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Microfinance attempts to deliver financial services to micro-enterprises and households that are excluded or banned from traditional commercial banking services. Typically, these are self-employed, low-income, or informally employed individuals with no standardized ownership titles on their valuables or assets and with limited identification papers. The term Microfinance is a combination of two words. One is Micro, which means small and the second one is finance which means the circulating capital system by way of loans. Microfinance is a way to boost the economic development of any country. It also empowers the creation of employment and the growth or expansion through the support of small entrepreneurs. Muhammad Yunus first introduced Microfinance. Poor Indians do not have good access to the formal banking sector because of many reasons.
Sometimes, it is due to the lack of retail banking services for them, and other times, it is because of the lack of correct assets they can use as collaterals. The most frustrating was that the commercial banking system of India failed to comprehend the loan requirements of the downtrodden. But with the introduction of Microfinance, the poor can get small-time loans as per their requirements.
You might not believe that the Microfinance sector has seen unprecedented growth in the last few years. Today, more than 100 Scheduled Banksii, 27 State Rural Livelihood Missions, 349 District Cooperative Central Bank, and 5000 plus non-profit organizations or NGOs are engaged in boosting the microfinance business in India.
Microfinance generates cash flow in rural areas as the cash flow reaches lower levels. It assists all sectors of people, like blacksmiths, weavers, carpenters, and others, by offering different types of financial assistance. The decentralization process narrows documentation regarding dispersal as it gets redirected through NGOs, Missions, or self-help groups. The primary principle of Microfinance is mutual help through self-help. With the assistance, people can fulfill their dream without worry as they can access the required money. In that way, the microfinance sector evolves in India rapidly and also boosts the Indian economy.
Below we have mentioned some ways to improve the microfinance sector shortly.
• Proper regulations
With the introduction of Microfinance in India, regulations have become a necessity. Given the high development trajectory of MFIs, it is imperative to enforce correct protocols to protect the stakeholder’s interest and promote further growth.
• Encourage rural penetration
Hoping to lower the cost of operations, MFIs are curious about opening their branches in places that already have complete operational MFIs. It is an effective way to boost the Microfinance sector as there is a need to set up new branches in areas of low financial penetration by offering financial assistance.
• Transparency of interest rates
Different Microfinances employ different interest rate patterns. It confuses the downtrodden people and renders the borrower incapable of bargaining power. That is why it is wise to implement a uniform interest rate to keep transparency.
By reading the above segments, you can see how the Microfinance sector has evolved in India over the last few years. It has become an integral part of the Indian economy as more and more people can get financial assistance through this sector.