Organizations that offer financial and banking services to low income people are called Micro Finance Institutions (MFI). Low income population, more specifically poor people, who do not have any assets for mortgage formally and/or proper employment cannot get credit benefits from the mainstream financial institutions like banks. These MFIs accesses financial resources (money) from the banks and give the poorer people the benefit of credit. Their prime target is to help microentrepreneurs (from the low level income strata).
Some of the main goals MFIs try to achieve through their services are to understand and identify what helps people to move out of poverty by creating self-employment opportunities. And, they also provide financial resources to the under-previleged and train them in putting the resources to their best use and generate income and employment through it. Micro financing is also profitable because if properly it can generate upto 50 percent returns on investment and it also helps the clients to pay higher interests.
One of the major challenges that our MFIs come across in promoting micro-financing is the client illiteracy and lack of experience managing their finances. This requires people trained in micro-finance to deal with people in training them, and their unavailability affects the growth of the organization. And other challenge is in distributing the funds that government releases in support.
The Indian Scenario
Major Indian population resides in villages, and there has been a consistent effort by various governments after independence to develop rural India. The governments have tried to reduce poverty by providing grants, subsidies and credit through the main-stream banks. But these schemes proved to non-profitable for the banks and often led to their misuse. And it was also ineffectiveness on the governments' side in helping out the targeting beneficiaries. This scenario gave a platform for local money lenders to dominate the poor by lending money at exorbitant interest rates, which often leads to selling of assets and suicides due to inability to pay the debts. This has also led to the urban migration in search of a better living. With this, India adopted the micro-credit concept.
Just like anything else, the MFIs could not even protect themselves from the face of corruption in India. These non-profit organizations with a 25,000 Crore INR industry gradually turned out to operate for profits. And these "for profit" MFIs have grown spectacularly in the recent times by charging greater interest rates. Which made, MFIs a paradox in India. A recent study revealed about the coercive practices used by some MFI agents to recover the loans. There were incidents which have led to lots of suicides in the recent past, and which were allegedly coerced by the agents so that the loan money gets repayed through their insurance. And, government has recently taken steps to monitor these MFIs after they have faced the allegations at various levels.
But do these people, who face hardships through out their life for making a living, need to face exploitation at this level also?