-ever
Index of Financial Inclusion to find out the extent
of reach of banking services among 100 countries,
India has been ranked 50.This rank is significantly
low compared to size and growth of the country.
Coverage of Financial Services as a of Percentage
of population (Estimates based on various studies
and Market Surveys):
Check in accounts - 40%
Life Insurance - 10.0%
Non-Life Insurance - 0.6%
Credit Card - 2%
ATM + Debit Card - 13%
Geographical coverage
5.2% villages are having a bank branch (There are
6, 50,000 villages in India.)
Financial Inclusion should include access to
financial products and services like,
Bank accounts – check in account
Immediate Credit
Savings products
Remittances & Payment services
Insurance - Healthcare
Mortgage
Financial advisory services
Entrepreneurial credit
Microfinance
Microfinance is generally an umbrella term that
refers to the provision of a broad
range of financial services such as deposits, loans,
payment services, money transfers and
insurance to poor and low-income households and
their micro-enterprises.
(Sharma 2001, p. 1)
It has been observed that microfinance-
• Promotes investment in assets
• Facilitates activities to earn a
livelihood
• Protect against income shocks
• Build social capital and improve
quality of life
Two models of microfinance are practiced in India.
1) Self-Help groups (SHGs) Bank linkage model
where commercial Banks lend directly to SHGs
formed explicitly for this purpose. 2) The
Microfinance Institution Model where MFIs borrow
funds from banks to on-lend to microfinance clients
many of whom form joint liability groups for this
purpose. The first model is predominant in India
and is a good example of meaningful liaison
between Commercial Banks and informal SHGs.
Credit is the most important tool some observances:
The Director of Grameen Bank Mohammad Yunus
states this view forcefully “…… credit is more than
business, just like food, credit is a human right. A
rural finance Access survey 2003, conducted by the
World Bank and the NCAER, revealed that 79% of
the rural households had no access to credit from
formal sources. ( Basu, 2006)
According to a report of Working Groups
Competition Micro-Credit market in India Dr.
Arvind Virmani of Planning Commission(Jan’07)
both institutional and non-institutional channels
exist for supply of credit in rural and urban area.
While banks, MFIs and Credit Co-operative
comprise the institutional channel, landlords, local
shopkeepers traders/suppliers and money-lenders
constitute the non-institutional channels. Share of
informal loans in rural credit went down from 91%
in 1951 to 45% in 1991. But most of the benefits of
this development have gone to relatively better-off
people.
Credit is considered to be an essential input to
increase productivity, mainly land and labour. It is
believed that credit boots income levels, increases
employment at the household level and thereby
alleviates poverty. Credit facilitates the poor to
triumph over their liquidity constraint and
undertake some income generating activities.
Furthermore, credit helps poor to smoothen their
consumption patterns in times of lean periods of the
year ( Binswanger and Khandekar, 1995). Hence
credit will maintain the productive capacity of rural
poor households. ( Mosely and Hulme 1998)
In order to address the issue of Financial Inclusion
the Govt. of India constituted a committee on
Financial Inclusion under the chairmanship of Dr.
C. Rangarajan. The committee has submitted its
final report to Hon’able Union Finance Minister in
2008.
The successof Grameen Bank in Bangladesh, Bank
Rayat Indonesia and Boncosol in Bolivia
In Indonesia borrowers increased their incomes by
12.9 percent compared to increases of 3 percent in
control group incomes.7 Another study on Bank
Rakyat Indonesia borrowers on the island of
Lombok in Indonesia reports that the average
incomes of clients had increased by 112 percent and
that 90 percent of households had moved out of
poverty.
A study of SHARE clients in India documented that
three-fourths of clients who participated in the
program for longer periods saw significant
improvements in their economic well-being (based
on sources of income, ownership of productive
assets, housing conditions, and household
dependency ratio) and that half of the clients
graduated out of poverty. There was a marked shift
in employment patterns of clients from irregular,
low-paid daily labor to diversified sources of
earnings, increased employment of family
members, and a strong reliance on small business.
Over half of SHARE clients indicated that they had
used their microenterprise profits to pay for major
social events rather than go into debt to meet such
obligations.
The Director of Grameen Bank Mohammad Yunus
states this view forcefully “…… credit is more than
business, just like food, credit is a human right. A
rural finance Access survey 2003, conducted by the
World Bank and the NCAER, revealed that 79% of
the rural households had no access to credit from
formal sources. ( Basu, 2006)
According to a report of Working Groups
Competition Micro-Credit market in India Dr.
Arvind Virmani of Planning Commission(Jan’07)
both institutional and non-institutional channels
exist for supply of credit in rural and urban area.
While banks, MFIs and Credit Co-operative
comprise the institutional channel, landlords, local
shopkeepers traders/suppliers and money-lenders
constitute the non-institutional channels. Share of
informal loans in rural credit went down from 91%
in 1951 to 45% in 1991. But most of the benefits of
this development have gone to relatively better-off
people.
Credit is considered to be an essential input to
increase productivity, mainly land and labour. It is
believed that credit boots income levels, increases
employment at the household level and thereby
alleviates poverty. Credit facilitates the poor to
triumph over their liquidity constrant and undertake
some income generating activities. Furthermore,
credit helps poor to smoothen their consumption
patterns in times of lean periods of the year
( Binswanger and Khandekar, 1995). Hence credit
will maintain the productive capacity of rural poor
households. ( Mosely and Hulme 1998)
In order to address the issue of Financial Inclusion
the Govt. of India constituted a committee on
Financial Inclusion under the chairmanship of Dr.
C. Rangarajan. The committee has submitted its
final report to Hon’able Union Finance Minister in
2008.
The successof Grameen Bank in Bangladesh, Bank
Rayat Indonesia and Boncosol in Bolivia
In Indonesia borrowers increased their incomes by
12.9 percent compared to increases of 3 percent in
control group incomes.7 Another study on Bank
Rakyat Indonesia borrowers on the island of
Lombok in Indonesia reports that the average
incomes of clients had increased by 112 percent and
that 90 percent of households had moved out of
poverty.
A study of SHARE clients in India documented that
three-fourths of clients who participated in the
program for longer periods saw significant
improvements in their economic well-being (based
on sources of income, ownership of productive
assets, housing conditions, and household
dependency ratio) and that half of the clients
graduated out of poverty. There was a marked shift
in employment patterns of clients from irregular,
low-paid daily labor to diversified sources of
earnings, increased employment of family
members, and a strong reliance on small business.
Over half of SHARE clients indicated that they had
used their microenterprise profits to pay for major
social events rather than go into debt to meet such
obligations.
Literature Review
There are a couple of studies that argue that
microfinance is very helpful in improving the
economic and social welfare of the member
households (Hossain, 1988; Remeny and Benjamin,
2000; Otero and Rhyne, 1994; Khandker, 1998).
The study by Mosley (2001) reveals that
Bangladesh and Indonesia is quite impressive and
reached reasonably a large number of poor (not the
vulnerable poor or extreme poverty). Zeller and
Sharma (1998) argue that microfinance could help
to establish or expand family enterprises,
potentially making difference between grinding
poverty and economically secure life. There are a
couple of studies that argue that microfinance is
very helpful in improving the economic and social
welfare of the member households (Hossain, 1988;
Remeny and Benjamin, 2000; Otero and Rhyne,
1994; Khandker, 1998). The study by Mosley
(2001) reveals that the achievement of microfinance
in reducing the poverty in Bolivia, Bangladesh and
Indonesia is quite impressive and reached
reasonably a large number of poor (not the
vulnerable poor or extreme poverty). Zeller and
Sharma (1998) argue that microfinance could help
to establish or expand family enterprises,
potentially making difference between grinding
poverty and economically secure life. The
proposed goal of microfinance sector is to improve
the welfare of the poor as a result of better access to
small loans. Lack of access to credit for the poor
may have negative consequences for various
household level outcomes including technology
adoption, agricultural productivity, food security,
nutrition, health and overall welfare. Access to
credit, therefore, affects welfare outcomes by
alleviating the capital constraints of poor
households. Access to credit, in addition, increases
the poor households’ risk-bearing ability, improves
their risk-coping strategies and enables
consumption smoothing, over time. By so doing,
microfinance is argued to improve the welfare of
the poor (Navajas, et al., 2000; Diagne and Zeller,
2001).
Littlefield, Morduch and Hashemi (CGAP 2003, p.
1) have argued that microfinance, and
the impact it has, go beyond just business loans.
The poor use financial services not only
for business investment in their micro enterprises
but also to invest in health and education,
to manage household emergencies and to meet a
wide variety of other cash needs that they
might encounter. Furthermore, since many micro-
finance programmes have targeted
women (who are the poorest of the poor) as clients,
they have not only helped empower
women who appear more responsible and show a
better repayment performance but also
shown that women are more likely to invest
increased income in the household and family
well being (Littlefield, Morduch and Hashemi
2003, p. 7). Microfinance, therefore acts not
only as an economic stimulator for small enterprises
but also has far reaching social
impacts. It is generally believed that microfinance
programmes will raise incomes and broaden
financial markets by principally providing credit,
among other services, to small scale
entrepreneurs (Aghion & Morduch 2000, p. 402).
According to Muhammad Yunus of Grameen Bank
a most important contribution has perhaps been to
successful circle can be set up: "low income, credit,
investment, more income, more credit,
more investment, more income" (IDSS 1994 cited
in Hulme & Mosely 1997, p. 101).
. financing and development of SSI. It has launched
Efforts Undertaken in India
In India self help groups linkage model evolved
from the pioneering effort of NABARD and two
NGOs MYRYADA and PRADHAN. Starting with
500 groups in early 1990s the cumulative number
of SHGs that have been finance have increased to 1
million by now.
NABARD has adopted multipronged strategies for
addressing various constraints in the success of
women entrepreneurship.
Addressing the capacity building
needs of women.
Increasing the access of women to
credit.
Engineering an appropriate credit
delivery system.
In India the National Bank for Agriculture and
Rural Development (NABARD) finances more than
500 banks that onlend funds to self help groups
(SHG). SHGs comprise twenty or fewer members,
of whom the majority are women from the poorest
castes and tribes. Nearly 1.4 million SHGs
comprising approximately 20 million women now
borrow from banks, which makes the Indian SHG-
Bank Linkage model the largest microfinance
program in the world.
SEWA (Self-employed women’s association of
India) is a trade union for poor, self-employed
women worker in India. SEWA was founded in
1972 by the noted Gandhian and civil rights leader
Dr.Ela Bhatt. SEWA’s main office is located in
Ahmadabad, Gujarat and it works in several states
of India. SEWA had a membership of 9,66,136 in
the year 2008.
Through the initiative of SEWA Bank, the
poor women have been given control of natural and
financial resources.
SEWA bank is innovative in more ways-
organizationally, institutionally, financially. Its
encourage the women to participate fully in all
phases of banking, lending and saving activities.
SIDBI was established in 1990 to serve as a
principal financial institution for promotion,
Microcredit Scheme (MCS) in Feb’1994, to provide
support to NGOs for on-lending to the poor
individuals or groups for setting up
Microenterprises. SIDBI has also launched a
Foundation For Micro Credit (SFMC) in Nov.1998
with an initial capital of 100 crore, for effective
management of financial risk involved in MCS.
Rashtrya Mahila Kosh (RMK) was established as a
society under the societies registration Act, 1860, in
March 1993. It supports NGOs, Co-operative
societies and women development Corporation
(WDC) for providing financial services to the poor
women.
Aanganwadi Groups: These groups are formed by
Department of women & Welfare at the habitation
level for implementing health, nutrition and literacy
programmes for women. Microfinance is extended
to the member for income generating activities to
individuals or group enterprise.
DWCRA Groups (Department of Women and
Children in Rural Areas)
Department of rural development forms groups of
maximum 15 members. A lump sum grant of
25,000 is given to the group. Training in leadership
attitude and skills for income generation is integral
part of the scheme.
Besides Swarnajayanti Grameen Swarojgar Yozna
(SGSY) Ministry of Rural Development is
implementing other schemes having women
component. They are the Indira Awas Yozna (IAY)
National Social Assistace Programme (NSAP),
Restructured rural sanitation programme,
Accelerated Rural Water Supply Programme
(ARWSP), the Integrated Rural Development
programme(IRDP) and Jawahar Rojgar Yozna It is estimated that 167.09 million (as on May 31,
(JRY). 2009)of Kisan Credit Cards have been distributed
Other programmes such as Working Women’s to farmers. it is estimated that banks have opened
Forum (WWF) in India are very active politically. over 50 million ‘no frills accounts' and these have
WWF has a union and advocacy branch as well as a an outstanding balance of over Rs 5,400 crore. The
lending programme and has been successful in government has decided to pay banks Rs 140 for
mobilizing very large number of women for every no frills account they open as part of the
political and legal changes that support women financial inclusion plan.The government has
rights and opportunities. According to WWF over actuaaly decided to give out Rs 50 crore to banks
89% of its members had taken up civic action for for this purpose in the upcoming fiscal. Under the
pressing problem in their neighborhoods, showing financial inclusion plan, the government has set a
that microfinance and political empowerment can nationwide target of covering 73,000 new
be complementary processes. With a portfolio of habitations, with population of 2,000 and above,
Rs.9.6 billion and a client base of 3.5 million, ICICI with banking services by March 2012. Besides,
Bank's micro finance programme is one of the banks will have to open five crore new accounts
largest among private sector banks in India. nationwide during the period. KYC(Know your
Customer) principles have been simplified to open
accounts for customers in rural & urban areas. The
Budget 2011 has proposed to set up a Rs 10 crore
equity fund for the microfinance sector, which has
witnessed turbulence in the past few months. The
India Microfinance Equity Fund will be
administered by the Small Industries Development
Bank of India (SIDBI). The budget for 2011/12,
which was tabled in parliament on Monday, also
sought to allocate Rs 500 crore to SIDBI to
refinance commercial banks’ lending to micro,
small and medium enterprises (MSMEs). This
move is also expected to benefit microfinance
institutions (MFIs) as they fund micro enterprises.
He also said that to empower women and promote
their Self Help Groups (SHGs), he intended to
Client outreach (outstanding account) create a ‘Women’s SHG’s Development Fund’ with
Segment 2006- 2007- 2008- Growth a corpus of Rs 500 crore. The minister in his last
07 08 09 2009 budget speech had advised banks to provide
over banking facilities to habitations with a population of
2008 over 2000 by March, 2012. The Banks identified
Banking 38.02 47.1 54.0 6.9 about 73,000 such habitations for providing
System banking facilities using appropriate technologies.
MFIs 10.04 14.1 22.6 8.5 A multi-media campaign, “Swabhimaan”, had been
Total 48.06 61.2 77.6 15.4 launched to inform, educate and motivate people to
Total 44.97 56.0 70 14 open bank accounts. During the year 2011, banks
adjusted will cover 20,000 villages. Remaining will be
for covered during 2011-12 stated the minister.
overlap
Source: State of the sector Report 2009 In order to increase banking penetration and
promote financial inclusion, the Reserve bank of
India on march 31, 2010 asked both public and
private sector banks to present their financial
inclusion plans for the next three years to target
number of villages with a population of at least
2000 who are without banking facilities.
Apart from these Indian Government has taken
various initiative for financial inclusion like the
payment in various government rojgar schemes is
channeled through bank accounts..In future RBI is
thinking that the financial inclusion will be an
agenda while issuing bank licenses.
Conclusion
There are various participants like NGOs, For profit
organization as MFIs, Banks channeling the
movement of microfinance in India.The percentage
of the population covered by Microfinance
Institution remains still very low just 5% of the total
population. While for Bangladesh this is 65%. The
current crisis in Andhra Pradesh has only triggered
this problem as Banks are not lending to MFIs. The
local level politics has also heightened this problem
as leaders have asked public not to repay. The cost
of funds to MFIs is also a issue of concern as they
are not able to reduce the interest rate due to small
size of the loans and operational cost. Banks rate of
interest are also very high. Government should
classify MFI lending as a priority sector lending
and fund should be available to them at minimum
cost. The use of technology should be enhanced as
it will reduce the operational cost. Financial literacy
should be the main agenda of the government as it
will itself bring financial inclusion. Moble
penetration in India can be leveraged to move the
agenda of financial inclusion forward. The SHG
linkage programme by NABARD is the world
biggest inclusion plan till now.
References-
State of the sector Report 2009 by Access Group
State of the sector Report 2010 by NABARD
Stijn Claessens a,b,c,∗ , Enrico Perotti
Finance and inequality:
Channels and evidence ✩
Abiad, Abdul, Mody, Ashoka, 2005. Financial reform: What
shakes it? What shapes it? American Economic Review
Graham A.N. Wright The Single
Biggest Challenge for
Microfinance
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