8 October 2024 : Daily Answer Writing

Q1) Critically assess the role of microfinance in satisfactorily addressing the interconnected challenges of poverty and unemployment.

(150 Words/10 Marks)

ANS

Microfinance refers to small loans and other financial services designed, specifically for poor and low-income households who face difficulties in accessing formal finance. RBI has defined microfinance as any collateral-free loan provided to a borrower with annual household income of up to ₹3 lakh. Also, repayments during the year cannot exceed 50 per cent of the annual household income.

Microfinance is an economic tool designed to promote financial inclusion which enables the poor to break-free from the interconnected challenges of poverty and unemployment in following ways:

1. Microfinance increases income-generating activities among the poor. For example, in Bangladesh, Grameen Foundation has helped women escape poverty by supporting income-generating ventures like tailoring, weaving etc.
2. Empowerment of women through dedicated MFIs and SHGs has wider implications for improvements in social indicators like health and education. It builds human capital which is crucial to break free of poverty-unemployment cycle.
3. Microfinance helps the poor in building resilience against unexpected economic shocks or health emergencies. This protects the poor from falling back into the poverty trap.
4. Microfinance gives poor access to institutional credit, which enables them to escape the clutches of loan sharks and their high interest rates.
5. Microfinance creates entrepreneurial synergies by bringing together people with common interests and diverse capabilities, such as through SHGs. In the process, it helps to address issues like lack of jobs, migration etc.
6. High repayment rates of microfinance make it a sustainable channel for financial inclusion of the underserved and vulnerable sections.

Despite its numerous advantages, microfinance also suffers from challenges, such as:

1. Interest rates are high. The social pressure and shame associated with default has led to problems like secondary debt and suicides.
2. Microfinance operates very much within the patriarchal system. For example, microfinance funds are used to send husbands or sons abroad for work, while the woman is saddled with debt.
3. Many of the microfinance loans are used for non-income generating purposes, including for dowry payments or to pay off unpaid debt.
4. Covid-19 has reduced the capability of the poor to pay-back loans, leading to defaults.
5. Microfinance penetration is much lower in rural India. There is also a regional divide with eastern parts of the country lagging behind.

Microfinance is a promising model to help the poor escape poverty-unemployment through creation of economic and social good. The inherent challenges need to be addressed to create innovative financial products and scalable solutions to catalyze entrepreneurship at the bottom of the pyramid as a way to break the poverty-unemployment cycle.