Three industry experts respond on why Indian microfinance has a long way to go
The Harbinger:’Microfinance can play a crucial role’
a Padmashree awardee (2000), is the founder of Myrada, a Bangalorebased NGO that pioneered the Indian SHG movement.
|Photo: S Radhakrishna|
IN THE MID 1980s NABARD and Myrada promoted self help groups (SHGs) in India. In 1986-87 NABARD provided Myrada with rupees one million to train these groups and match their savings. Three policy decisions were taken by the Reserve Bank of India and followed in a committed manner over the past 30 years by NABARD. These were: i) To allow banks to lend to unregistered groups provided they saved, maintained records of decisions and accounts ii) To allow banks to lend to groups without asking for the purpose prior to lending; and iii) To lend without physical collateral provided there was adequate social capital — an affinity based on mutual trust, backed up by the habit of savings and at least six months experience of internal lending. These three decisions represent a major reform in the financial sector, which has not been recognised adequately. NABARD then launched the SHG-Bank Linkage program in 1992. Today, over 42 lakh SHGs are linked with commercial, private and regional rural banks. With an average size of 15 members per group, the total number who have benefited from loans is over 600 lakh. This makes the SHG-bank linkage programme movement the largest micro finance movement in the world.
Microfinance in rural areas by itself cannot eradicate poverty. Credit may be a trigger for growth, but it requires a context of all-round development to function. This must be promoted by the government, the private sector or by the NGOs in really remote regions. It is this all-round development that creates investment options which the poor can choose from. Secondly, credit will not trigger growth where there is poor governance and insecurity, and where feudal relations control resources and the access to them. The deeper the poverty — social, economic and political — the less effective is credit as a trigger for livelihood. The SHGs and their federations provide the social space and the political power that the poor need, to overcome these hurdles.
Experience in the field indicates that micro finance can play a crucial role:
• Where all round and infrastructure development has taken place in rural areas due to private sector investments (factories, mines, etc.), by government (roads, power, storage, public sector units), or by market forces (trade centres/mandis, near crossroads where passenger vehicles ply regularly, etc.)
• Where significant increases in productivity in dryland agriculture, in agricultural diversification and in the portfolio of rural livelihood options, both on and off farm have occurred.
• Where the risk of investment in agriculture by the poor has been significantly lowered through insurance, irrigation and dryland agriculture technology
• Where people have market linkages for agricultural and forest products
• Where the poor have been able to overcome oppressive relations which deprive them of access to resources, markets, equal opportunity, political power, confidence, management skills and social status.
The Critique: ‘No. It cannot solve mass poverty’
Madhura Swaminathan is a professor at the Indian Statistical Institute, Kolkatta, and has researched extensively on rural credit and development issues.
THE SHORT answer is “no”. Despite major structural changes in credit institutions and forms of rural credit in the post-Independence period, the exploitation of the rural masses in the credit market is one of the most pervasive and persistent features of
rural life in India.
Although micro-credit has expanded in a big way in the last few years, it is still a minuscule player in the rural credit scene. In 2000-01, the total lending under the SHG-bank linkage programme was less than half of one percent of the total amount that was disbursed for agriculture and allied activities by the banking system.
The terms micro-credit and micro-finance have risen spectacularly to fame in development literature in the last decade and a half. The Declaration of the Micro-Credit Summit held in Washington, DC in 1
997 defined micro-credit programmes as those “extending small loans to poor people for self-employment projects that generate income, allowing them to care for themselves and their families.” The following are features characteristic of micro-credit: very small loans, no collateral, formation of borrower groups, borrowers from among the rural and urban poor, loans for income-generation through marketbased self-employment, and privatisation, generally through the mechanism of NGO control over disbursement and the determination of the terms and conditions attached to each loan.
Micro-credit is a favoured alternative because, first, it is assumed that the transaction costs of banks and other financial institutions can be lowered significantly if these costs are passed on to NGOs or self-help groups. Secondly, NGOs are expected to perform better than formal- sector credit institutions in respect of the recovery of loans.
Evidence shows that the administrative costs of NGOs are relatively higher than those of commercial banks. NGOs cannot match the economies of scale of a comprehensive system of banking (in the case of India, perhaps the best network of rural banks in the less-developed world). Repayment rates in NGOcontrolled micro-credit projects are related directly to the level of administrative costs. NGO-controlled microcredit projects finance their high-cost operations by turning to donors for funds, or by raising interest rates to levels higher than those offered by the banking system, or by doing both. While annual interest rates in the range of 24 to 36 percent are common, it is not unknown for micro-credit SHGs to charge even 50 or 60 percent per annum. Any project funded by high cost micro-credit will have to generate a very high rate of return to be profitable and sustainable for the borrower.
There is the admirable record of high repayment, but this success is not costless. A system based on the quick repayment of very small loans does not allow for funds to go into income-bearing activities that have a gestation period of any significance. Only projects with very quick rates of return and high rates of return relative to the tiny investment can meet existing repayment schedules. Micro-credit cannot be used to initiate large-scale productive investment, technological change and employment generation.
Although micro-credit can serve as a palliative measure, and also as a way of social mobilisation (formation of women’s groups), it is not a substitute for social and development banking. Micro-credit cannot solve the problem of mass poverty.
The Regulator: ‘The average loan size is too low to eradicate poverty’
KG Karmakar is the Managing Director of NABARD, which initiated the SHG-bank linkage programme in India. If the pending microfinance Bill gets passed in Parliament, NABARD will become the official regulator of the Indian microfinance sector
THE GROWTH of the microfinance sector with SHGs, MFI’s, and various models, is a fascinating story, which continues to unfold before our eyes. Over 40 lakh SHG meet the microcredit needs of 40 crore poor families, all over the country, is no doubt an achievement for the NGOs and the banking sector. But its early days yet for the sector if it sets out to tackle poverty issues. At best, we can admit that the microfinance sector is a useful tool for financial inclusion. Most of the 25 crore poor people in the country are yet to have access to financial services and many do not have even the ‘no frills’ deposit accounts while access to other financial services such as affordable credit, micro insurance, safe funds transfers, financial counseling, etc., is missing!
If we assess the average loan size per SHG borrowings, it is only Rs 7,000. This amount is too low to eradicate poverty. Many more cycles of micro credit availment may enable a rural family to achieve some levels of prosperity, provided the group remains in existence. It is estimated that an amount of rupees one lakh is the minimum amount necessary for a rural family to rise above poverty levels.
Our limited aim is to ensure financial inclusion for all poor families in the country (especially in East /North East regions) within the next three to five years. However, before this can happen, we need to look at issues relating to food security, then financial inclusion and only then concentrate on poverty alleviation, depending upon the level of development achieved as on date.
If we can review the regulatory challenges the microfinance sector faces in the near future, the basic issue revolves around the need for self-regulation by smaller microfinance institutions and NGO’s. Over-regulation at a time when the entire microfinance sector is at a nascent stage of growth could throttle the growth potentials of the SHG’s. The next important step would be to have a common technology platform termed as a common business platform, on a statewise basis with sub-agents and facilitators manning the CSCs (common service centers). This is the only way to ensure the financial inclusion of a large number of very poor people and SHG members, at low cost.
The regulator would also need to issue detailed guidelines on various other initiatives so as to protect the interests of the microfinance clients, such as guidelines for the banking correspondent/business facilitator model approved by the Reserve Bank of India. Guidelines are also needed for utilising mobile telephones for safe remittances and for facilitating a payment system for the rural poor. There is also a need to prepare guidelines for setting-up rural credit bureaus in all states as this will facilitate rural loans faster.
THE EXISTING microinsurance models do not really meet the requirements of the rural poor. The present IRDA guidelines do not permit the convergence of life and nonlife insurance
policies by the same insurance provider. Also, to expect the rural poor to have separate insurance policies for life, health, assets, accidents, etc., is unrealistic. A better method would be to have people’s mutuals to be set up for designing appropriate policies which will benefit SHG members and the calculation of risks will be on a group mode, and not on an individual mode, so as to reduce costs for the SHG clients.
Another important issue for the regulator is to build up the framework of a supervisory/regulatory model with both on-site and off-site systems. This supervisory model will be applicable for the major microfinance institutions, which are not being regulated by any other regulatory body.
All these can wait, as Parliament needs to approve the Regulatory Bill for the Microfinance Sector. With the growth of the sector, there is a need to maintain viability, solvency and sustainability of the microfinance systems and institutions and this would require an effective regulatory framework