Micro Credit and Rural Development - A Case Study of Amritsar

Abstract

Micro credit as a tool of rural development through the development of micro enterprises was introduced to the economy because formal credit institutions (capital markets) and informal lending system either failed to deliver the goods or were not very much conducive to the growth of micro enterprises. As is known, the economic giants of the world developed their economies by relying on formal credit institutions through the development of their capital markets. But the formal credit institutions have on the whole failed to provide credit to the poor in under-developed countries for many obvious reasons (Von Pischke 1991). The micro finance industry in India emerged in the 1970s to provide poor people with access to credit without resorting to the usurious interest rates fixed by informal moneylenders. Because of their weak asset base, poor people are generally unable to fulfill loan guarantees required by traditional banks and remain trapped in a vicious circle of low income, low investment and low revenue. In 1974, SEWA Cooperative Bank was established to help low income women escape this trap and reduce their dependence on moneylenders. Through its success, SEWA bank proved that the poor were bankable and helped pave the way for the emergence of hundreds of micro finance institutions during the 1980s and 1990s. Further, many micro finance institutions fund the loan portfolios through borrowings from commercial and state finance institutions. Such re I inances include the National Bank for Agriculture and Rural Development (NABARD) and Small Industrial Development Bank of India (SIDBI), as well as a number of state and commercial banks. Many other micro finance institutions, however, do not provide direct micro finance services and instead facilitate the formation of Self-Help Groups (SHGs) that generate internal funds and link with formal banks for additional financing.