Contribution of Microfinance Sector to India’s Gross Value Added likely to grow

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Contribution of Microfinance Sector to India’s Gross Value Added likely to grow

According to a recent study by the National Council of Applied Economic Research (NCAER), the contribution of microfinance to India’s Gross Value Added (GVA) is likely to increase.

According to a study by NCAER, the microfinance sector contributed about 2% to India’s GVA in the year 2018-19 and about 5.5% to the entire financial sector.

GVA is a method of measuring the productivity of an economy.

Microfinance refers to financial services provided to low-income individuals or groups. These people or groups are usually deprived of traditional banking services.

The Malegam Committee (2011) helped establish the microfinance sector as a legit asset class (legal asset class).

Delivery Model of Microfinance in India:

  • Self-Help Groups (SHGs) Bank Linkage Program (SBLP): The history of the microfinance movement in India can be traced back to the SHG-Bank Linkage Program. It was started as a pilot project by NABARD in the year 1992.
  • Micro-finance Institutions (MFIs) such as Non-Banking Financial Companies (NBFCs), Cooperatives etc. are regulated by the Reserve Bank of India.
  • Bank partnership model
  • Banking correspondent

Importance of Microfinance:

  • Due to this, women empowerment has been encouraged by giving loans directly to women.
  • This has increased the status of women in the family, community and society at large.
  • It promotes financial inclusion to enable poor and low-income households to come out of poverty, increase their income levels and improve overall living standards.
  • Loans are provided to the poor without any collateral.
  • It also helps in employment generation.

Challenges of Microfinance:

  • The borrowers owe a lot of debt.
  • The interest rate is comparatively very high.
  • Microfinance institutions are heavily dependent on commercial banks for their funds.

Source – The Hindu

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