The Hindu Business Line : Explosive growth in micro-loan disbursements

THE year 2004-05 saw an explosion in microfinance. Microcredit disbursements, both from banks and microfinance institutions, have gone up tremendously.

Here are the examples: Share Microfin Ltd, a Hyderabad-based for-profit NBFC engaged in micro lending, has in its 11 years of existence disbursed cumulatively Rs 870 crore, of which Rs 450 crore happened this year. Another MFI, Spandana, has given away micro loans worth Rs 550 crore since its inception in 1998; Rs 350 crore of them happened this year.

ICICI Bank's micro credit disbursements this year would cross Rs 700 crore - more than three times last year. HDFC Bank's disbursements this year have doubled to Rs 60 crore.

Ms Padmaja Reddy, who runs Spandana, says there is no dearth of funds today, as banks are looking at MFI favourably, unlike in even a few years ago.

Clearly, microfinance is an idea whose time has come. It is not just the lendings that are growing - various components of the industry have begun to fall in place, like pieces of a jigsaw puzzle.

For instance, the recent Budget has announced Government's intention to borrow from abroad. Several ECBs are interested.

Basix, for example, had a $4 million line of credit from IFC, Washington, which it could not use, because RBI disallowed NBRCs from going in for external commercial borrowing. According to Mr S. Ramachandran, Vice-President-Operations, Basix, the MFI is keen on using the line of credit.

Share Microfin, which received a $2 million venture funding recently, is also very keen on ECB, according to its MD & CEO, Mr Udai Kumar.

Secondly, a lot of research is happening on micro-finance - material, which could feed into national policy.

One of the more recent studies estimates the lending opportunity thrown up by micro-finance at Rs 45,000 crore a year, and says that against this opportunity, the entire financial sector has lent about Rs 3,900 crore.

The Institute for Financial Management and Research (IFMR), which is supported by ICICI Bank, has initiated a series of research projects into microfinancing, including several for studying the impact of micro finance on rural society.

Third, Nabard has initiated steps to get MFIs rated, so as to make it easier for banks to lend to them. Rating agencies are ready.

The Micro-Credit Ratings International Ltd (M-CRIL) has developed expertise in rating MFIs; Crisil is now getting into the fray.

All these demonstrate that in this International Year of Micro-credit, the potential of the sector has secured the recognition it deserves. The question now is, how to go forward.

At the field level, many MFIs are finding their own ways to move forward. For example, the Chennai-based Micro-credit Foundation of India, which has a loan book of Rs 150 crore, has started a survey among self-help groups across 23 districts of Tamil Nadu, to identify local skills, resources and livelihood opportunities.

"Once this is completed, the MFI will impart training in about 30 of the most promising options," says Dr K.M. Thiagarajan, Chairman of the Foundation. The training would be in areas as diverse as agarbatti manufacture, tailoring and village tourism - providing accommodation and hospitality for a fee.

But at a macro level, the general opinion is that a policy framework for micro-finance should be evolved.

In a study entitled `A blueprint for the delivery of comprehensive financial services to the poor in India', researchers at ICICI Bank have articulated a `vision', which calls for creation of at least "200 mature MFIs" across the country. (Today, according to the study, there are about 30 `mature MFIs' with a combined outreach of less than three million households.)

If each of these 200 MFIs operates in three districts and they cumulatively cover 100 million households, the credit could potential be about $6 billion (Rs 27,000 crore), the study says.

This would be possible with steps on two counts - improving infrastructure for lending and creating an enabling regulatory framework, says a paper on `Expanding Access to Financial Services - where do we go from here', by Dr Nachiket Mor, Executive Director, ICICI Bank.

On the infrastructure front, Dr Mor suggests that every citizen should have a unique identification number which records basic biometric data (like photograph, fingerprint).

He calls for public investment in Internet connectivity at village level and a specialised `rural credit bureau', perhaps be run by Nabard.

Further, a comprehensive network of real-time weather stations for providing weather insurance and a comprehensive network of health diagnostic centres, would strengthen the physical infrastructure for rural credit.

On regulatory framework, Dr Mor calls for deregulation of interest rates, including the removal of the cap on lending rate.

At present, the banks cannot charge more than PLR for rural loans up to Rs 2 lakh. But because of the cap, if there is a borrower who can be given a loan at, say, 16 per cent, the borrower goes without any access to funds at all.

Although banks have got around the `cap' hurdle by lending through MFIs, many feel that interest rates are left best to the market forces. Thanks to banks pouring funds into the sector, micro credit interest rates have come down substantially.

Spandana's Ms Padmaja Reddy says that ICICI Bank used to lend to the MFI at 14 per cent, but "this year they have brought it down to 10 per cent".

But because of high costs of operation and MFIs' need to build their networth to offer comfort to the banks, the ultimate borrowers get loans anywhere between 18 and 24 per cent.

However, the borrowers lap up loans even at these rates, because they would otherwise not get any finance at all, or if they do, it would be at still higher rates.

In this context, it is pertinent to note what a recent publication of the Citigroup says. Speaking of the group's "experiments" in micro-financing, it says, "With obscenely high repayment rates, often in excess of 95 per cent on micro-finance loans, these experiments have demonstrated the zeal of the poor to improve their incomes and standards of living."

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