Financial Inclusion in Rural India: The role of Microfinance as a Tool

Abstract

The responsibility of meeting the credit needs in the rural areas of India was entrusted primarily with the cooperative sector and later to the commercial banks. One of the major objectives of the nationalization of major commercial banks in 1969/1980 was to improve the flow of formal institutional credit to rural households. Although these measures were ambitious and laudable, bank credit did not reach the poor people in adequate quantum. The financial sector reforms begun in 1992 have been systematically moving away from the social objective of the banking sector. The formal financial sector in India is shifting its focus from " mass banking " to " super-class banking " . Though banking sector has witnessed tremendous changes in recent periods in terms of technological advancements, internet banking, online money transfers, etc, " financial exclusion " is a reality. It is in this context that the term " financial inclusion " gains importance and it is defined as the process of ensuring access to financial services and timely and adequate credit needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. In countries with a large rural population like India, financial exclusion has a geographic and social dimension. Geographic exclusion is exposed through inaccessibility; distances and lack of proper infrastructure. Building an inclusive financial sector has gained growing global recognition bringing to the fore the need for development strategies that touch all lives, instead of a select few. The overall strategy for financial inclusion, especially amongst the poor and disadvantaged segments of the population should comprise ways and means to effect improvements within the existing formal credit delivery mechanism, as well as an evolution of new models for extending outreach, and a leverage on technology solutions to facilitate large scale inclusion. Only two to five percent of the 500 million poorest households in the world have access to institutional credit. Of which, women receive a disproportionately small share of credit from formal banking institutions. The Women's Self Help Group movement is bringing about a profound transformation in rural areas of India. Microfinance Institutions (MFIs) play a significant role in facilitating inclusion, as they are uniquely positioned in reaching out to the rural poor. Many of them operate in a limited geographical area, have a greater understanding of the issues specific to the rural poor, enjoy greater acceptability amongst the rural poor and have flexibility in operations providing a level of comfort to their clientele. The present paper deals with how the mechanism of microfinance can enable the financial inclusion of hitherto excluded population, especially the women, into the formal financial sector.