Micro-Finance in India: Sustainable Rural Development for the Poor

 | June 24,2010 12:55 pm IST

It is now recognized fact that microfinance can help rural poor people to increase their income through viable micro enterprises. It could be a powerful instrument for achieving economic and social empowerment of rural poor especially women.


As the poor people cannot have huge amount of savings, the demand for cheap and low cost funds are high. Although there are a number of rural banks in India, the rural poor rarely perceive those banks as alien institutions. As a result, majority of rural poor could not come purview of formal credit system. The following are the reasons behind the failure of formal credit system:


  •  1. Formal banks impose burden of loans on the poor who have no repaying capacity. Thus the credit becomes counter productive.
  •  2. Habitual poverty invalidates the hopes and aspirations of poor people.
  •  3. Credit programme for the poor may be highly feeble.
  •  4. Credit provides only temporary relief to poor.
  •  5. Credit for the production activities sometime used as other social and consumption needs.
  •  6. Micro credit for micro enterprise is useless if the micro credit is not accompanied with training for capacity development, marketing skill, technological skill etc.


In rural India it can be seen that the poorer sections of the society of and destitute cannot avail of the credit from banks and other formal institutions due to their inability to deposit collateral security and mortgage property. At this point of view, micro financing of group lending is being looked upon as the instrument that can be considered as the golden stick for poverty alleviation vis-à-vis rural development.


Micro-Finance: Concepts

The term microfinance is of recent origin and is commonly used while addressing the issue of financial support to micro-entrepreneurs. There is, however, no statutory definition for microfinance. The taskforce on Supportive Policy and Regulatory Framework for Microfinance has defined microfinance as “Provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards”.

Micro Financial Sector (Development and Regulation) Bill, 2007 defines Microfinance services as credit, life insurance, general insurances and pension services. While micro credit has been defined as loans not exceeding Rs. 50000 (Rs. 1,50,000 in case of housing).

The different Models of Microfinance are:

1) SHGs promoted and financed by banks.
2) SHGs promoted by NGOs/Govt. Organisations and finance by banks.
3) SHGs promoted by financed through by NGOs by raising bank loans
4) The federated SHG approach.
5) SHGs promoted by NGOs/Societies/other organizations and financed by Microfinance Institutions.
6) SHGs promoted and financed by MFIs (Grameen Replicator Approach)
7) Individuals directly financed by MFIs
8) The Urban Corporation Banking Model.
9) The Multi State Cooperative Solidarity group model.
10) The NBFC approach.

Rural Development: Concepts

Rural Development means over-all development of rural areas to improve the quality of life of rural people. It is an integrated process, which includes social, economic, political and spiritual development of the poorer sections of the society.


Right from independence in fact even in the pre-independence era, rural development vis-à-vis poverty alleviation had been considered as a major challenge to our country. Initially it was assumed that various poverty alleviation programmes such as IRDP, TRYSEM, DWCRA, ICDP, SITRA, etc. could be able to enhance income level of the rural masses through trickle down effect. But these programmes failed to achieve the target because ‘trickle down’ effect of economic growth cannot be achieved if the growth is not accompanied with infrastructure development; which is essential for speedy percolation of the benefit of such programmes. Most poverty alleviation schemes also faced the problem of credit mobilization to the rural masses. In the earlier schemes like IRDP, DWCR, etc. the beneficiaries perceived the loan as grant. They did not feel the responsibility of repaying the loan. Bankers too did not have the time or mechanism to monitor the repayment process. Due to poor recovery of loan the schemes became non-viable (Rath, 1995 and Rao, 1990). The urgent need is capacity building of the poor masses so that they can progress themselves; mere financial support cannot be useful in Rural Development in the long term. Group approach can make rural people more capable for considerable improvement in their quality of life.




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Guest on 07/12/10 at 02:43 pm

can you please tell me that are there universities which have pg courses for microfinance
thanks in advance

Umashankar on 08/06/10 at 03:31 pm