Role of Microfinance in the Development of Non-Farming Sectors

Micro credit has been defined by the RBI as the provision of thrift, credit and other financial services to the poor in rural semi urban areas to enable them to raise their standards of living. It may cover not only consumption and production loans for various farm and non-form activities being pursued by the poor but also include their credit need such as housing. The micro credit supply must be seen as complementary to formal credit supply.   Development of Non-Farm sector in rural areas enables us to use the unutilized labour-force productively in the rural areas, most of which cannot be moved away to urban areas. Non-farm activities also give fillip to other activities including agriculture through their forward and backward linkages, promoting a closer integration of agriculture and industry in the rural economy. Diversification of agriculture not only provides more employment to human labour but also increased productivity of land and labour.

Expansion of non-farm activities in rural area alone can arrest the large scale rural-urban migration. By localizing employment, they can bring down pressure on urban infrastructure. It is argued that in the case of distress diversification the level of rural agriculture wage rate relative to the agricultural wage rate should be lower. This is so because the workers without enough work in the non agricultural sector at lower wages. The empirical evidence of vaidyanathan however shows that the non-agricultural wage rate is in general higher than agricultural wages. Employment generation outside agriculture in a spatially dispensed manner holds the key to the strategy of poverty alleviation in the country. Of course, the state has to create an appropriate economic environment. Thus, the modernization process of rural economy would be incomplete without sustainable growth of non-farm sector in rural India. Micro finance has to play an important role in strengthening rural non-farm sector. Banks should think that small loans to poor are no longer a social obligation, but potential business opportunities.