Grassroot problems $30 finance trying to address

In India, almost 36% of the rural population do not have access to the formal banking services. Although, India has a good network and outreach of banks in the rural areas, but a small number of population has been served by these banks and specifically, low income generating clients have been left out. As a result, this 36% population has mainly relied on informal money lending sector for fast access to money whose exorbitant interest rate reinforces the indebtedness that ultimately results in life time poverty for the poor.

One of the main goals of UN’s Millennium Development Goals (MDGs) is “Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a day.” Providing microfinance services to poor people is cited as one of the effective mechanism to alleviate poverty. There are evidences that corroborate this claim – notable example is Grameen bank which helped transform lives of more than 7 million disadvantaged and marginalized women in Bangladesh. It is apparent that Microfinance Institutions (MFIs) can play an important role in the social and economic development of poor communities. MFIs are the institutes that seek to provide credits to low income household and small informal businesses. Access to (micro) credit enables households to accumulate assets including wealth, which allow them to better cope with their economic and social vulnerabilities. In India, MFIs include non-governmental organizations (NGOs), not-for-profit bank financial intermediaries, and even a few commercial banks. Even though the there is a realization of the potential of microfinance in reducing poverty and empowering low income generating clients, replicating the success story of Grameen Bank is still far from reality. That said Indian government has taken some right steps to promote MFIs in the country. One of the steps is acknowledging the fact that Information and Communication Technologies (ICT) has an important role to play to leap frog the banking sector in the delivery of quality and timely financial services to the remotest areas with significant efficiencies.

As briefly touched upon in the previous section, the problem we are trying to address is the wide gap that exists in the availability of financial services to poor (rural or urban slum) population. It is important to address both demand and supply side of the problem. As far as demand side is concerned, following are the notable reasons for the exclusion of large number of rural population from the formal banking sector:
• Lack of collateral security
• Lack of banking habits and credit culture
• The loan amount is too small to catch the attention of profit oriented banks
• Due to small loan amount and high number of accounts, the transaction costs is high
• Lack of infrastructure and mechanisms to monitor and evaluate the cash flows
• Lack of credit history for the low income clients
• Presence of information asymmetry and lack of data base
• Physical constraints for reaching out to some of the remotest part of India
• Human resource related constraints in terms of lack of manpower and expertise

Further, the supply side reasons for this exclusion are as follows:
• High transaction costs at client (borrower) level such as travel costs, incidental expenses
• Lack of awareness mainly due to illiteracy
• Very small amounts – not encouraged by formal banks
• Efforts and resource involvement in documentation and procedures in the formal system for serving big number of clients
• Prior experience of rejection by the formal banks

The above mentioned reasons are very general and applicable to most of the rural parts in India. These reasons are also complemented by other factors influenced by local condition, caste structure etc.