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ROLE OF MICRO FINANCE IN FINANCIALINCLUSION

P Syamala Devi1

1Research Scholar, Center for Dr B.R.Ambedkar Chair, Acharya Nagarjuna University,Nagarjuna Nagar, Guntur, Andhra Pradesh, India.

ABSTRACTFinancial inclusion may be defined as the process of ensuring access to financial servicesand timely and adequate credit where needed by vulnerable groups such as weakersections and low income groups at an affordable cost. Yet, the extent of financial exclusion hasbeen staggering. Out of the 600,000 habitations in the country, only about 30,000 had acommercial bank branch. Just about 40 per cent of the population across the country had bankaccounts. The proportion of people having any kind of life insurance cover was as low as 10 percent and proportion having non-life insurance was an abysmally low 0.6 per cent. People havingdebit cards comprise only 13 per cent and those having credit cards only marginal 2 per cent.KEYWORDS: Financial Inclusion, Reserve Bank, Social Contracts, Grameena Bank, MicroFinance

INTRODUCTIONFinancial inclusion may be defined as the

process of ensuring access to financial services andtimely and adequate credit where needed byvulnerable groups such as weaker sections and lowincome groups at an affordable cost.(FinancialInclusion Committee Chairman, Dr. C. Ranga rajan.)Financial Inclusion efforts are not new, bothgovernment and the Reserve Bank have been pursuingthis goal over the last several decades throughbuilding the rural co-operative structure in the 1950s,the social contracts with the banks in the 1960s andthe expansion of bank branch networks in the 1970s

and 1980s. These initiatives have paid off in termsof a network of branches across the country. Yet, theextent of financial exclusion has been staggering.Out of the 600,000 habitations in the country, onlyabout 30,000 had a commercial bank branch. Justabout 40 per cent of the population across the countryhad bank accounts. The proportion of people havingany kind of life insurance cover was as low as 10 percent and proportion having non life insurance wasan abysmally low 0.6 per cent. People having debitcards comprise only 13 per cent and those havingcredit cards only marginal 2 per cent.

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OBJECTIVES OF THE STUDY1. To examine the extent of financial inclusion;2. To enquire in to the role of micro finance

in helping the rural population in the caseof financial inclusion;

3. To study the extent of progress made bymicro finance in rural India and

4. To look in to the challenges ahead for microfinance in India.

The National Sample Survey Data revealedthat nearly 51 per cent of farmer households in thecountry did not seek credit from either institutionalor non institutional sources of any kind. Millionsof people across the country are thereby denied theopportunity to harness their earning capacity andentrepreneur talent, and are condemned tomarginalization and poverty. A sound system ofinstitutions and instruments of intermediation isessential for promoting an efficient system.Increasing access to credit for the poor has alwaysremained at the core of Indian Planning in its fightagainst poverty. Recognizing this dilemma, theevolution of Financial Inclusion, that aims to broadenand deepen access to development finance for all,of which Micro Finance is a subset, is timely. MicroFinance Sector has grown rapidly over the past fewdecades. Nobel Laureate Muhammad Yunus is creditwith laying the foundation of the modern MFIs withestablishments of Grameena Bank, in Bangladesh in1976. Today it has evolved in to a vibrant industryexhibiting a variety of business models. The uniqueaspect of micro finance in India is that it is deliveredthrough a variety of Commercial Banks and RegionalRural Banks directly dispensing micro credit andthrough their Business Correspondents (BCs), SelfHelp Groups (SHGs) linked to bank branches, co-operative banks and primary co-operative societies,micro finance institution (MFIs) as NBFCs and inother forms, obtaining funds from a variety ofsources, domestic and external. Ultimately, it is anissue of reaching out to low-income families in acost-effective, hassle-free and sustainable mannerparticularly to those who, otherwise, would not havehad such access to financial services.

Micro Finance as a model facilitatesfinancial inclusion. The logic and rationale of SHGbased micro finance has been established firmlyenough to prove that micro credit has effectivelygraduated from an experiment to a widely-acceptedparadigm of rural and developmental financing in

IMPORTANCE OF MFIs

India. This is no mean achievement. In fact, to theextent peoples mindset is the biggest road block inthe success of innovation, it may well be one of themost important steps in the saga of Micro Finance.Micro Finance is recognized as a cost effective andsustainable way of taking the banking system to therural poor. The broad principle behind micro financeinitiatives are:

1. To act as a cost effective avenue for theformal financial sector to expand itscoverage of poor

2. To develop effective collateral substitutes3. To emphasize on the poor masses, both

rural and urban especially women and4. To focus on the objectives of macro-

economic growth.Indirectly, micro finance improves

schooling, health and womens empowerment.Globally, in the last two decades, the micro financesector has opened up considerably in the early 1990swhen it was realized that micro credit providers couldrecover loans to poor and low income people as wellas cover their costs, focus was on a single product(credit) which was delivered by specialized microfinance institutions. Micro credit subsequently,developed in to the concept of buildings entirefinancial systems for the poor, focusing on inclusivegrowth.

The basic idea of Micro Finance is that poorpeople are ready and are willing to pull themselvesout of poverty if given access to economic inputs.The need for informality in credit delivery and easyaccess is demonstrated by the fact that SHGs andMFIs contribute the fastest growing segment inrecent years in reaching out to small borrowers. MicroFinance is a new development in which Indianinstitutions have acquired considerable expertise andwhere up-scaling holds great promise both to expandthe nature of financial services offered to microenterprises and to make these the spring board toentrepreneurial development. (Planning Commission,2006) Micro Finance is often considered as a tool inthe fight against poverty while it has to be understoodfirst and foremost as a tool against financialexclusion. MFIs plays a significant role in facilitatinginclusion, as they are uniquely positioned in reachingout to the rural poor. Many of them operate in alimited geographical area, have a greaterunderstanding of the issues specific to the rural poor,enjoy greater acceptability amongst the rural poorand have flexibility in operations providing a level

P Syamala Devi

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of comfort to their clients. It is roughly estimatedthat there are about 1000 NGO-MFIs and more than20 company facilitating the activities in all over India.RBI has adopted Bank Led Model for achievingfinancial inclusion; certain NBFCs which weresupplementing financial inclusion efforts at theground level. Bank Led Model for financial inclusion,which seeks to leverage on technology. The FIinitiatives would have to be ICT based and wouldride on new delivery models that would need to bedeveloped by the market participants to best suit theirrequirements. FI is better served through mainstreambanking institutions as only they have the ability tooffer the suite of products required to bring ineffective/meaningful financial inclusion. Otherplayers such as mobile companies should be allowedto partner with banks in offering servicescollaboratively.

As Banks and SHGs involved in MFIs, tomeet the criterion of availability of banking services,a minimum of 4 basic products must be offered tocustomers. a) a check in account with emerging creditfacility b) payment services and remittances facilityc) a pure savings product such as a recurring depositd) facility of entrepreneurial credit to deservingpeople.

The task of FI is gigantic and cannot be donewithout actively leveraging technology and withoutthe involvement of society as a whole. The FinancialInclusion strategies and delivery models beingdeveloped by banks are primarily technology driven.However, models adopted by banks are technologyneutral, which facilitates easy up scaling andcustomization, as per individual requirements. Andanother approach is BC model. Click and mousetechnology will be helpful in extending financialinclusion especially in geographically dispersed areas.Banks need to make effective use of technology toprovide banking services in remote areas throughthe BC model. The BC model allows banks to providedoorstep delivery of services, especially cashtransactions. Banks have been mandated to allocateat least 25 per cent of all new branches to unbankedrural areas. Banks have also been mandated to openintermediary brick and mortar structures betweenthe base branch and customer locations which willlead to efficiency in cash managementdocumentation, redressal of customer grievances andclose supervision of BC operations.

Structured , planned approach to financialinclusion where in all banks have prepared Board

approved (FIPs) Financial Inclusion Plans, with a 3year horizon extending up to 2013 containing selfset targets which are congruent with their businessstrategy and comparative advantage. The initial goalshould be providing access to banking services. Thefocus should be shifted from just opening accountsto the volume of business transacted in theseaccounts, which is the key for making FI model asuccess. Recently the RBI Governer Raghuram Rajanoutlined, in conceptual terms, what inclusion shouldbe simplicity and reliability in financial inclusionin India, though not a cure all, can be away ofliberating the poor from venal politicians, he said.Further inorder to draw in the poor, the productsshould address their needs a safe place to save, areliable way to send and receive money, a quick wayto borrow in times of need or to escape the clutchesof the money lender, easy to understand life andhealth insurance and an avenue to engage in savingsfor the old age.

While over the years the government hastaken several steps to spread the banking habit,formidable tasks lie ahead. Of the 24.67cr. do nothave access to banking services. In rural areas, 44%households and in urban areas 33% still do not havea bank account. The governments latest plan ofaction, as envisaged in the CFIP or Sampoorna VittigaSamavesham, hopes to extend coverage of basicfinancial services all excluded households. In thefirst phase, the CFIP will endeavour to provideuniversal access to all the beneficiaries throughsubservice areas (SSAs). each SSA will consists of100 to 500 families in a cluster of villages and eachSSA will be serviced by a BC agent (BCA), whose taskwill be facilitate to account opening and smoothbanking operations. The latest inclusion plan will have its focushouseholds ratherthan geographical areas. Aftersatisfactory conduct of accounts it is proposed tooffer reasonable need based credit facilities for whichoverdraft facilities will be sanctioned. A smart card(Rupay Card) will be issued to enable customers tooperate their accounts even without BCs. And in thesecond phase, there is a proposal to make availablea pension scheme for identified individuals in theunorganized sector and offer microfinance productsthrough government owned insurance companies.

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An evaluation of SHGs carried out by theRegional offices of the Reserve Bank revealed thatthere was scope for improvement in the area ofmaintenance of books of accounts, rotation of groupleaders was generally not followed by SHG. Therewould be need for greater transparency in theirfunctioning and for facilitating their reach tounbanked population of the country. Interest ratesin microfinance sector have to significantly higherthan in the banking sector reflecting the much highercost of doing business. This attracts criticism.

There have been incidents of Stategovernments imposing restrictions on microfinanceinstitutions in a manner (for instance, in AP(Krishna districts story) which does not reflect anappreciation on realities on the ground. Excessiveregulation and control is dangerous as it can preventthe development of a healthy and competitivemicrofinance sector which could compete with moneylenders (planning commission, 2006).

CHALLENGES AHEAD FORMICROFINANCE IN INDIA

Finance is the lubricant, which oils thewheels of development. Therefore microfinancemodel extends credit and savings to the poor, thechallenges faced by the industry has to be rectifiedin due course for the effective working model.Therefore inorder to draw in the poor, we have to

CONCLUSION

1. Chakrabarty K.C (2011) Financial Inclusion and Banks:Issues and Perspectives, RBI Bulletin, Nov.2011.

2. Chakrabarty (2012): Empowering MSMEs for FinancialInclusion and Growth-Role of Banks and IndustryAssociation address at SME Banking conclave 2012.

3. Chakrabarty (2013), Financial Inclusion in India: Journeyso far and the way forward, key note address at FinancialInclusion conclave organized by CNBC TV 18 at NewDelhi, Financial Inclusion committee ,2008.

4. Rakesh Mohan (2007 Finance For All: Policy & Pitfallsin Expanding Access, Policy Research Report; http//goworld Bank.org/4ys25ks6c0 World Bank, Access to Finance& Development: Theory and Measurement, World BankWorking Paper, Washington,2008, govt. of India, Reportof the committee on FI (2000) Financial Inclusion-reinventing- Manoj Rawats,rbi.org.in

5. www.the hindu.com/opinion/column/C-R-L-Narasimhan/the challenge of financial inclusion/article 6345276.

6. Financial inclusion- reinvesting- Manoj Rawats,rbi.org.in

REFERENCES

take active steps from account opening, savings forold age, insurance schemes etc; and they should beeducated about governments plans and policies forinstance like, Jan Dhan Yojana. So, by utilizing bankingor financial services properly financially excludedpeople can overcome poverty and escape fromclutches of the money lenders to some extent.

P Syamala Devi