Financial Inclusion in India and Its Challenges

Microfinance Institutions

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Role of microfinance in India and challenges sector faces

The article highlights the important role played by the microfinance sector in furthering financial inclusion in India and suggests measures to achieve holistic development of the sector.

Important role played by microfinance

  • No other form of financial services has had the kind of far-reaching impact, in terms of fostering financial inclusion, as microcredit has.
  • Access to small, collateral-free loans for economically productive purposes has helped transform the lives of millions at the bottom-of-the-pyramid—especially women.
  • Over the past decade, India’s microfinance industry has grown at a compound annual growth rate of 26% to reach 2.36 trillion.
  • It has helped 50 million economically vulnerable Indians, 99% of them women, live a life of dignity and financial independence.
  • Assuming that these 50 million people who took a loan to start a small business employed at least one other person, it translates into 50 million additional jobs in the country.
  • This creates a ‘network effect’ that has a social impact at scale.

Evolution of microfinance industry

  • Recommendations of the Malegam Committee, which became regulations, and practices such as relying on credit bureau data to assess a borrower’s creditworthiness have helped the industry immensely.
  • The vital role that microfinance plays in the last-mile delivery of financial services was acknowledged.
  • Subsequently, eight out of the 10 small finance bank licences granted were also given to microfinance institutions.
  • RBI has sought to undertake a comprehensive review of the sector again, after 10 years, to better align the regulatory framework with the sector’s current realities.

Steps for development of sector

  • First, Entities should promote financial literacy through group meetings of borrowers.
  • Second, organizations should complement their microcredit operations with social development projects and community-connect initiatives.
  • Third, prospective borrowers’ indebtedness and ability to repay dues should be assessed properly.
  • Fourth, loans must be given only for income-generation purposes.
  • Fifth, every microfinance organization should devote time and resources for capacity building at the grassroots.
  • Sixth, rather than focusing on taking over the existing debt of a borrower, or lending to her further, institutions should focus on bringing new-to-credit customers into the fold.

Consider the question “How can microcredit stimulate financial inclusion in India? Suggest the measures for the development of microfinance sector in India.”

Conclusion

There is much more that we, as a nation, collectively need to do in order to bring a vast population of unbanked and underbanked Indians into the fold of formal financial services.

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