ESSAY FOR SBI PO - ROLE OF MICROFINANCE IN INDIA

Role of microfinance in India

The concept of microfinance is not new in India. Traditionally, people have saved with and taken small loans from individuals and groups within the context of self-help to start businesses or farming ventures. Majority of poor are excluded from financial services. Micro finance is a programme to support the poor rural people to pay its debt and maintain social and economic status in the villages. Micro-finance is an important tool for improving the standard of living of poor. Inspite of many organizations of micro finance, micro finance is not sufficient in India. The potential for growing micro finance institutions in India is very high. Microfinance market in India is expected to grow rapidly, supported by government of India’s initiatives to achieve greater financial inclusion, and growth in the country’s unorganized but priority sector. Microfinance has evolved rapidly into a global movement dedicated to providing access to a range of financial services to poor and near-poor households. The organizations that provide these services, known as microfinance institutions (MFIs) may operate as formal micro banks, non-bank financial institutions, non-governmental organizations, or community-based financial institutions. These providers offer a range of financial services from small business loans to savings accounts, money transfers, insurance, and consumer loans.

PROS:

Microfinance contributes to poverty decline through higher employment and higher incomes, leading to improved nutrition and improved education of the borrowers’ children. This effect will break the poverty trap that ties people to a fate of poverty. A poverty trap is the process in which low income leads to poor nutrition which in turn causes low productivity and low income, and the children’s lack of education leads to low skills and poor job prospects.

CONS:

Microcredit has driven poor households into a debt trap, since the money loaned is used for daily consumption or luxury goods rather than for business investments. In this way, just like many welfare programs, microfinance leads to financial dependence and decreased income. Even in the case of truly determined and enthusiastic new business owners, due to the lack of experience as well as expert advice, a large percentage has failed to generate the income needed to repay the loan and thrive in the long run. Moreover, because the loans are targeted to very poor households, it cannot effectively generate macro-level economic growth. In fact, one very big drawback of microfinance is that, even if it does not fail, it can only create income opportunities one person at a time and delivering few changes to infrastructure, institutions, or the capacity of the private sector.

REMEDIAL STEPS :

Some of the ways to fix microfinance’s current problems could be :

First, closer examination of small businesses and detailed consultation can be employed so that small businesses have a higher chance to succeed. Second, while not everyone is inclined or able to start their own businesses, certain subsets of the population can adjust to the requirements of self-employment. Microfinance can provide stability to farmers’ uneven revenue, for example, allowing them to invest more in inputs and capital. As the farmers move from subsistence to surplus, the local economies can also thrive. This type of microfinance will have a higher financial self-sufficiency, since the farmers already have a guaranteed, though fluctuating, income.