The Hindu Business Line : Micro-finance — Lessons from Bangladesh

Micro-finance has emerged as a promising tool for reducing the poverty and empowering the underprivileged, especially women. . In India, the Self-help Group-Bank linkage programme, initially started by Nabard (National Bank for Agriculture and Rural Development) as a pilot project in 1992, has grown into one of the largest micro-finance programmes in the world. Small Industries Development Bank of India's (SIDBI) Foundation for Micro-Credit (SFMC) is promoting the micro-finance institution (MFI) model. Rastriya Mahila Khosh (RMK) and Friends of Women's World Banking (FWWB) India are also promoting the micro-finance component as apex bodies.

Lessons from Bangladesh

The Indian micro-finance sector has many lessons to learn from the Bangladesh experience. The micro-finance market in Bangladesh is mature and there is intense competition among MFIs. They offer a wider choice of financial services, ranging from savings, micro-credit, pension, insurance, and loans for business, agriculture, housing and disaster management to cater to the needs of different groups, such as the extremely poor, poor, landless, micro-entrepreneur, farmers, guardians of street children, and those affected by disasters.

Risk mitigation:Most of the MFIs offer a package of insurance services covering different risks — death, accident, loss of business assets and fire. As their insurance programmes are community-managed on the basis of mutuality, they do not extend cover for risks of a co-variant nature, such as flood cover and crop failure. The insurance premium collection is done by deducting one per cent of the loan amount at the time of disbursement on a compulsory basis and the coverage is for the outstanding loan amount.

Flexible Savings:In Bangladesh, most poor people face food insecurity for two months, so they require a flexible savings service on a priority basis to see them through the lean season. Some NGOs addressed this need by making slight modifications in the manner of accounting.

Agricultural finance: Commercial banks do not always prefer lending to the farm sector. Traditional micro-credit terms are not suitable for seasonal agricultural loans; while micro-credit involves weekly repayment, most agricultural activities bring income at the end of the season. Hence, farmers continue to depend on informal sources for their farming operations. In Bangladesh, IFAD (International Fund for Agricultural Development) is experimenting with an innovative project — micro-finance for marginal farmers and small farmers — where seasonal agricultural loans are offered with flexible options for repayment.

Larger individual enterprise loans: In Bangladesh, many micro-finance beneficiaries have graduated after several cycles of loans to take larger individual enterprise loans. NGOs prefer promoting individual enterprises by group members rather than group enterprises. As the risk appetite and the entrepreneurial spirit of the individual members vary, the members also prefer to opt for the individual enterprises and select loan sizes according to their risk-bearing capacity.

The Way Forward

Banks and MFIs have to roll out a range of products to match the needs of different client-segments. Banks and MFIs can tie up with insurers and offer micro-insurance products.

The RBI permits savings mobilisation by NBFCs (non-banking financial companies) only if they have investment-grade rating. The RBI would do well to fix a benchmark and allow other players to mobilise savings from their members. Banks must design a customised savings product targeting the poor. NGOs should facilitate SHGs to offer flexible savings option too. And banks and MFIs should deliver agricultural seasonal loans with flexible repayment options, through groups, on a pilot basis.

An exclusive micro-finance promotional agency, on the lines of the Palli Karma-Sahayak Foundation (PKSF) of Bangladesh, could be created to add quality dimensions to the micro-finance programmes. The Government must consider making Nabard's MCID (Micro-Credit Innovation Department) an autonomous promotional body.

Banks and MFIs must encourage members to take up larger micro-enterprise loans and offer individual loans, with the recommendation of groups, when the credit requirement is above Rs 50,000 per member.If the stakeholders take concerted action to implement the above measures, it will take the micro-finance sector forward and the more vulnerable sections, now left out of the formal institutional finance system, will benefit.

(The author is a Madurai-based micro-finance consultant. Response to this article can be sent to vijayjeyaseelan@yahoo.co.in)

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