Abstract:

The article traces the evolution of the Microfinance revolution in India as a powerful tool for poverty alleviation. Where institutional finance failed Microfinance delivered, but the outreach is too small. There is a question mark on the viability of the Microfinance Institutions. There is a need for an all round effort to help develop the fledgling Microfinance Industry.

The terminology- Micro Finance:

The Term Micro Finance has two components namely Micro and Finance .The word micro is applied in terms of smallness by and large for representing the poor/ low income people. The word Finance which is suffixed with Micro represents small amount of finance matching the needs of the poor/low income people. Since needs of the poor goes beyond credit, the word Finance here is covering savings, insurance and other financial and non financial services for their development Microfinance refers to a movement that envisions a world in which lowincome households have permanent access to a range of high quality financial services to finance their income-producing activities, build assets, stabilize consumption, and protect against risks. More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers."[1] Those who promote microfinance generally believe that such access will help poor people out of poverty.

Introduction:
The Indian state put stress on providing financial services to the poor and underprivileged since independence. The commercial banks were nationalized in 1969 and were directed to lend 40% of their loan able funds, at a concessional rate, to the priority sector. The priority sector included agriculture and other rural activities and the weaker strata of society in general. The aim was to provide resources to help the poor to attain self sufficiency. They had neither resources nor employment opportunities to be financially independent, let alone meet the minimal consumption needs. To supplement these efforts, the credit scheme Integrated Rural Development Programme (IRDP) was launched in 1980. But these supply side programs (ignoring the demand side of the economy) aided by corruption and leakages, achieved little. Further, The share of the formal financial sector in total rural credit was 56.6%, compared to informal finance at 39.6% and unspecified sources at 3.8%. [RBI 1992]. Not only had formal credit flow been less but also uneven. The collateral and paperwork based system shied away from the poor. The vacuum continued to be filled by the village moneylender who charged interest rates of 2 to 30% per month. 70% of landless/marginal farmers did not have a bank account and 87% had no access to credit from a formal source. It was in this cheerless background that the Microfinance Revolution occurred Worldwide. In India it began in the 1980s with the formation of pockets of informal Self Help Groups (SHG) engaging in micro activities financed by Microfinance. But Indias first Microfinance Institution Shri Mahila SEWA Sahkari Bank was set up as an urban co-operative bank, by the Self Employed Womens Association (SEWA) soon after the group (founder Ms. Ela Bhatt)was formed in 1974. The first official effort materialized under the direction of NABARD (National Bank for Agriculture and Rural Development).The Mysore Resettlement and Development Agency (MYRADA) sponsored project on Savings and Credit Management of SHGs was partially financed by NABARD during 1986-87.

Who are microfinance clients?

Typical microfinance clients are poor and low-income people that do not have access to other formal financial institutions. Microfinance clients are usually self-employed, household-based entrepreneurs. Their diverse microenterprises include small retail shops, street vending, artisanal manufacture, and service provision. In rural areas, micro entrepreneurs often have small income-generating activities such as food processing and trade; some but far from all are farmers. Hard data on the poverty status of clients is limited, but tends to suggest that most microfinance clients fall near the poverty line, both above and below.

What kinds of institutions deliver microfinance?

Most MFIs started as not-for-profit organizations like NGOs (nongovernmental organizations), credit unions and other financial cooperatives, and state-owned development and postal savings banks. An increasing number of MFIs are now organized as for-profit entities, often because it is a requirement to obtaining a license from banking authorities to offer savings services. For-profit MFIs may be organized as non-bank financial institutions (NBFIs), commercial banks that specialize in microfinance, or microfinance departments of full-service banks.

How does microfinance help the poor?

1. The impact of microcredit has been studied more than the impact of other forms of microfinance. Microcredit can provide a range of benefits that poor households highly value including long-term increases in income and consumption. 2. A harsh aspect of poverty is that income is often irregular and undependable. Access to credit helps the poor to smooth cash flows and avoid periods where access to food, clothing, shelter, or education is lost. 3. Credit can make it easier to manage shocks like sickness of a wage earner, theft, or natural disasters. 4. The poor use credit to build assets such as buying land, which gives them future security. 5. Women participants in microcredit programs often experience important self-empowerment. 6. There is a strong indication from borrowers that microcredit improves their lives. They faithfully repay their loans even when the only compelling reason is to ensure continued access to the service in the future. 7. Other microfinance services like savings, insurance, and money transfers have developed more recently. Client demand indicates that poor people value such services. MFIs that offer good voluntary savings services typically attract far more savers than borrowers.

Service Volumes:

From The Bharat Microfinance Report 2008:

MFIs with Loan Portfolio up to 5 crore Society Trust Cooperative Bank MACS Section 25 Company NBFC LAB or any other Total No of MFIs 87.7 24.0 8.3 5.2 11.6 10.6 13.6 161.0 137

MFIs with Loan Portfolio >5 to 50 crore 543.8 149.8 11.0 127.4 197.3 13.7 1,043.0 57

MFIs with Loan Portfolio over 50 crore 478.3 225.4 543.6 3,312.1 134.7 4,694.1 22

Total 1,109.7 399.3 8.3 16.2 682.6 3,520.0 1,62.0

No of MFIs 104 31 8 10 22 25 16 216

5,898.2

In the financial year 2007/08, Microfinance in India through its two major channels SBLP and MFIs served over 33 million Indians, up by 9 million over the previous financial year. 4 out of 5 microfinance clients in India are women.

From The Bharat Microfinance Report 2008:

Portfolio in Rs. crore; Clients in 10,000 persons

When is microfinance NOT an appropriate tool?

Financial services, particularly credit, are not appropriate for all people at all times. For loans that will be used for business purposes, microcredit best serves those who have identified an economic opportunity and can capitalize on it if they have access to a small amount of ready cash. Regardless of how loans are used, MFIs can provide long-term, stable credit access only when clients have both the willingness and ability to meet scheduled loan repayments. Microfinance is particularly inappropriate for the destitute, who may need grants or other public resources to improve their economic situation. Grants are a more efficient way to transfer resources to the destitute than are loans that many will not be unable to repay. Too much risk is placed on the MFI and client, when the only way a client can repay a loan is by starting a successful business. Basic requirements like food, shelter, and employment are often more urgently needed than financial services and should be appropriately funded by government and donor subsidies. Governments and development agencies often use microfinance as a tool to address socio-economic problems such as relocation of refugees from civil strife, generating employment among demilitarized soldiers, or assistance following a natural disaster. Microfinance may or may not be able to respond to these situations effectively, and certainly not as a stand-alone intervention. Implementing a successful microfinance program to address these types of situations depends upon a number of factors, the most important of which is a client base capable of making regular repayments.

How do savings services help poor people?

Savings has been called the forgotten half of microfinance.

Most poor people now use informal mechanisms to save because they lack access to good formal deposit services. They may tuck cash under the mattress, buy animals or jewelry that can be sold off later, or stockpile inventory or building materials. These savings methods tend to be riskycash can be stolen, animals can get sick, and neighbors can run off. Often they are illiquid as well one cannot sell just the cows leg when one needs a small amount of cash. Poor people want secure, convenient deposit services that allow for small balances and easy access to funds. MFIs that offer good savings services usually attract far more savers than borrowers.

Weaknesses of Existing Microfinance Models:

One of the most successful models discussed around the world is the Grameen type. The bank has successfully served the rural poor in Bangladesh with no physical collateral relying on group responsibility to replace the collateral requirements. This model, however, has some weaknesses. It involves too much of external subsidy which is not replicable Grameen bank has not oriented itself towards mobilising peoples' resources. The repayment system of 50 weekly equal instalments is not practical because poor do not have a stable job and have to migrate to other places for jobs. If the communities are agrarian during lean seasons it becomes impossible for them to repay the loan. Pressure for high repayment drives members to money lenders. Credit alone cannot alleviate poverty and the Grameen model is based only on credit.

Four pillars of microfinance:

The four pillars of microfinance credit system are supply, demand for finance, intermediation and regulation. The following tables indicate the existing and desired situation for each component.

DEMAND
Existing Situation

Desired Situation

fragmented Undifferentiated Communities not aware of rights and responsibilities

Organized Differentiated (for consumption, housing) Aware of rights and responsibilities

SUPPLY
Existing Situation

Desired Situation

Grant based (Foreign/GOI) Mainly focussed for credit Dominated

Regular fund sources (borrowings/deposits) Add savings and insurance Reduce dominance of informal, unregulated suppliers

INTERMEDIATION
Existing Situation Desired Situation

Non specialized Not oriented to financial analysis Not organized

Specialized in financial services Thorough in financial analysis Self regulating

REGULATION
Existing Situation

Desired Situation

regulating the wrong things e.g. interest rates Multiple and conflicting (FCRA, RBI, IT, ROC, MOF/FIPB, ROS/Commerce)

Regulate rules of game Coherence and coordination across regulators

The Challenge:
To the extent that microfinance institutions become financially viable, self sustaining, and integral to the communities in which they operate, they have the potential to attract more resources and expand services to clients. Despite the success of microfinance institutions, only about 2% of world's roughly 500 million small entrepreneurs are estimated to have access to financial services. Challenges: 1. Traditionally, banks have not provided financial services, such as loans, to clients with little or no cash income. Banks incur substantial costs to manage a client account, regardless of how small the sums of money involved. For example, although the total gross revenue from delivering one hundred loans worth Rs. 1,000 each will not differ greatly from the revenue that results from delivering one loan of Rs. 1,00,000, it takes nearly a hundred times as much work and cost to manage a hundred loans as it does to manage one. The fixed cost of processing loans of any size is considerable as assessment of potential borrowers, their repayment prospects and security; administration of outstanding loans, collecting from delinquent borrowers, etc., has to be done in all cases. There is a break-even point in providing loans or deposits below which banks lose money on each transaction they make. Poor people usually fall below that breakeven point. A similar equation resists efforts to deliver other financial services to poor people. In addition, most poor people have few assets that can be secured by a bank as collateral. 2. There is a wide gap between the MF concept and practice. It is not the question of right model or wrong model but it is gross misuse of the brand name MF without following generally (global/national) accepted guidelines which are framed for more for social cause through Micro finance towards global poverty reduction. This sordid

situation, reflecting irresponsible Micro finance dominated by credit and the credit related institutions (MFIs), emerged knowingly or unknowingly in the absence of global surveillance. Credit is necessary but in development context it is inadequate for a sustainable poverty reduction. 3. For meaningful worldwide inclusion of 2+ billion, it is not the question of true answer but with the given answer, what matters is true process of inclusion with mitigation, courage, collaboration, passion and empathy for the cause of fellow global citizen across socioeconomic cultural spectrum and humility. This process of inclusion with a noble mission for a human cause is time consuming one as it demands ethical and social approach on one hand and integration of both financial and physical support system on the other hand to deliver the good sustainably for making a dent in global poverty canvas.

The Need to Go Ahead:

A way out is expansion of scale of operations which can bring down the average operating expenses. The major factor holding up scaling of operations is cited to be lack of funds. 1. Majority of MFIs would like to be converted to NBFCs which would enable them to raise public deposits for on lending. A big deterrent is the startup capital of Rs 20 million required to register as an NBFC which is beyond the reach of many MFIs. But this requirement is part of the regulatory apparatus of RBI to ensure the issue of safety of public money. But MFIs need liquidity also. Hence, they should be allowed to borrow public money with adequate safeguards like deposit insurance with banks. 2. Another area of concern is the activities financed by microfinance tend to remain micro. With a loan of Rs 2000/- to Rs 15,000/- and monthly /quarterly installment payments, there is not much scope for expansion of activities. The activities of selling cow milk, goat milk, chicken, fireweed, agriculture on leased land, only provide the poor with the bare minimum. One way it makes a difference is that when the income generated is added on to the present income of the upper crust of the poor it helps them to transcend the income line, but does not help to develop an asset base. The only solution is to enhance the volume of credit in line with the growth of the productive activities i.e. Macro and not Micro finance is needed for a larger scale of operations. 3. Further, if for some reason the micro activity does not fetch any return say crop failure due to bad monsoons, the beneficiaries of Microfinance suffer tremendously. In such instances Micro insurance helps in providing a buffer and it is heartening to note that national and private insurance companies are taking steps here.

Conclusion:

The term Micro finance should reflect more ethical and moral elements integrated with economic, financial and social sensitivities. Then only it would become an indispensable holistic weapon in the arsenal maintained in the battle against poverty. Monitoring also needs to be done more based on these values for making a distinguishable identity in the financial landscape rather than with mere credit outreach.

Micro finance is the most effective way to achieve the goal of financial inclusion because it distributes credit in a more democratic way, to the poor masses. Apart from conventional banking, it is more close to the people, to their needs. And to a certain extend it has fulfilled the requirements of the people. But there are certain limitations and draw backs, not of microfinance, but of its implementation. We have resources, people and ideas. But the success lies in the effective coordination of these three. For this we need a creative, efficient and sincere leadership. The aim of microfinance is to give financial assistance to the poor. But giving financial assistance is not the only solution to end poverty. We should give all other technical and advisory support to them (from production to marketing).This needs an integrated network of banks, governments, semi-governmental or nongovernmental organizations, social workers etc.