Microfinance in India, History and Benefits

Microfinance in India: Microfinance is a term for financial services offered to people from weaker socio-economic backgrounds or who do not have access to traditional financial services. Microfinance includes a range of services such as savings accounts, checking accounts, remittances, micro insurance, and microcredit.

Microfinance in India

History of Microfinance

• Microfinance appeared in the middle of the 19th century.
• In the 19th century, Lysander Spooner offered small loans to entrepreneurs and farmers to alleviate poverty.
• Friedrich Wilhelm Raiffeisen founded the first credit cooperative bank to help farmers in rural Germany.
• The term "microfinance" was coined during the growth of Grameen Bank of Bangladesh in the 1970s, founded by microcredit pioneer Muhammad Yunus.
• Grameen Bank formalized microcredit practices after its establishment in 1976.
• Many people in developing countries still depend on subsistence farming or trading in staple foods for their livelihood, and the smallholder has received considerable support.

Role of Microfinance in India

• Formal institutions such as rural banks and cooperatives.
• Semi-formal organizations, often NGOs.
• Informal sources include small moneylenders and shopkeepers.
• Institutional microfinance covers the offerings of both formal and semi-formal institutions, and some MFIs are well-managed and independent in their operations.

• Commercial banks.
• Credit unions.
• Non-governmental organizations
• Sectors of state-owned banks.
• Cooperatives.

Microfinance in India

Self Help Group (SHG): Self Help Group is a group of people with similar socio-economic backgrounds. These small business owners come together for a limited time to form a common fund for mutual business needs. These organizations are classified as non-profit organizations. The collection is done in a group. This type of group loan does not require collateral. In addition, interest rates are often cheap. Several banks have entered into partnerships with SHGs to increase financial inclusion in rural areas of the country.

Joint Liability Group (JLG) : It is usually an informal group of 4-10 people who apply for a loan based on a mutual guarantee. Loans are usually used in agriculture or related activities.

Grameen Model Bank: Nobel laureate Prof. Muhammad Yunus developed the Grameen model in the 1970s in Bangladesh. This prompted India to establish Regional Rural Banks (RRBs). The main objective of this approach is to grow the rural economy from start to finish.

Rural Cooperatives: When India became independent, rural cooperatives were established. Through this fund, the resources of the poor were pooled and financial services were provided.

Benefits of Microfinance

• People can use microfinance as a source of capital. It also empowers women, which can lead to financial stability for families.
• In addition, the International Finance Corporation (IFC) predicted that since 2014 more than 130 million people directly benefit from microcredit.
• However, only about 20% of the world's poor, or three billion people, benefit from this microcredit for companies.
• In addition, IFC has helped establish or improve credit reference offices in 30 developing countries.
• According to the World Bank, more than 500 million people have benefited from microcredit organizations.

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