Micro Finance and Poverty Alleviation: In Indian Context

Let us begin with a story from www.unitus.com which speaks about an women from so called
“Bottom of the pyramid” and BSS, a microfinance institution.

“Before joining BSS, Uma was an educated woman with few outlets for her talents. Uma
completed the 12th grade, but never sat for her final exams as her marriage was already arranged
at that time. She was not unhappy, but she wished for more.
When Uma decided to become a tailor to supplement her family’s income, she turned to BSS.
With the BSS loans she received, Uma bought a sewing machine and opened her tailor shop.
Since then, she’s taken out and paid back, on time and in full, five additional loans—the last one
for more than $350. She currently makes about $35/month in profit from her business and is able
to send her children to a good government school.

While her income makes life easier, Uma is also thankful for the relationships she’s built with
other clients of BSS. She says, “Before I joined BSS, I was a housewife and spent most of my
time inside my home. Now my work keeps me very busy and I am able to meet and gather
together with other members.”

Uma now helps other women gain the time management, savings and business skills she learned
from her experiences. She leads a women’s empowerment group called Stree Shakti (Women
Power), and helps women work together on income generating activities and save as a group—
they’re currently making sambhar powder, a common spice used to make a traditional lentil dish,
in bulk.

Now that Uma and her husband have purchased a larger home (one with a cemented roof,
kitchen, bathroom, dining room and two bedrooms—quite different than their previous one-
bedroom house with attached kitchen and outside bathroom), Uma hopes to turn her old house
into a sewing school. With her hard work and BSS’s help, she knows that this dream can become
a reality. She says, ‘For the future, I have no fears. Only hope.’ “

‘Development from below’ is not enough. The emerging social change is not for other but an
invitation for all of us. The inner work starts from the reflection of one’s values. Sustainable
social change requires a careful and patient process of integrating both inner and outer. There is
necessity of material infrastructure to support of material infrastructure to support that change of
consciousness. This process leads to formation of groups and thus Microfinance starts. The main
motto is to provide banking facility to non bankable areas. It has been found that poor people are
capable of transforming their own lives given a chance.

More than subsidies poor need access to credit. Absence of formal employment make them non
bankable. This forces them to borrow from local moneylenders at exorbitant interest rates.
Financial services enable the poor to leverage their initiative, accelerating the process of building
incomes, asset and economic security. Microfinance is expected to play a significant role in
poverty alleviation and development. In India, verities of microfinance scheme exist and various
approaches have been practiced by the Govt. and NGO’s.

To define Microfinance we can quote the words of Joel Wassi Adechi, the Ambassador of Benin
to United Nations, who says, “…… Microfinance represents a participatory approach to

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development where people can take control of their lives and because of self sufficient. One does
not need to be an individual of significant means to have creative business ideas, save according
to one’s own priorities, and ultimately plan for the future.” Sustainable access to Microfinance
so to say which refers to loans, savings, insurance ,Transfer services and other financial products
helps to alleviate poverty by generating income, creating jobs, allowing children to go school,
enabling families to obtain healthcare and empowering people to make their choices that best
serve their needs.

Now let us talk something about India. India is a country where the demand for microfinance
services amongst the poor exceeds the supply. Fewer than 10% of India’s 75-80 million
households that could make use of microfinance have access to it. The microfinance market in
India has not quite matured in terms of number of clients, range of services and variety of
institutional models. It is dominated here in India is dominated by Self Help Groups (SHG’s).
Bank linkage programme, aimed at providing a cost effective a cost effective programme. Based
on “Peer Pressure” and group savings as collateral substitute, the SHG programme has been
successful in not only meeting the demand for financial products but also in strengthening the
self help capacities. The poster boys among the Indian Microfinance NGO’s SHARE, BASIX,
SEWA, MYRADA and PRADAN for example have deservingly gained attention. However
SHG’s usually at the behest of certain developmental NGO’s have quietly mushroomed in most
of the Districts of India over the years. Microfinance in India is in “Win-Win” position which can
be said by its considerable growth during 1990’s. Unlike Bangladesh, India has been a leading
country in Microfinance despite massive rural poverty. NABARD reported that as of
March31,2001, Over 260,000 SHG’s involving over 4 million poor families had been linked to
Banks. It has set a target of reaching a million groups covering 100 million rural poor by 2008.

It has been more than 25 years since the birth of Microfinance with the funding of Grameen
Bank in Bangladesh by Prof Mohd. Yunus. The UN Year of Micro credit in 2005 indicated a
turning point for Microfinance as the private sectors are taking more interest in what has been the
domain of NGO’s. The players like GF-USA and ICICI Bank are now incorporating an India
based Finance Institution, Grameen Capital India Pvt. Ltd to structure securitization transition to
bring much needed capital to India’s micro finance institutions. The most common microfinance
product is Micro credit loan. These are enough for hardworking micro entrepreneurs to expand
their business. Again the poor people also need a place to keep their treasure. One most striking
feature of microfinance is that the repayment rate is more than 95%.

To say about poverty alleviation, many questions have been raised about micro finance and
poverty alleviation. Micro finance by providing small loans and saving facilities to those who are
excluded from financial services has been developed as key strategy for reducing poverty. By
providing sustainable access to financial services for the working poor, a group which has been
previously excluded from affordable sources of credit and that are secure, convenient and liquid,
microfinance programmes demonstrates that the poor are credit worthy: a lesson for banks and
development agencies alike.

India is attempting to expand its microfinance arena and it is logical that the country would look
its large bank network as the primary way to supply microfinance services. The recent Govt.
poverty initiatives threaten to undermine commercial microfinance by providing more subsidies
for the poor. The interest charged by most of the microfinance institutions for micro loans are too
low to cover lending costs and risks, as shown by the M-CRIL analysis(2001) of MFI and the
experience of other countries. By this way, are we not putting ourselves in a wrong position? If
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we are talking of long term sustainability of these microfinance institutions to make them
effective tools of poverty elimination, how can we ignore their financial health being put into
danger?

It is proved umpteen number times that “Respublic” or public business without economic sense
is not at all a business. And the way we are handling this issue, without worrying much about
economics, is really a greater worry! Therefore, before it is too late, let us look for ways to
develop our institutes of microfinance so that they remain healthy enough to put life into the
sector. Else they will also end up three decades later in the usual way : another wave of dud
institutions that neither dies nor heals?”

By: Basabi Deb

Jagadish Nath
Faculty, ICFAI National College, Guwahati.