Financial Inclusion in India: The Role of Microfinance as a Tool

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1 Financial Inclusion in India: The Role of Microfinance as a Tool Jagadeesh B* Assistant Professor Department of Commerce Field Marshal K.M Cariappa College, Madikeri, Kodagu Abstract Microfinance has assumed immense importance throughout the world in view of its efficacy in credit dispensation, loan repayment and reduction of poverty. The experience world over has proved that hassle free and repetitive dose of credit is the basic need of the poor which has become the hallmark of microfinance. Several countries like Bangladesh, Indonesia, Philippines, Kenya and Bolivia have implemented microfinance programmes with encouraging results. In the Indian context, the microfinance sector has witnessed an unprecedented growth in the last few years, and has firmly established itself as significant potential contributor in the government s agenda of Financial Inclusion. Financial services for the poor have proved to be a powerful instrument for poverty reduction that enables the poor to build assets, increase incomes, and reduce their vulnerability to economic stress. Microfinance aims at providing broad range of financial services such as deposits, Loans, payment services, money transfers, insurance to poor and low-income households and their micro enterprises. The present research paper is an attempt to examine the role of micro finance in the empowerment of people and the realization of financial inclusion in India. KEYWORDS: Financial Inclusion, Micro finance, NGO, Self-Help Groups (SHGs) A sizable population of the world particularly the poor, underprivileged, disadvantaged and vulnerable group of people does not have access to most basic financial services. Financial Empowerment is the prime basic need to all. Financial Inclusion is delivery of financial services like Bank Accounts, Savings Products, Remittances & Payment services, Insurance, Financial advisory services, Entrepreneurial credit, Micro finance and Micro Credit to the weaker section in rural and urban areas, also not to ignore unemployed, Women, Old people, Physically challenged people etc at an affordable cost. 64

2 Government of India and Reserve Bank of India have taken series of measures and have experimented various alternatives to take financial services to the masses, but the task is so stupendous, hence the pace of work should be accelerated and sustained. Financial Inclusion is delivery of basic banking services at an affordable cost to the vast sections of disadvantaged and low income groups. It includes access to formal financial system such as financial institutions, markets and instruments, like savings, loans, remittances and insurance services, at affordable prices. Microfinance and Financial Inclusion Since formal credit institutions rarely lend to the poor, special institutional arrangements become necessary to extend credit to those who have no collateral to offer. Microfinance, by providing small loans and savings facilities to those who have been excluded from commercial financial services, has been promoted as a key strategy for reducing poverty in all its forms by agencies all over the world. Microcredit has been defined as programmes that provide credit for selfemployment and other financial and business services (including savings and technical assistance) to very poor persons (Micro Credit Summit, 1997). Nowadays, microfinance represents something more than microcredit - it also refers to savings, insurance, pawns and remittances, in sum to a much wider range of financial services (Tankha, 1999). In most cases, microcredit programmes offer a combination of services and resources to their clients in addition to usual credit for selfemployment. Also, this is an effort to provide a bridge between formal financial markets and the informal groups in the formal microfinance initiatives. The basic idea of microfinance is that poor people are ready and are willing to pull themselves out of poverty if given access to economic inputs. The need for informality in credit delivery and easy access is demonstrated by the fact that Self Help Groups (SHGs) and Microfinance Institutions (MFIs) constitute the fastest growing segment in recent years in reaching out to small borrowers. Microfinance is a new development in which Indian institutions have acquired considerable expertise and where upscaling holds great promise both to expand the nature of financial services offered to micro enterprises and to make these the springboard for entrepreneurial development. (Planning Commission, 2006) 65

3 The SHG movement is bringing about a profound transformation in rural areas of India. MFIs play a significant role in facilitating inclusion, as they are uniquely positioned in reaching out to the rural poor. Many of them operate in a limited geographical area, have a greater understanding of the issues specific to the rural poor, enjoy greater acceptability amongst the rural poor and have flexibility in operations providing a level of comfort to their clientele. It is roughly estimated that there are about 1,000 NGO-MFIs and more than 20 Company facilitating the activities in all over India. There are today over 22 lakh such groups linked with banks. The objective of the country is to enroll at least 50% of all rural women in India as members of SHGs over the next five years and link these SHGs to banks. Financial inclusion through Self-Help Group (SHG) and Bank Linkage Programme A revolutionary step in rural banking is the introduction of SHG-Bank Linkage programme (SBLP).The formal financial institutions like commercial banks and Regional Rural Banks play significant role in financial inclusion, but sparse presence of these institutions and shrinking share of micro credit to total credit disabused by banks showed the essence of programme like Self-Help Group and Bank Linkage. This fills the gap existing between formal financial networks and unbanked poor weaker sections which is the intention of financial inclusion. This links formal financial system (public and private sector commercial banks, Regional Rural Banks, Co operative banks) with the informal SHGs. SHG-Bank Linkage Programme was started with the intention of extending the outreach of formal banking to poor who mainly consist of women, small and marginal farmers, daily wage labourers, landless farmers, small businessmen, craftsmen etc. To begin with pilot project was launched by NABARD by linking 500 SHGs with banks in It has increased to 0.5 million in As on March 2012 total number of SHGs linked with banks were lakhs with balance of Rs 6550 crore with banks (Status of Micro finance in India ). Review of literature Ghosh (2005) traced the evolution of the Microfinance revolution in India as a powerful tool for poverty alleviation and women empowerment. Where institutional finance failed Microfinance delivered, but the outreach is too small. Rangarajan (2008) accessed that to finance by the poor and vulnerable groups is a prerequisite for poverty reduction and social cohesion. The objective of financial inclusion is to extend the scope of activities of the organized 66

4 financial system to include within its ambit people with low incomes. Through graduated credit, the attempt must be to lift the poor from one level to another so that they come out of poverty. Sharma (2009) studied the financial inclusion by channelizing existing recourses. His conclusions are that (i) use of technology in the banking system is the most feasible solution for achieving financial inclusion, and (ii) the implementation of technology should follow a top down approach. Objectives To explain the role and importance of financial inclusion in Indian Financial System. To analyze the different approaches of financial inclusion. Methodology Secondary sources of data are used. Data published by various institutions such as Government of India, World Bank, Consultative Group to Assist the Poor (CGAP), Reserve Bank of India (RBI), National Bank for Agriculture and Rural Development (NABARD, State Level Bankers Committee (SLBC), etc are used for the purpose of the present paper. I. Role and importance of financial inclusion in Indian Financial System. The concept of financial inclusion and its implementation has come a long way since the last two decades and the results are also quite fair. There have been much technological advances that have transformed the banking industry from traditional brick and-mortar infrastructure like staffed branches to a system supplemented by other channels like automated teller machines, debit and credit cards, internet banking, online money transfer etc. The moot point, however, is that access to such technology and services are restricted to only certain segments of the society. There is a growing divide, with an increased range of personal finance options for a segment of high and upper middle income population and a significantly large section of the population who lack access to even the most basic banking services. This is termed as Financial exclusion. Financial exclusion can be geographical exclusion, exclusion on the grounds of charges, exclusion due to ignorance & also self exclusion. The need for financial inclusion Despite witnessing substantial progress in financial sector reforms in India, it is disheartening to note that nearly half of the rural households even today do not have any access to any source of fundsinstitutional or otherwise. Hardly onefourth of the rural households are assisted by banks. Hence the major task before 67

5 banks is to bring most of those excluded, i.e. 75% of the rural households, under banking fold. But the task is not so easy since they are illiterate, poor and unorganized. They are also spread far and wide. What is needed is to improve their living standards by initiating new/increased economic activities with the help of banks, NGO s and local developmental agencies. To start with, it is necessary to develop a fair understanding of their profile. In addition, their perception about the bank and its services needs to be understood. So there is a need for the formal financial system to look at increasing financial literacy and financial counseling to focus on financial inclusion and distress amongst farmers. Indian banks and financial market players should actively look at promoting such programs as a part of their corporate social responsibility. Banks should conduct full day programs for their clientele including farmers for counseling small borrowers for making aware on the implications of the loan, how interest is calculated, and so on, so that they are totally aware of its features. There is a clearly a lot requires to be done in this area. Benefits of financial inclusion Financial inclusion has many benefits. Following are some of the benefits summed up. It paves the way for establishment of an account relationship which helps the poor to avail a variety of savings products and loan products for housing, consumption, etc. An inclusive financial system facilitates efficient allocation of productive resources and thus can potentially reduce the cost of capital. This also enables the customer to remit funds at low cost. The government can utilize such bank accounts for social security services like health and calamity insurance under various schemes for disadvantaged. From the bank s point of view, having such social security cover makes the financing of such persons less risky. Reduced risk means more flow of funds at better rates. Access to appropriate financial services can significantly improve the day-today management of finances. For example, bills for daily utilities (municipality, water, electricity, telephone) can be more easily paid by using cheques or through internet banking, rather than standing in the queue in the offices of the service. Transfer of money can be done more safely and easily by using the cheque, demand draft or through internet banking. A bank account also provides a passport to a range of other financial products and services such as short term credit facilities, overdraft facilities and credit card. Further, 68

6 a number of other financial products, such as insurance and pension products, necessarily require the access to a bank account. II. Approaches of Financial Inclusion According to C. Rangarajan there are six approaches in the system of Financial Inclusion, they are, as follows. First, credit to the farmer households is one of the important elements of financial inclusion among them providing credit to the marginal and sub marginal farmers as well as other small borrowers is crucial to the need of the hour. Second, rural branches must go beyond providing credit and extend a helping hand in terms of advice on a wide variety of matters relating to agriculture. Third, in district where population per branch is much higher than the national average, commercial banks may be encouraged to open the branches. Fourth, there is need for the simplification of the procedures in relation to granting of loans to small borrowers. Fifth, the further strengthening the SHG- Bank Linkage Programme (BLP), as it has proved to be an effective way of providing credit to very small borrowers. Sixth, the business facilitator and correspondent model needs to be effectively implemented. Conclusion Financial exclusion is a manifestation of social exclusion. All the five year plans have an objective of Financial Inclusion. As Financial Inclusion is a vital component of the inclusive growth envisaged for the overall development of the economy, both public and private sectors are working in tandem to leverage the strengths and drive for financial inclusion Financial inclusion will be real and successful only when the small and marginal farmers and landless labourers have unhindered access to the financial services like Savings, Credit, Micro insurance and remittance facilities. Though there is variety of programmes to alleviate poverty and empower rural people, SHGs have done well in the country. The Plan provides a new vision of inclusive. MFIs and Commercial Banks have played a pivotal and are the possible combinations of formal and non-formal institutions that are involved in channeling funds for loans to poor families. 69

7 References 1. Agarwal Amol (2008), The need for financial Inclusion with an Indian Perspective, IDBI GILTS 2. Bock, T.A. Demirguc-Kunt and R. Levine (2007), Reaching out: Access to and use banking services across countries, Journal of Financial Economics, Vol.85, Pp Barr, Michael S. (2005), Microfinance and Financial Development, The John M. Olin Centre for Law & Economics Working Paper Series, University of Michigan Law School, p Government of India (GoI), Economic Survey 2009, New Delhi, Kannan K. P. and Pillai N. Vijayamohanan (2009), Basic Socio-economic security in rural India and China-a comparative study of selected villages, Indian Journal of Human Development, Vol. 3, No. 2, July, Pp Karam Pal and Jasvir Singh. (2006), Efficacy of Regional Rural Banks (RRBs) In India: A Conventional Analysis, JIMS-8M, Indian Journals.com. 7. Ravikumar, B. Ratna (2006), A Primer on Micro Finance The Paradox of Plenty in Poverty The Chartered Accountant, May Reserve Bank Of India (RBI), Report Of The Working Group To Review The Business Correspondent Model, Mumbai, Sivachithappa K (2008), Success story of Poverty Alleviation Through Self-Help Groups, Kurukshetr - Journal on Rural Development, Ministry of Rural Development, New Delhi, Vol. 57 No. 2, December, pp