To make microfinance more pro-poor, there is an immediate need for more emphasis on savings rather than credit.

Mr Vijay Mahajan, a social entrepreneur and chairman of Basix Group, is considered as one of the pioneers of microfinance in the country. As president of the Microfinance Institutions Network (MFIN), he is also part of the think-tank for the microfinance sector. He spoke to Business Line on a host of issues facing the sector.

Excerpts from the interview:

Since the enactment of AP Microfinance (Regulation of Moneylending) Act in October 2010, microfinance institutions (MFIs) have been facing many challenges. How do you see the future of microfinance?

The future is pretty good. The guidelines from the Reserve Bank of India (RBI) announced in May and subsequent draft MFI Bill by the Government of India are good signs. If you read them together, the possibility of extreme profits are eliminated. At the same time, the need for microfinance is protected. The proposed Bill could be a reality some time during next financial year and should make a positive difference.

What do you think is the net outcome of microfinance for the poor? Though it might have made a difference to some by helping them generate earnings, don't you think it has also forced others into a perennial debt trap?

There have been too many outlandish claims. Microfinance certainly does some good. It may not completely help the poor. Some people may make money out of it. There could be some black sheep. Basically, the middle ground is the future. As a whole, I feel that there is enough ground to say that it is viable model.

If microfinance is to be made more user-friendly or pro-poor, what are the top three changes you suggest in the existing system?

There is an immediate need for more emphasis on savings rather than credit. Insurance should be encouraged. The number of transaction outlets need to go up to ensure widespread network, perhaps, by using a model similar to that of banking correspondents (BCs) used by banks. Lending models based on Unique Identification Number (UID) might also be of use going forward.

Self-regulation has been the buzzword for some time, but appears to have made little headway. How do you think adherence to self-regulation can be achieved?

Self-regulation will work if it is based on a delegated-power model or, to be simple, if Self-Regulatory Organisations (SROs) are recognised by the RBI. Already, code of conduct is being enforced among the major MFIs, including lending based on credit bureau data. Surely, there will be far more adherence in the days to come.

What about investors' perception of MFIs? Is there any reduction in interest from private equity players from abroad and the domestic market?

The interest in microfinance sector is almost frozen now. In the next six months to one year, it might change for the better. The consolidation should also happen in the industry.

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