What is Microfinance?
Microfinance refers to lending or depositing of money of poor people who are from the lower strata of the economy or to the self help group. Though primary role is lending the money they may even undertake some other basic financial services.
There is generally no collateral security required to be given by the clients which makes the process of credit availability easy. The interest percentage though is very high, generally around 20%.
Microfinance across the Globe
The global recognition for microfinance was received by the Mohd Younus of Grameen Bank who won a Nobel prize for his microfinance in Bangladesh which bought about upliftment of the poor in the country. The susus of Ghana, tandas of Mexico, arisan of Indonesia and cheetu of Sri Lanka are all examples of presence of microfinance across the world which are famous in the respective countries. There are instances of Franciscan friaries assisting local community which was also a form of Microfinance.
Origin In India
The major chunk of the money market was controlled by local money lenders but the entry of Microfinance Institution is changing the entire system now. Chit funds are an important kind of microfinance scheme which fuelled the growth of microfinance in South India. The Marwadi led money lenders are the major players in the north.
Advantages Of Microfinance
1. Availability of cash for clients is easy: The cash required though small is made available easily since there is no collateral security or strict procedures to be followed.
2. Low operating expenses: The business is mainly done through agents and the cost of office and other requirement is low as most of them are situated in rural areas. The cost on expansion is also really low since lesser statutory requirements are to be followed.
3. Less Regulation: There is not much regulation of microfinance by the central bank or the governments.
4. Less Risk: Generally the repayment is more than 97% on microfinance.
5. High Profitability: The profitability of these institutions is really high since they borrow at 3-5% and lend at 20%
Microfinance in India
The microfinance is not a regulated market in India. The Reserve Bank of India is planning to regulate the microfinance industry but no actions have been taken which brings the entire system under one regulatory body. This is actually helping this field to grow.
The microfinance generally thrives in the rural areas and India has a rural population of more than 70% and this gives ample opportunity for the growth of this sector. The NCEAR has identified that the main reason for non development of the rural India is unavailability of finance. The microfinance can actually help in this favour.
The microfinance institutions are actually having a lot of demand in India and the fund requirement is rising up. They are not able to raise enough funds from their deposits or ploughed back profits. Some of them are coming up with the idea of raising of money from the capital market.
The SKS Microfinance is raising 1500 crores from the market. The other institutions are waiting to follow the path of SKS. The microfinance also impresses the entrepreneurs with its values and profitability. The entry of Narayana Murthy to microfinance is an example to prove it.
MY OPINION
The microfinance should be encouraged by the Government by not putting too much regulation on this sector. The government should make use of government banks like IDBI Bank or something and enter into this sector thus encouraging the competition in this field. Providing of tax benefits or something should also be encouraged in the initial years.
If the rural india needs to be developed the microfinance should be given a boost. The problem of excessive crowding in urban areas is because of lack of development because of the inability of the budding entrepreneur to raise capital for their micro projects.
I firmly believe that microfinance can even be more successful than banks and play a key role in development of rural India....
