INTERNATIONAL JOURNAL OF DEVELOPMENT STUDIES (IJDS)

Vol. VIII, Issue-I, January-June, 2016, ISSN 0975-5799 pp. 249-252

www.rsmeena.com/ijds

The Role of Microfinance and Rural Development in India:

Issues and Challenges
Dr. Sunil Kumar
Assistant Professor, Department of Commerce, Govt. P.G. College Obra, Sonbhadra <dr.sunilkumar79@gmail.com>

This present paper highlights the meaning of microfinance, rural development emerging role, issues and

2016
Received on: 11-03-2016 Acceptance: 11-04-
challenges being faced in India. The paper represents the micro finance meaning and definition provided by the
author. This paper explains the need and challenges that are faced by the poor people in India and providing
them financial helps, in way of microcredit to start their own small businesses, so they can generate income and
provide for their families. The study explores some glaring issues, challenges and offers some suggestion to
make micro finance more effective. Hence, Government, RBI and various MFI’s have to face various challenges
and to overcome with these challenges and issues some preventive measures are also taken by these financial
bodies so that to provide benefits to the poor people and social class of the society. On the basis of need, issues
and challenges related to microfinance, the study predicts the new agenda for future.
Keywords: Microfinance, rural development, small businesses, issues and Challenges.

INTRODUCTION a large number of the poor continued to remain outside

Since independence unemployment and poverty has the fold of the formal banking system. Both, the market
been two major challenges before India. Several efforts and the government failed to provide credit access to the
in the form of self employment programmes have been poor. The evolution of microfinance was in response to
made to fight these two challenges. However, all self the failure of institutional initiatives of rural credit and
employment programmes do not lead to microenterprise to the weaknesses of exploitative informal system of
development. But, one of the important variant of credit. To some extent, microfinance has been successful
self employment programme is microenterprise in providing credit access to the poor. However, recently
development and in various forms it had always found the role of microfinance has become controversial with
place in development strategy of India. Microenterprise various sections raising objections and criticism in this
usually needs small capital. Still it is difficult for the regard. In fact, both microfinance and microenterprises
poor to manage that small amount of capital need. exist for the common goal of poverty alleviation.
This article provides a brief overview of some of the
On the other hand ‘Access to financial services’
emerging issues and challenges of microfinance and
has been recognised as a human right. Strengthening
microenterprise development in India.
credit-delivery services and increasing their outreach
has always been regarded as an important component of
Indian development strategy. Access to credit has been Issues and Challenges
an important factor determining the success of small Microfinance is understood as provision of financial
entrepreneur. Despite the wide and expanded network services i.e. savings, credit, insurance, remittances etc.
of the organised banking system deep into rural areas, for the poor. However, in India microfinance is often

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misunderstood and is taken in very narrow sense of involvement of private banks may help in improving
microcredit. However, microfinance is quite broad the situation.
and involves a range of services i.e. savings, credit, Another way of achieving sustainability is to
insurance and money transfers. In India, microfinance increase the scale of MFI operations and outreach.
services are mainly dominated by credit services. Data shows great potential of MFIs in increasing their
However, unlike other country India is fortunate to get a outreach and scale of operations. It has been observed
saving based microfinance model like Self Help Groups that MF programmes focus a great deal of attention
(SHGs). Despite a huge potential for insurance services on women. It has been argued that women are better
in rural areas it’s been largely neglected. clients as they are more inclined to save than men, they
The major ongoing debate in microfinance sector borrow smaller amounts than men and their repayment
in India is related to the outreach and sustainability of performance is better than men. These characteristics
microfinance. In a study by Basu and Srivastava (2005) of women clients constitute evidence in support of
based on empirical assessments of their reach or impact the inclination of MFIs to cater the needs of women.
it is clearly indicated that despite the capacity to impact Women may be better and more reliable clients but, in
significantly still its outreach is relatively less i.e. only order to increase their outreach MFIs can not ignore
5% as compared to Bangladesh of 65%. This data men as clients.
indicates the huge potential of microfinance in India. Similarly, it has been noted that MFI pay more
Further, MFIs are being promoted with the ostensible attention to rural areas and largely neglect the urban
objective of serving the poor. But, in order to attain poor. Out of more than 800 MFIs across India, only
financial sustainability these MFIs are charging very six are currently focusing their attention on the urban
high interest rates which poor find difficult to pay. The poor. However, the population of the urban poor is
rate of interest charged by these institutions has become quite larger amounting to more than 100 million. With
the point of debate. In the present situation there is increasing urbanisiation this number is expected to rise
lot of variation in terms of the interest rate charged rapidly in the coming years. In this situation, MFIs need
by the various organisations. Higher interest rate has to pay equal attention to the urban poor because they
been identified as the biggest threat in promoting too need financial assistance for various activities.
entrepreneurship. For a long term sustainability of Now a day’s one of the most important issue is
microfinance sector sustainability of the client as well promotion of clusters for developing microenterprise.
as MFI is needed. By charging high interest rate, the There have been few studies to explore the importance
MFIs are making their client all the more vulnerable. of clustering in promoting microenterprise. Some may
Poor are more likely to fall in the debt trap. argue on the role of clustering for microenterprise
It has been argued that MFIs are private entities and development. But, for the purpose of clusterization,
hence need to be financially sustainable. They do not each small microentrepreneur is considered as a separate
receive any subsidised credit for their lending activities, firm. Additionally, the group and cluster approach can
and that is why they need to recover their operational be an effective strategy for MFIs in increasing their
costs from borrowers. In the process, the basic reason scale of operations.
for their existence and their primary objective is being A successful and sustainable microenterprise
lost. It is important that these NGOs should be willing development needs broadly two types of services i.e.
to operate at narrow margins and to bear a low effective Financial and Non financial services. One of the major
interest rate so that they can maintain a balance between controversies related to the role of credit is that on credit
their dual objectives of commercial viability and vs. credit plus approach. Is it enough to provide only
serving the poor. In dealing with this issue, promotion credit to the poor for poverty alleviation? This issue is
of microenterprise can be an effective strategy. It is debated constantly. Some argue that in the absence of
believed that government policy can also play an any income - generating activitiy the poor may fall into
important role in dealing with these issues. Other a debt trap. For the sustainability of their operations
than this focus on quality aspect, inclusiveness and MFIs should not go in for a minimalist approach of

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providing credit. The poor need a constant and steady microfinance and microenterprise development
source of income and for this reason MFIs need to go in especially in the context of developing countries.
for a holistic approach. However, provision of services Achievement of Grameen Bank in using social
should not be on a mandatory basis but, should be collateral in microcredit delivery was widely reported
provided on a voluntary basis. by several scholars. Joint responsibility concept had
Some scholars believe that providing only credit helped lot in terms of repayment performance in
is not a comprehensive approach. There should be Grameen bank (Jain, 1996).
a combination of financial and non financial services Balancing the twin objectives of commercial
for promoting microenterprises for the poor. Otero viability and serving the poor in a cost- effective
and Rhyne (1994) also believe that these non financial and efficient manner is the biggest challenge before
problems can mitigate against the success of microcredit MFIs. Another important challenge is human resource
intervention. And therefore it is necessary to focus on management for MFI operations in the current context of
non financial services as well to optimize the impact of globalisation. Conflicts of interest with the government
microfinance. and unwarranted political expectations and interference
Promoting income generating activities remains are some of the most important threats for MFIs. If
primary objective of the microfinance. Income MFIs want to have a long-term impact on the larger
protection vs. Income promotion always remains goal of poverty alleviation, they need to rethink their
a matter of debate. Some scholars argued that all strategy in terms of managing the emerging challenges
microfinance lending should necessarily be directed and problems in the sector more effectively.
towards productive use of loan. Whereas, other group
of scholars view consumption purposes as equally CONCLUSION
important for the poor. However, it is sometime In the recent years, microfinance has evolved has
difficult to differentiate between consumption and a boon for micro entrepreneurs. It has been helpful
productive purposes. E.g. investing the loan for illness in providing short term and timely credit to the
is a productive purpose or a consumptive. Because if micro entrepreneurs. Both microfinance as well as
the person is not well, he can not work and in this way microenterprise has the common objective of poverty
he is losing the opportunity cost which he would have alleviation and creation of employment opportunities for
earned being well. Investment for education may be the poor and therefore there is a need for both of them to
productive purpose for the poor who believes that with come together and act for the larger objective of poverty
good education he will be able to earn more. Similarly, alleviation. Other than several advantages, microfinance
a poor while investing in social activity believes that has also been criticized for its role in microenterprise
he is building his relationship which will be helpful development. In the recent years, several issues have
for him in case of emergencies. In other words, he is been discussed in the literature. However, microfinance
building social capital. Can investment for building also has some shortcomings which need to be addressed
social capital is considered as a productive purpose or a for long term impact on microenterprise development.
consumptive purpose is remain a matter of debate? There are shortcomings with respect to the policy
Microfinance and microenterprise development in support also for these microenterprises. Microenterprise
the developing countries largely depend on the concept development is a self reliant development strategy but
of groups. People need to come together to avoid the along with microfinance it need to be supported by
disadvantage of their small size as well the isolated enabling environment and proper infrastructure support.
location. In the process social capital is built. However For creation of enabling environment there is need
role of social capital in promoting microfinance and for government and non government entities to work
microenterprise development is still a grey area and together. Then only these microenterprises can grow
need to be explored, there is no argument on the and contribute efficiently towards the larger objective
fact that social capital has the potential to promote of poverty alleviation.

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