Microfinance and economic development in India: Growth and challenges

Most of the countries in the world are making an improvement in prosperity in varying degrees but still the problem of poverty is severe in third world nations especially in Asia and Africa. It is estimated that 2.5 billion people around the world live in poverty, struggling to survive on less than 2 US dollar a day. There are more than 400 million people in India who are struggling to ensure income security. However, there is some improvement in prosperity in India but the people living below poverty line in urban areas has increased in recent years as more proportion of poverty in urban areas is transmitted from rural areas. Poor Families are unable to afford adequate meals, clean drinking water, education, proper shelter and even medicine when they are sick. Most of the economies have not got much expansion mainly due to poor accessibility to the credit market. For smooth and overall development of Indian economy, it is necessary to stimulate the banking system at micro level so that banking services can be insured easily accessible to the vast sections of disadvantaged and low income groups at affordable cost in a fair and transparent manner. It will also help to protect the poorer from harsh moneylenders who charges unexpectedly high rate of interest and exploit them. In other words, it is possible only through durable microfinance system with well-equipped resources which can help to stimulate the economic growth from very basic level.

The financial sector reforms in India with financial inclusion emerging as a major objective for the policy planners to search for products and strategies for delivering financial services to the poorer and small entrepreneurs mainly of rural area in a sustainable manner who generally lack direct access to the banking services. NABARD was the first organization to introduce the concept of microfinance to enhance the agriculture and rural development activities in India. After that the spread of microfinance is steadily growing through SHGs. Government of India and RBI has also done a lot for easy accessibility of financial services to poorer and small businesses. Microfinance sector has made substantial progress over the past few decades and brought number of people above poverty line in India. This sector play an important role in beginning and expanding the small business by offering small loans to lower income groups which generate income and employment to local communities. Thus no doubt, microfinance has been treated as an important tool for economic development. However, there are huge masses of people especially in rural areas who are still remaining out of the ambit of the outreach programmes. Further, with phenomenal growth in microfinance, there are some glaring challenges also reality of this sector. Thus, the main objective of this paper is to study the role of microfinance in economic development and the challenges of this sector in India.