Microfinance as backbone of rural economy

   By Kuldip Maity ,  09-Dec-2018
Microfinance as backbone of rural economy

As an active driver of financial literacy, it does hand-holding and teaches the poor the best use of funds

There is a need and there is a compulsion. When it comes to the rural economy, the compulsion is to survive and when it comes to the need, the rural economy needs access to fund. A January 2018 report by KPMG highlighted the direness of the situation.

Sometimes, even an astute student of finance tends to ignore the extreme disparity in the access to finance between the urban and rural economies. Weighted against the contribution to the gross domestic product or GDP, the rural economy has a disproportionately low access to lendable funds compared to the urban economy. The KPMG report says that rural India gets only 10 per cent loans.

Therefore, microfinance can become the backbone of the rural economy. In the North East, self-help groups’ sourcing of funds clearly points to their dependence on the microfinance industry. The microfinance industry accounts for an overwhelming 71 per cent, followed by regional rural banks at 13 per cent, commercial banks at 11 per cent, and cooperative banks at a measly 5 per cent.

Microfinance has an overwhelming weight in the funding of self-help groups because this is the way the industry operates. Unlike banks and similar lenders, the microfinance industry is an interventionist source of fund. It does hand-holding, teaches the groups the best use of funds as investment, and structures their businesses; in short, it is an active driver of financial literacy. 

Therefore, the performance of a microfinance company should not be measured just by their financials but also by their success in helping their clients in improving their enterprises and living standards. 

The ethos of microfinance lies in direct intervention at the grassroots level; it becomes an enabler of poverty alleviation. For it provides funds without seeking conventional collaterals. 

By enhancing enterprise capacity, microfinance turns itself into the backbone of the rural economy, especially at the grassroots level.