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How can Microfinance revive an economy?

by | Aug 4, 2021 | Economics | 5 comments

What is a microfinance?

Microloans/ finance are a type of loans that are provisioned to low-income groups of individuals

Microloans assist communities of the economically excluded to achieve a greater level of asset creation and income security at the household and community level. Microloans do not require any collateral.

Note:(The content provide over here are based on India as it is one of the most affected countries by the covid-19 pandemic)

The problem

As per the Indian Express before the dawn of covid-19 35% (265 million people) of the rural population were poor. Woefully the number is expected to rise roughly 50.9-55.8% (341-418 million people) in 2021-22.

To counter this the RBI(Central Bank of India) has started pushing more microfinance companies to open branches in rural areas.

RBI also says microfinance is an economic tool designed to promote financial inclusion which enables the poor and low-income households to come out of poverty and improve living standards.

How it all started

Before the dawn of covid-19, the Indian economy was already in recession because of the demonetization of currency(₹500 and ₹1000) and GST(type of tax).

This has decreased demand from the urban part but at the time in the rural part of the country, there was still demand because a farmer who works on his farm, stays in the month of sowing and harvesting. In the months between the sowing and harvesting session, the farmers go to the city for extra income which they send back to their homes. Which indeed increases the demand from rural India.

During the first covid-19 wave the government had imposed a 3months strict lockdown. Which had crippled the country’s economy which had a growth rate of -14.2% reported by the FICCI in their report of the economic outlook. During the 3months lockdown, the country had an exodus of migrant labourers which led to the massive unemployment rate of 8.2% Urban India and 6.5% Rural India as of July 2021 reported by the CMIE.

What is the goverment doing?

As the government is concerned it’s pushing people to take loans at a low fixed rate interest rate. With the coordination of RBI and the finance ministry, the government is opening cooperative banks, microfinance banks, and also creating SHG(Self Help Group).

mortgage documents signing

As microfinance loans don’t require collateral they are famous in the rural economy but there are also private lenders in the villages which rural people prefer over a bank and microfinance company because they think banks ask a lot of paperwork for giving loans. To overcome this, the government is helping rural villages by helping to create SHG.

The government is also providing schemes to pull people out of poverty, increase their income and improve overall living standards

The way forward

For reviving the Indian Economy is financial literacy to the people, provide cash to the needy, provide low-interest loans (fixed rate) to the entrepreneur (includes Traders, manufacturers aka any sector) and learn from the 3 r’s of FDR (32nd USA President).

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