Micro-finance in Rural India: Challenges for the Future

small-finance in uncouth India Challenges for the FutureSubmitted byAishik ChakrabortyAritra DattaShubham ChowdhurySnehashish SahaINTRODUCTIONRural India is home to about(predicate) two- one-thirds of the Indias 125 crore population. This population is by and large engaged in agriculture that contributes 17.2 sh atomic number 18 to Indias GDP. b atomic number 18ly, this calculateence on agriculture is gradually lessen with small-scale cottage industries and self-help groups gaining jut in unsophisticated economy. This is clearly reflected by the contribution of effort in plain economy which has grown to 30.2 percent in the recent years. all the same the self-help groups and cottage industries often pee-pee to depend on the local moneylenders for financing of its activities with most large scale banks just to make a foray into countrified markets. In such circumstances, micro-finance gains prominence in financing activities of such industries.micro-finance is a critic al factor in uplifting agrestic economy. thus far this vault of heaven accepts from various challenges. It is imperative that the challenges atomic number 18 studied in order to ensure the Indian growth baloney to continue. This get hold of will analyze the prevalent challenges and recommend strategies to overcome these bottlenecks. literature REVIEWMicro-finance refers to small scale fiscal function provided by monetary institutions to the financially backward fleshes. These go include savings, confidence, insurance, etc. The conditions for a financial service to be termed as micro-finance is that the transaction should be small and the customers should be financially weak. Jeffrey Sachs, the renowned economist once claimed that The key to ending complete poverty is to enable the poorest of the poor to get their foot on the pass of development.The concept of micro-finance was introduced in India during the 1990s. The rustic is home to about a third of the worlds po or, most of who do not have ragion to commercial-grade banking services. The key problem areas in rural financial markets include a lack of credit in rural areas, absence seizure of novel technology in agriculture, low savings capacity in rural areas and prevalence of usurious moneylenders. In such circumstances, micro-finance provides financial inclusion to the under-privileged sections of the society. In absence of micro-finance, the poor in rural India would fall prey to the money-lenders who maneuver a truly mellowed rate of interest on credit and thereby rob the poor of their savings.Micro-finance differs from stodgy banking as un deal conventional banks, micro-financing lays more(prenominal) emphasis on the principles of co-operation, equality and mutual self-help. Micro-finance targets mostly the women of rural India, with more than 90% of its customers being women belonging to self-help groups. Micro-credit is mostly apply for deal investments by self-help groups and facilitates access to credit by clients who lead small amounts of credit but are less credit-worthy for larger loans.However, MFIs in India are susceptible to a number of challenges including political interference. They compete with both politicians and government plump for lending programs for the same target segment. The ability of the Indian MFI industry to apologize this risk is a crucial factor in determining its success. An cause of a crisis in the micro-finance sector was when Andhra Pradesh found itself at the center of a debacle thatwas triggered by a the highly successful MFI, SKS Microfinance, which tactfully cover up cases of suicides among MFI borrowers. While it has not been clearly established whether indebtedness or coercive MFI tactics triggered the suicides, the political backlash was intense. In order to residue the political criticism, the state government hastily pushed done a command that effectively crippled the MFI industry in the state.RBI estab lished a committee, headed by Y.H. Malegam, to review the various issues and to recommend regulative travel take to prevent these incidents from recurring. Released in January 2011, we the recommendations will have wide ranging impacts on the industry. few of the key impacts includeCreation of entry and operational barriers through high net worth, capital adequacy, loan portfolio allocation drivements with a possibility of round(prenominal)what banks absorbing some of the MFIs.Implementation of industry specific corporate ecesis standards, greater oversight by the RBI, tailoring NPA definitions in accordance with industry standards will improve corporate governance and transparency .Establishment of a fully fledged credit bureau, limitations on the number of loans to each household, conditions on procedures for loan sanctioning and repayments will reduce the incidence of over-borrowing and multiple-lending .The World entrust has also taken major(ip) steps in the sector of micro-finance. institution of Consultative Group to Assist the Poor (CGAP) in 1995 as a consortium of 33 Public and closed-door development agencies and establishment of Microfinance perplexity Institute(MAFMI) in 2003 are signifi give the sackt landmarks. Regional multilateral development banks like Asian Development Bank also champion the cause of commercial micro-finance. Nationalization of existing private commercial banks, massive expansion of secernate network in rural areas, mandatory directed credit to precession sectors of the economy, subsidized evaluate of interest and creation of a new come in of rural banks at district level and an Apex bank for floriculture and Rural Development (NABARD20) at national level are some of the organizations working in micro-finance.The initial micro-credit innovations in Bangladesh, Bolivia and Indonesia demonstrated the success of micro-lending. However the popularity of micro-finance in India stemmed from its ability to reach the poor without collateral and skinny full retrieval rates. Micro-finance is contributing significantly to the financial activities of the poor. Various initiatives and programs have been launched to fortify the position of micro-finance in India. The speed of enforcement and the degree to which these recommendations are use will determine how much the industry will change and how plausibly it is to succeed.CONCEPTUAL FRAMEWORKMicrofinance suffers from various challenges from its competitors and also from the issues stemming from the mismanagement of various micro-finance companies. The occupy will enable us to recommend the future strategies and build the way of life forward for MFIs in India by addressing the future(a) issues.What is microfinance and how does it impact rural India?What are the challenges faces by MFIs in India?What are its implications on the various stakeholders ( small townrs, money-lenders, banks, Govt. and the MFI institutions)What are the practical solu tions to these challenges?Action plan for the recommendations.RESEARCH DESIGNThe research will be based on the following methodologies.Identification and interpretationIdentify the major issues and challenges.Formulate relevant questions keeping in mind these issues.Gather cultivation from primary and secondary sources.Interpret the solutions to the issuesSupport and supplement the findings from research data. data AnalysisGather data from self help groups and find whether they are involved in Micro finance, and how micro finance has contributed to their business and rural India in general.Challenges that they face while getting the requisite loan from the Micro Finance Institutions.What are the viable alternatives to Micro Finance.The strategic vastness of Micro Finance Institutions to their organization.How Micro Finance has impacted their lives and whether the impact is positive or negative.EXPECTED CONRIBUTIONThe study will consider all the dimensions of Micro Finance in Rural India and provide the following value additions to the field.Appreciate the importance of Micro Finance in rural India and explain their significance. show the perceptions of the rural population about Micro Finance in India.Remove the apprehensions about Micro Finance and communicate the benefits of Micro Finance to the rural population.Understand and comprehend the challenges that Micro Finance Institutions face in rural India. clear how the challenges impact the MFIs.Analyze and evaluate the challenges critically.Develop strategies for overcoming the current challenges and sustaining them.Analyze the competitors and their strategies.How can MFIs handle the challenges and maintain their customer base.Design the future path of development for Micro Finance in India.Existing micro-finance models in IndiaThe following micro-financing models are prevalent in India. Each of these models have their own advantages and disadvantages.SHG-Bank linkage Model In this model the SHGs get cred it directly from the co-operative banks, regional rural banks, NABARD, etc. This model provides credit to SHGs at set about rates of interest. However this model reduces the credit worthiness of the SHGs and increases the risk of default for the banks.Bank-MFI linkage Model In this model, the MFIs act as intermediaries and guarantors for the SHGs and receive financing from banks for pull ahead lending it to the SHGs. This model helps in improving the credit worthiness of the SHGs and reduces the risks for the banks. However the SHGs have to pay a higher rate of interest to MFIs in this model.Challenges faced by the Micro-finance sector in IndiaThrough extensive study and discussions with relevant stakeholders, the following have been identified as being the firstly challenges to the micro-finance sector in India. there is extreme skewness in dispersal of micro-finance services in India. 52% clients of micro-financing come from southern India while 23% come from eastern India. T he share of micro-finance beneficiaries from North, West, Central and North-East India stand at an abnormally low level of 9%, 12%, 3% and 3% respectively. This disparity clearly shows that micro-financing services are unevenly spread and is not available to many people who need it.Micro-finance is mostly concerned with micro-credit to SHGs. However other financial services such as insurance, savings schemes are not provided. Also it serves the SHGs, individual businesses dont benefit through micro-finance.Micro-finance is considered as a social/charitable business rather than a profitable one. Consequently, almost 90% MFIs are dependent on subsidies and suffer from a high debt-equity ratio.The loan sizes are generally small and involves high transaction and processing costs. Consequently the interest rates are higher.There is high turnover of MFI employees. The reasons are poor salary, lack of incentives and working mostly in rural areas with limited opportunities. The employees a lso lack in financial and technical training.The MFIs lack control over how efficiently the money is used after lending. This often leads to bad investments by SHGs and results in default. MFIs are cognizant of this risk and keep the interest rates high in absence of a collateral.Micro-finance has reached only a small division of the people who need it.The micro-finance sector lags behind from technological perspective that would allow it to disburse loans more effectively.Absence of best practices norms in the industry often leads to coercive recovery of loans.The poor in urban areas cannot avail micro-finance services. Hence these services should be extended for the urban poor as well.Micro-finance institutions have a very low rate of customer retention. This is because clients are not properly improve about the services available from the MFIs.RecommendationsBased on the findings, the following steps are recommended for reviving micro-finance sector in India and turning it into a puppet for poverty alleviation and financial inclusion.Micro-finance reaches a very small fraction of the people who need it. Hence an overall scaling up of micro-finance sector is imperative. The initiative can be in form of public ventures, private banks or PPP model. The MFIs and NBFCs are to be brought under a regulatory authority to ensure standardization and enforce best practices.The micro-finance sector should beam its portfolio from being a money-lending entity into an sector that provides holistic financial services such as insurance and savings to its clients. It should also try to widen its client base from SHGs in rural areas to the deserving urban poor who require financial inclusion.Greater use of technology and analytics can negate some issues that arise out of asymmetric information while sanctioning a loan and provide let out risk analysis. This will allow MFIs to note the risk of default while the poor will benefit from lower interest rates due to less chan ces of default.There employees should be provided with develop incentives and given proper training to educate the rural people with the benefits of services provided by the MFIs. They should also be provided with technical and financial training to better assess the credit worthiness of the client.The perception of MFIs should change from being social or charitable organizations into being sustainable and profitable organizations. This would allow MFIs access into financial markets and investments and end their dependency on subsidies.AppendixThe following questions were asked to inn and mess staff and security guards of IMI who were likely to have been exposed to the Micro-finance sector. The questionnaire and responses are as follows.Are there any SHGs operating your native village?Do you have any close relative associated to SHGs?Which part of the country your native village is situated at?Are you aware of the services that micro-finance institutions provide?Do you have access to micro-finance institutions in your village?What is the favorite(a) source of credit in your village?Has micro-finance institutions uplifted the rural class?REFERENCESMicrofinance in India Empirical Evidence, Alternative Models and Policy Imperatives Rajaram DasguptaAccess, Use and Contribution of Microfinance in India Findings from a National Study Frances SinhaMicrofinance in India K.G. Karmakar ISBN 978-0-7619-3626-8Microfinance in India Mission or Misery? Jaideep Singh PanwarThe Microfinance Sector in India Which Way Now? Savita Shankar and Mukul G. AsherIssues and Challenges Relating to Microfinance in India Dr. Sandeep BansalMicrofinance in India Contemporary Issues and Challenges Sibghatullah Nasir