To most, microfinance means providing very poor families with very small loans (microcredit) to help them engage in productive activities or grow their tiny businesses. The most innovative and important part of microfinance loans is that they are given to groups of people, rather than to individuals. Thus, a loan is given to 5-10 people together, and they all must repay, or risk termination of further loans for the entire group. Microfinance clients are typically self-employed, often household-based entrepreneurs.
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In rural areas, they are usually small farmers and others who are engaged in small income generating activities such as food processing and petty trade. In urban areas, microfinance activities are more diverse and include shopkeepers, service providers, artisans, street vendors, etc. Microfinance clients are poor and vulnerable non-poor who don’t have a relatively stable source of income and live on the little they earn through tilling land or by doing other menial work. Loans given by MFIs are in very small amounts, of $10-$500, with their quantity building up over time, and receiving new loans contingent on repayment of earlier loans.
Thus, if borrowers want to continue receiving loans, they must continually repay. In other words future loans are a sort of collateral for the current loans. Microfinance’s mechanism does not mandate the provision of collateral to gain access to these loans unlike in the case of the moneylenders, who charges exorbitant interest rates and brings greater financial burden onto the borrowers and their kin. A borrower who is not able or inclined to repay will generally stop repaying early in their relationship with the bank, when their loans are smaller, and never get to the larger loan sizes.
The loan repayment mechanism is socially entrenched in the framework thereby making it a self supporting model. Each individual becomes responsible for the loan and fosters a cross-guarantee mechanism within the group members. If a person defaults, which is quite unlikely, the person is socially outcast from the community. This fear cultivates seriousness towards the task at hand. These microfinance customers are the ultimate beneficiaries of the loan which passes onto them via 2 tyres i. e. the MFI and the bank. Over time, microfinance has come a long way to include a broader range of services like credit, savings, insurance, etc.
This on account of the realization that the poor and the very poor who lack access to traditional formal financial institutions require a variety of financial products to be able to build assets, stabilize consumption and protect themselves against risks. Having access to affordable and secure credit, leads to a more sheltered future with a small bank balance to support the period of crisis. This encompasses close to about 2-3 billion people in India, referred to as “The Bottom of the Pyramid” and have little financial means to survive.
A large portion of this financing caters to the women in this section and helps alleviate their poverty by engaging them in some productive work. A World Bank study found that a 10 per cent increase in borrowing had led to an increase in women’s non-land assets by 2 per cent for loans from the Grameen Bank and 1. 2 per cent for loans from the Bangladesh Rural Advancement Committee (BRAC) (World Bank 1998). In India, microcredit studies done on groups dealing with dairy farming have noted positive profit levels and short payback periods for loans.
Data collected by some of the agencies involved in this study is shown below speaks aloud about the potential available in this sector. The table shows the coverage and growth of Indian Microfinance in 2006-07, spelling the amount and scope of opportunities in this field in the future… For many poor farmers the financing may actually facilitate a safer place to save the proceeds from their harvest. Thus, we see a broadening of the concept of microfinance which requires efficient and reliable ways of financing or consulting to be devised to provide a one-stop booth for information and funds. This encourages inclusive banking as well.