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

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International Journal of Development Studies (IJDS) ISSN 0975-5799
misunderstood and is taken in very narrow sense of
microcredit. However, microfinance is quite broad
and involves a range of services i.e. savings, credit,
insurance and money transfers. In India, microfinance
services are mainly dominated by credit services.
However, unlike other country India is fortunate to get a
saving based microfinance model like Self Help Groups
(SHGs). Despite a huge potential for insurance services
in rural areas it’s been largely neglected.
The major ongoing debate in microfinance sector
in India is related to the outreach and sustainability of
microfinance. In a study by Basu and Srivastava (2005)
based on empirical assessments of their reach or impact
it is clearly indicated that despite the capacity to impact
significantly still its outreach is relatively less i.e. only
5% as compared to Bangladesh of 65%. This data
indicates the huge potential of microfinance in India.
Further, MFIs are being promoted with the ostensible
objective of serving the poor. But, in order to attain
financial sustainability these MFIs are charging very
high interest rates which poor find difficult to pay. The
rate of interest charged by these institutions has become
the point of debate. In the present situation there is
lot of variation in terms of the interest rate charged
by the various organisations. Higher interest rate has
been identified as the biggest threat in promoting
entrepreneurship. For a long term sustainability of
microfinance sector sustainability of the client as well
as MFI is needed. By charging high interest rate, the
MFIs are making their client all the more vulnerable.
Poor are more likely to fall in the debt trap.
It has been argued that MFIs are private entities and
hence need to be financially sustainable. They do not
receive any subsidised credit for their lending activities,
and that is why they need to recover their operational
costs from borrowers. In the process, the basic reason
for their existence and their primary objective is being
lost. It is important that these NGOs should be willing
to operate at narrow margins and to bear a low effective
interest rate so that they can maintain a balance between
their dual objectives of commercial viability and
serving the poor. In dealing with this issue, promotion
of microenterprise can be an effective strategy. It is
believed that government policy can also play an
important role in dealing with these issues. Other
than this focus on quality aspect, inclusiveness and
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involvement of private banks may help in improving
the situation.
Another way of achieving sustainability is to
increase the scale of MFI operations and outreach.
Data shows great potential of MFIs in increasing their
outreach and scale of operations. It has been observed
that MF programmes focus a great deal of attention
on women. It has been argued that women are better
clients as they are more inclined to save than men, they
borrow smaller amounts than men and their repayment
performance is better than men. These characteristics
of women clients constitute evidence in support of
the inclination of MFIs to cater the needs of women.
Women may be better and more reliable clients but, in
order to increase their outreach MFIs can not ignore
men as clients.
Similarly, it has been noted that MFI pay more
attention to rural areas and largely neglect the urban
poor. Out of more than 800 MFIs across India, only
six are currently focusing their attention on the urban
poor. However, the population of the urban poor is
quite larger amounting to more than 100 million. With
increasing urbanisiation this number is expected to rise
rapidly in the coming years. In this situation, MFIs need
to pay equal attention to the urban poor because they
too need financial assistance for various activities.
Now a day’s one of the most important issue is
promotion of clusters for developing microenterprise.
There have been few studies to explore the importance
of clustering in promoting microenterprise. Some may
argue on the role of clustering for microenterprise
development. But, for the purpose of clusterization,
each small microentrepreneur is considered as a separate
firm. Additionally, the group and cluster approach can
be an effective strategy for MFIs in increasing their
scale of operations.
A successful and sustainable microenterprise
development needs broadly two types of services i.e.
Financial and Non financial services. One of the major
controversies related to the role of credit is that on credit
vs. credit plus approach. Is it enough to provide only
credit to the poor for poverty alleviation? This issue is
debated constantly. Some argue that in the absence of
any income - generating activitiy the poor may fall into
a debt trap. For the sustainability of their operations
MFIs should not go in for a minimalist approach of
January-June 2016 Volume VIII Issue I
providing credit. The poor need a constant and steady
source of income and for this reason MFIs need to go in
for a holistic approach. However, provision of services
should not be on a mandatory basis but, should be
provided on a voluntary basis.
Some scholars believe that providing only credit
is not a comprehensive approach. There should be
a combination of financial and non financial services
for promoting microenterprises for the poor. Otero
and Rhyne (1994) also believe that these non financial
problems can mitigate against the success of microcredit
intervention. And therefore it is necessary to focus on
non financial services as well to optimize the impact of
microfinance.
Promoting income generating activities remains
primary objective of the microfinance. Income
protection vs. Income promotion always remains
a matter of debate. Some scholars argued that all
microfinance lending should necessarily be directed
towards productive use of loan. Whereas, other group
of scholars view consumption purposes as equally
important for the poor. However, it is sometime
difficult to differentiate between consumption and
productive purposes. E.g. investing the loan for illness
is a productive purpose or a consumptive. Because if
the person is not well, he can not work and in this way
he is losing the opportunity cost which he would have
earned being well. Investment for education may be
productive purpose for the poor who believes that with
good education he will be able to earn more. Similarly,
a poor while investing in social activity believes that
he is building his relationship which will be helpful
for him in case of emergencies. In other words, he is
building social capital. Can investment for building
social capital is considered as a productive purpose or a
consumptive purpose is remain a matter of debate?
Microfinance and microenterprise development in
the developing countries largely depend on the concept
of groups. People need to come together to avoid the
disadvantage of their small size as well the isolated
location. In the process social capital is built. However
role of social capital in promoting microfinance and
microenterprise development is still a grey area and
need to be explored, there is no argument on the
fact that social capital has the potential to promote
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microfinance and microenterprise development
especially in the context of developing countries.
Achievement of Grameen Bank in using social
collateral in microcredit delivery was widely reported
by several scholars. Joint responsibility concept had
helped lot in terms of repayment performance in
Grameen bank (Jain, 1996).
Balancing the twin objectives of commercial
viability and serving the poor in a cost- effective
and efficient manner is the biggest challenge before
MFIs. Another important challenge is human resource
management for MFI operations in the current context of
globalisation. Conflicts of interest with the government
and unwarranted political expectations and interference
are some of the most important threats for MFIs. If
MFIs want to have a long-term impact on the larger
goal of poverty alleviation, they need to rethink their
strategy in terms of managing the emerging challenges
and problems in the sector more effectively.
CONCLUSION
In the recent years, microfinance has evolved has
a boon for micro entrepreneurs. It has been helpful
in providing short term and timely credit to the
micro entrepreneurs. Both microfinance as well as
microenterprise has the common objective of poverty
alleviation and creation of employment opportunities for
the poor and therefore there is a need for both of them to
come together and act for the larger objective of poverty
alleviation. Other than several advantages, microfinance
has also been criticized for its role in microenterprise
development. In the recent years, several issues have
been discussed in the literature. However, microfinance
also has some shortcomings which need to be addressed
for long term impact on microenterprise development.
There are shortcomings with respect to the policy
support also for these microenterprises. Microenterprise
development is a self reliant development strategy but
along with microfinance it need to be supported by
enabling environment and proper infrastructure support.
For creation of enabling environment there is need
for government and non government entities to work
together. Then only these microenterprises can grow
and contribute efficiently towards the larger objective
of poverty alleviation.
International Journal of Development Studies (IJDS) ISSN 0975-5799
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