Growing Trend of Micro Finance Institutions (MFIs) in Mysore

Customers prefer to take financial services from Microfinance Institutions (MFIs) rather than formal financial institutions, indicating a positive sign for the economy. MFIs provide financial support to people who are not in a position to approach banks for loans, whereas banks demand high amounts of security as compared to the amount of loan, creating a financial burden. The growth potential of microfinancial institutions is closely affected by economical conditions at the national and global level.

Literature Review

Table of Contents
Literature Review.............................................................................................................................1
a. Importance and growth aspects of micro finance institutions................................................1
b. What is economic downturn as well as its impact upon the economy and micro finance
institution.....................................................................................................................................4
c. Interrelationship between the global economic downturn and growth of micro finance
institution.....................................................................................................................................8
REFERENCES..............................................................................................................................10

Literature Review
Literature review represents the theoretical analysis of secondary data sources. In this,
researcher critically evaluates the books, journals and research paper to find out valuable insight
in relation to the subject matter (Goudarzi and Ramanarayanan, 2011). It provides more
assistance to the researcher in accomplishing the research in an effective manner. In addition to
this, it also develops understanding about the subject area along with their advantages and
disadvantages. It acts as a guide which helps the researcher in getting depth knowledge about the
topic.
Micro finance institutions can be defined as a those institution who offers financial
assistance to the lower income group at very concessional rates. Micro finance institution plays a
significant role in the growth and development of the economy. This literature review aims at to
evaluate the economic down turn at global level in the recent past. Besides this this, it also
critically assess the potential growth of micro finance institutions in Mysore. Along with it, it
also critically discuss the relationship between global economic downturn and growth of micro
finance institution in Mysore.
a. Importance and growth aspects of micro finance institutions
Micro finance institutions refer to those institutions which provide financial assistance to
lower income group or segment of the people. They offer financial services to the entrepreneur
and small sized business organization which are unable to approach bank to meet their financial
requirements. It includes credit union, commercial bank, cooperatives and other government
institution who offers loan, depository and other financial services to the customers (Karlan and
Valdivia, 2011). Cooperative banking can be defined as a retail banking institution which takes
deposits and offers lending facilities in most part of the world. Cooperatives work on the basis of
the different values such as self responsibility, equality etc.
In addition to this, credit unions are termed as nonprofit financial cooperatives who offer
savings, credit and financial services to their members. It is the group of people who belong to
specific community, religion and place of employment. In this, each member of the group
deposits fixed amount in union as per the predetermined norms (Kothari, 2010). Besides
deposits, it also renders lending facility to members of the group at very concessional rate as
compared to the other sources of funding. Along with it, repayment loan system of credit union
is also very simple as compared to the other financial institutions.
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As per the view point of Peters and et.al. (2012) micro finance institution helps poor and
unemployed people which further contribute in reducing the rate of the poverty.
In the present scenario, micro finance institutions play a significant role in promoting the
economic development. This statement is argued by that it is not necessary that financial
assistance provided by micro finance institution contribute in the economic development.
Growth and economic development of the country highly depends upon effective concept,
strategies and policies framed by the entrepreneur. For example: If entrepreneur fails to make
optimum utilization of finance which are provided by the micro institutions then growth and
development aspects in negatively affected. Thus, it is very difficult for the financial institution
to assess that which investment gives positive result or not.
According to Kothari (2010) micro finance institution also contributes in economic
growth by supporting the entrepreneur and small sized organizations. Micro finance institution
offers financial support to the entrepreneurs at very concessional rates as compared to other
financial institutions. Through this, micro finance institution encourages the entrepreneur to
think unique or something different. By providing financial services, micro financial institution
provides opportunity to the entrepreneur to implement their new ideas and strategies. Through
this, entrepreneur also assists in raising standard of living of the people. In addition to this,
micro finance institution also plays crucial in development of sector such as agriculture and other
aspects.
Due to lack of the sufficient fund farmers are unable to produce grains by taking into
consideration the most effective and innovative techniques. In this condition, micro financial
institutions provide assistance to the farmers by fulfilling their financial needs and requirements
at the cost effective rates. Prosperity of the country is highly dependent upon agricultural aspects.
In addition to this, micro finance institution secures farmers and rural people from the
exploitation of money lenders. However, it is to be critically evaluated by the Peters and et.al.
(2012) that still there are large number of people who take financial assistance from the money
lenders due to the low awareness towards these institutions.
As per the view point of another Venkatesh and Vanishree, 2014 micro finance
institutions encourages rural people to save their money. By introducing attractive rate of interest
on the deposits micro institutions can develop the saving habit among the individuals. MFI's
plays a vital role in reducing the gap between formal financial institution and rural people. In the
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present era, large number of borrowers prefers to take financial assistance from micro financial
institution in comparison to other institutions. Along with it, micro finance institution focuses on
understanding the needs and requirements of poor people. Through this, they are able to deliver
best services to the lower segment of the people by complying with their needs.
Growth aspect of the micro finance institution is high over past decades. As per the view
point of VenuGopal and Rao, 2014 due to the easy procedure to take financial assistance and
cost effective interest rates large number of people prefer to approach MFI's. During the period
of 2003-2008 micro financial institutions have grown by 21%. Along with it, the portfolio of
organization has also grown by an average of 34% in the same period. Micro institutions provide
financial support to the backward people which help the country in decreasing size of
unemployed people. Besides this, they also help farmers and rural people who facilitate
economic growth and development in the country. Thus, it can be said that growth potential of
the micro finance institution is very high as compared to other financial institution or sector.
However, it is to be critically evaluated by Boyer and Blazy (2014) that growth potential or
performance of micro finance institution is highly dependent upon favorable economic
conditions and policies. Customer preference and needs are also affected by the economic
condition which takes place within the country. Economic crisis which takes place at global level
also affects the growth potential of micro finance institution. In 2008, there is the high slowdown
in the economy due to which many micro institutions were forced to wind up many branches.
Thus, economical conditions and aspects also place significant impact upon the growth aspect of
micro finance institutions.
In accordance to Yadav (2014) the growth aspect of micro financial institution can be
visible in many aspects. More than 800 NGOs are involved in delivering financial services to
the customers. Along with it, approximately more than 350 new cooperatives provide thrift and
credit services to people. In addition to this, formal financial institution has failed to fulfill the
financial needs of poor people. By realizing this fact micro financial institution has started to
provide financial assistance to lower segment of the people. All the above mentioned aspects
show that the growth aspects of micro finance institution are very high as compared to the other
finance institutions.
According to the view point of Alem and Townsend (2014) there are many sub hubs of
Mysore which are still not developed. In addition to this, there are many rural people are resides
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in Mysore who approach micro financial institutions to meet their financial needs and
requirements. Micro institutions which are established in Mysore provide financial services and
assistance to the lower income group of the people who economic background is not very strong.
Micro financial institution which works in Mysore plays a significant role in making contribution
in the organizational growth and development. Statistics of Mysore states that people of this city
prefers more to take financial assistance from the micro financial institution. Moreover, micro
institutions provide funding at the concessional rate. This aspect attracts entrepreneurs and small
business organization to approach MFI's for the financial support. In addition to this, micro
financial institutions that operate their business in Mysore provide high interest on deposits as
compared to the other financial institution.
In addition to this; MFI's gives more priority to the backward and rural people in
comparison to the people who have strong background. Thus, growth aspects of micro financial
institution are very high in Mysore. However, it is to critically evaluate by Alum and Townsend
(2014) that growth of the financial institution is not only dependent upon the demand and needs
of the customers. Economical situation or aspects such as inflation and deflation closely affects
the growth potential of micro finance institution. As activities and operations of micro financial
institution are not only restricted to national level but also they are also affected by the
happening which takes place in the international market. Any changes which take place in the
global market highly impact the activities and functions of micro financial institution. Thus,
micro finance institution shows growing or emerging trend but economical crisis which arose in
the past place negative impact upon such kind of institutions.
b. What is economic downturn as well as its impact upon the economy and micro finance
institution
Economic downturn refers to the slowdown in the economic activity of the country. As
per the view point of Fletschner and Kenney, (2014) economic downturn is the part of the trade
or business cycle which indicates that country is entering into the recession which closely
hampers the growth and development aspect of the country. There are several reasons due to
which situation of economic downturn is arises includes lower economic growth, falling asset
prices and investment, increasing unemployment as well as increasing government borrowing.
Economic downturn is the critical situation which may cause of the period of recession arises in
the economy or country. It is contradicted by Borio (2014) that there are many other factors
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which may cause of the recession or situation of slowdown arises in the economy. High interest
rate is also one of the main cause due to which condition of recession is arises. During the period
of slowdown, investments are not encouraged in the economy and there by impacts the
productive activities of the respective country. Besides this, during the period of slowdown
consumer are not likely to spend money. Investors think that if economy is bad then there is no
chance to get higher investment. Thus, psychological state or mindset also impacts the
economical aspects. In addition to this, in economic downturn wages of the workers is also
reduced which place impact upon their purchasing power as well.
Slowdown in the economy represents that gross domestic product of the country is
decline which closely impacts the activities of the respective economy. Thus, period of
slowdown places many negative impacts upon the growth potential of the country. However, it is
to be critically evaluated by Machado and Mata (2015) that slowdown is not static condition of
the economy. Economic condition is dynamic in nature which can be changed by the country by
making sound strategies and policies. In the period of inflation purchasing power of the
customers is increase. Besides this, investment is also encouraged in the economy during this
period which proves to be more fruitful for the country. Thus, period of slowdown closely
impacts the economical aspects and activities.
Global crisis comes in existence in 2008 when two largest banks Marill lynch and
Layman brothers declared that they are become bankrupt. There are numerous US and other
nations companies that have their account in these banks. Due to bankruptcy of these banks
turmoil comes in world economy and concern about economic health were revealed by the major
economists. The main reason behind such case was loose risk management system of these
banks. In USA people takes a home loan at a very low interest rate by mortgaging their houses.
This trend was continuing from many years (Karlan and Valdivia, 2011). It is evident that people
of USA do not make prudent use of money and they start using loan amount to meet their
personal expenses. In 2007 prices of these houses start falling and many people show their
inability to make payment on time. Banks of USA does not give any importance on these trends
and them allotting more and more loan. As a result, number of defaulters in USA starts
increasing and due to devaluation in house prices it become difficult to recover loan. By the time
these banks take steps situation become out of control and these institutes were compelled to
declare their bankruptcy.
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Due to bankruptcy of these banks corporate greatly affected and economy of USA start
falling. As per fact, form 2007 this trend commenced and at that time growth rate was almost
nearby to zero. In 2008 GDP of USA becomes negative. It is well known fact that USA is a large
market and it is largest importer and exporter of commodities. Due to negative growth rate;
production fall and due to this reason demand for raw material declines (Goudarzi and
Ramanarayanan, 2011). This affects other nation’s economy like China, Brazil and UK etc.
Moreover, unemployment rate also reached to 8-10% which was very high. Due to this reason
demand for products also declines in USA. As a result major exporting nations of USA greatly
affected by downfall in USA economy. The economy of nations that have good trading
partnerships with nations that export products to USA also affected indirectly due to negative
growth rate of USA economy. In this way USA economy poor performance affect entire world
and global recession comes in existence.
This entire scenario affects entire globe in many ways. In European nations and USA
GDP declined, inflation rate increased and unemployment rate skyrocketing. Due to rescission
Euro zone also face a lot of problems in economy. Countries like Greece economy growth fall to
-5%. At that time unemployment rate in Greece was 5% but in 2015 it grows to 25%. In case of
growth rate nearby results were observed in other nations of Euro zone. In all European nations
at that time unemployment rate was very high and same trend was observed in case of inflation
(Venkatesh and Vanishree, 2014). Due to this reason demand in European nations also decline
and this scenario further add fuel to the problem. Hence, it can be said that crisis in USA become
crisis for entire world and longer time is taken in order to overcome this crisis to some extent.
As pert the view point of Shepherd and Page (2015) global financial crisis which arises in
the period of 2007-08 placed high level of influence upon the rural as well as micro financial
sector. As micro financial institutions are closely related to global financial market. Thus,
economic crisis which arises at global level closely affects the activities and operations of the
micro finance institutions. Global financial crisis places more impact upon the micro financial
institution that is situated in Mysore. Moreover, micro financial institutions are not limited to the
national level but also they worked at global level (VenuGopal and Rao, 2014). Therefore, if
minute changes which take place in the economic market closely impacts the business functions
and activities of micro finance institutions. During the currency crisis, people are not interested
to make investment in their business operations. Thus, they are not interested in taking financial
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assistance from any kind of financial institutions. In addition to this, people do not have the
capacity to take loan or financial support from the micro financial institutions.
In the period of slowdown income aspect of the individual is decreases and there by
affects the purchasing power of the individual as well. Therefore. People ignore to make
investment in the luxurious aspect by taking loan from the financial institutions. As real wages of
the people decreases and there by saving of the individual also decreases. On the basis of the
above aspect it has been stated that in the slowdown people neither save nor lend money from
the micro financial institution. It is one the main reason which compels large number of the
micro financial institution to close their branches. Micro financial institution which is situated in
Mysore shows growing trend but financial crisis which arises in the economy closely impacts the
growth and development aspects of them. Moreover, working aspects of micro financial
institutions are highly dependent upon the deposits, lending and other financial services. In the
economic downturn people shows very less interest towards the micro finance institutions. It is
contradicted by Krause and Ellram (2014) that not only the micro financial institutions are
affected by the currency crises which arouse in 2008. In this period, banking industry is closely
affected by financial crisis which proves to be more disastrous for them. During the economic
downturn, share prices of the banking industry and micro financial institutions are highly
decreased. This situation imposes difficulty in front of the financial institution or banking
industry. Thus, it is very difficult for the micro financial institution to survive during the period
of the economic downturn.
Along with it, organization or MFI's also faces difficulty in predicts the impact of global
financial crisis which will arise in the near future on the basis of the past trends. Various impacts
which financial crisis place upon the micro financial institution is seem like a punishment.
Before the financial crisis which arises in the East Asia and Latin America micro financial
institution serves the rural and backward people more effectively and efficiently. However, it is
to critically evaluated by Drezner (2014) that currency crisis not only affects the micro finance
institution but also impacts the rural and lower income segment of the people. During the
economic downturn most of the branches of the micro financial institution are closed which
creates difficulty in front of the rural people to take financial assistance from the financial
institutions at very concessional or cost effective rates. In addition to this, financial crisis is also
the cause of unemployment which hampers the economic growth and development (Boyer and
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Blazy, 2014). In addition this, people are least interested to make investment in their business
operations and activities. Thus, situation of economic downturn closely impacts the growth of
the micro financial institutions establish in Mysore and other parts of the world.
c. Interrelationship between the global economic downturn and growth of micro finance
institution
As per the view point of Ahlin, Lin and Maio (2011) there is the high interrelationship
between the global economic downturn and growth of micro financial institutions. Global
economic downturn represents the condition of decreasing tends in the investment and other
productive activities. Besides this, during the condition of financial crisis there is no huge
production of goods and services. In addition to this, purchasing power of the customers are also
decreases during the period of financial crisis which closely impacts the growth of the micro
finance institution. Moreover, in the time currency crisis people does not approach to bank for
the financial support and services. Due to the low income people are not able to pay interest to
the micro financial institution and there investment is discouraged. Thus, growth of the micro
financial institution is negatively affected during the period of financial crisis. As financial crisis
take place in the economy then activities and functions of micro financial institutions are affected
in the same direction. It is contradict by Brau and Woller (2004) that it is not necessary
condition of economic slowdown negatively affects the operations and functions of small sized
financial institution. In the period of slowdown in the economy survival of the micro financial
institution is highly dependent upon their capacity to fulfill the financial needs and requirements
of the lower segment of the people. During the period of recession or economic downturn
success of an organization is highly based on their strategies and policies. With the help of
competent policies it is possible for the micro financial institution to serve their customers in an
effective manner.
Chang and et.al. (2009) has found that micro financial institution shows growing trend in
all part of the world including Mysore. This aspect indicates that customers prefer to take
financial services from MFI's rather than formal financial institutions. It indicates positive sign
for the economy as it provides financial support to the people who are not in the position to
approach bank for the loan. Moreover, bank demands high amount of security as compared to the
amount of loan which creates financial burden in front of the person who require financial
assistance. Whereas, micro financial institution does not demand for the financial security who
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value is higher than the amount of loan. It indicates that financial there is the more growth
opportunity to micro financial institution to open their branches. However, it is to be critically
evaluated by Chor and Manova (2012) that growth potential is not enough for the smooth
working of the micro financial institution. It also requires favorable economical conditions and
aspects to take benefit of the growth opportunities which are present at marketplace. This,
growth of the micro financial institution is closely affected by the economical conditions which
are present at national and global level.
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REFERENCES
Books and Journals
Ahlin, C., Lin, J. and Maio, M., 2011. Where does microfinance flourish? Microfinance
institution performance in macroeconomic context. Journal of Development Economics.
95(2). pp. 105-120.
Alem, M. and Townsend, R. M., 2014. An evaluation of financial institutions: Impact on
consumption and investment using panel data and the theory of risk-bearing. Journal of
econometrics. 183(1). pp. 91-103.
Borio, C., 2014. The financial cycle and macroeconomics: What have we learnt?. Journal of
Banking & Finance. 45. pp. 182-198.
Boyer, T. and Blazy, R., 2014. Born to be alive? The survival of innovative and non-innovative
French micro-start-ups. Small Business Economics. 42(4). pp. 669-683.
Brau, J. C. and Woller, G. M., 2004. Microfinance: A comprehensive review of the existing
literature. Journal of Entrepreneurial Finance, JEF. 9(1). pp. 1-27.
Chang, S. S. and et.al., 2009. Was the economic crisis 1997–1998 responsible for rising suicide
rates in East/Southeast Asia? A time–trend analysis for Japan, Hong Kong, South Korea,
Taiwan, Singapore and Thailand. Social science & medicine. 68(7). pp. 1322-1331.
Chor, D. and Manova, K., 2012. Off the cliff and back? Credit conditions and international
trade during the global financial crisis. Journal of International Economics. 87(1). pp.
117-133.
Drezner, D. W., 2014. The System Worked: Global Economic Governance during the Great
Recession. World Politics. 66(01). pp. 123-164.
Fletschner, D. and Kenney, L., 2014. Rural women’s access to financial services: credit, savings,
and insurance. In Gender in Agriculture. Springer Netherlands.
Goudarzi, H. and Ramanarayanan, C. S., 2011. Empirical Analysis of the Impact of Foreign
Institutional Investment on the Indian Stock Market Volatility during World Financial
Crisis 2008-09. International Journal of Economics and Finance. 3(3). pp. p214.
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Karlan, D. and Valdivia, M., 2011. Teaching entrepreneurship: Impact of business training on
microfinance clients and institutions. Review of Economics and Statistics. 93(2). pp .510-
527.
Kothari, V. B., 2010. Executive Greed: Examining Business Failures that Contributed to the
Economic Crisis. Palgrave Macmillan.
Krause, D. and Ellram, L. M., 2014. The Effects of the Economic Downturn on Interdependent
Buyer–Supplier Relationships. Journal of Business Logistics. 35(3). pp. 191-212.
Machado, J. T. and Mata, M. E., 2015. Pseudo Phase Plane and Fractional Calculus modeling of
western global economic downturn. Communications in Nonlinear Science and
Numerical Simulation, 22(1), 396-406.
Peters, G. P. and et.al., 2012. Rapid growth in CO2 emissions after the 2008-2009 global
financial crisis. Nature Climate Change. 2(1). pp. 2-4.
Shepherd, J. and Page, N., 2015. The economic downturn probably reduced violence far more
than licensing restrictions. Addiction. 110(10). pp. 1583-1584.
Venkatesh, S. and Vanishree, M. R., 2014. Feminization among elderly population in India: role
of micro financial institutions. Global Journal of Finance and Management. 6(9). pp.
897-906.
VenuGopal, B. and Rao, C. R. P., 2014. Micro finance Institution: Challenges and Issues. Online
Journal ISSN. 2347. pp. 9671.
Yadav, R. K., 2014. Significance of microfinance institutions in rural development of India.
International Letters of Social and Humanistic Sciences. (10). pp. 84-90.
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