International Journal of Business

Management & Research (IJBMR)

ISSN(P): 2249-6920; ISSN(E): 2249-8036
Vol. 4, Issue 4, Aug 2014, 81-88
TJPRC Pvt. Ltd.

THE IMPACT OF MICRO FINANCE ON RURAL DEVELOPMENT AND POVERTY

ALLEVIATION IN INDIA
DEEPASHA GUPTA
Faculty, Department of Humanities and Social Sciences, Motilal Nehru National Institute of Technology (MNNIT),
Allahabad, Uttar Pradesh, India

ABSTRACT
Rural development is primarily concerned with addressing the financial needs of the rural poor for sustainable
economic development. The alleviation of rural poverty can be achieved by provision of finance, identifying
income-generating activities and generation of employment in rural areas for socio-economic development.
The rural households need financial assistance in the form of loans at subsidized rates, convenient avenues for
saving, micro-insurance, etc. And this financial assistance is well catered to with the advent of Micro finance.
Micro finance is an effective tool of financial inclusion that facilitate rural development and poverty alleviation by
generating new employment opportunities, promoting agriculture production, establishing small scale industries,
encouraging entrepreneurship, wage labour, self-help groups and restricting migration to urban areas. Thus main objective
of this paper is to explore the potentiality of Micro finance with a view to study the impact of Micro finance in the
development and poverty alleviation of the rural households.

KEYWORDS: Micro Finance, Financial Inclusion, Self-Help Group (SHG), Wage Labour, Micro Insurance, Migration
INTRODUCTION
In the early 1980s, the prevailing banking policies, procedures and systems were not suited to meet the
requirements of the rural poor households. The rural poor primarily resorted to the unorganised sector which comprised of
the indigenous moneylenders to fulfill their financial needs and demands. It was NABARD which took the first step to
financially help the rural households. NABARD recommended various policies, systems and procedures to provide
financial aid to the rural people and free them from the shackles of the moneylenders. Thus micro finance was being
introduced in the banking sector.
Micro finance has emerged as an effective tool of financial inclusion that aims to serve the rural poor, low income
rural households and micro enterprises by providing them financial assistance in the form of loans, deposits, payment
services, money transfers and micro insurance. It is assisting in the social and economic up-liftment of a developing
country like India and is expected to play a vital role in the alleviation of poverty and rural development.

OBJECTIVE OF THE STUDY

To study the impact of microfinance on rural development.

To study the role of microfinance in poverty alleviation.

To find out whether diversification of work opportunities and reduction in migration leads to rural development.

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To find out whether wage labour & Self Help Groups (SHG) are playing a prominent role in developing rural
employment.

To study and analyze how Micro insurance promotes rural development.

To explore the overall effects in terms of vulnerability.

MICRO FINANCE-AN OVERVIEW

The concept of microfinance was being introduced by Mohammed Yunus, with the setting up of the Grameen
Bank in Bangladesh for which he was awarded the Noble Prize. The word Grameen means rural or village in Bangladesh
language. The concept of Grameen banks was very successful and emerged as one of the largest financial institution in
Bangladesh. Grameen banks basically provided loans to the poor who did have anything to put up as a collateral security
for the acquired loan. And their lending policies and procedures were primarily designed for the women, as 97% of the
clients of these Grameen Bank were women.
Microfinance can be defined as Financial Services (savings, insurance, fund, credit, etc.) provided to poor and
low income clients so as to help them raise their income, thereby improving their standard of living. The Microfinance
sector has dramatically grown in present times to facilitate rural development and to alleviate poverty. The National Bodies
like Small Industries Development Bank of India (SIDBI) and National Bank for Agriculture and Rural development
(NABARD) have assisted significantly in the growth of the micro finance sector by providing the necessary support in the
form of financial assistance, time and energy.
Micro finance provides financial support to the poor and assists them to build assets and become self-employed.
It has facilitated in diversifying the income generating activities of the rural people and improving their standard of living.
Features of Micro Finance
Some important features of microfinance are as follows:

Microfinance provides credit to rural poor.

Microfinance facilitates in poverty alleviation.

Microfinance is a tool for socio-economic development.

Microfinance is a tool for empowerment of poorest women.

Microfinance is essentially for promoting Self employment & wage employment.

Micro finance is used by poor households to uplift their standard of living.

Profile of Microfinance in India

The profile of micro finance in India at present can be traced out in terms of poverty. The following are some
components of micro finance:

It is 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.

Impact Factor (JCC): 4.9926

Index Copernicus Value (ICV): 3.0

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The Impact of Micro Finance on Rural Development and Poverty Alleviation in India

A cumulative disbursement under all micro finance programmes is only about Rs. 5000 crores.

Total outstanding of all micro finance initiative in India estimated to be Rs. 600 crores.

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

A cumulative of about 20 million families has gained access to micro finance.

10% lending to weaker sections is required from the commercial banks, but they neither have the network for
lending and the supervision on a larger scale nor do they have the confidence to offer term loan to big micro
finance institutions.

Need for Micro Finance

The need of microfinance arises because the rural India requires sources of finance for poverty alleviation,
procurement of agricultural and farms input.

Micro finance is a programme to support the poor rural people to pay its debt and maintain social and economic
status in the village.

As we know that India is agriculture based economy so microfinance can be considered as an effective tool to
empower the farmers and rural peoples in India to make agriculture profitable.
The impact of micro finance on the different sectors of the economy can be well understood with the help of

following diagram

Source: Growth of Micro-credit in India-An Evaluation

Figure 1

ANALYSIS & INTERPRETATION

After conducting an in-depth study and analysis on the subject the following factors were considered as the vital
factors or advantages of micro finance that facilitate rural development and poverty alleviation in India:
Diversification
Diversification refers to the broadening of income-generating activities portfolios by rural individuals or
households. Diversification includes on-farm activities, and/or off-farm activities. Labour implications of diversification at
the household level can be more of self-employment, engaging into wage labour, or hiring wage labour, thus providing a
job to one or several persons outside the household. Micro finance by providing credit can give an impetus to
diversification and will open doors for exploration of more income-generating sectors which are as follows:

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Deepasha Gupta

On Farm/ Agricultural Subsectors: Farming, Crops, Forestry, Animal Husbandry, Fisheries, Poultry Farms.
Off Farm/Non-Agricultural Subsectors: Construction, Wielding, Wood Products Manufacturing, Beverages &
Tobacco Manufacturing, Leather & Leather Products Manufacturing, Paper & Allied Products Manufacturing, Food
Manufacturing,etc.
Diversification Leads to Employment in Following Rural Families

Agricultural families (both members are employed in agriculture)

Public sector families (both members are employed in public sector)

Non-farm families (both members are employed in non-farm sector)

Mixed agricultural families ( one member works in agriculture and other in non-farm or public sector)

Mixed non-farm families (one member works in public sector and the other works in non-farm sector)

Migration
Rural-urban migration usually leads to a loss of necessary man power in the rural areas to work on the farm lands.
It also leads to congestion in the urban areas, thus leading to a high unemployment level, poor housing situations and an
increase in the crime levels. On the other hand, increased man power in urban areas provides cheap labour to the industries
in these areas. But this migration to urban areas can be eliminated by an appropriate supply of credit services through
micro finance which can slow down the migration flow by offering new and more attractive local labour and employment
opportunities in the rural areas itself.
Effective Control in Migration through Micro Finance Leads to Rural Development Such as

Create employment opportunities to reduce mobility of labour.

Promote agriculture and farming in order to avoid poverty among people.

Improve the transport and communication network.

Improve the infrastructural development by constructing modern schools and hospitals.

Improve the security and provide security services in rural areas in order to promote peace.

Make land reforms to enable the poor and low income earners get access to land.

Aware people regarding the effects of rural urban migration and how they can develop themselves in villages.

Provide credit facilities in rural areas to enable easy accessibility to finance.

Vulnerability
Vulnerability here deals with the economic stress that the rural households are exposed to due to poverty,
un-employment, seasonality of agriculture activities and the climatic risk. Then the rural households have also to cope with
the financial burden of meeting some family obligations like marriage, social and religious rituals, etc, which though are
predictable cannot be avoided. Then the vicious money-lenders and exploitative labour contracts can also lead to
vulnerability to social and economic stress. The need for individuals and households to cope with risk and vulnerability can
Impact Factor (JCC): 4.9926

Index Copernicus Value (ICV): 3.0

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The Impact of Micro Finance on Rural Development and Poverty Alleviation in India

definitely affect the demand for financial services and facilitate growth of Micro finance.
MICRO INSURANCE
Micro insurance cover the risks arising due to natural calamities like drought, flood, earthquake, etc., and insures
the life and assets of the rural households. The assets that are covered under Micro insurance include food grains, crops,
cattle, carts, tractors, loans taken, etc. For availing the facility of Micro insurance a nominal premium has to be paid on a
regular basis. Then there are other customized schemes of Micro insurance to provide risk cover to rural poor depending
upon their premium paying capacity.
Ownership of the Micro Insurance Schemes

34 % of the schemes were implemented by organizations providing micro finance services to the poor.

31 % of the schemes were implemented by NGOs supporting a wide range of development activities at the
grassroots level.

23 % of the schemes were implemented by community based organizations.

12 % of the schemes were implemented by health care providers.

Areas of Intervention of Micro Insurance Schemes

60.8% of the schemes are based in rural areas.

31.4% of the schemes cover both rural and urban areas.

Only 7.8 % of the schemes are totally urban-based.

Services Provided through the Micro Insurance Schemes

The schemes provide a wide spectrum of insurance services to the poor. Among them, life and health insurance
are however predominant.

61 % of the schemes provide life insurance services.

57 % of the schemes provide health care services.

25 % of the schemes provide insurance services covering disabilities.

25 % of the schemes provide insurance services covering assets.

20 % of the schemes provide insurance services covering livestock.

10 % of the schemes provide insurance services covering accidental death.

10 % of the schemes provide insurance services covering loans.

Wage Labour
Growth of wage labour in agricultural & non-agricultural sectors is especially important in rural economy.
The following diagram illustrates the division of wage labour on the basis of various employment opportunities available to
them.

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Deepasha Gupta

Source: laboureconomics.wordpress.com
Figure 2
Job prospects improve as education, skills, health and early nutrition levels of wage labour increase. Rural-urban
migration (whether temporary or permanent) opens new opportunities and also helps in strengthening rural labour markets.
And with the rising productivity and wages, it has become easier to push for better labour standards which helps in poverty
reduction and leads to rural development.

FINDINGS OF THE STUDY

Sustainable Rural Development Requires

Continuous growth and diversification of the rural economy.

Access of all segments of the population including rural micro-entrepreneurs, farmers and the poor to sustainable
financial services such as savings, credit and insurance.

Self-reliant and sustainable financial institutions.

Sustainable Rural Microfinance Requires

Offering both savings and credit services.

Mobilizing their own resources.

Having their loans repaid.

Covering their costs from their operational income.

Impact Factor (JCC): 4.9926

Index Copernicus Value (ICV): 3.0

The Impact of Micro Finance on Rural Development and Poverty Alleviation in India

87

Micro Finance Can Contribute to Reduce Poverty as an Integral Part of Rural Development Which Can be
Illustrated by the Following Flow Chart:

Figure 3

CONCLUSIONS
Thus we conclude that Microfinance is one way of fighting poverty in rural areas and facilitates in rural
development. It is an effective source for the rural households to overcome poverty, procure finance, save and invest, and
to protect their families against adversities. Micro finance plays a pivotal role in eradicating poverty, generating
income-generating opportunities, diversifying agriculture activities, improving farm productivity, reducing vulnerability of
rural households to economic stress, restricting migration to urban areas, improving the standard of living and finally,
facilitates in overall rural development. But, though Micro finance has been successful in achieving its objective in the
major rural areas of India but still a majority of rural areas and villages remain unexplored and are devoid of the benefits of
Micro finance. These rural areas in India have to be reached by Micro finance to free them from the vicious circle of
poverty.

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Impact Factor (JCC): 4.9926

Index Copernicus Value (ICV): 3.0