The Hindu Business Line : Not-so-creditable on microfinance

The microfinance sector in India has not reached its full growth even 15 years after its emergence because of slow policy processes. There is a need to evolve uniform regulations and a single regulatory body for the sector and legislate so that all confusions are laid to rest. It is hoped that the Bill on microfinance that is expected to be tabled in the Parliament session opening tomorrow will take care of these issues.

This year's Peace Nobel has been gone to the father of microfinance, Prof Muhammed Yunus of Bangladesh, and his Grameen Bank. In the three decades since 1976, when he stated his rffort, Prof Yunus could change the lives of thousands of poor women and their families and develop a full-fledged microfinance sector in Bangladesh.

Prof Yunus is disappointed with the slow growth of this sector in India. According to him, the movement in India has a long way to go.

Bill for microfinance

The Bill to regulate and boost microfinance should be a good beginning. According to the National Sample Survey 59th Round (2003), of the total number of cultivator households only 27 per cent receive credit from formal sources and 22 per cent from informal sources. The remaining households (51 per cent), mainly of small and marginal farmers, have virtually no access to credit.

SHG-BANK LINKAGE APPROACH

A commonly agreed proposition is that access to credit by the poor people is an important, though not the only, intervention for poverty alleviation.

While Bangladesh's Grameen Bank verified this proposition in 1982, a decade after, in 1992, the Self Help Group (SHG)-Bank Linkage Programme was started in India.

This programme is based on the premise that NGOs/banks promote groups and provide them microfinance through the refinance scheme of the National Bank for Agriculture and Rural Development (NABARD).

This emerged as the largest microfinance service delivery programme in India. As on March 31, 2006, as over 22.35 lakh SHGs were linked with banks; 90 per cent of them were women groups, and Rs 113.98 billion had been disbursed to 32.98 million poor households. The average loan per group in this programme is Rs 50,917 and per household Rs 3,456.

There are certain apprehensions about whether this programme has helped poor people in improving their quality of life.

It is evident from the fact that average loan of Rs 3,456 per household is too small to start any income-generating activity by a poor family. This amount is also too small to meet the basic consumption needs or repay moneylenders.

WHOLESALER-RETAILER MODEL

Small Industries Development Bank of India (SIDBI) launched its microcredit scheme in 1994. In 1999, it created the SIDBI Foundation for Microcredit to create a cadre of Microfinance Institutions (MFIs) through wholesaler-retailer model and at the same time strengthen capacity of select management institutions in training, research and consulting.

However, SIDBI could neither scale up its operation nor make an impact on the management institutions. The training programmes started by management institutions could not become self-financing because of reluctance of MFIs to pay for training.

Students of such management institutions were also reluctant to join microfinance sector because of the low salary compared to the corporate sector. Besides Nabard and SIDBI, other important microfinance players are Rashtriya Mahila Kosh, sectoral National and State Financial Corporations, private banks such as ICICI Bank, Citibank, ABN Amro Bank, and funding agencies.

These apex financial institutions and funding agencies including NABARD and SIDBI are providing support to about 1000 MFIs in India with different operational strategies.

Yet, these MFIs have not been able to cover 10 per cent of the total microfinance business.

SLOW GROWTH

The main reason for the slow growth of microfinance sector is the glacial policy processes and weak networks. Starting from July 24, 1991, when the Reserve Bank of India issued a circular to all the scheduled commercial banks (excluding regional rural banks) on improving access of rural poor to lending through SHGs, manydeclarations and recommendations have been made by the Government.

The latest one is in theBudget speech of 2006-2007 to liberalised microfinance norms. Sadly, the regulatory and legal frameworks of the microfinance sector are not only poor in India but remain a farce.

The need of the hour is evolve a uniform regulation and single regulatory body for MFIs and make a law that solve all confusions.

While on the one hand, the SHG programme is focusing on outreach, the wholesaler-retailer model stresses commercial banking. But the plight of the poor remains the same.

Neither programme looks at ways to provide means of livelihoods and a quality of life to the poor.

Credit delivery

It must be understood that credit delivery is not `the only' intervention for poverty alleviation and employment generation. The key is to provide them with livelihood support as well.

The BASIX model is the best suited for India to scale up microfinance services as also provide livelihood support to the poor.

The ground reality of microfinance is that there are no positive networks for the growth of this sector Hopefully, the Bill on microfinance will take care of these issues.

(The author is Professor, ICFAI Business School, Gurgaon. He can be reached at nspundir@hotmail.com)

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