It all started somewhere in the middle of 1800s in Europe when people felt the need to think beyond conventional banking concept, and shifted their focus from offering finances to the ones who can afford it, to the people who were deprived of it just for the fact that they have no collateral to offer. Known as credit co-operatives in the beginning, these institutions emerged as a tool to help people overcome poverty and adversities. Micro financing in its full form plays a cardinal role not only in providing finances to the weaker sections but also in offering other allied services to them for instance savings, insurance etc.
Micro-financing albeit started on an experimental basis, has proved itself to be successful. It had emerged as a vibrant industry contributing majorly in the growth of the developing economies in particular and world economy in general. Moresoever, MF takes a centre stage with government of countries like India aiming for financial inclusion. All in all MF steals the show by striving to empower the weaker sections in the society, until the chapter of drawbacks is opened.
What poses a herculean challenge to the MF sector is financial illiteracy in the society, especially in the developing nations. There are other grey areas too, inviting public attention which essentially includes the lack of regulation in the sector, recovery issues, over indebtedness etc. The quantum of issues increases at the international level with a strong need of robust regulation. The operational costs required for microfinance organizations too are really high, while most of the loans taken are on short term basis and that too are without collaterals disturbing the expense – revenue equation.
The pathos of the story is, in countries like India major entities like the central bank of the nation and the finance ministries are not efficiently armed to take the regulatory responsibilities of the MF sector. On one hand where finance ministry is willing to make RBI a regulatory authority for MFIs while on the other RBI feels they lack in resources. And a wide spread of the MF institutions makes it difficult for them to control over. And RBI feels that states are best suited to regulate the small entities which are not registered as companies. Thankfully NGOs like Belstar in association with a German university of Frankfurt School of Finance and Management take up the onus and works for job creation and poverty reduction in India. Belstar provides loans through Self Help Groups.
Everything said and done government and RBI will have to conclude their debate, at least in the interest of millions of borrowers who are banking on the MFIs to build & sustain their sources of income. A regulatory house is the last ray of hope for the millions who believe that it will reduce their problems of high interest rates, non transparent transactions, and abject recovery practices (provoking suicide cases in rural population).We keep our fingers crossed hoping for the best.