Financial
Inclusion and Micro Finance in India
India as a country presents great diversity in its
geography, history, culture and population demography. This diversity makes it
extremely difficult to suitably categorize the country on economic, political,
religious or demographical grounds. Post independence growth has led to overall
development of the country as a whole but it has also divided it into two
distinct segments thus providing a suitable basis of categorization in the form
of
Rural India and Urban India. As per
the census of 2001 only 27.78% population of the country lives in the urban
segment while the rest are still residing in the inherently characteristic
Rural India. The things however have changed significantly since independence
when around 82% of the population lived in the rural segment. The rural segment
is distinct in respect of various features such as purchasing power,
development, social system etc. These distinctions relate directly to the kind
of distinct demand patterns that the rural sector has in various product
segments especially when it comes to
Financial services. The sector presents a
real challenge given its technological backwardness and mass illiteracy as
people are still caught in ancient financial systems that were both
exploitative and futile. Financial inclusion is the biggest problem in front of
the financial system today in rural India and infrastructural bottlenecks are worsening it
even further with each passing day.
Banking and other financial services were acknowledged as
the ultimate growth drivers in rural India at the time of independence. The role of the banking
sector in financing rural households was envisioned in the 1950s, in pursuance
of the recommendations of the RBI survey, viz. All-India Rural Credit Survey
(AIRCS), which observed that “Agricultural credit fell short of the
requirements, was not of the right type, did not serve the right purpose and
often failed to go to the right people”. Despite the insignificant role played
by cooperatives in financing rural households at that time, a proactive role
for cooperatives was suggested stating that “Cooperation has failed, but cooperation
must succeed”. Commercial banks were also inducted in the 1970s into the ambit
of financing agriculture and other priority sectors. Thus both commercial and
cooperative banks have been financing the rural segment holding a major share
in institutional finance. However a lot remains to be achieved so far in the
rural domain which as per this paper will be the future key to growth for the
banking sector in India. We will thus analyze the role of Micro finance Institutions in
providing cheap and prompt access to financial services in the rural terrain so
as to explore a massive untapped segment of the financial market in India.
Micro
financing has emerged as the promising arena to channelize the savings of
millions of rural citizens all over the world to create a sustainable model of
growth, development and empowerment. The context for this paper derives from
the current overriding emphasis on
microfinance in rural finance discourse and
its celebration as the new ‘magic wand’ in the fight against poverty. The paper
also discusses the factors and theoretical position associated with evolution
of microfinance and its global acclaim based on it being a Win-Win proposition
for both Micro Finance Institutions (MFIs) and Clients.
The paper
aims at analyzing the historical and the present state of the rural financial
system in India and also seeks to identify the reasons so as to how
the rural sector can be the next big developmental platform for the Indian sector. The paper is divided into three major segments where Segment (I)
presents the background of the rural financial system and also studies the problem
of Financial exclusion, (II) segment deals with the institutions working for
the rural financial system, segment (III) focuses on Micro Finance Institutions
and deals with the analysis of the overall paradigm as it holds for the Micro
Finance Institutions in India
The paper is
based on references and inferences from works done previously in this
particular domain and it takes into account various special studies done by
international and domestic agencies such as the World Bank, Asian Development
Bank and off course the Reserve Bank of India. The paper poses to be a symposium of diverse facts
and conclusions drawn from various research works. The paper seeks to present
the rural sector as an opportunity of the future for the commercial banking
system as they fight out the challenge of financial inclusion in rural India and thus hit fortune at the bottom of the income
pyramid in India. It provides a comprehensive picture of why and how
rural sector can emerge as a profitable segment for the banking industry in India and how there is tremendous scope for taking
universal banking to the Indian hinterlands with a little bit of creativity and
lot of ingenuity. Micro financing in particular has the competence to revolutionalize
the financial system of rural India and thus facilitate its alignment with the overall
growth story of India and its Economy in this century that is slated to see India claim its historical position of the global leader.
Thus this paper is a small attempt to accentuate the importance of Micro
financing in the rural Indian economy.
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