From the time of independence unemployment and poverty has been two major characteristics and challenges of India. The major cause for the above two has been the unavailability of sufficient credit facilities for the poor and unemployed. These two factors have become the most challenging roadblock in the path of sustainable development of the country. The rapidly opening economy is widening the gap between the rich and poor. Microfinance allows the poor to get the loans they need to save, invest, and create a sustainable lifestyle of financial independence and growth. These loans are used productively by the poor to create their own businesses, grow their assets, and get out of poverty once and for all. Microfinance is becoming a significant force in India. In the last two decades, substantial progress has been made in developing techniques to deliver financial services to the poor on a sustainable basis. These loans are aimed at empowering the impoverished people to start their own businesses and to grow their money so that they can achieve long-term financial independence and develop sustainably. Microfinance is one of the effective ways for poverty alleviation, economic growth and sustainable development in emerging economies and the MFIs play a significant role in this regard. This paper will focus the importance, challenges, obstacles, opportunities and outcome of microfinance in Indian context for a sustainable development.
Keywords: Microfinance, Sustainable Development, MFIs, Poverty,
Microfinance is one of the most visible innovations in anti-poverty policy in the last half-century, and in three decades it has grown dramatically. The most important benefit of microfinance in India is that it helps long-term financial independence in these poverty-stricken areas. Microfinance help sustained impact by educating recipients on how to create their own businesses and how to properly manage and grow their money. Microfinance in India and several other countries received a major boost. Undoubtedly it has been successful in bringing formal financial services to the poor. Many believe it has done much more and, by putting money into the hands of poor families and it has the potential to increase investments in health and education and empower women. Microfinance institutions have created a massive social infrastructure uniquely positioned to reach millions of clients on a regular basis. Microfinance social infrastructure is no more a financing channel but it has also emerged as a strong distribution channel with numerous credit products, repayable over a longer period of time, and solar lamps, fuel-efficient stoves, mobile phones and mobile banking devices are some of them. In the last two years, many companies are manufacturing solar products with microfinance distribution channel to sell their products.
In the present decade, there are many areas of slow or negative growth especially in the rural areas. There may be improvement in terms of GDP and in HDI, but the overall development of the country is still under the curtains. The benefits of development have distributed unevenly between rich and poor nations and between rich and poor groups in individual nation. The global number of extremely poor and under nourished have remained high and in some societies it has increased. One of the major negative impacts of development has been on the environment and on existing social structure. Many traditional societies and villages have been devastated by development of forest, water system and intense of fisheries. Environmental damage of development, if unchecked, may undermine the achievement of development and even collapse of essential ecosystem. The growing awareness of the challenges to traditional development thinking has led to the increasing acceptance of a new concept of development, sustainable development.
STATEMENT OF THE PROBLEM:
Many poor in the world don’t have access to basic financial services which are helpful in managing their assets and generate income. To overcome poverty, they need to be able to borrow, save and invest, and to protect their families against adversity. Microfinance is one way of fighting poverty in rural areas, where most of the world’s poorest people live. It puts credit, savings, insurance and other basic financial services within the reach of poor people. Through microfinance institutions (MFIs) such as credit unions, financial non-governmental organizations and even commercial banks, poor people can obtain small loans, receive money from relatives working abroad and safeguard their savings.
OBJECTIVES OF THE STUDY
The objective of the study is to analyze the challenges of microfinance and MFIs, and to suggest some measures to tackle those challenges.
This study is mainly based on secondary data only. Secondary data is collected from various sources like journals, books, magazines and reports. So trueness of the data depends on the trueness of the source.
The most common definition of sustainable development refers to a pattern of resource use that “meets the needs of the present without compromising the ability of future generations to meet their own needs” (1987 UN World Commission Report). The term broadly encompasses a number of inter-related global issues such as poverty, inequality, hunger, and environmental degradation.
In the extensive discussion of the concept of sustainable development since then, there has been recognition of three aspects of sustainable development: economic, environment and social. An economically sustainable system must be able to produce goods and services on a continuing basis to maintain manageable levels of government’s internal and external debt and to avoid unhealthy sectorial imbalance which damage agriculture or industrial production.
MICROFINANCE: AN OVERVIEW
Micro Finance may be defined as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi urban or urban areas, for enabling them to raise their income levels and institutional initiatives of rural credit and to the improve living standards”. At present, a large part of micro finance activity is confined to credit only. Women constitute a vast majority of users of micro-credit and savings services.
Microfinance is the supply of loans, savings, and other basic financial services to the poor. (http://cgap.org) As these financial services usually involve small amounts of money – small loans, small savings, etc. – the term “microfinance” helps to differentiate these services from those which formal banks provide.
Poor people save all the time, although mostly in informal ways. They invest in assets such as gold, jewelry, domestic animals, building materials, and things that can be easily exchanged for cash. They may set aside corn from their harvest to sell at a later date. They bury cash in the garden or stash it under the mattress. They participate in informal savings groups where everyone contributes a small amount of cash each day, week, or month, and is successively awarded the pot on a rotating basis. Some of these groups allow members to borrow from the pot as well. The poor also give their money to neighbors to hold or pay local cash collectors to keep it safe.
However widely used, informal savings mechanisms have serious limitations. It is not possible, for example, to cut a leg off a goat when the family suddenly needs a small amount of cash. In-kind savings are subject to fluctuations in commodity prices, destruction by insects, fire, thieves, or illness (in the case of livestock). Informal rotating savings groups tend to be small and rotate limited amounts of money. Moreover, these groups often require rigid amounts of money at set intervals and do not react to changes in their members’ ability to save. Perhaps most importantly, the poor are more likely to lose their money through fraud or mismanagement in informal savings arrangements than are depositors in formal financial institutions. (http://cgap.org )
The poor rarely access services through the formal financial sector. They address their need for financial services through a variety of financial relationships, mostly informal.
Microfinance is provided through Microfinance Institutions (MFIs). To be sustainable, MFIs ultimately have to:
‘ Mobilise their own resources through savings and equity, augmented by other domestic resources
‘ Recover their loans
‘ Cover their costs from their operational income
‘ Finance their expansion from their profits
‘ Acquire an appropriate legal status
‘ Submit to appropriate regulation and super- vision
There is no place for charity in microfinance.
CHALLENGES OF MICROFINANCE & MFIs IN INDIA:
Poor people do not live in a static state of poverty. Every year, many millions of people transition out of poverty by successfully adopting new farming technologies, investing in new business opportunities, or finding new jobs. At the same time, large numbers of people fall back into poverty due to health problems, financial setbacks, and other shocks. If available at critical moments, effective tools for savings, payment, credit, and insurance can help households capture an opportunity to climb out of poverty or weather a crisis or emergency without falling deeper into poverty.
Worldwide, approximately 2.5 billion people do not have a formal account at a financial institution, according to the World Bank’s Global Financial Inclusion Database. As a result, most poor households operate almost entirely in the cash economy, particularly in the developing world. This means they use cash, physical assets (such as jewelry and livestock), or informal providers (such as money lenders and payment couriers) to meet their financial needs’from receiving wages to saving money for fertilizer. However, these informal mechanisms tend to be insecure, expensive, and complicated to use. And they offer limited recourse when major problems arise, such as a serious illness in the family.
Following are some challenges faced by MFIs in providing microfinance for a sustainable development:
Low Outreach: In India, MFI outreach is very low. It is only 8% as compared to 65% in Bangladesh.
High Interest Rate: MFIs are charging very high interest which the poor find difficult to pay.
Negligence of Urban Poor: It has been noted that MFIs pay more attention to rural areas and largely neglect the urban poor. Out of more than 800
MFIs across India, only six are currently focusing their attention on the urban poor.
Client Retention: Client retention is an issue that creates a problem in growing the MFIs. There is about 28% client retention in the MFIs.
Loan Default: Loan default is an issue that creates a problem in growth and expansion of the organization because around 73% loan default is identified in MFIs.
Low Education Level: The level of education of the clients is low. So it creates a problem in the growth and expansion of the organization because its percentage is around 70% in MFIs.
Language Barrier: Language barrier makes communication with the clients (verbal and written) is an issue that creates a problem in growth and expansion of the organization because around 54% language barrier has been identified in MFIs.
Late Payments: Late payments are an issue that creates a problem in growth and expansion of the organization because late payments are around 70% in MFIs.
Geographic Factors: The Geographic factors make it difficult to communicate with clients of far-flung areas which create a problem in growth and expansion of the organization. MFIs are basically aimed to facilitate the BPL population of the country but due to lack of infrastructure in those areas it becomes difficult to reach them.
Debt Management: Clients are uneducated about debt management. 70% of the clients in MFIs are unaware of the fact that how to manage their debt.
‘ High Transaction Cost
‘ Lack of access to Funding
‘ Loan Collection Method
‘ Uneven Population Density
‘ Challenges Before the MFIs
‘ Quality of SHGs
‘ Regional Disparity
‘ Deserving Poor are Still not Reached
‘ Microfinance Outreach in Seven Poorest States of India (Orissa, Bihar, Chhattisgarh, Jharkhand, Uttaranchal, Madhya Pradesh and Uttar Pradesh
‘ Low Depth of Outreach
‘ Unregulated Microfinance Institutions
‘ Lack of Insurance Services
MEASURES TO OVERCOME CHALLENGES:
The following are some measures to overcome the challenges faced by MFIs in providing microfinance services to have a sustainable development.
1. Proper Regulation: The regulation was not a major concern when the microfinance was in its nascent stage and individual institutions were free to bring in innovative operational models. However, as the sector completes almost two decades of age with a high growth trajectory, an enabling regulatory environment that protects interest of stakeholders as well as promotes growth, is needed.
2. Field Supervision: In addition to proper regulation of the microfinance sector, field visits can be adopted as a medium for monitoring the conditions on ground and initiating corrective action if needed. This will keep a check on the performance of ground staff of various MFIs and their recovery practices. This will also encourage MFIs to abide by proper code of conduct and work more efficiently. However, the problem of feasibility and cost involved in physical monitoring of this vast sector remains an issue in this regard.
3. Encourage rural penetration: It has been seen that in lieu of reducing the initial cost, MFIs are opening their branches in places which already have a few MFIs operating. Encouraging MFIs for opening new branches in areas of low microfinance penetration by providing financial assistance will increase the outreach of the microfinance in the state and check multiple lending. This will also increase rural penetration of microfinance in the state.
4. Complete range of Products: MFIs should provide complete range of products including credit, savings, remittance, financial advice and also non-financial services like training and support. As MFIs are acting as a substitute to banks in areas where people don’t have access to banks, providing a complete range of products will enable the poor to avail all services.
5. Transparency of Interest rates: As it has been observed that, MFIs are employing different patterns of charging interest rates and a few are also charging additional charges and interest free deposits (a part of the loan amount is kept as deposit on which no interest is paid). All this make the pricing very confusing and hence the borrower feels incompetent in terms of bargaining power. So a common practice for charging interest should be followed by all MFIs so that it makes the sector more competitive and the beneficiary gets the freedom to compare different financial products before buying.
6. Technology to reduce Operating Cost: MFIs should use new technologies and IT tools & applications to reduce their operating costs. Though most NBFCs are adopting such cost cutting measures, which is clearly evident from the low cost per unit money lent (9%-10%) of such institutions. NGOs and Section 25 companies are having a very high value of cost per unit money lent i.e. 15-35 percent and hence such institutions should be encouraged to adopt cost-cutting measures to reduce their operating costs. Also initiatives like development of common MIS and other software for all MFIs can be taken to make the operation more transparent and efficient.
7. Alternative sources of Fund: In absence of adequate funds the growth and the reach of MFIs become restricted and to overcome this problem MFIs should look for other sources for funding their loan portfolio. Various alternative sources of fund for the MFIs may be by getting converted to for-profit company i.e. NBFC, Portfolio Buyout, and Securitization of Loans etc.
Sustainable development requires continued growth and diversification of the rural economy, access of all segments of the population including rural micro-entrepreneurs, farmers and the poor to sustainable financial services such as savings, credit and insurance provided by self-reliant, sustainable financial institutions in a conductive macroeconomic policy environment and development of MFIs.
Sustainable rural microfinance requires local initiative and careful donor support for the development of institutions, enabling them to offer both savings and credit services, mobilise their own resources, have their loans repaid, cover their costs from their operational income, and finance their expansion to the poor and non-poor from their profits. Do not support temporary or ad-hoc solutions with no chance of institutional sustainability.
Vijayaragavan, T. (2013). Microfinance: A Sustainable Tool for Economic Growth. IJRCM, 3(06), 89-91.
Basheer, M. (2013). What Does Sustainable Development Really Means? – A Study on Different Dimensions Of Sustainability. IJRCM, 3(10), 114-116.