




































 

 

ISSN : 2693 6356 

2023 | Vol 6 | Issue 1 

 

INSTITUTIONS OF MICROFINANCE AND THE PROGRESS OF RURAL AREAS 

K.Sravanthi , K,Sandeep , C.H .Ashok 
Assistant Professor1,2,3 

Bharthi Institute of Management 

 

 
             Article Info 

                                      Received: 01-11-2022   Revised: 20 -12-2022   Accepted: 14-02-2023     

 
 

 

INTRODUCTION 

Microfinance, in its first iteration, meant 
giving small loans to low-income families so 

that they could take part in productive 

activities or build their small businesses. 

Reference: (F.A.J. Bouman et al., 1990) 

Microcredit, microsavings, and 

microinsurance are now all included in the 

broader category of "microfinance." As a 

consequence, the goal of microfinance is no 

longer limited to the provision of small loans 

but rather the coordination of microfinance 

with other forms of development. Microfinance 

has risen to the forefront of public welfare 

policy as a strategy to promote economic 

growth in undeveloped areas and social 

groups. 

Microfinance institutions (MFIs) offer a wide 
range of financial services to low-income and 

working-class individuals and their 

microenterprises, including deposits, loans, 

payment services, money transfers, and insurance. 

In the dictionary definition of micro-finance, it 

refers to "financial services such as savings, 

insurance, funds, credit, and other financial 

products that are supplied to poor and low- income 

customers to assist them in increasing their income 

and consequently improving their quality of life." 

A 1999 report by the National Micro-finance 

Taskforce concluded that "the poor remain 

poor not because they are lazy, but because 

they do not have access to financial resources." 

Micro-finance refers to the distribution of very 

tiny amounts of savings, loans, and other forms 

of capital to low-income people in rural, semi-

urban, and urban areas.increase in income and 

better living conditions" 

IMPORTANT FEATURES OF MICRO- 

FINANCE 

1. Micro-finance is a critical component of 

 

 
Abstract 

Microfinance allows low-income and marginalized people who lack access to conventional banking to build wealth, 

broaden their sources of income, and become more resilient in the face of economic hardship. Microfinance refers to 

a wide range of financial services targeted on low- and middle-income earners and their small businesses, including 

loans, deposits, payment services, and insurance. Microfinance institutions have had a significant impact on the lives 

of the poor around the globe, raising incomes and improving living conditions in rural, semi-urban, and urban areas 

alike. 

Keywords: Microfinance, Women's Self-Help Groups, Agricultural Expansion, and the Fight Against Poverty 



2. It is one of the most successful and well- 

justified Poverty Alleviation Strategies 

available today. 

 

3. It offers an incentive for low-income 

persons to pursue self-employment options 

if they areavailable. 

 

4. It is more concerned with providing 

services than with making a profit. 

 

5. It is intended to provide assistance to small 

business owners and producers. 

 

6. Because they are simple and God- 

fearing, poor borrowers are seldom 

defaulters on their loan payback 

obligations. 

 

7. India requires the establishment of a 

number of microfinance organisations. 

OBJECTIVES OF THE STUDY 

The precise aims of the research are as 

follows: 

1. To examine the role of 

microfinance businesses in the social 

and economic development of India; 

and 

2. To examine the role of microfinance 

firms in the growth of the Indian 

economy. 

3. To determine the role played by 

microfinance via SHGs in the 

advancement of social and 

economic development. 

 
3. To investigate the role of SHGs in 

India's rural development efforts. 

ROLE AND SIGNIFICANCE OF 

MICRO-FINANCE 

Micro-finance contributes to social 

and economic development of the nation 

in the following ways: 

1. Because of their limited financial 

resources and incapacity to deal with 

banking processes and documents, poor 

individuals are unable to receive banking 

services. Microfinance enables a broad 

variety of financial services, including as 

deposits, loans, payment services, money 

transfers, and insurance, to be made 

available to low- income and working-

class people, as well as their micro- 

enterprises, via a single channel. 

2. Microfinance institutions, via their 

non-governmental organisations (NGOs), 

help disadvantaged individuals build 

saving habits. A portion of the financial 

resources created via savings and 

microcredit received from banks is used to 

give loans and advances to members of 

Self-Help Groups (SHGs). As a result, 

microfinance organisations aid in the 

mobilisation of savings and the use of 

these funds for the benefit of its members. 

Poor individuals are unable to get loans 

from the traditional banking system 

because they lack the necessary collateral 

or counter-guarantee, which they cannot 

provide. Once again, high interest rates, 

as well as lengthy loan application and 

paperwork processes, discourage 

impoverished individuals from seeking 



financial assistance from banks. 

Microfinance removes all of these 

stumbling blocks and offers low-interest 

loans to rural and low-income people on 

favourable conditions. 

 
4. Micro-finance enables the weaker 

sectors of society to get loans at lower 

interest rates, enabling them to start their 

enterprises on a small scale, build their 

businesses, and eventually lift themselves 

out of poverty and become self-sufficient 

and independent. It contributes to the 

development of long-term financial 

independence among the weaker sectors 

of society, and as a result, it encourages 

people to become self-sufficient. 

 
The provision of micro-finance is made 

possible via the intermediation of Self- 

Help Groups (SHGs). In the United States, 

more than half of all Self-Help Groups 

(SHGs) are started by women. They now 

have better access to financial and 

economic resources as a result of this. It is 

a significant step forward in providing 

better protection for women. As a result, 

microfinance provides underprivileged 

women with economic and social 

empowerment. 

6. Typically, the rural sector relies on non-

institutional organisations to meet their 

financial obligations, and as a result, 

they are abused in a variety of ways. 

Micro-finance has shown to be effective in 

reducing poverty. 

EXISTENCE OF MICRO FINANCE IN 

INDIA 

 

 
The term "microfinance" was first 

used in the 1970s, at the same time as 

organizations like the Grameen Bank 

of Bangladesh, founded and run by 

microfinance pioneer Muhammad 

Yunus, were laying the groundwork 

for the modern microfinance industry. 

In the early 1970s, the Self Employed 

Women's Association ("SEWA") of 

the state of Gujarat founded the Shri 

Mahila SEWA Sahakari Bank, an 

urban cooperative bank, with the aim 

of providing banking services to low- 

income women who were self- 

employed or otherwise financially 

independent. In the 1980s, the concept 

of SHGs (or self-help groups) was 

developed, and these informal 

organizations were given the 

responsibility of providing savings 

and credit services to its members. 

Due to its size and population (about 

a billion people), India's GDP is in the 

top 20 of the world's economies. 

However, there are over 400 million 

people who live in poverty, or about 

60 million households. Predictions 



also show that just around 20% of 

these households have access to 

formal funding, highlighting the 

underserved nature of the informal 

economy. Another major issue is the 

large proportion of rural residents who 

lack access to reliable financial 

intermediary services like banks and 

savings institutions. Giving the poor 

access to credit under fair terms has the 

potential to significantly alleviate 

poverty. Therefore, microcredit is 

crucial in the context of India. 

Concerns and difficulties prohibit 

microfinance from reaching the most 

vulnerable, as shown by the fact that 

approximately 60 million households 

are living at or below the officially 

defined poverty level and that more 

than 80% of the population cannot 

receive credit at reasonable rates. As 

the graph below shows, the prospects 

of unskilled and illiterate people have 

not increased at the same rate as the 

rest of the economy despite 

globalization and economic 

liberalization. Institutions involved in 

microfinance have a crucial role in 

reducing economic inequality and 

making significant contributions to 

rural development, both of which are 

crucial to the expansion of the 

economy as a whole. 

MICROFINANACE AND 

POVERTY REDUCTION FOR 

RURAL DEVELOPMENT IN 

INDIA 

According to government data, more than a 

quarter of India's population is poor. The 

World Bank estimates that between 260 and 

290 million people in India are living in 

extreme poverty; this number jumps to over 

390 million when measured against the 

international poverty line of those surviving 

on less than $1.90 per day in India. roughly 

half of India's poor, or roughly 133 million 

people, live in only three states: Uttar Pradesh, 

Bihar, and Madhya Pradesh. The widening gap 

between urban and rural communities in India 

has resulted in three- quarters of the country's 

poor living in rural areas. The Indian 

government has made poverty reduction a top 

priority, investing heavily in infrastructure, 

social development (especially education and 

health), and rural livelihoods. To reduce 

poverty, microfinance institutions (MFIs) 

focus on enhancing rural communities. Most 

people living in poverty are able to slowly 

increase their wealth by investing in 

companies and real estate. The provision of 

financial services has the potential to 

encourage the economically disadvantaged to 

take charge of their own lives and speed up the 

process of building wealth. 

Banks and other lenders often avoid giving 

loans to low-income households or those run 

by women because of the perceived high 

default rate associated with such borrowers. 

However, many families with self-employed 

breadwinners experience fluctuations in 

income over time. Lenders would rather deal 

with fewer, larger loans than a large number 

of smaller loans since the former reduces 

administrative costs while the latter does not. 

They're also on the lookout for guarantees, 

something that's out of reach for many low- 

income families. Repayment rates are higher 

and loan funds are put to better use when given 

to low-income borrowers who are given 



access to rapid, responsive financial services 

at market rates, as shown by recent success 

stories in providing finance to small businesses 

and manufacturers. This is hardly unexpected, 

considering that they can only realistically get 

funds via the black market. 

Community banks, non-governmental 

organizations (NGOs), and credit groups all 

around the world have found success in 

providing microenterprise loans, making 

microfinance one of the most effective 

strategies for alleviating poverty. 

 
MICROFINANCE AND SELF HELP 

GROUPS (SGHs) FOR RURAL 

DEVELPOMENT 

Microfinance in India is mostly based on 

two approaches: the Self-Helpgroups 

technique and the Grameen system. An 

SHG is an unofficial group with typically 

10-20 members that meets once a 

week. The members of the SHG have come 

together with the express objective of 

facilitating the provision of savings and 

credit services to its members. These 

benefits are made possible by members 

pooling their money to establish a shared 

fund. In order to empower members, the 

SHG process and social involvement are 

intended to be instruments of 

empowerment, building the capacity of 

members to eventually conduct and 

manage SHGs on their own behalf, and 

enabling them to have greater autonomy 

in financial decision-making as well as 

broader social participation. Meetings of 

the SHG are scheduled to take place at 

regular intervals and at a predetermined 

hour. Members of the group are recruited 

from the same socioeconomic tier as one 

another, and they operate on the principle 

of equal participation and contribution 

from all members. At any one moment, the 

groups are headed by one of the group's 

lead members; this position is often rotated 

to allow for capacity development among 

all members. A structured meeting process 

is used to ensure that all financial 

transactions, group decisions, and activities 

are accurately recorded and kept up to date. 

Once founded, SHGs are urged to form 

alliances with other SHGs and, ultimately, 

with financial institutions in order to get 

access to more financial aid and resources. 

This programme, which began as a pilot 

programme in 1992 to link 500 SHGs with 

banks and has grown exponentially over 

the last two decades to provide regular 

savings opportunities to over 97 million 

rural households through the network of 

74.12 lakh SHGs that are linked to a variety 

of financial institutions. 



SHG Savings with Banks as on 31st March 

 
2011-12 2012-13 2013-14 2014-15 2015-16 

No. 

Of 

SHGs 

Amount No. Of 

SHGs 

Amount No. Of 

SHGs 

Amount No. Of 

SHGs 

Amount No. Of 

SHGs 

Amount 

74.12 7016.34 73.18 8217.25 74.30 9897.42 76.97 11059.84 79.03 13691.39 

Table 1. Progress of Micro-Finance in India (Amount Rs. In crore /Number in lakhs) 

 

 

Source: Report on Micro-finance. 
 

 
 

No. of SHGs 

79.03 

76.97 

74.12 74.3 

73.18 

2011-12 2012-13 2013-14 2014-15 2015-16 



MICRO-FINANCE – CHANGING THE 

FACE OF POOR INDIA 

Micro-finance is emerging as a significant 

tool for poverty reduction in the new 

economy, particularly in developing 

countries. In India, the Self-Help Groups 

(SHGs) – Banks Linkage Program (BLP) 

dominates the microfinance industry. The 

BLP is designed to provide a cost- effective 

system for delivering financial services to 

the "unreached poor." When referring to 

microfinance consumers in India, words 

such as "small and marginal farmers," 

"rural craftsmen," and "economically 

disadvantaged groups" have been used to 

describe them in broad terms. 

In recent years, a more sophisticated form 

of micro-credit distribution has emerged, 

emphasising the supply of financial 

services in conjunction with technical 

support and agricultural business 

development activities. When compared to 

the broader SHG bank linkage movement 

in India, private MFIs have had a very little 

impact on the ground. There has been a 

recent trend of major micro-finance 

institutions transitioning into "Non-Bank 

Financial Institutions," which we have 

observed (NBFCs). This shift in the face of 

microfinance in India looks to be a good 

development in terms of the potential of 

microfinance to attract more 

money and, as a result, broaden the reach 

of its services. There are three groups of the 

population that are in need of micro- credit 

or micro- finance, according to the need for 

finances. People without land and engaged 

in seasonal agricultural employment, as 

well as manual labourers employed in 

forestry, mining, domestic industries, 

construction, and transportation are among 

those at the very bottom of the income and 

asset distribution scale. Firstly, this section 

wants spending credit during the months 

when they do not have labour job as well as 

for eventualities such as sickness and 

accidents. They also need loans in order to 

acquire modest productive assets like as 

cattle, which they may then use to create 

more revenue for themselves. 

 

In the next section are small and marginal 

farmers, rural craftsmen, weavers, and 

those self- employed in the urban informal 

sector, such as hawkers, vendors, and 

employees in home microenterprises, 

among other groups. This category is 

mostly in need of credit for working 

capital, with a minor portion of that credit 

also being used to meet consumption 

demands. The agricultural sector also 

requires term loans for the acquisition of 

new productive assets, such as irrigation 

pumpsets, bore wells, and animals in the 

case of farmers, as well as equipment 



(looms, machines, and work sheds) in the 

case of non-farm employees. 

This market category consists of small and 

medium-sized farmers who have invested 

in commercial crops such as excess paddy 

and wheat, cotton and groundnuts, and 

others who are involved in dairying, 

poultry, and fisheries among other 

activities. Maintaining provision stores, 

repair workshops, tea shops, and a variety 

of service businesses are examples of non- 

farm activities. These individuals are not 

necessarily impoverished, despite the fact 

that they live just over the poverty line and 

have little access to formal credit. 

 
These are the individuals who need 

financial assistance, which is made possible 

via micro-finance. Right now, the difficulty 

is that it is SHGs who are doing this, and 

steps should be taken to ensure that the 

large financial institutions also show up 

and begin contributing funding to these 

individuals and organisations. This would 

result in a better India and will undoubtedly 

help to realise the ambition of our late 

Prime Minister, Mrs. Indira Gandhi, of 

decreasing poverty in the country. As Adam 

Smith put it, "When you have a little, it is 

sometimes simple to obtain more, but the 

greatest problem is in getting the little." 

India is now confronted with a significant 

challenge in  terms of 

poverty reduction. In India, over 25 

million people live in poverty or below the 

poverty line. India is one of the poorest 

countries in the world because of its low 

per capita income, high population 

pressure, prevalence of massive 

unemployment and underemployment, low 

rate of capital formation, misdistribution of 

wealth and assets, prevalence of low 

technology and poor economic 

organisation, and instability of output in 

agriculture production and related sectors. 

CONCLUSIONS 

By enabling the poor, and especially low- 

income women, access to loans and the formal 

financial system, these organizations have 

expanded the possibilities of institutional 

finance. The government is concerned about 

the uneven expansion of microfinance 

throughout the country and the considerable 

variation in interest rates paid to members. 

Microfinance, a crucial component of poverty 
reduction programs, may make a major 

contribution to fixing the problem of 

inadequate housing and urban services. The 

challenge is in figuring out how much leeway 

to provide the credit instrument so that it may 

accommodate the various credit demands of 

low-income borrowers without forcing lenders 

to bear an unfeasibly high expense of 

monitoring its end-use. The time period 

between the launch of a new economic activity 

and the beginning of the creation of positive 

profits is identified as one in which the 

consumption loan is especially useful. The 

impoverished have been proved to be capable 

of repaying loans and willing to accept higher 

interest rates via successful microfinance 

operations. Microfinance organizations 

should provide possibilities for the poor to 

save, since the poor are also savers. 



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