Financial Daily from THE HINDU group of publications
Friday, Nov 18, 2005
Financial Daily from THE HINDU group of publications Friday, Nov 18, 2005 |
|
|
|
|
|
|
|
Opinion
-
Economy Micro-finance: Overcoming the mismatches
Navin Bhatia
Banks linked to the self-help group network must recognise that micro-finance clients require safe, convenient and timely deposit services, and orient their services accordingly.
Micro-finance took root in 1992-93 with the launch of the Self Help Group (SHG)-bank linkage programme by the National Bank for Agriculture and Rural Development (Nabard). Under the programme, which has now run for over a decade, groups of poor people — mostly women — have been formed and linked to banks for credit. Nabard has been proactive in this linking process and up to March 2005 over 16.18 lakh such groups had been linked to banks. This translated to an estimated 24.25 million poor families being brought within the fold of formal banking services. The cumulative bank loan disbursed since the inception of the programme stood at Rs 6,898.46 crore up to March 2005.
Demand and supply
The demand for micro-finance is enormous. According to the Tenth Plan document, in 1999-2000, 26.10 per cent of the population was living below the poverty line. Of the 260 million poor, 193 million were in the rural areas and the remaining 67 million in the urban areas. In terms of micro-finance, the number of people living below or just above an austerely defined poverty line has been estimated at around 400 million. Translated into number of families, it comprises approximately 80 million households. The financial needs of this vast population, even at a conservative estimate of Rs 6,000 and Rs 4,500 per urban and rural family respectively per annum, adds to about Rs 40,000 crore. This sum has considerable significance for the financial system. On the supply side, the banking sector comprising commercial banks, cooperative banks and regional rural banks (RRBs) caters primarily to the demand mentioned above. According to Nabard, by end of March, 35,294 branches of 560 banks were involved in extending credit to SHGs. These comprised 48 commercial banks, 316 cooperative banks and 196 RRBs. During 2004-05, these banks had disbursed Rs 2,994 crore to 5.39 lakh SHGs. Compared to the demand, this amount is indeed miniscule.
Characteristics
Empirical evidence has confirmed that micro-finance clients require safe and convenient deposit services. A prominent feature of the savings demand is its urgency. When a micro-finance client has a desire and opportunity to save, that amount, though often very small, has to be saved at that instant, if not it will probably be spent. This demand originates both from households and micro-enterprises. The requirements from the former may be for food, consumption needs, medical emergencies, school fees, house repairs, and the like. The requirements may not strictly conform to the rigours of the banking system and procedures. What the clients need is quick and prompt fulfilment of their financial demands. On the repayment side, since their income streams are small and erratic, micro-finance clients prefer flexible and easy repayment schedules. Given a chance, they may even opt for daily repayments. Apart from saving and borrowing, micro-finance clients seek to insure themselves against the vagaries of life. Thus the demand for insurance services is vast. So also the demand for insurance of livestock, crops and homes. Ideally, micro-finance clients would like to deal with a single agency for all their financial requirements. They would also prefer that agency to be locally available, easily accessible, speak their language and understand their needs. Since a sizable proportion of the clients is illiterate or barely literate, they would prefer simple procedures and minimal paperwork. The major suppliers of micro-finance, primarily banks, are usually large and necessarily bureaucratic organisations, resistant to change. Micro-finance is a new area and is still an insignificant part of their overall credit portfolio. Despite a huge banking network, the facilities, particularly in rural areas, are not easily accessible. The banking hours are not attuned to the convenience of the small rural client who would prefer to deal with his financial matters in the morning or late evening. Added to this is the alien culture of the branch-level functionaries who are, by and large, not sensitive to their requirements.
Despite Nabard's efforts to sensitise its staff to these realities, the average rural banker has failed to understand the psyche of the micro-finance client. Being male, the average banker finds it difficult to deal with the SHG members, who are predominantly female. Further, to cater to the demand for micro-finance, the products available are notoriously limited. There is no segmentation nor has any serious attempt been made to identify the special needs of this vast market. On the savings side, the savings bank account in the name of the SHG is the only product available. Further, the RBI has fixed the interest rate on savings bank deposits and there is no scope for innovation by the banks in this regard. Similarly, on the credit side, banks take into account the savings made by the group and provide credit only up to a fixed multiple of the savings (generally four times). Banks are primarily concerned with the amount of money given and not the purpose for which it is lent. It has been said that, among the poor, many borrow, more save and all insure. However, this need of the poor has largely been neglected. A limited form of insurance has been available for the assets financed and for borrowers in the Kisan Credit Scheme. The Crop Insurance Scheme is also in operation in some States, but there is no holistic treatment of insurance products for the micro-finance clients.
Overcoming the mismatches
There are serious mismatches between the demand and supply of micro-finance, both in quantity and characteristics. With the rapid growth of micro-finance, it is important that these mismatches are removed. One option is to sensitise banks to be more responsive. The over 95 per cent repayment record of SHGs needs to be highlighted. Studies show that transaction costs in rural lending can be reduced by adopting the SHG approach. Nabard has taken the initiative and is conducting training programmes for bankers, NGOs and government officials. Specialised outlets (as differentiated from branches) may be designed for delivery of micro-finance products. In this, the use of technological innovations such as smart cards, automated teller machines (ATMs) and mobile phones may be employed, as is being done in some countries. An internal group appointed by the RBI to study issues relating to rural credit and micro-finance has suggested two models for streamlining delivery of micro-credit. It has suggested the Business Facilitator Model for non-financial services, and the Business Correspondent Model for financial services. Under the former, banks may use the services of individuals or agencies such as NGOs for non-financial functions such as promotion or nurturing of SHGs. In the latter model, micro-finance institutions (MFIs) may be appointed as "pass through" agents for financial transactions of banks. These models have the potential to leverage both the existing network of bank branches and the plethora of informal and formal agencies engaged with the poor, in particular, to strengthen the outreach of micro-finance. However, the appointment of banking correspondents is subject to necessary mechanisms and safety measures being put in place. Micro-finance is a specialised field of activity. To expect mainstream commercial banks to focus attention on the rural poor would be asking for too much. RRBs have not been able to rise to the challenges of micro-finance. Among the Local Area Banks (LABs), only one has shown interest in micro-finance. While the role of RRBs as Self Help Group Promoting Institutions (SHGPIs) can be expanded, specialised LABs for micro-finance can be established. It may also be examined if separate subsidiaries of banks, dealing exclusively with micro-finance, can be set up for the purpose. There is an immediate need to expand the range of products available in the market, both on the savings side and on the credit and insurance sides. As the micro-finance sector grows and develops, MFIs are expected to play a greater role in the times ahead. In 2000, the RBI had allowed banks to adopt their own model of lending to micro-finance and choose any intermediaries for the purpose. As a result, new models are being experimented with by banks. The Task Force on Supportive Policy and Regulatory Framework for Microfinance had recommended the promotion of Self Regulatory Organisations (SROs), evolving from within the MFI sector. The Advisory Committee on Flow of Credit to Agriculture and Related Activities (Vyas Committee) had observed that further experimentation is needed to establish the MFI model; (such) experiments need to be encouraged in areas where banks are still not able to meet credit demands of the rural poor adequately. It also observed that MFIs may not be permitted to accept public deposits unless they comply with the extant regulatory framework of the RBI. According to the RBI Internal Group on Microfinance, an exclusive regulatory and supervisory framework for MFIs may not be required for the present. However, a decision regarding the regulatory framework, if any, is now due. This decision will determine the direction the MFIs would take in the times ahead. Needless to say, both mainstream financial institutions as well as MFIs would be required to play an increasingly prominent role in the micro-finance sector in the times ahead. (Navin Bhatia is Deputy General Manager, Reserve Bank of India, Mumbai, and Anju Bhatia is Associate Professor, University of Rajasthan, Jaipur. The views are personal.)
Article E-Mail :: Comment :: Syndication :: Printer Friendly Page
|
Stories in this Section |
|
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription Group Sites: The Hindu | Business Line | The Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2005, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line
|