More

    Two Challenges Before Microfinance

    GovernanceFinance and EconomyTwo Challenges Before Microfinance
    - Advertisment -

    Two Challenges Before Microfinance

    The rate of interest charged by microfinance institutions is high enough not to allow microfinance to bring about any significant change in the lives of most people.

    By Hardik Kumar Satvedi

    According to a study published by National Bank for Agriculture Research and Development, The Status of Microfinance in India for the year 2021-22, Self Help Group – Bank Linkage Programme which is the largest microfinance programme in the world, touches 14.2 crore households through more than 119 lakh SHGs with deposits of over ₹47,240 crore and annual loan offtake of more than ₹99,729 crore and loan outstanding of over ₹1,51,051 crore. Adding to these numbers the microfinance disbursement through private microfinance institutions would make it larger. This shows that microfinance through both SHGs and institutional approaches have been instrumental and is important tool used for the inclusion of crores of individuals in formal lending mechanism.

    Credit taking from microfinance have increased substantially. Microfinance have helped people in various activities: agriculture, starting microbusiness, education and medical expenses. The big factor behind rise in microfinance through microfinance institutions is the non-requirement of collateral and paper work for the loans. However, the help is just enough for people to sustain their lives – which means, no significant change in economic conditions of the people have been noticed, barring a few cases. The biggest reason for this is the use of money in consumption expenditure. Thus, they again have to go back to microfinance to sustain their lives. The current structure of microfinance, albeit helping in sustaining lives with relative ease, is falling short of its intended objectives.

    This Opinion piece is based on a study of the impact of microfinance on the socio-economic conditions of the people in Kasarla and Dongargaon village in Nagbhid Taluka of Chandrapur district in Maharashtra. The region is marked by factors like poor crop yields leading to huge losses for farmers and indebtedness which ultimately raises the need of the money again to sustain agriculture as well as lives. This piece looks the issues faced by the people in repayment of the loans.

    Low interest vis-à-vis moneylenders

    In the absence of microfinance, people borrowed from the rich (acting as moneylenders) in their village or neighbouring villages against a collateral, usually jewellery in exchange and charged a monthly interest of three per cent. This high interest resulted in non-repayment and ultimately, the borrower had to forgo of his/her jewellery. They also had to sell other assets in order to complete the repayment with volume of money increasing with time making their condition further vulnerable. Now, with the microfinance institutions coming up, it becomes a bit easier for people to borrow money as and when they need it, as these institutions don’t ask for collateral and also charge relatively less rate of interest.

    - Advertisement -

    But, even this rate of interest is difficult to pay off. The rate of interest charged by microfinance institutions is high enough not to allow microfinance to bring about any significant change in the lives of most people. In both the villages, the wages for female agricultural labour is ₹150 for a day’s work. The most common amount of loan that was taken was ₹40,000 for which the weekly instalment is ₹725. So, almost five day wages of one member of family are going directly in repayment of the loan instalment, leaving no scope for making any improvement in their lives.

    This ‘high’ rate of interest poses a significant challenge for microfinance to be awarded as a tool for social justice. Rather, it is turning into a more of business model to make more money by exploiting the people.

    The strongest argument in favour of restricting the high rate of interest charged by microfinance institutions is that as the rate of interest charged by microfinance institutions on loans are almost twice the interest charged by public sector banks. It is assumed that the nature of microfinance institutions is exploitative and hurt the poorest or marginalized sections of the society.

    Fear of social boycott

    Barring two or three people, everyone pays their instalments on time. On the face of it, the timely repayments of loan seems like perfect functioning of microfinance structure. Just prima facie. Because, when we dig deeper, it reveals there is catch: people said they have to pay the instalments on time no matter what, because, if they do not pay, it would be like a matter of shame (embarrassment) for them. The society will start seeing them as culprits if they default on repayment.

    The situation reflects that the social pressure is so much that almost no one defaults on the repayment, for fear of social boycott. If people do not have money, they run around two or three days before the date of repayment to arrange for the repayment (another loan or selling or mortgaging valuables). It was reported that in some instances people also cut down the costs of their basic expenditure such as food expenditure in order to save money for the repayment.

    The other kind of pressure leading to timely repayments Is peer pressure: if you don’t pay your instalments on time, you will be excluded from the group next time. There also applies the “Theory of Intersectionality” which reveals that the pressure is more on the already socially marginalized sections of the communities. This can be substantiated by the fact that in proportion to total population, the households belonging to Scheduled Caste communities borrowed least from microfinance institutions.

    Even if there are some instances but if the intensity of social pressure and peer pressure is so much that people also cut down the costs of their regular basic needs then the situation is very problematic as cutting down the costs of food expenditure will have a spiller effect on them such as reduction in nutrition levels and their work efficiency.

    Hardik Kumar Satvedi is an MA student in Jawaharlal Nehru University (JNU). This piece has been extracted from the internship report submitted by the author as part of the Abhijit Sen Rural Internship programme of National Foundation for India (NFI).

    - Advertisement -

    LEAVE A REPLY

    Please enter your comment!
    Please enter your name here

    Latest news

    Sri Lanka’s Elephant Corridor Plan ‘Unscientific’

    Nearly 5,000 elephants and 1,600 people have been killed in the last 15 years in clashes between elephants and humans in Sri Lanka, home to one of the largest remaining populations of Asian elephants, according to official figures.

    New Projections Show Extreme Glacier Loss Already at 2°C

    Staying close to 1.5°C on the other hand preserves at least some glacier ice in all regions, even Scandinavia, with 20-30 per cent remaining in the four most sensitive regions; and 40-45 per cent in the Himalayas and Caucuses; stressing the growing urgency of the 1.5°C temperature goal and rapid decarbonization to achieve it.

    Government Extends Interest Relief for Farmers, Reinforces KCC and MISS as Pillars of Agricultural Credit

    Through the KCC framework, farmers benefit from revolving credit facilities for up to five years. This flexible structure allows them to draw and repay funds as per their seasonal requirements without having to reapply for loans each season.

    Legal Battle Brews Over Rampant Illegal Sand Mining in Meghna River

    The massive profits coupled with a weak legal framework have drawn influential individuals with political connections into the sand mining business, making it dangerous for environmental activists and journalists to speak out.
    - Advertisement -

    Yunus Warns of ‘War-Like Situation’ Amid Political Crisis and Rising Tensions

    The high-stakes meeting brought together 20 leaders from various political parties and organisations in two separate sessions, as Yunus sought to shore up support amid reports of internal tensions within his interim government and growing external pressure.

    Vice President Calls for Direct Subsidies and Agri-Entrepreneurship at Madhya Pradesh Conclave

    He urged agro-based industries, NGOs, MPs, and MLAs to adopt villages and help build agri-entrepreneurial ecosystems.

    Must read

    Sri Lanka’s Elephant Corridor Plan ‘Unscientific’

    Nearly 5,000 elephants and 1,600 people have been killed in the last 15 years in clashes between elephants and humans in Sri Lanka, home to one of the largest remaining populations of Asian elephants, according to official figures.

    New Projections Show Extreme Glacier Loss Already at 2°C

    Staying close to 1.5°C on the other hand preserves at least some glacier ice in all regions, even Scandinavia, with 20-30 per cent remaining in the four most sensitive regions; and 40-45 per cent in the Himalayas and Caucuses; stressing the growing urgency of the 1.5°C temperature goal and rapid decarbonization to achieve it.
    - Advertisement -

    More from the sectionRELATED
    Recommended to you