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EFFECTING FINANCIAL INCLUSION THROUGH MICROFINANCE
- Arathy Nair H(112CM002) Rathnavel Subramaniam college of Arts and Science,- Barathram B(112CM004) Rathnavel Subramaniam college of Arts and Science,
ABSTRACT
The Reserve Bank of India (RBI), which became an official member institution of
the Alliance for Financial Inclusion in 2012, set up the Khan Commission in 2004 to look into
financial inclusion and the recommendations of the commission were incorporated into the mid-
term review of the policy (200506).Reserve Bank permitted commercial banks to make use ofthe services of non-governmental organizations (NGOs/SHGs), micro-finance institutions, and
other civil society organizations as intermediaries for providing financial and banking services.
As evidently seen above, the RBI puts significant importance on financial inclusion and
taken quite big steps in that direction. This is because the economic stability dependsamong
many thingson the financial inclusiveness of the country by influencing the overall savings of
the country. This paper intends to study how microfinance plays a role in making the countrys
financial system financially inclusive.
INTRODUCTION
Financial inclusion is delivery of banking services at an affordable cost to the vast
sections of disadvantaged and low income group. Unrestrained access to public goods and
services is the sine qua non of an open and efficient society. As banking services are in the
nature of public good, it is essential that availability of banking and payment services to the
entire population without discrimination is the prime objective of the public policy.
This paper intends to analyze how microfinance in India enables this financial inclusion.
On this note the discussion following immediately will be about a briefing on financial inclusion
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FINANCIAL INCLUSION IN INDIA
The Reserve Bank of India (RBI), which became an official member institution of
the Alliance for Financial Inclusion in 2012, set up the Khan Commission in 2004 to look into
financial inclusion and the recommendations of the commission were incorporated into the mid-
term review of the policy (200506). In the report RBI exhorted the banks with a view of
achieving greater financial inclusion to make available a basic "no-frills" banking account. In
India, financial inclusion first featured in 2005, when it was introduced by K C Chakraborthy,
the chairman of Indian Bank. Mangalam Village became the first village in India where all
households were provided banking facilities. Norms were relaxed for people intending to open
accounts with annual deposits of less than Rs. 50,000. General credit cards (GCCs) were issued
to the poor and the disadvantaged with a view to help them access easy credit. In January 2006,the Reserve Bank permitted commercial banks to make use of the services of non-governmental
organizations (NGOs/SHGs), micro-finance institutions, and other civil society organizations as
intermediaries for providing financial and banking services. These intermediaries could be used
as business facilitators or business correspondents by commercial banks. The bank asked the
commercial banks in different regions to start a 100% financial inclusion campaign on a pilot
basis. As a result of the campaign, states or union territories like Pondicherry, Himachal
Pradesh and Kerala announced 100% financial inclusion in all their districts. Reserve Bank of
Indias vision for 2020 is to open nearly 600 million new customers' accounts and service them
through a variety of channels by leveraging on IT. However, illiteracy and the low income
savings and lack of bank branches in rural areas continue to be a roadblock to financial inclusion
in many states and there is inadequate legal and financial structure.
In India, RBI has initiated several measures to achieve greater financial inclusion, such as
facilitating no-frills accounts and GCCs for small deposits and credit. Some of these steps are:
Opening of no-frills accounts: Basic banking no-frills account is with nil or very low minimum
balance as well as charges that make such accounts accessible to vast sections of the population.
Banks have been advised to provide small overdrafts in such accounts.
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Relaxation on know-your-customer (KYC) norms: KYC requirements for opening bank
accounts were relaxed for small accounts in August 2005, thereby simplifying procedures by
stipulating that introduction by an account holder who has been subjected to the full KYC drill
would suffice for opening such accounts. The banks were also permitted to take any evidence as
to the identity and address of the customer to their satisfaction. It has now been further relaxed to
include the letters issued by the Unique Identification Authority of India containing details of
name, address and Aadhaar number.
Engaging business correspondents (BCs): In January 2006, RBI permitted banks to engage
business facilitators (BFs) and BCs as intermediaries for providing financial and banking
services. The BC model allows banks to provide doorstep delivery of services, especially cash
in-cash out transactions, thus addressing the last-mile problem. The list of eligible individualsand entities that can be engaged as BCs is being widened from time to time. With effect from
September 2010, for-profit companies have also been allowed to be engaged as BCs. India map
of Financial Inclusion by MIX provides more insights on this.
Use of technology: Recognizing that technology has the potential to address the issues of
outreach and credit delivery in rural and remote areas in a viable manner, banks have been
advised to make effective use of information and communications technology (ICT), to provide
doorstep banking services through the BC model where the accounts can be operated by even
illiterate customers by using biometrics, thus ensuring the security of transactions and enhancing
confidence in the banking system.
Adoption of EBT: Banks have been advised to implement EBT by leveraging ICT-based
banking through BCs to transfer social benefits electronically to the bank account of the
beneficiary and deliver government benefits to the doorstep of the beneficiary, thus reducing
dependence on cash and lowering transaction costs.
GCC: With a view to helping the poor and the disadvantaged with access to easy credit, banks
have been asked to consider introduction of a general purpose credit card facility up to `25,000 at
their rural and semi-urban branches. The objective of the scheme is to provide hassle-free credit
to banks customers based on the assessment of cash flow without insistence on security, purpose
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or end use of the credit. This is in the nature of revolving credit entitling the holder to withdraw
up to the limit sanctioned.
Simplified branch authorization: To address the issue of uneven spread of bank branches, in
December 2009, domestic scheduled commercial banks were permitted to freely open branches
in tier III to tier VI centers with a population of less than 50,000 under general permission,
subject to reporting. In the north-eastern states and Sikkim, domestic scheduled commercial
banks can now open branches in rural, semi-urban and urban centers without the need to take
permission from RBI in each case, subject to reporting.
Opening of branches in unbanked rural centers: To further step up the opening of branches in
rural areas so as to improve banking penetration and financial inclusion rapidly, the need for the
opening of more bricks and mortar branches, besides the use of BCs, was felt. Accordingly,
banks have been mandated in the April monetary policy statement to allocate at least 25% of the
total number of branches to be opened during a year to unbanked rural centers.
MICROFINANCE
Microfinance is the provision of financial services such as loans, savings, insurance, and
training to people living in poverty. It is one of the great success stories in the developing world
in the last 30 years and is widely recognized as a just and sustainable solution in alleviating
global poverty.
The industry began by providing small loans to emerging entrepreneurs to start or expand
businesses. Over the years, the microfinance sector has expanded its financial service offerings
to better meet client needs.
Microfinance organizations make it a priority to serve the particular needs of women,
since a staggering 70 percent of all those living in extreme poverty are female. Women are often
excluded from education, the workplace, owning property and equal participation in politics.
They produce one half of the worlds food, but own just one percent of its farmland. When
women improve their circumstances, they also improve the lives of their children. By investing
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in nutrition and education, they help to create a better future for their children and their
communities.
Despite the success of life-transforming microfinance services, the World Bank says that
the industry is not close to meeting the demand. Five hundred million people living in poverty
could benefit from a small business loan and only one-third of the worlds population has access
to any kind of bank account. The lack of access is particularly severe in sub-Saharan Africa
where the World Bank estimates that microfinance is reaching only a small percentage of the
economically active population. In sub-Saharan Africas poorest countries, less than 10 percent
of the population has an account with a financial institution. In response, Opportunity has
committed to building scalable, sustainable and accessible banks throughout the developing
world to provide loans, training, savings and insurance products tailored to the specific needs ofeach region.
As the microfinance industry continues to mature, there is a danger that it will drift
toward a more secure client base. It is critical that microfinance organizations continue to focus
on those with the greatest needsthose who have been displaced, those in rural areas, those who
traditional institutions consider unbankablethe most marginalized people. Maintaining that
focus, microfinance can help create a world in which the underserved have fair access to
economic opportunities and the hope to move beyond poverty.
TYPES
The microfinance in India has evolved over the years. There is no single appropriate form
of legislation for institutions undertaking microfinance. MFIs have been registered under these
heads.
Non profit MFIs
Societies registered under the societies registration act, 1860 or similar state acts. Public trusts registered under the Indian trusts act, 1882. Non-profit companies registered under section 25 of the companies act, 1956.
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Mutual benefit companies State credit cooperatives National credit cooperatives Mutually aided cooperative societies
For profit MFIs NBFCs registered under the companies act, 1956.
Impact
The impact of microcredit is a subject of much controversy. Proponents state that it reduces
poverty through higher employment and higher incomes. This is expected to lead to improved
nutrition and improved education of the borrowers' children. Some argue that microcredit
empowers women. In the US and Canada, it is argued that microcredit helps recipients to
graduate from welfare programs.
Critics say that microcredit has not increased incomes, but has driven poor households into a
debt trap, in some cases even leading to suicide. They add that the money from loans is often
used for durable consumer goods or consumption instead of being used for productive
investments, that it fails to empower women, and that it has not improved health or education.
The available evidence indicates that in many cases microcredit has facilitated the creation
and the growth of businesses. It has often generated self-employment, but it has not necessarily
increased incomes after interest payments. In some cases it has driven borrowers into debt traps.
There is no evidence that microcredit has empowered women. In short, microcredit has achieved
much less than what its proponents said it would achieve, but its negative impacts have not been
as drastic as some critics have argued. Microcredit is just one factor influencing the success of a
small businesses, whose success is influenced to a much larger extent by how much an economy
or a particular market grows.
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CONCLUSION
A report produced by BL centre for development research and action and sponsored by
the Planning commission, Government of India, puts forth the following findings pertaining to
MFIs:
Microfinance institutions have to be very careful in assessing the repayments capacity ofthe borrowers especially in individual based lending technologies.
There is considerable scope for microfinance in India since there is enormous unmetdemand for financial services in this sector.
The MFIs need proper regulation and operation of business transactions. Therefore RBI,SIDBI, NABARD and other organizations should evolve proper mechanism for
monitoring, supervision, direction and appraisal of MFIs.
The main problems in micro financing as observed were related to documentation, lack ofcooperation, lack of knowledge, outreach of banking services, etc.
To conclude, it may be said that the role of MFIs in establishing and supporting financially
inclusive financial system can only be defined by the extent of awareness about the facilities of
micro financing among those people to whom it could actually be of some use. Measures are to
be taken in respect of the afore mentioned aspects in order to better utilize the micro financing
facilities in the direction of economic development of the nation.