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Why microfinance is important for the growth of India?

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In India, microfinance is very important due to its large population of poor and marginalized people needing financial support to overcome poverty and vulnerability.

According to the World Bank, 22% of India’s population is surviving below the national poverty line of $1.90 per day.

The reason for lacking access to formal financial services is due to various barriers, such as low income, low literacy, lack of collateral, high transaction costs, and social discrimination.

Microfinance also supports bridging the gap with affordable and convenient financial services to suit the needs and preferences.

The benefits of microfinance for India are:-

  • The income and consumption of the poor are increased by letting to invest in productive activities, such as agriculture, trade, or services. Microfinance also copes with shocks and emergencies by providing liquidity and insurance.
  • The vulnerability and dependence of the poor are reduced on informal sources of finance such as moneylenders, relatives, or friends. The sources also charge high-interest rates, impose harsh conditions, or exploit the borrowers. The importance of microfinance is its ability to offer more transparent and fair terms of repayment and interest.
  • The empowerment and agency of women are enhanced to provide access to financial resources, decision-making power, and self-confidence. Women also constitute 80% of the microfinance clients in India. It also improves social status, health, education, and participation in community affairs.
  • Microfinance also promotes financial literacy, awareness, and citizenship among the poor by creating trust, cooperation, and solidarity.

However, nothing is without its challenges, India also struggling with its fair share of challenges:-

  • Operation and financial risks due to various unknown and uncertain risks such as high operating cost, and over-indebt.
  • It needs to adopt sound management practices, and risk mitigation strategies to ensure sustainability and efficiency.
  • Regulatory and policy constraints are encountered due to factors such as lack of clarity, coordination, or consistency among different authorities and stakeholders.
  • It needs to comply with various rules and regulations such as licensing, reporting, or consumer protection.
  • Trade-offs difficulties and other vital and social difficulties due to various conflicts between individual and group interests or unintended consequences of intervention.
  • Corruption, scandal, misuse of power.

However, if you look at the bigger picture, entrepreneurship support, women empowerment, poverty alleviation to smooth the process, generating more employment in the rural society, financial resilience for households, and economic growth to catalyze the grassroots for economic progress.

Even, though challenges are present it has a profound impact that is positive for low-income groups in India. It supports huge growth and is a powerful structural tool for inclusive development and poverty reduction in the country.

Sources:- nabard, sksindia, mfinindia, rbi

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