Historically informal money lending operations without legal supervision have been a major problem in India especially in the rural areas. The stories of how the poor rural folks have continued to suffer in the hands of unscrupulous money lenders have found their place into major research area in social sciences, as also in celebrated literary works.

To unchain the rural poor from the clutches of the unscrupulous shylocks various attempts like rural branches of nationalized banks and cooperative banking have been experimented with without any major impact on the operations of the informal money lending business. Even the experiment with the banking correspondents that attempted to take banking operations to the doorsteps of the poor through briefcase carrying agents have not had the desired impact.

However, historically, micro credit and micro finance institutions have been the best combatant against the usurious practices of unscrupulous money lenders. For example, to help the poor against the shylocks, Franciscan monks initiated community oriented pawn shops in the 15th century. European Credit Union movement started in the 19th century. However, the microfinance movement as we know of today started in South Asia in the 1970s with the 1980s marking the milestone decade for the microfinance movement in India.

While the microfinance companies emerged as a positive reaction to the exploitation of the poor by the shylocks it needed a reactive policy response for the other financial systems to emerge and compliment the microfinance activities in the areas of remittance and other areas in which microfinance cannot act as these areas exceed the specified ambit of their operations.

In fact, the phenomenon of illegal deposit raising companies raising funds from the poor with the promise of absurd unsustainable rates of return and then expectedly failing triggered another attempt by the monetary authorities of India to initiate an operation to bring the rural masses within the fold of the legally sanctioned institutionalized financial structure in areas where microfinance institutions cannot act. Referred to as the financial inclusion, the attempts got structured through various committees.

The shape of the new institutions was looked into in details by the Raghuram Rajan Committee in 2009. The committee felt the need for private well governed deposit taking small finance banks to address the issue. The committee in its recommendation provided a detailed structure that along with other committee reports became the roadmap for the RBI to release 10 licences for such banks and the declaration was made by the Bank through a press note issued on September 16, 2015. That was the genesis of the payment banks taking their formal shapes.

All these efforts are now yielding results. According to the Global Findex Report, 2017, of the World Bank, the inclusion impact is quite discernible from the way the number of account holders are growing very fast in the country. In 2011, 35% of the adults in the country had accounts. This rose to 53% in 2014 and then to 80% in 2017. Between 2014 and 2017 the number of accounts opened globally is counted at 51.4 crore. India accounted for 55% of this gross figure.

Compare this with the 2003 situation and the effect would be clearly discernible. According to the situation indexed by the NSSO 59th round survey of January-December, 2003, 51.4% households were financially excluded from formal or interestingly, even informal sources! Of the total farmer households, only 27% had access to formal sources of credit and one-third of this group also kept borrowing from the non-formal sources. Overall 73% of farmer households had no access to formal sources of credit.

Net net we can with conviction conclude that with the regulatory authorities realizing the huge role that the new age financial institutions can play in financial inclusion mission, things have started rolling in a positive direction. The awareness being created by the microfinance institutions and the penetration of the digital media to the base of the pyramid is amazing. It is also creating huge prospects in the territories that were previously given up by the India Inc as traditional market due to inaccessibility in all senses of the term. In short the new age financial institutions, including the microfinance institutions have started making their presence felt as a major change agent in what is being referred to as the emerging tiger in Asia.

Globally, not excluding India, the MFI intervention model rests on two principles.

  • Providing access to finance to those who do not have access to the traditional channels and
  • Empowering them to leverage the accessed fund gainfully and efficiently.
This creates a stream of revenue to the beneficiary in the form of income while at the same time creating indirect employment opportunities for others.

To understand the chain let us look at the reasons that have led to the proposition that we have specified. The first question that we need to look at is the reason why by the turn of this century the policy focus shifted to micro finance as a tool to empower the people at the bottom of the pyramid or, in other words, the poor.

The poor people are caught in the vicious circle of poverty as they lack surplus resource to propel themselves out of the poverty trap. The government policy everywhere has now come to accept the fact that the poor, lacking education as they do,fear to access the traditional channel like banks even if it is at their doorsteps because of the perceived complications in obtaining loans for generating a stream of sustainable source of income.

They therefore need institutions to approach them at their doorsteps, convince them about the opportunities that they may create with loan funds and guide them in the proper utilization of the credit they are availing themselves of. This is where the unique structure of microfinance institutions comes into play. By the very structure of their functioning microfinance institutions provide them with the financial resources, guide them in the process of the fund’s investment so that from the returns of that investment they not only create earnings for the sustenance of their families but also generate that surplus to pay back the loan and grow. This process is now known as capacity creation.

Now comes the more interesting part. For every single person thus empowered through microfinance intervention a few more are benefitted creating a chain of secondary and secondary to secondary beneficiaries. In other words, a chain of indirect employments gets created from one direct beneficiary. If someone sets up a shop as the primary beneficiary, that shop will need suppliers, transport to cart supplies and so on and so forth. In the process every single indirect beneficiary in turn also keeps creating job opportunities and source of income for others down the chain.

This is why capacity creation through microfinance intervention is said to be a very important generator of opportunities to alleviate poverty.

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