Issues in Microfinance Impact in India

Liberalization in the banking sector and a policy thrust, in the form of priority sector lending requirements, has made it easy for individuals to take loans. However, even today, a significant proportion of India’s population, especially in rural areas, has difficulties in accessing small loans from formal financial institutions and banks because of a paucity of appropriate loan delivery and maintenance structures, which make it costly for these institutions to service such clients. This makes access to credit for the poor an important impact issue for the microfinance sector.

There has been a growing consensus among microfinance practitioners that in addition to credit, the poor need an entire range of financial services including savings, insurance and fund-transfers. Savings, and to an extent insurance, are mechanisms which allows poor, individually or in groups to save up and build a resource pool, which can be drawn upon during times of need. Effective transfer services enable people to remit money across geographies. In India, where work related migration is widespread, cheap money transfer services assume importance. Stuart Rutherford has argued that effective financial services for the poor should entail mechanisms to turn savings into lump sums for a wide variety of uses. Savings, insurance and money transfer services enable poor to smoothen their cash-flows across time and space.

Another critical impact issue in microfinance is livelihood promotion and maintenance. By providing a convenient access to capital, microfinance provides the opportunity to poor to take up income generation activities. The success of these activities depend also on environmental and technical factors. However, access to capital is an important and sometimes determining constraint. The poor are also most vulnerable to risks. Prima facie, it appears that microfinance enables poor to diversify their risk management strategies, and get over phases of distress. Finally, microfinance also has a role in improving the social status of the underprivileged especially women.