Research Journal of Humanities and Social Sciences

Abstract

Microfinance term is used as a source of financial services for poor and self-employed who lacking access to conventional formal banking institutions. The two main mechanisms for the delivery of financial services are: (1) relationship-based banking for individual poor and small businesses; and (2) group-based models, where several entrepreneurs come together to apply for loans. More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers. India, has largest population in the world after China. Around 70 percent of its population lives in rural areas and more than 55 percent still depend on agriculture and allied activities. As a result, there is chronic unemployment and per capita income is relatively low in rural areas. Rural people have very low access to institutional sources of credit. Microfinance has been one of the effective tools amongst many for poverty alleviation programmes. However, it should be used with caution despite recent claims, the equation between microfinance and poverty alleviation is not straight-forward, because poverty is a complex phenomenon. We need to understand when and in what form microfinance is appropriate for the poorest; the delivery channel, methodology and products offered are all inter-linked. Access to formal banking services is difficult for the poor. The main problem before the poor when trying to acquire loans from formal financial institutions is the demand for collateral security.

In addition, the process of acquiring a loan entails many bureaucratic procedures, which lead to extra transaction costs for the poor. Formal financial institutions are not motivated to lend money to them. In general, formal financial institutions show a preference for urban over rural sectors, large-scale over small scale transactions, and non-agricultural over agricultural loans. This paper attempts to analyze the growth of microfinance sector, its role in poverty alleviation. It also focuses on the structure and pattern of SHG 'Parivartan' in urban Alwar district of Rajasthan along with the issues and challenges faced by microfinance institutions followed by remedial observations and conclusion.

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