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ROLE OF MICROFINANCE FOR PROMOTING INTEGRATED RURAL DEVELOPMENT AND POVERTY ALLEVIATION

ROLE OF MICROFINANCE FOR PROMOTING INTEGRATED RURAL DEVELOPMENT AND POVERTY ALLEVIATION

                                               

Neeta  Aurangabadkar and A. D. Diwan

       

Introduction

 

The concept and role of micro financing is well known for social upliftment as well as for the development of rural and backward areas. Considerable efforts are being made at the public and private sectors to bring in enough number of technologies in the rural areas for their implementation and use through micro financing for the overall development. However, support of micro financing agencies including banks is not reaching at the grass route levels and therefore, most of the developmental programmes get diluted or ineffective and many a times they don't even take off. In the rural areas people are not much aware about the micro financial schemes and their benefits. Hence, in order to provide sustainable rural development and progressive poverty alleviation the role of micro financing agencies becomes an important in the context of current scenario. In the present communication the whole mechanism of micro finance, its role to achieve sustainable rural development and for social economic benefits are discussed in detail.

 

All over the world the role of micro financing for rural development and alleviating poverty is well known and in many a cases it has been proved that well organized micro financing policies have helped in achieving sustainable development of the rural sector. During 11th five year plan Government of India also emphasized development of the rural sector through poverty alleviation and achieves more than 8% economic growth. For this purpose appropriate financial budget allocation has also been announced. For achieving this goal, both public and private sectors have to play important role in macro and micro financing. Numbers of renowned economist have published an account on micro financing for development of rural infrastructure so that in due course of time the outcome of such efforts may lead to sustainable development accruing socio-economic benefits., (Bayadas, et., al, 1997, Ditcher, 1996, Gonzalez Vega, 1998, Trape et., al, 1996 Seibel et., al 1998, Rhye, 1998, Fvan, et., al., CORE International, Inc.,  2003).  Role of micro financing in promoting renewable energy technologies in rural areas for sustainable development and poverty alleviation has been worked out in detail by Shrivastava (2009). While dealing the topic he mentioned that the success of micro financing in rural development and promotion of renewable energy technologies (RET) is dependent on presence of several factors which includes infrastructure, availability of information, education of rural population, and availability of maintenance services and creation of opportunities for incoming generating activities. In other words, integrated rural development and RET based rural energy programmes are dependent on the use of micro financing. Further, he mentioned that only such an approach can bring about poverty alleviation and improve the quality life of the rural poor. Prasad (2006) has brought out in detail about the issues and concerns of micro, small and medium enterprises financing in India.

         

Many underdeveloped countries like Afghanistan, Tajikistan, Sierra Leone, Bosnia and Herzegovina have emphasized how micro financing stimulates growth and development of the rural section in their respective countries (from internet). In India more than 70% of the population lives in villages and most of these villages are underdeveloped. Research and development sector in our country brings number of green and eco-friendly technologies every year. Implementation of these technologies in the rural sector can bring radical change in the rural economy which may also lead to poverty alleviation, create employment opportunities and generate or stimulate good growth. However, for implementing these technologies micro financing through public and private sector agencies is the need of the hour. In the present paper efforts have been made to critically analyze all the issues focusing how micro financing can bring mutational changes in the rural economy for overall benefits to all the communities and weaker sections of the society.

 

Green technology for rural development

          The green technologies are those technologies which are eco-friendly. In other words, the technologies developed by using natural resources and when adopted will not create any nuisance to the environment. In India there are number of R & D scientific organizations like Council of Scientific and Industrial Research (CSIR), Indian Council of Agricultural Research (ICAR), Indian Council of Medical Research (ICMR), Indian Institute of Technology (IIT), Conventional Universities, Agricultural Universities, Baba Atomic Research Centre (BARC) and number of private industrial research agencies are contributing in evolving one or other technology which is rather eco-friendly and can be defined as green technology. Depending on the necessity and challenges that are required for the overall development of the rural sector we need to bring in and implement at least some of the green technologies in such locations. For this purpose micro financing is very much needed for applications of green technologies. Integration of micro financing and technological application will definitely stimulate growth and overall development of the rural sector. Today we have number of green technologies namely renewable energy from wind, water, tidal energy, solar energy, development of bio-fuels from natural resources, bio-gas plants, bio-fertilizers, bio-manures, bio-pesticides, bio-waste recycling, bio-conservation, cattle farming and aquaculture, dairy and dairy products, pollution control and water purification, water conservation, rejuvenation for plantation and development of forest etc.

 

After witnessing a dip in 2009 on account of global financial crisis, the green sector in India is once again attracting the attention of investors and banks. Three reasons have been thought of which are favorable for investors in rural sector i.e. high REO's (returns on equity), increasing investor comfort with renewable generation risk, and strong commitment from the central government to ensure renewable feasibility. The growth of the green sector is substantiated by pace of lending support financially through banks for implementing green technology projects. Recently Yes bank and State Bank of India have set aside certain percentage allocation of funds to implement projects related to clean technologies. For example Yes Bank has offered Rs 700 crores for a project involving management of municipal solid waste and its disposal in an environmentally friendly manner. State Bank of India has tied up with Managing Emission, a Mumbai-based company involved in business of setting up projects for renewable energy and energy efficiency with carbon embedded assets, to provide 20, 000 energy efficient plants to rural India through micro finance loans. The project involves building bio-gas plants at farmers houses. The project aims at reducing greenhouse emission by saving conventional fuel such as fire wood, LPG and kerosene.

 

Under the project, farmers contribute 50% of the cost and the balance 50% is financed through low interest micro finance loans from the bank. The repayment of the micro finance loan is then structured in a manner by which the income received from carbon credits is used for repayment.

                                                                      

Information, awareness and technology selection

 

Though number of green technologies is available, all these cannot be implemented each and every where. Depending upon resources available and geographical and climatic condition, location specific technologies we need to bring in and implemented. In such efforts we may have to critically examine location specific technologies and their feasibility for implementation.    

 

To familiarize about the technologies and develop skill there is again need for training and awareness. For this purpose regular training programmes have to be organized through various agencies and create a kind of awareness and develop expertise. This kind of exercise is very much needed for successful implementation of technological applications. Micro financing including lending and repayment rules and its awareness should be the part of such training programmes.

     

Micro finance for technology applications

 

Microfinance is defined as provisions of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standard. Microfinance is provided in varying context either to individuals or groups ranging from personal micro credit to small enterprise support and rural finance.

 

 

 

 

 

 

The institution that provide microfinance and credit services are diverse including non-government organizations(NGOs), credit union, non-bank financial intermediaries and commercial banks. Generally, microfinance clients are poor and low income people that do not have access to other formal financial institutions. Microfinance clients are usually self employed or house hold based entrepreneurs. Their diverse "Micro enterprises include small retail shop, street vending, artisan manufacture and service provision". In rural areas micro entrepreneurs often have small income generating activities such as food processing and trade. However in order to bring rural development on the faster track micro financing is essential to all these clients for technological applications. As referred earlier there are number of technologies available in the country. As the outcome of the efforts made by the R&D institutions in the country and in order to implement such location specific technologies, support of micro financing from the microfinance institutions is required. It is very much essential that while giving such support of microfinance to the different clients,  the lending policies should be clear to take care of the client interest, so that, the technological application becomes a successful programme. While implementing such programmes both micro financing agencies as well as clientele should utilize the expertise for technological applications through outsourcing agencies.

 

Sustainable micro finance-features and principles

         

Microfinance is considered to be an adequate tool for financing small scale activities/technological applications in the rural areas because of the following features.

 

1        Provide credit for investment in small scale activities chosen by the poor people.

2       Empower the poor to build self confidence that I can do something.

3       Can pay for itself with the interest earned.

4       Allow to develop opportunities for self employment to the underserved people.

5       Have the broadest utility and the least cost per beneficiary.

 

The principles of sustainable micro-financing are as follows: (1) offers flexible customer friendly services preferred by low-income group, (2) has opportunities for streamlining operations and reducing costs (standardized simple lending process, decentralized loan approval, inexpensive offices, and use staff from local communities), (3) operate in market basis charging market interest rates and fees, and (4) strive to recover the costs of the loan.

 

Micro finance as an industry

         

Many view rural microcredit as an input, along with business development services, into rural micro-enterprise development. Traditional microfinance products and methodologies generally reflect this model, with products aimed primarily at micro entrepreneurs, especially market vendors, with short loan terms, regular repayment schedules, and ever-increasing loan amounts. Increasingly, a new consensus is emerging among microfinance practitioners, donors and experts. This new view considers microfinance as an industry worth promoting in and of it.

 

Microfinance institutions (MFIs) can be small and medium enterprises at the heart of rural sustainable development. Their development positively correlates with rural business development. A new approach considers a wide range of flexible financial services for a variety of poor clients, not just rural micro-entrepreneurs.

 

This means that micro credit becomes transformed from input into rural enterprise development into a financial service that available to poor people. What this mean to MFIs and donors is the following:

 

MFIs: Under the current micro-enterprise development model, an MFI offers very limited number of range of supply driven credit products, which tend to focus fairly narrowly on micro enterprises needs and activities. Loaning for green technological systems is not a usual practice for MFIs. Under the new approach MFIs need to evolve to provide more demand driven flexible and efficient financial services for the rural poor. These flexible demand-driven services would recognize the varying requirements of poor.

 

Donors: Currently, donors design projects to reach the rural micro-enterprise sector or other specific target groups. Many of these projects combine credit with business development services, reflecting the traditional micro-enterprise development model. Donors often insist that the MFIs charge "market" or "sustainable" interest rates in order to become developmental activities sustainable. Under the new approach, donors need to push for the transformation of these MFIs into demand-driven financial service providers with a wider variety of financial products.

                              

The dynamic growth of the microfinance industry has been promoted not only by market forces but also by conscious actions of national governments, Non-Governmental Organizations (NGOs), and the donors who view microfinance as an effective tool for eradicating poverty. The powerful push behind this huge and increasing support for microfinance indicated that national economic and social impacts are significant and it needs to be examined more closely.

              

Models of micro finance institution and rural development

         

It is worth to mention few micro-finance institutions that may successfully expand their business to provide small loans for rural development programmes that have a focus on rural sustainable development and poverty alleviation. There are three accepted models in micro financing in India namely, (1) Self Help Group/ SHG Bank Linkage Model (2) Grameen Model (3) Individual Banking Model operated through micro financing institutions. Among the three models the first model is most popular in India. 90% of the micro-credit is being disbursed through SHG bank linkage mode. Infact, with emphasis on capacity building of micro finance institutions and intermediaries, micro credit has transformed into micro finance.

         

The phenomenal growth of micro financing is evident from the fact that the number of SHGs which was 4757 in 1995-96, had increased to 1.83 million by the end of December, 2005 and the volume of credit had increased from Rs. 6 Crore to Rs.8319 crore during the same period. However, in spite of this phenomenal growth, micro financing has not attained the shape of a movement. There exist a vast gap in demand and supply of credit. As per one study, micro credit requirement was assessed at Rs. 50000 crore for the year 1999-2000. By adding other requirements such as housing loan, education loan and micro-enterprise loan, the upper ceiling of loan requirement was assessed at Rs. 2 lakh crore of micro credit. At present date of cost escalation and taking the base at Rs. 50000 crore, it is estimated that the present minimum requirement of micro credit may be Rs. 70000 crore. As against this, the supply is not more than Rs. 10000 crore. Recently, during the 11th five year plan the Government of India has announced an allocation of Rs.145000 crores for the rural infrastructure development.

 

Crowd financing or crowd source capital

 

Inspired by global efforts, some websites in the country are providing  a platform to high net worth individuals and professionals who want to extend credit to rural entrepreneurs and get returns on it and these crowd funding sites have started making difference to people's lives.

 

Crowd funding-sometimes called crowd financing or crowd sourced capital-describes the collective cooperation, attention and trust by people who net work and pool their money together, usually via the internet, to support efforts initiated by other people or organizations. Crowd funding occurs for any variety of purposes, from disaster relief to citizen journalism to artists seeking support from fans, to political campaigns.

 

These websites employ crowd funding techniques, informing and encouraging common people online to act as investors in micro finance schemes aimed at the small borrowers. It leads to much larger awareness and participation and helps in covering the previously untapped geographies and communities. In crowd funding platforms like these, all an investor has to do is pledge a sum of money online to a borrower whose business plan inspires some confidence in him. There is a waiting period where the barrower puts the money to use and sees their profits soar. Once that happens, they start repaying the barrower in monthly installments.

                     

Since literacy levels and internet penetration are low in rural segments, these sites have field partners like Gram Utthan, Hope Foundation and Association for Sustainable Community

Development(ASSCOD) and also dip into databases of NGO's like Saadhan, These partners have good understanding of local conditions and so are able to assess the creditworthiness of each candidate and monitor the progress. This helps build trust in investors who know exactly where their money is being used.

 

These sites also arrange for investors to contact the borrowers to check on the progress of the business, suggest ideas and discuss future plans

                               

Creating market environment for self sustained eco friendly green technology

 

Besides the support of micro finance and technology applications, development of organized markets is an essential component in bringing growth of the rural economy. Proper micro financing with the technical expertise for technological application may lead to varieties of product development. These products may be in the form of consumables/non-consumables. However to generate income the products should find a proper market so that money in the form of profit will be realized out of the sale of the products. In order to bring this kind of effective mechanism, organized and well structured market are essential at least at taluka level. This kind of system helps both micro finance agencies and a clientele to keep the lending and borrowing policies in a healthy way. For example the World Bank states that "one of the most powerful ways to improve energy supply is to ensure that the energy market is determined by consumer choices that means both that the prices of energy should reflect its cost and that regulation of energy industry should encourage competition and choice" (World Bank,1956).

 

Donor support market intervention

 

In India development of market are not well organized not only at district, town and village level but also in metropolitan cities. In order to build well structured market the role of donor agencies and their intervention become and important factor. Well structured market helps in keeping and maintaining the quality of products made out of technology applications and these products in turn helps both at consumer level as well as manufactured level benefiting collaterally. This kind of market linked technology application may help micro finance industries to be sustainable benefiting each and every unit and leading to overall development of the rural sector.

                               

Conclusion and suggestions:

          Micro-finance plays an important role in integrating rural development and poverty alleviation. The impact of micro finance on rural development and poverty reduction has been measured in terms of several dimensions such as improved income, employment and household expenditure and reduced vulnerability to economic and social crisis.

   

 However, integrated rural development and technology based programmes leading to incoming generating opportunities for rural population can easily be put on fast track by the use of micro financing.  For implementing these technologies we have to make efforts to examine location specific technologies and its implementation.  People belonging to villages are still unaware of the banking policies and credit systems. They are lacking the knowledge of the technologies available and how micro finance is used. We must make villagers to familiarize about the technologies by conducting training and awareness programmes and the aim of these programmes should be not only on lending and repayment of microfinance but proper use of micro finance for technology implementation. NGOs should also communicate to them and share their views with villagers. Banks should convert and build up professional system into social banking system for poor. While giving micro finance to the villagers the micro finance institutions should also arrange the experts who are aware of how, when, where and which technology is being used and how best they are useful for villagers so that it will build and sustain the rural developmental activities. In these efforts, the Government of India and the State Government should also provide the support for capacity building initiative and ensure transparency and enhance credibility through disclosures.

 

 

 

 

 

 

About the Authors

 

Neeta Aurangabadkar is working as Assistant Professor in the Department of Economics, Vivek Vardhini College of Arts and Science, Hyderabad

 

Dr A D Diwan is former Asstt Director General with the Indian Council of Agricultural research under the Ministry of Agriculture, Govt of India, New Delhi and presently UGC Emeritus Professor, Mahatma Gandhi Mission' Institute of Health Sciences(Deemed University), Aurangabad (Maharashtra state)  

 

 

         

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                                                                   

 

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