Microfinance is a small-scale financial service provided to people operating small or micro-enterprises or working for low wages or commissions.
It is essentially a micro or small primary credit and savings financial service to individuals and groups at local levels, both rural and urban, in developing countries. It takes banking opportunities to the people stuck in the lower rung of the economic strata.
Overall, microfinance helps low-income people increase their incomes and improve the quality of their lives and that those dependent on them by reducing risk, improving management, increasing productivity, and thereby income.
Microfinance assists in including the poor people into the mainstream economy and adding their support in the process of nation-building.
The evolution and growth of microfinance in India is a very good example of microfinance. The growth of Indian microfinance can be seen through its impressive performance even during the global liquidity crunch during the first decade of the 2000s.
It has emerged as the most socially conscious, commercially viable, and financially sustainable worldwide thanks to its achieving one of the highest growth rates globally since the early 2000s.
History of Microfinance in India
Microfinance is not a new concept and has existed for many centuries. One might consider them akin to a self-organized financial group and may be found throughout the world.
For example, the "Chit funds" in India, "Gui" in China, "Arisan" in Indonesia, "Paluwagan" in the Philippines, and the “Tontines” in West Africa. This form of financing can be compared to pawn shops in some European countries that saw a rapid increase in number during the Middle Ages.
The history of microfinance in India typically starts from the concept of "Chits or Chit Funds" which has been around in the Asian giant for over ten centuries. It has found practice in China, Pakistan, and Central Africa as well.
It may be considered one of the best methods of saving money for low-income groups, salaried people, and the self-employed.
Historically, the system was referenced to the Malabar Kuri system that existed from ancient Dravidian times. The erstwhile ruler of Cochin State, Raja Rama Varma gave loans to Syrian Christian traders and retained a part of the loan for administrative and other expenses.
However, soon there grew a large number of loan seekers and the king ordered a cast of lots and the accumulated amount was given to those who drew the lot on the principle of equity.
In time, the practice spread across the peninsula and even crossed the borders of Burma and Sri Lanka.
This system, of microfinance, was eventually streamlined by the Chaldean Syrian church between 1830-35CE. It started Kuries and issued passbooks as proof of enrolment for the Kuries.
Being a potent device to reach the banking services to the economically backward people and thereby decrease the poverty in India, the government gave special attention to the development of rural credit.
This primarily existed around chit funds in South India and the Institute for Financial Management and Research (IFMR) in India concluded that chit funds circulated over thousands of crores of rupees.
Andhra Pradesh topped the list with the number of households participating in chit funds followed by Tamil Nadu in second.
Although the Indian banking system has grown by leaps and bounds chit funds remain the most popular option among the low and middle-class sections.
The banks do provide a range of lucrative and innovative financial products and services, but chit-fund seems to grab more attention due to its less documentation and are quite hassle-free requirements, thus chit funds turnover is estimated to be around $4 billion in India.
Evolution of Microfinance in India
Starting from a dynasty in southern India, the Evolution of microfinance in India has come a long way. It has evolved from micro-savings to microcredit followed by micro-enterprises and now micro insurance, micro remittance, micro pension, and micro livelihood.
This gradual growth process has boosted the rural poor in India providing them a better life, along with social and cultural empowerment.
Growth of Microfinance in India
It’s a fact that India has overwhelming poverty and hence, the early government of the independent country gave much focus to developing rural credit.
In fact, the government reconstructed the cooperative structure and partnered with states to establish co-operatives, Regional Rural Banks (RRB) and National Bank for Agriculture and Rural Development (NABARD).
Meanwhile, Non-Government Organizations (NGOs) have played a major role in spreading and developing micro-financial services in India.
This coupled with the push from both, the state and central governments to the microfinance industry has resulted in a fast-paced growth in the last two decades.
In order to boost the growth of microfinance in India, the government introduced the Microfinance Services Regulation Bill of India which defined microfinance services as financial assistance provided to an eligible group or an individual.
Besides, several microfinance models were developed to cope with the financial challenges in economically backward areas. These microfinance models included the creation of Joint Liability Group (JLG), Self Help Group (SHG), The Grameen Bank Model, and Rural Cooperatives.
In conclusion, all types of microfinance institutions may differ in practice but function for the same goal of financial inclusion.
The success of some models may be less effective in comparison to others due to operational frameworks, but all of them do their bit of work to take the country and its people ahead economically.