The Hindu Business Line : Micro-credit has not made any macro impact

Despite the progress made by the micro-finance movement over the past decade, at the macro level, the sector has not been able to make much of an impact. There is a need to extend the services to meet the diverse needs of borrowers. This will require more funds and, may be, public subsidies too, says S. D. NAIK.

The Nobel Committee has put poverty on the international agenda by awarding the Peace prize to the Bangladeshi micro-credit pioneer, Prof Muhammad Yunus, and his Grameen Bank. In its citation, the Committee said: "Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means... Across cultures and civilisations, Prof Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development."

The Bangladesh experience has shown that programmes that empower women at the bottom can make a real difference to the quality of life of the poor even under conditions of mass deprivation. This is reflected in the steady progress made by Bangladesh over the past two decades on the human development front.

GROWING RECOGNITION

In a way, this represents a culmination of the growing recognition of micro-credit as an instrument of poverty alleviation, the world over. Thirty years ago, the concept of micro-credit was unknown. Since then, its role in poverty alleviation and empowerment of the weaker sections has gained recognition in many developing countries and even in a few developed ones. Today, it is active in more than 100 countries and is said to have helped more than 100 million people take their steps to reduce poverty.

Last year, the United Nations had declared 2005 the International Year of Micro-credit. The motto of the year was to build inclusive financial sectors to achieve the Millennium Development Goals. During the year, the World Bank and the Consultative Group to Assist the Poor (CGAP) worked with national committees by hosting a series of events and conferences to highlight the importance of micro-finance in the fight against poverty.

In recent years, the World Bank and the International Finance Corporation (IFC) have also participated in the promotion of micro-finance. Of course, the Bank's role has been much bigger in this endeavour; it has targeted the farm, financial, and social protection sectors in many developing countries. The World Bank Group's portfolio in micro-finance initiatives has risen to over $1 billion in recent years.

INDIAN EXPERIENCE

A significant feature of the micro-finance movement in India is that it has relied heavily on the existing banking infrastructure, in the process obviating the need for a new institutional set-up. Most of the leading practitioners of micro-finance activities follow the Grameen model. Banks lend micro-credit through self-help groups (SHGs) and to local micro-finance institutions (MFIs) that have contacts in small villages.

India's bank-SHG link programme is now the biggest in the world. According to the RBI Annual Report 2005-06, the cumulative number of SHGs linked to banks stood at 2.2 million with total bank credit to these SHGs at Rs 11,398 crore. The 2006-07 Budget envisages the banking industry to credit-link another 3,85,000 SHGs in 2006-07. Some 30 million women have reportedly formed 2.2 million small businesses so far and another four lakh are expected to be in place by March 2007, according to the National Bank of Agriculture and Rural Development (Nabard).

Of late, some of the leading commercial banks, such as ICICI Bank, HDFC Bank, UTI Bank and the State Bank of India, have begun focussing on this sector rather aggressively. Even some of the multinational banks operating in India, such as ABN Amro, Standard Chartered, HSBC and Citibank, have moved into the sector. There is a growing realisation among commercial banks that micro-finance is a bankable proposition.

The award of the Peace Nobel to Prof Yunus and Grameen Bank is expected to provide a big boost to micro-finance activities in India. ICICI Bank, which has emerged as an active and innovative player in the micro-finance segment, has now joined hands with Grameen Foundation US and ITCOT Consulting to set up Grameen Capital India (GCI). It has already approached the Reserve Bank of India seeking a licence for a non-banking finance company (NBFC).

MAJOR WEAKNESSES

Despite the progress made by the micro-finance movement in India over the past decade, it must be admitted that, at the macro level, the sector has not been able to make much of an impact. The total micro-credit disbursed to poor families amounted to just about Rs 7,000 crore by March 2005.

The average loan amount per beneficiary works out to just about Rs 2,000 or so; too small to enable the poor families to cross the threshold of poverty. To start even a tiny enterprise that could generate some regular income, the amount of micro-credit should be at least Rs 20,000-25,000.

Though no precise figures are available, the total demand for micro-credit in India is estimated at Rs 200,000 crore. Against this, the actual disbursal of about Rs 7,000 crore can hardly be expected to make any dent in the poverty situation. The coverage of the sector also remains limited; over 60 per cent of the sector is concentrated in Andhra Pradesh, Tamil Nadu, Karnataka and Kerala. Extension of coverage is constrained by poor rural infrastructure and the lack of marketing support.

Critics have also pointed out that quite a few MFIs have been charging relatively higher interest rates — 15-36 per cent — on the loans given to poor families. This is perceived by many as exploitative and against the spirit of micro-credit. Since most MFIs deliver their services at the doorstep of villagers rather than requiring the clients to come to bank branches, and have lower business volumes, their transaction costs are much higher than those of the formal banking channels.

CHALLENGES

Evidently, the challenges facing the sector are quite formidable. Despite the progress made by the micro-finance sector in recent years, the market penetration of service providers is still low. There is a skewed distribution of SHGs across States; in those which have a larger share of the poor, the coverage is comparatively low and, in many cases, quite insignificant.

According to Mr Vijay Mahajan, Managing Director, Basix India, and a long-time practitioner in the field of micro-finance, micro-credit in its present form is not in a position to address the livelihood problems of the poor.

Hence, there is a need to broaden the paradigm from micro-credit to `livelihood finance' by extending the services to include savings, insurance cover, nutrition, health, education, and vocational training. This will require more funds and, may be, some public subsidies.

According to the World Bank, for successful provision of micro-finance in India, it would be necessary to focus on improving governance, professionalising management and improving internal transparency. It would also be necessary to expand beyond credit to meet the diverse needs of borrowers, and improving the financial infrastructure to scale up.

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