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Microfinance In India – Is The Path To Heaven Or The Doorstep To Hell?

Microfinance was started with the unique aim of clearance of poverty from the lowest level of society or the grass root level by concentrating on microcredit lending designed to spur growth in developing economies. The intention of microfinance is to change. You must have found out the famous sentence that is" Your Life Doesn’t Get Better By Chance. It Gets Better By Change ".

This new theory is implemented to be a path changer and a new movement of the 20th century. Assisted by technological advancements the extent of growth in this sector is very vast. However, in this sector, late hurdles or barriers are curbing growth. Greedy elements in our society are built up at the cost of this industry.

So What Is Micro-Finance?

You must be knowing that Microfinance mainly includes offering financial services such as loans, insurance and promoting savings, and communicating the required training needed for the people in abject poverty to escape from this situation. Small loans are offered to entrepreneurs starting small businesses. Microfinance encourages financial services such as savings and insurance along with flexible loan products and business and training for product development. This is very mandatory to prevent investors from falling back into poverty. Women’s empowerment is the important aim of microfinance is. Many rural women were too shy and afraid to visit the banks for loans.

This problem was solved by initiating a public bank run exclusively by women and providing loans for women. The backbones of the family are the Women and their development empowers the entire family. In the nonappearance of this sector, the rural class would take the money from money lenders at an extremely high rate of interest. This puts them into the debt trap. This segment also aims at small-scale industry, animal husbandry, and which helps the farmers through loans required to obtain seeds and industrial equipment for farming.

So How Does Micro-Finance Work?

You know that banks will not disburse your loans until they are thoroughly satisfied with your repayment abilities. They would study the previous history of your credit, and they would demand security or collateral. In spite of this sector being of high default risk, Micro Finance institutions had their loans repaid along with quite high rates of interest. They developed and grew at a rapid rate.

So How Did They Control To Do This?. You know that individuals who utilized these loans were split into a group of 4-5 members. Each group contains a leader. The members of the group had to stand assurance for other members of the group if they are not able to repay the loans. You must be knowing that 4-5 members of such groups from the same locality to form a batch they were joined together. From one of the leaders of each group, one member was selected to lead the batch. In charge of the batch a field officer mainly an employee of the Micro Finance Institution was kept. To impart basic knowledge of financial instruments specialized training programs were conducted, specialized training in the use of industrial equipment, and in the case of women knowledge of health and nutrition. The field officer arranges the meetings periodically where collections are made.

So Why Does Loan Default Not Occur In This Sector?

• You can avail of a loan only after you attend a certain number of batch meetings. This proves that you are a serious contender for the program and a certain basic level of knowledge of the financial product has been imparted to you.

• Your new loans can be availed depending on past repayment history made towards earlier loans. After a thorough checkup of past loan repayments and timely payments, you can avail of another loan.

• Your amount of loans is slowly increased based on your past loan repayments.

• You know that the interest on a single loan taken will gradually reduce during each collection period.

• The field officer will not provide the loans but are acquired at the branch office of the MFI.

• Another major reason why these loans are repaid is Social Stigma. No member wants to be seen or perceived as one who cannot pay back the loans. Each member of the group takes the task of loan repayment very seriously.

What Are The Problems Occurring In The Micro Finance Industry?

Lack Of Knowledge On Financial Products

You know that in the rural area people don’t have basic education to read and write and many of them do not know even how to sign their name. So How Can The Idea Of Financial Instruments Be Convey To Them? Most of the field officers of the micro-financial institutions sent them to guide the rural area people just concentrate on teaching them to sign their name. Can you think about the effect of just knowing to sign your name and nothing else?

Capitalization Of Micro Finance Institutions

These MFI’s don’t have the ability to raise equity easily from the primary market. They finance themselves by getting loans from banks. This will increase the component of debt in their capital structure. Banks are not ready to finance their huge debts until they raise a sufficiently large pool of equity. They mainly depend on acknowledgment from the government or nonbanking institutions like SIDBI and NABARD for funding.

Lack Of Trust Among Group Members

You know that MFI’s lend after cross verifying the previous repayment records of group members. They will follow the phrase " All For One And One For All ". When any member drops out and moves to another group the whole strength of that group is disturbed.

High-Interest Rates

You know that in this sector there is a general insufficiency of transparency in the pricing of interest rates of the loans. They show their loans at very low-interest rates but later they show high service charges and processing fees. This indirectly increases the rate of interest on loans. These rates can be as high as 30-100% on a yearly basis.

Formation Of Clusters

You must know that MFI’s are like to implement their operations in semi-urban areas and the areas where MFI operations are already implemented. The cost of operations of start-ups such as educating and training of the rural areas are greatly decreased. This results in massive savings for these MFI’s. This results in the generation of clusters which is basically all MFI ‘s provides only a particular area at the cost of the rural area which goes against the basic social welfare idea of these institutions.

Fear Of Competition

In this sector different from free markets competition goes against this sector and affects both the MFI and the borrower. The competition aims MFI to provide multiple loans to the same borrower. This unnecessarily increases the burden of debt on the borrowers who at a later point in time are not able to repay their loans resulting in a high rate of suicides.

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