Introduction
The poor population
having their in habitat the rural areas are the ones deprived of the amenities
of the modern world the most. The major factor driving them out of the
mainstream is the lack of opportunities and the lack of money supply. Such a
situation, if compared with an urban habitat seems much easy with the
availability of credit almost at your doorstep. To make the same convenience
available to the rural population a lot of efforts need to be directed towards
the cause. A major step in the direction is the increased growth of
microfinance activities in the rural areas. Such activities were initiated to
accomplish the petty needs of the rural population specially to aid them
financially in the desired cultivation of crops. But, this concept grew far
ahead and started helping the rural population in achieving what can be termed
as Rural Economic Independence.
Review
of Literature
The advent of
micro-financing initiative was strongly supported on the developmental aspect.
The rural population and those living below the poverty line were to be
benefitted highly with the use of small financial support. But, in the later
stages the micro financing initiative started to pic up as a profit generating
area. Apart from being a profit generating venture, the area of micro finance
never lost its sheen to be called as a purely social initiative, at the helm of
its purpose.
Some authors applied
the pluralism theory to reject the deductivism of orthodox economics and made
themselves open to accepting the new ideas. Such open mindedness creates an
excellent basis for interdisciplinary development studies.
Micro-finance literature has already
established that people of very different persuasions work together, talk
together, plan and act together, and learn from each other. This
group interaction is to be encouraged, although at the same time one should not
give up one’s critical faculties. The notion of schools of thought is a useful
one in development studies which enhances our critical faculties while
encouraging cross-school bridging communications.
The basic principle governing
micro-financing activity is thrift. Money made available at “competitive” rates
is lent to collectives of the poor and landless, typically referred to as
Self-Help Groups (SHGs) or Thrift groups. In many countries Non-Governmental
Organizations (NGOs) manage micro-loans, but in India the banking system itself
has also taken on this role. Individually, the members of the self-help groups
would not normally be able to access loans at all. These are poor people who
could not provide collateral as a guarantee. As a result, the most economically
disadvantaged members of developing communities are normally denied access to
the finance that they could use to lift themselves out of their poverty.
Also, the politicians have been using
the tool for their own selfish motives. There have been frequent examples of
Banks being forced to write off debts just before elections to favour the rural
population of a particular area. And this leads to a different perspective on
micro financing domain. Loans are taken out in the expectation that in due
course politicians will compel banks to write off some of the debts. Government
at state or national level will prevent the banks from exercising their
collateral guarantees. In such a situation, from the lenders’ perspective, the
lower costs and risks of lending to groups can be sufficient to justify making
collateral-free loans.
Micro-finance therefore provides a way
for banks to lend small sums of capital to the poor and landless people, thus
enabling them to participate in economic activities that would otherwise be
denied to them. In doing so, the more disadvantaged members of society are
enabled to engage in entrepreneurial activities, increasing their own incomes
to reduce poverty while at the same time loosening their dependence on
traditional money-lenders; the poor therefore are empowered to escape from
exploitative business relationships.
The increasing weightage of
micro-finance in the Indian scenario can not be solely attributed to the policy
and regulatory pressures or the willingness of the interested parties to take
the loan and then not to repay the same. It also comprises of a thematic
approach of the financial institutions to explore this developing market to
generate returns from this social initiative.
Whatever may be the reason the
development of the micro-finance domain is surely going to make a mark on the
development status of the rural population and will contribute towards the
progress in that way.
But how should the money be channelized?
What could be the important areas of fund generation and dissemination? And, how
should a schematic development of economy be brought about as far as a rural
parts of the country are concerned?
Statement
of Problem
“Microfinance: The sole tool for Rural
Economic Independence”.
This study is primarily concentrated on
the study of the use of micro-finance as a tool for rural development and
bringing the rural class at par with the mainstream of the economy of the
country.
Rationale
of the Study
The rationale of the study can be
enumerated as:
·
Micro-finance has not yet been taken as
a tool to support the rural development but only to cater to their petty needs.
·
The development of micro-finance can only
be brought about with the initiative of the already developed urban economy to
bring the rural economy at par with it in terms of all the facilities.
·
The rural economy should also be made
self sustainable in the economic terms as an independent economic unit.
Objective
of Study
The objective of the study is to
ascertain and establish the importance of micro-finance as an important tool
for rural development. Also, to achieve economic independence for rural India
as a unit the importance of micro-finance can not be undermined. The study will
also concentrate on the quantum and methodology of the micro-finance
initiatives to achieve the desired goals.
Also, the importance of various segments
in the society, financial and social institutions, will also be studied and
analyzed.
Methodology
The study is an exploratory research and
various constituents of the area will be explored and studied for their
relative and combined importance. The major areas will be explored on the basis
of the research already done and primarily on the basis of the latest events
that have a bearing on the topic of research.
Study
and Analysis
The basic theme of micro-finance was to
provide the masses with an easy tool to generate the financial resources at the
time of need. The amounts involved in these cases are mostly very small. And
that’s why may be, it is termed as micro-finance.
The basic principle for financing such
needs was not an external financing activity. The finance or the amount, in
this case, was to be generated only through the co-operative efforts of the
local self group. Such efforts, to be achieved through thrift or co-operation,
were the basis of the micro-financing activities. Also, the very important
reason why micro-finance was brought into existence was the urgent petty needs
of the rural public and the unnecessary exploitation by the local money lenders
of such people.
Through the activity of micro-finance, a
local group of people was formed which was managing the flow of the money to
the needy on a case to case basis. Such an SHG or a Self Help Group was formed
by the members from amongst the community or area only to be associated with
the activity of financing needs. For this credit to be availed, the person only
has to be the member of the group. The membership criterion gives the member a
sense of belongingness to the group. Since the members belong to the same
closed community, the need for documentation is subsided and the finance can be
given without much of the formalities as in the case of a formal credit or
loan.
In the case of a loan taken from a bank,
there are certain criteria that need to be followed. The norms are called KYC
norms or Know Your Customer norms. These norms ascertain the genuineness of the
person applying for the loan and establish the validity and eligibility of the
loan seeker. The typical process followed for the credit placement is to estimate
the worth of a person on the basis of various C’s of credit namely capacity,
character, capital, etc. After the estimation of the credit worthiness of the
applicant, the credit is allotted to him. But this process involves a lot of
documentation. And such documentation is worth only in case a considerable sum
of money is involved. Also, the time lag in compiling all the information,
assessing it, and then completing the legal formalities is quite elongated
because of the processes adopted.
In the case of rural financing
solutions, the establishment of genuineness is done at the onset only, by the
member of SHG fulfilling the criteria to be a member of the group. Also, the
requirements like processing fees, legal documentation etc. are done away with
in this case, as the person is already well known to the whole group and is not
required to re-affirm his identity. Also, the identification is not needed as
the chances of a fake identity are minimal. With these requirements reduced in
a closed system and also supplementing to the needs of a less educated crowd,
micro-finance is the only solution.
Also, a small amount of finance, that
the micro-finance is facilitating, can not afford to have the legal requirements
to such an extent that they become more than the worth of the finance itself.
With the reduced procedural requirements, and the shortened time for processing
of credit, micro-finance provides the most feasible alternative for the rural
population to approach.
With the population of Rural India
getting more and more aligned with the mainstream, the tendency to develop
using the latest means of production is also growing. A number of surveys show
that with the uninterrupted supply of electricity in the rural areas and the
connectivity with the urban areas have been the important reasons for the
increased sale of luxury products in the villages. Now its not uncommon to see
at least Refrigerators and Television sets in most of the houses in villages.
This development has raised a number of avenues for the rural population to
progress and earn as per their capability.
Micro-Finance provides the masses with a
tool to satisfy their petty financial needs for which they are ready to pay a
premium. Also, a lot of things that were not though of earlier are being
considered as an option to grow and to earn money. Our study is primarily
concentrated on the application of Micro-Finance in the rural domain.
It is the primary concern of any of the
Governments to attain a state of economic independence. Such a state is
expected to be achieved in both the rural and urban spheres. Till now in our
country, the urban development has been substantial and the economy of the
urban areas is now in a self sustained mode. The Government intervention is
required only in case of administration and distribution of resources. The
sources of finance are freely available to all those who are capable and
willing to afford it.
But, in case of rural economy, the
sources of finance are limited and a large share of the rural finance comes
from the unorganized sources. The poor villager has to go asking for finance
even in case of small needs like funds for sowing of seeds, and funds for
transporting his produce to the nearest market. Such a situation makes the
villager go for small borrowings which in turn becomes a habit and a source of consistent
losses too.
Micro-finance operations work as stated
above, by the formulation of various Self Help Groups, it organizes the
community into one place and bring them on the same common platform. Thus the
assessment of a need based demand is done and the money is provided to the neediest
of the persons. Also, this requires funding, which comes either from the small
savings of the community members or is funded by some external source. Most of
it is funded from external sources now. The returns in the area of
micro-finance are huge, and considering a petty amount they accumulate to a
pile in percentage terms.
A number of Banks and Financial
Organizations are now concentrating on the financial avenues in the field of
micro-finance because of the sheer revenue streams. Although there is a huge
potential for the same in the Indian market, but at the same time the risk
involved is also high. But, even after the consideration of the risk, the
financial institutions are keen on investing into the field keeping the huge
returns in mind.
The funds for the same directs through
the NGO’s and SHG’s to the needy. As the Banks and Financial Institutions don’t
have a direct say in the rural market, the funds are first given to the
mentioned organizations which then direct the fund to the respective class
based on a mutual perspective. The assets based lending is done by the Banks
and financial institutions to cater to the needs based on a specified set of
directives. Such directives are issued by the regulators like RBI and the
Finance Ministry and some refinement is also done by the respective fund
providers.
The requirement for finance in the rural
domain is huge attached with a considerable margin. The margins are not the
only factors driving the funds to the area. The margins are also backed by a
strong requirement of finance in the rural domain and a Government support to
do so. The requirement of micro-finance is there in every stream. Be it the
sowing of seeds, or the requirement for irrigation, or the assistance for
selling of produce to even the marriage of a child for which the loan is taken
and the same can be repaid later. All such requirements constitute the routine
life of a person residing in a rural area. Such requirements clubbed for most
of the residents at different times generates a huge float for the
micro-finance to be allocated.
These factors give a very positive
feeling about the magnitude of the micro finance requirement in the Indian
economy. As per a recent survey, the requirement of micro-finance in the Indian
market may reach upto 3.5 lac crores by the year 2015. And the market is
catered upto the extent of 27% only. Such figures give a huge boost to the
ventures into the micro-finance markets. The penetration in the field will give
a big push to the development of the structured market in the area.
There could have been only one
constraint in the provision for micro-finance, and that is source of fund. But
with the increased number of Banks and Financial Institutions seeking interest into
the area and with an increased pace and vigor, the constraint seems to have
become an opportunity. The reason for the same is not just social service. The
returns involved are huge and the institutions want to tap the same. The
returns range from 16 to 24 percent and the risk as compared to the same is
less. This has enticed the financial institutions to enter into the field of
micro-finance.
The Government has made it a point to
carry the rural India to the mainstream of the country. For the same purpose,
Priority Sector Lending has been given has been given a substantial weightage
in the credit portfolio of the lending institutions. It is only with building the
rural economy a boon and bringing it to the mainstream that development can be
brought about.
The primary factor driving the
development of the urban economy has been the development of the financial
sector and the free availability of the credit for various purposes. The masses
or an individual don’t have to look towards the state for development. One can
avail credit at competent and reasonable rates without any state intervention. Also,
the credit is freely available for the business. We could not have expected to
build and maintain huge shopping malls and theme amusement parks. The
concentration of the state was solely on the infrastructure development and the
private sector cam forward with the plans of development of business and
society. This later developed into a self sustained model where the state’s
responsibility was limited to the development & maintenance of
infrastructure and law & order. The state confined itself to the role of a
regulator in the rest of the areas as the private sector took over the
developmental pace. This state is hereby being called Economic Independence.
For the rural areas a similar model
needs to be developed and followed. But the primary concern is the availability
of credit for a self-sustained development without much intervention from the
state. The development can be brought about by funding the sustenance and
developmental needs of the rural population like:
1.
Short Term funding required at various
times for farming
2.
Funds required for meeting the social
needs at various times
3.
Requirement of funds at the time of
emergency
4.
Requirement of funds for development
purpose or starting a new venture
If these requirements for funds and other
such requirements, that do not require a huge amount, can be fulfilled, the
rural economy can be driven purely on a self-sustained basis just like urban
economy.
The basic feature that the system of
providing micro-finance is lacking is the standardization of process and
guidelines. This is the biggest roadblock that is preventing the institutions
from getting into a full throttle for the purpose. Lack of standardization
creates uncertainty and this is the main reason for the risk involved in the
venture.
If there are some standardized processes
and set of guidelines provided for the disbursement of micro credit, such as
the feasible and reasonable counterparts of the KYC and AML norms and of course
the repayment capability estimation i.e. financial underwriting, the
uncertainty will surely reduce giving more confidence to the investors for
parking funds with confidence. With these systems in place, it is expected that
more and more institutions will be inclined towards investment in the area of
rural micro financing.
Once the model of micro-finance in the
rural areas is up and running, a lot of problems of the Government regarding
the funding of the petty needs of small farmers shall go. Also, the rural
economy will start developing at its own pace with a self-sustained model of finance
in place.
One more important advantage of the
model can be discussed. The rural population may also avail credit for the
purpose of starting a new venture. Like in the case of female members, that do
not have much to do during the day while the male members of the family are out
to work, they can pick up some occupation like sewing, knitting or other such
work as craft, that can bring them some money while they work and also become a
regular secondary source of earning. Such ventures require equipment and tools
that are not so expensive but are unaffordable by most of the poor people
residing in the rural areas. Such type of financial assistance can be provided
to the population requiring the same and then self-sustenance can be talked
about.
Financing the small needs of the rural
population will surely go a long way in building a robust model of a
self-contained and self-sustained rural economy.
So far, a lot of efforts have been made
by the Government for the development and connection of the rural economy with
the mainstream of the country, but the efforts lacked a base that could make
the economy stand on its own feet. It is not only micro-financing activity, but
a lot of other such efforts taken jointly, that will drive the rural economy in
a self-sustained mode. Yes for achieving the state of Rural Economic Independence, a strong financial system supported by
a deep rooted need driven funding is required, but that comes as the next phase
of the vision. Right now the tool that can be applied to achieve the desired
state is Micro-Finance.
A state of Rural Economic Independence
can be said to be a state in which all the systems and needs are fulfilled on a
self-sustained basis and is a system that is functioning totally on its own
without any Government intervention. The phenomenon can be said to have the
following characteristics:
1.
The financial needs are fulfilled by the
available sources of credit only
2.
There is no intervention needed of any
kind (other than regulatory) from the state
3.
The demand and supply of funds is in
equilibrium
4.
In case of an in-equilibrium being
reached, the system itself attains a new point of equilibrium and sustains
5.
The role of the state is just that of
the regulator and no intervention in financial terms is done by the state
When such a state is achieved, the rural
economy will also be said to have achieved its independence and the development
will actually be attained.
Micro-finance is the sole tool that will
lead us to such a state and hence should be promoted and developed by all means
as it is a win-win situation for both the private and the public sector.
A true state of Rural Economic Independence
will be achieved with a consistent support from the lending institutions which
in this case can be routed through micro-finance in the short run.
Suggestions
The following are the suggestions based
on the above discussion:
1.
A sustainable growth can be achieved
through routing of the financial resources for the development of the rural
parts equally as the case is with the urban areas
2.
The lending institutions have a
lucrative opportunity if they provide for an equal diversion of funds to the
micro-financing needs of the rural areas
3.
Rural Economic Independence
can be sought and achieved only through a self-sustainable model of financing
the petty needs of the residents in the rural areas
4.
Government should look for more subsidy
for the institutions going in this area
Future
Scope of Study
The study is just an exploratory insight
into the scope of micro-financing as a tool for the development of the rural
economy and attaining a state of Rural Economic Independence. The
area is vast open for further research in the field in the areas of the process
and methods in which such lending can be done. Also, the financials and quantum
associated with the same can be studied.
Limitations
The study is limited to the the
exploration of the areas in which Micro-Finance can be used as a tool and
specifically its use as a tool for the development of economic independence at
rural level. No study has been done for the quantum and financials involved in
the area.
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