Micro Finance in India
Essay Preview: Micro Finance in India
Report this essay
India is a vast and very diverse country situated in South Asia with 1.2 billion population (Census of India, 2011). The human development index of India ranked it as 135th country in the world. The GDP growth rate of India is 5 percent (World Bank, 2013).

The Financial system of India can be divided as formal and informal sector. The formal sector is regulated by the Ministry of Finance (MOF), the central bank of India known as Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI) and other administrative bodies (Indian Financial System – An overview, n.d.).

Formal financial sector comprise of four sections, these are markets, institutions, instruments and services. Financial Institutions are delegates that create and mobilize savings and appropriate funds efficiently. Financial institutions are further categorized as banking sector and non-banking secor. In India, in Non-Banking Financial sector major players who accounted as major purveyors of credit are Development Financial Institutions – DFIs, Non-Banking Financial Companies – NBFCs and Housing finance companies.

Financial institutions are again categorized as Term Finance Institutions such as Industrial Financial Corporation of India (IFCI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Investment Bank of India (IIBI), Industrial Development Bank of India (IDBI), and Small Industries Development Bank of India (SIDBI). Other financial institutions include specialized finance institutions like Infrastructure Development Finance Company (IDFC), Export Import Bank of India (EXIM) and sectoral institutions like National Bank for Agricultural and Rural Development (NABARD).

Investment bodies in the sector of mutual funds in India include public sector mutual funds and private sector mutual funds. Insurance under the companies like Life Insurance Corporation of India (LIC), General Insurance Company of India (GIC) and its subsidiaries or other related firms are classified also classified under financial institutions. There are state level financial institutions also at each state in India like State Financial Corporation and State Industrial Development Corporation (SIDCs). These companies are run by State Governments in India (Indian Financial System – An overview, n.d.).

According to World Bank data, accounts registered at a formal financial institution (% age 15+) in India above the age of 15 is 35 percent. The percentage of accounts used to receive government payments and funds is 4 percent. Only 2 percent of the population have credit cards. The percent of loans from a financial institution in 2010 is 8 percent. The percentage of loans taken from informal institutions specifically family or friends is 20 percent. The usage of debit card in India is 8% (World Bank, 2012).

The informal financial sector in India comprises of:
Cash lenders, for example relatives, neighbors, merchants, wealthy people etc.
Groups of people working as associations which may have their own rules.
Association firms comprising of local agents, dealers and non-banking mediators for example Chit funds, finance companies (Indian Financial System – An overview, n.d.).

The informal sector in India is very strong. There are private individuals with no registration give loans to people with very high interest. This has resulted in making poor people suffer and pushing them into extreme poverty. Though the government have policies and laws in practice, there is no strict enforcement of these laws are made.

Another form of informal structure of money transaction are Western Union. Western Union is a method to send and receive money from one place to another. Western Union outlets are there extensively throughout in India.

There is also another method called “Hawala or Hundi Money” (Ghunawat, 2014). This a method on transferring money from one place to another without giving any service charge or duty to the government. This is illegal in India. But people often transfer money from gulf countries to India using Hawala or Hundi method. This has resulted in increase in black money (untaxed income), increase in gold price and corruption in India (Ghunawat, 2014).

Microfinance refers to small savings, credit and insurance services made available to socially and economically deprived sections of the society. This has emerged as an effective tool in poverty eradication in India. The micro finance institutions in India has adopted mainly three delivery models such as Self-help group model (SHGs), Grameen Bank model and Co – Operative model (Nasir, 2013).

Micro Finance has able to empower rural population in India. It has given credit accessibility to rural population in India. The Self Help Group development is achieving a significant change in rural regions of India. Micro finance institutions assume a critical part in encouraging and contacting the poor in rural areas. A significant number of them work in a constrained geological territory, have a more noteworthy understanding of the issues particular to the poor, appreciate more prominent adequacy amongst the rustic poor and have adaptability in operations giving a level of solace to their customers. It is generally evaluated that there are around 1,000 NGO-Micro finance institutions and more than 20 Company encouraging the exercises in all over India. There are today in excess of 22 lakh such gatherings interfaced with banks (J, 2012).

But the coverage that MFIs imparts is less. The outreach to remote areas is less. Critics also says that microfinance includes only peripheral poor but not extremely poor population. Micro Finance reach in the poorest states in India such as Madhya Pradesh, Orissa, Jharkhand, Bihar, Uttaranchal, Chattisgarh and Uttar Pradesh is less. Around 53.5% of poor people in India is in these seven states. The contribution from these states is 23.60 percent (Nasir, 2013).

There would be requirement for more prominent transparency in the working of micro finance institutions and for encouraging their span to unbanked populace of the nation. Interest rates in the microfinance area must be fundamentally higher than in the managing an account part reflecting the much higher expense of working of MFIs. This pulls in feedback however it is paramount to recollect that most micro fund establishments charge rates which are much lower than rates charged by money lenders. Borrowers stand to profit

Get Your Essay

Cite this page

Micro Finance And Indian Financial System. (April 17, 2021). Retrieved from https://www.freeessays.education/micro-finance-and-indian-financial-system-essay/