Impact of Microfinance in India
Poverty in the society indicates that, the occupants lack basic needs such as foods, houses, clothes, and under educated people who are unable to read or write. Work bank mentions poor people have very little asset at $1. 25 to survive every day (Alkire and Santos, 2014. Pg 251). The poor in the community can also be described as those who have lack of many essential conditions such as poor nutrition, poor infrastructure, clean water which are the key reasons that affect their health and reducing their long living life. The main objective of microfinance program is serving for poor people who can’t access the traditional banking services. The microfinance program is called microfinance institution (MFIs). Microfinance had great improvement in recent years. He mentioned the figure of people takes loans in developing countries were 105M people in 2010.
The majority of customers were women with 80%. Therefore, it has a critical role in increasing the living standard of poor people. People used to take loans and create their saving from informal sectors. There were many groups of wealthy people offered informal financial services in the village and the city for people excepted from a traditional bank, because they have a very low salary. In the recent years, with a new program as microfinance that Indian can be secure for their saving, their credits, and even insurances. It serves poor people in India who are suffered from traditional banking services because now they can borrow money from the bank easier. India’s economy has been developed and it has a stable policy over the decade.
India has a large number of poor populations with more than 860 M people in over the last 10 years, their income less than $2 per day. A huge difference of earning income that widens the gap between the poor and the rich has been on rise in the region. Microfinance take advantage on a big population of poor people who really need help and Indian market’s potentials that create more opportunities for microfinance’s success in reducing poverty in India. (Alshebami and Khandare, 2015. It also harbors the core aim of the paper and the research questions that guide the entire path taken by the research to meet the targeted aim. Chapter 2 Literature review The second chapter is comprised of a collection of more than 50 research papers related to the history of microfinance and their objectives; the models of microfinance in India, impacts of microfinance in the Indian society, the interest rate of microfinance and the level of microfinance outreach in India including geographic and client outreach.
The gap in the study has also been identified in this chapter. Chapter 3 Methodology In chapter three, I have examined the research method applied to achieving the research goal. Research design mainly quantitative and qualitative research are highlighted on their significance on accomplishing the acquisition and analysis of the secondary data which forms the entire data source for the research. 1 History of microfinance According to MAHANTA and Panda (2016. Pg 144), the microfinance’s founder was Muhammad Yunus. The idea of lending a small amount is known as microfinance, it became very widespread after he achieved the Nobel Prize for peace. In 1983 Muhammud Yunus launched his own bank named Grameen bank to create microloan product, which offers small loans for the poor people allowing them to borrow at least £15 each time.
MAHANTA and Panda (2016. In India, such organizations are diverse and vary significantly in terms of size, mission and credit delivery methods. The diagram below shows the hierarchy of MFIs in India. Source: Microfinance disbursement in India (Nasir, 2013. Pg 194) The RBI issued guidelines allowing the commercial banks to offer bulk loans to the MFIs for them to easily lend to groups and individuals or small borrowers. Currently, both private and public banks offer loan to the MFIs at an interest ranging from 8 to 11 percent per annum. MAHANTA and Panda (2016. Pg 147) highlight that the model was established in Bangladesh and encompass a group voluntarily formed consisting of five borrowers each. The author mentioned that It was designed in a manner, which the first two get the loan, followed by the preceding two and later the remaining individual.
Every member maintains their saving and loan account with the bank and after ample contribution to the group, they are able to receive loans from those banks. Furthermore, the group is not required to give a guarantor for loan payment. The financial organization issue loan and the entire group takes the responsibility of payment. The group can then decide on the criteria of diving the money or loan acquired among themselves. Individual lending model According to Priyanka (2014. Pg 10) This model offers loan to an individual even if he or she does not belong to any microfinance group. It is a straightforward credit-lending model where micro-loans are offered directly to the borrower. This is linked to increased investment in income generating activities besides diversifying the income source.
Other benefits accompanied by joining microfinance include an overall increase in the living standards, through better education, reduced vulnerability good medical and housing systems (MAHANTA and Panda, 2016. Pg 151). Moreover, access to finance contributes to improved social life and economic status among women. According to Devaraja (2011. This simply means that MFIs are more progressing in areas with formal financial institutions as opposed to areas that lack. They are strong where banking institutions are well established for instance in Andhra Pradesh and Kerala as highlighted by Prusty and Vishwakarma (2014. Pg 17). The northern region is however neglected due to a low level of formal financial institution development. Outreach is another key problem facing MFIs. Pg 195). Based on Nasir (2013. Pg 195) Loan use also appears to a great challenge in most of the microfinance.
Practitioners and donors always advocate for the sober use of the loans to expand small enterprises, however, the private sector feels that such restriction should not be enforced since money is fungible. They feel that the poor should use their money the way they want with minimal or no dictation from the rich or donors. The authors have also presented the fact that research has shown that microcredit interest loans are always much higher than regular banks and commonly the annual rates for microloans range from 20 to 70 percent, with an average of about 30 percent. As the higher than normal microfinance interest rates can be easily seen as exploiting the poor, this topic has been on agenda for many politicians and governments.
Source: (Dehejia et al. Pg 439). The interest rate has been considered to be a lesser issue among the poor since they pay the loan in the short time possible sometimes a maximum of 30 weeks’ time. (2013) for instance highlights that almost 80% of MFI’s income goes directly to operating expenses and cost of funding. The high operative and administration expenses cover for a large number of employees that carry out face-to-face interaction with the borrowers. D’Espallier et al. Pg 175) gave conclusive remarks that the high-interest rate in microloans mainly arises from the higher operation cost but not a high-profit requirement or inherent risk of lending to the poor. 6 Extent of microfinance penetration in India Geographical outreach As at March 2015, several States in India were marked as served including 15 of them, the rate of service received ranged from 50 to 75%.
51 lakh SHGs, the outstanding loans to SHGs amounted to Rs. 394 billion. The SHG Bank Linkage programme forms a sizeable portion of the overall microfinance outreach in India. The subscribers to MFIs increased steadily since 2005 to 330 lakh (Zerai and Rani, 2012. Pg 92). The bigger geographical spread of the country and high population growth post a challenge in achieving financial inclusion of the neglected population. The government is also putting regular efforts to extend banking services to the rural poor to widen the possibility of income outreach. Financial inclusion is the process of delivering financial services to the disadvantaged or poor including the women in the discriminated sections of the nation. Women are majorly neglected on the ground of the social, economic status and their gender sometimes.
Fig: represent growth of SHG and MFI (Saravanan and Dash, 2017. There is, therefore, a wider gap to be covered to reach the targeted group, this will entirely change the microfinance space in future. The benefit of MFIs is significant in addressing the needs of the poor and creation of financial sustainability in the society. 7 Summary Microfinance was founded in India by Yunus who lend some amount of money to a group in the rural area. Later it was recognized as an entity that can help improve the life of the poor in both urban and rural area. Currently, different models of microfinance exist in India, among them are Grammen bank model, the group approach, individual lending model and village banking. Pg 56).
The awareness on the microfinance in India is still limited to the evolution and growth; thus less weight is skewed to the poverty eradication. In most occasions, the access of this microfinance by the extremely poor has been difficult. Furthermore, exclusive analysis of the needs, priorities, and resources for the growth of the MFIs to curb the poverty rate and perform better in financially excluded places has not been adequately explored. This circumstance foster the re-evaluation of the plans and programs that should be put in place by the government, MFIs, and other relevant stakeholders to focus on the poverty reduction. Quantitative research This kind of research answers the relationship among variables in a research. It seeks reasons and the substantial result that will be obtained by other people in other places (Leedy and Ormrod, 2001.
Pg 102). Quantitative research starts with a problem statement, hypothesis formulation, literature review and quantitative analysis of data. Strategies applied to quantitative research includes experimentation and survey all that produces a statistical data (Creswell, 2003. This data had already been challenged by the experts and are not original as in the case of the primary data. Data analysis Data applied in this study on the impact of MFIs in India are all secondary sources from scholarly journals, articles, academic books, research papers, and dissertations. The information obtained will be analyzed quantitatively and qualitatively depending on the nature of the data collected. Qualitative analysis will encompass content analysis where the collected data will be summarized into meaningful information. Quantitative methods will analyze the figures, charts, and tables highlighting the numeric portion of Indian society that has been affected in any way whether positively or negatively by the microfinance institutions.
The ultimate result was to reduce the poverty just like in India. The graph below shows the level of achievement. Source: (Pandey, 2017). From the graph above it is evident that MFIs in Nepal is more effective than in India, however, several factors can be attributed to this, the more critical one being the population density. There is an improvement in annual income by 3. According to Batra (2012. Pg 71), the poor in India finds it difficult to get credit from the formal financial institutions like banks, due to their social status and geographical location. Banks rarely allow the poor the get since they lack steady financial income; therefore banks have no guarantee that they will pay the loan. MFIs in Indian have covered this gap and provide the underprivileged with a viable opportunity for generating income and rising out of poverty (Kotahwala, 2012.
Pg 8). Pg 2255). Challenges facing microfinance in India Problems facing the MFIs in India can be grouped in different categories including ethical, managerial, legal, unfortunate and other reasons. Ethical concerns surrounding the microfinance can be derived from their operation that deviates from the core objective of their creation. Quite often these MFIs are normally created to for social reasons to help the surrounding society; nevertheless, some have turned to be profit-making like other moneylenders. Corruption also faces some of the microfinance in India thus posting a critical challenge to their operations (Ahlin et al. The worrying relationship between the formal financial institutions and microfinance is also evident in Turkey. The nation lacks a credit union and financial cooperatives. They thus rely on the tradespeople and farmers trade unions to enable members to access the financial services.
This makes it difficult for the society members outside these institutions to acquire loans for their self-development (Hes et al. Pg 64). Pg 3) highlight the breadth of the outreach as the number of poor reached by the microfinance as many in Ethiopia. He also noted that the depth which is the total number excluding the poor as numerous and comparable to the formal financial institutions' members. The members of the MFIs or other self-help groups have also hindered the extent to which the poor are reached; some often set a non-poor program that lends money to the less poor and returns with interest in-time. The extremely poor are viewed as a burden in this groups since they might fail to pay the loan in time.
Apart from the highlighted institutional barrier, the poor themselves have psychological issues that bar them from participating in the MFIs. The micro-credit has not been entirely embraced by the commercial banks thus the study majors on the microfinance institutions rather than commercial banks. The private and foreign banks are also excluded in the study since they do not fall under the preview. Financial and time constraint is also a challenge to this study. Studying the entire India region requires a lot of financial support and time that can rarely be allocated during a simple class research. The study will thus examine and analyze microfinance and their impact mainly on the poor population and a narrow geographical array. Reducing the operational expense can be achieved through simplified and decentralized loan application, approval and collection process.
The acquisition of group loan can be encouraged for instance to allow the MFIs loan offices to handle more client at a single moment. This reduces the time, labor and resources accrued when loans are offered to every individual. Benefit to the government The successful operation of the MFIs can also be expanded through strengthening the MFIs linkages with the formal financial institutions like banks. The mutual relationship can be based on the comparative strength of the participant sectors. This has posted a little hope in realizing the effectiveness of MFIs in eradicating poverty. A strong argument can thus be made that microfinance alone cannot completely solve the problem of poverty in the society. Other social programs ought to be incorporated in the MFIs to yield a tremendous result in helping the poor.
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