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Tuesday, Mar 09, 2004

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Micro finance: Preparing for a major thrust

S. D. Naik

It is time to promote NGO-business partnerships in micro finance to provide gainful activities to, and empower, the poor. Many NGOs are funded by corporates, but there are hardly any NGO-business partnerships as in developed countries. The Government must encourage business houses to participate in this activity as they have a stake in creating a market for their goods and services in the rural areas, says S. D. Naik.

The significant jump in the number of self-help groups was made possible by the active involvement of bank branches, non-governmental organisations and many other agencies, including the development departments of different State governments.

THE ROLE of micro finance in poverty alleviation and empowerment of the weaker sections is gaining increasing recognition in many developing countries. In India, the programme of micro finance was heralded in 1992 as a pilot project. After more than a decade, it is now poised for a major expansion both in terms of scope and coverage. Given adequate policy support, the programme could make a major dent in poverty and help in arresting the gradual impoverishment of the countryside.

As on March 31, 2003, the programme had grown to cover 31,000 rural outlets with a loan portfolio of more than Rs 2,000 crore reaching formal banking to the doorstep of 11.6 million very poor households through 7.17 lakh self help groups (SHGs). The significant jump in the number of SHGs linked was made possible by the active involvement of 504 bank branches, 2,800 non-governmental organisations (NGOs) and many other agencies, including the development departments of different State governments.

Leading national financial institutions such as the Small Industries Development Bank of India (SIDBI), Nabard and the Rashtriya Mahila Kosh have also played a significant role in making micro credit a real movement in India. It is possible to provide further momentum to the movement by involving 196 regional rural banks (RRBs), four local area banks (LABs) and more NGOs and micro-finance institutions (MFIs).

The credit linkage programme covered 523 districts in 30 States and Union Territories by March 31, 2003. The most heartening feature of the programme has been the active participation of women accounting for 90 per cent of the total SHGs and a strong repayment performance of over 95 per cent.

Notwithstanding such commendable progress, however, the reach of the programme and its efficacy is still limited. Of the 52 million poor families (260 million poor) in the country, only 11.6 million families (58 million poor) or just 22.3 per cent of the poor families, were covered by the programme as on March 31, 2003.

Moreover, the average loan amount per beneficiary in micro credit works out to a paltry Rs 1,360. While micro finance, by definition, involves tiny amounts, this amount is too small to enable the poor families to cross the threshold of poverty. If a poor family is to start even a tiny enterprise that will generate some regular income, the amount of micro credit should be at least Rs 20,000 or so.

Similarly, the development of SHGs across states has remained highly uneven so far. Of the total SHGs credit linked, Andhra Pradesh accounted for 39 per cent followed by Tamil Nadu, Karnataka and Uttar Pradesh. These four states accounted for 69 per cent of the total SHGs in the country and four-fifth of total micro credit as on March 31, 2003.

While estimates about the total demand for micro credit in the country are in the range of Rs 30,000 crore and Rs 45,000 crore per annum, the actual amount disbursed by the end of 2002-03 was a little over Rs 2,000 crore only. Thus, both in terms of quantum and coverage, it is grossly inadequate to make a discernible dent in rural poverty. Of late the Reserve Bank of India has been encouraging the commercial banks to expand the coverage of micro finance. On the basis of the recommendations of the four informal groups constituted by it to examine various issues concerning micro-finance last year, it has proposed that:

  • Banks should provide adequate incentives to their branches for financing

    SHGs and establish linkages with them making the procedures absolutely simple and easy while providing for total flexibility in such procedures to suit local conditions;

  • The group dynamics of working SHGs may be left to themselves and

    need neither be regulated nor formal structures imposed or insisted upon;

  • The approach to micro financing of SHGs should be totally hassle-free

    And may include consumption expenditures to enable smoothing of consumptions as needed relative to time-profile of income flows;

  • Nabard should reinforce its commitment to maintaining and

    enhancing the flow of micro finance while simplifying the process; and

  • Nabard should devise mechanisms to ensure sharing of experiences

    among the bank branches that are closely involved in extending micro finance.

    Fortunately, banking institutions are now showing greater interest in extending micro credit because of the realisation that poverty can be a viable business proposition and not just a social obligation. CARE, an NGO working in several countries across the globe, is currently working with formal lending institutions to make them realise this. It has begun working with the country's largest commercial bank, the State Bank of India, and a few regional rural banks (RRBs) to propagate the micro finance culture.

    CARE is implementing CASHE (an acronym for Credit and Savings for Household Enterprise), a five-year-old project funded by the British Government's Department of International Development. The programme, with exclusively women beneficiaries, is being implemented in Orissa, Andhra Pradesh and West Bengal and is likely to be extended to other States.

    In another encouraging development, ICICI Bank, the second largest commercial bank in the country with an asset base of Rs 116,000 crore, has started securitising micro credit for the first time. It has securitised two asset pools worth Rs 20,000 crore in Andhra Pradesh. At present no secondary market exists for such securities and Crisil has been entrusted with the task of rating these asset pools. ICICI Bank is hopeful of getting a triple A rating for these since NPAs in such loans are insignificant at about half a percentage point.

    ICICI Bank's social initiative group headed by its Executive Director, Mr Nachiket Mor, has developed this novel approach to micro credit. It is hoped that securitisation of micro credit would help NGOs to concentrate their efforts on helping the target groups more effectively and may prove to be a turning point in this area.

    In the first two deals, ICICI Bank has replaced the costly loans advanced by MFIs, SHARE and Basix at 14 per cent interest by cheaper loans (at 8 per cent) to over 60,000 borrowers. The bank is also advancing new loans through a partnership model. According to reports, ICICI Bank's micro finance loans may zoom to Rs 400 crore this fiscal from Rs 150 crore last year. The target for 2005 is Rs 500 crore.

    ICICI Bank is also in talks with Grameen Bank of Bangladesh, a pioneer in micro finance for floating a company that will provide credit guarantee to such paper. Grameen USA, a Grameen Bank trust, may hold a majority stake in the proposed non-banking finance company (NBFC).

    A number of other private sector banks, including some foreign banks such as HDFC Bank, UTI Bank, ABN Amro Bank have also made a small beginning in this area. Earlier only the public sector banks were involved in extending micro credit as part of the priority sector lending. The interest now being shown in this activity by private sector banks is the result of the new realisation that this asset class is bankable. Against the backdrop of these positive developments, it is time the Government and the RBI provided the required policy support to the banking sector and MFIs to prepare for a major thrust in extending the scope and coverage of micro finance. While doing so one should not lose sight of the objective of providing micro credit to the rural poor, namely, to find the right kind of economic activities for those lacking in formal education.

    This would require identification and promotion of more labour-intensive activities such has production of handloom fabrics and garments, carpets, sericulture, handicrafts as also service activities such as repair workshops, provision stores, setting up of tea shops, and so on. Micro credit can also be extended for buying buffaloes, setting up poultry farms, etc.

    The other areas that would need greater attention are the strengthening of MFIs and creating a cadre of trained personnel to run these institutions. One of the ways to strengthen MFIs is to provide them experience-sharing opportunities, materials and training. Some of the professionally-run MFIs such as Seva and Basix have now started their own training centres.

    The RBI and Nabard should provide assistance to other MFIs to start similar training centres to impart training in marketing, accounting practices, etc. The government should also encourage business houses and industry associations to participate in this activity since they also have a stake in creating a demand for their goods and services in rural areas.

    Perhaps the time has come to promote NGO-business partnerships in the area of micro finance aimed at providing gainful activities and empowering the poor. Though many NGOs are funded by corporates, one hardly comes across NGO-business partnerships in India on the lines prevailing in developed countries.

    Analysts feel that since NGOs have social capital and business houses have financial capital, their coming together could create more value to the society. Apart from providing financial assistance, corporates can help NGOs to become stronger institutions. They can also help enhance NGO capacity to conceive, develop, plan and implement projects in a much better way.

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