From margin to mainstream through microfinance

“Microcredit plays a critical role in empowering women and helps deliver newfound respect, independence, and participation for women in their communities and households.” - Juan Somavia, Former Director-General of the International Labour Organisation (ILO).

What the former Chilean head of the ILO articulated nearly ten years ago still resonates deeply in India and the developing world. Various studies over the years have conclusively proved that microcredit/ microfinance to poor rural and urban women provides self-confidence and self-esteem as the “first steps” toward empowerment. This, in turn, has enhanced their bargaining capacity, reduced violence, and enabled them to influence the family’s decision-making significantly.

In their paper, researchers Puhazhendhi V and Satya Sai (2001) argue that “microfinance has given rural women an excellent opportunity to attain reasonable economic, social and cultural empowerment, leading to better living standards and quality of life for participating in households. According to CGAP, long-standing MFIs even report a decline in violence towards women since the inception of microfinance.

Providing microcredit to women has proved to be a boon for other family members. There has been a substantial improvement in full-time school enrolment and reduced drop-out rates among children, especially girls, in these families. Studies have also shown that the income generated from such microenterprises is first invested in children’s education, better health practices, and nutritious food resulting in a higher quality of life.

Microfinance companies also focus on women borrowers because they enjoy a better track record of making timely repayments than their male counterparts. They also contribute a significant portion of their income to household consumption, thus creating a solid business and public policy case for giving loans primarily to female borrowers.

The main aim of microfinance is to empower women by providing financial services to low-income clients, who traditionally lack access to banking and related services. Microfinance also besides credit provides other essential financial services to millions who are too poor to be served by regular banks because they cannot offer sufficient collateral.

What is most heartening is the impressive growth in the microfinance sector over the years. In the past ten years, the sector has grown 16.5 times from Rs 17,364 crore as on March 2012, to Rs 2,85,441 crore as on March 31, 2022. Banks hold the largest share of the portfolio with total loan outstanding of Rs 1,14,051 crore, which is 40.0% of the total micro-credit universe.

NBFC-MFIs are the second largest micro-credit provider with a loan amount of Rs 1,00,407 crore, accounting for 35.2% of the total industry portfolio. Small finance banks have a total loan amount outstanding of Rs 48,314 crore with total share of 16.9%. NBFCs account for another 6.9%, and Other MFIs (39) account for 1.0% of the universe.

The new regulations announced by the RBI will provide further boost to microfinance by allowing more operational flexibility and thereby allowing for innovations through improved products and services.

Similarly, the National Bank for Agriculture and Rural Development (NABARD), with its “Self-Help Groups (SHG) - Bank Linkage" model, touches 14.2 crore households and 119 lakh SHGs. It has a cumulative savings of Rs 47,240.48 crore as on March 31, 2022, and a credit outstanding of Rs 1,51,051.30 crore during the same period. And of the total SHGs, nearly 88% are exclusively for women.

There is enough evidence to show that members of self-help groups and other micro-entrepreneurs have been producing a range of products like ropes, jute bags, sanitary napkins, pottery products, artificial jewels, sarees, hand-made paper products, sweets, pickles, ready-mix powders, etc., across India, adding to their family income.

By contributing to a woman’s ability to earn, microfinance companies have the potential to start a “virtuous cycle” of economic empowerment, increased well-being for women and their families and broader social and political role, essential for achieving gender parity and changing men’s attitudes and behaviour towards women.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)