There is a need and there is a compulsion. When it comes to the rural economy the compulsion is to survive and when it comes to the need, the rural economy needs access to fund. If we look at the report of the KPMG (January, 2018) the riddle stares at our face so starkly that the situation goes beyond dire.

The fact that even an astute student of finance tends to ignore is the extreme disparity between the access to finance of the urban and rural economies. Weighted against the contribution to GDP the rural economy has a disproportionately low access to lendable funds compared to the urban economy.

According to a KPMG report (January, 2018) rural India contributes 47 per cent to the GDP, while has a 10 per cent loan outstanding against Urban India’s figures of 53 per cent and 90 per cent respectively.

The paragraph above clearly brings to the fore the contradiction between the need and the access deficit to funds. One may wonder as to the feasibility of the statement that microfinance being the backbone of rural economy.

Though it’s true that the rural economy has a severe access deficit to organized sector fund, the segment wise distribution of fund supply clearly tilts the balance in favor of microfinance being the major source.

A study in the same survey mentioned at the beginning of this blog about the sources and their weightage in terms of North Eastern India’s self help groups’ sourcing of funds clearly points to the dependence of them on the microfinance industry. As a source of fund to them the microfinance industry accounts for an overwhelming 71 per cent, followed by regional rural banks at 13 per cent, commercial banks at 11 per cent and cooperative banks at a measly five per cent.

This clearly points to the fact that even within the gamut of availability it’s the microfinance that holds the sway. And there is a reason for that. If we seek the reason why the microfinance holds such an overwhelming weight as a source of fund for the self help groups the answer will be simple if we look at the way the industry operates.

Unlike the banks or similar institutions, the microfinance industry is an interventionist source of fund. If we look at the way the microfinance industry functions we will find them holding the hands of their customers, teaching them best use of funds as investments, structuring the business – in short, an active driver of financial literacy. In fact, the performance of a microfinance company is not measured just by their financials but also by their success in helping their clients in graduating into better economic station in life.

The ethos of microfinance lies in direct intervention at the grassroots for poverty alleviation through creation of easy access to funds to the cohort that cannot provide conventional collateral for obtaining loans from banks or similar institutions. Having provided the fund, the microfinance companies are tasked with ensuring the loan provided is put to profitable use so that the clients can repay the loans from their earning surplus. And then in the subsequent cycles they are solvent enough to expand their earning source from further loans.

Microfinance by creating enterprise capacity thus at the grassroots turns itself as the backbone of the rural economy, or more appropriately the backbone for sustainable development efforts.