Financial inclusion architecture is incomplete without microfinance: Chidambaram

India’s nascent microfinance sector is showing signs of mild recovery after the SKS Microfinance-triggered meltdown, says a new report on the sector.

According to the State of the Sector Report 2012, brought out under the aegis of microfinance facilitation organisation Access Development Services, the loan amount disbursed by microfinance institutions, as well as the average loan ticket size, has shown signs of recovery in fiscal 2011-12.

SKS effect

But the industry is struggling to recover from the impact of the SKS Microfinance crisis and the imposition of State-level regulation in Andhra Pradesh, which led to a virtual cessation of microfinance activity in what was till then the largest market for microfinance in the country.

According to data in the report, the number of self-help groups (SHGs) funded by Nabard fell 9 per cent in 2011-12 to 4.36 million. The total client outreach of the private/non-government microfinance institutions also declined by 15.7 per cent in the same year, as against a rise of 19.1 per cent recorded in the previous fiscal. The gross loan portfolio of MFIs also declined 3 per cent.

However, the total loan portfolio of bank-linked SHGs rose to Rs 36,341 crore in 2011-12, as compared to Rs 30,619 crore in the previous fiscal, an increase of 19 per cent, while the loan portfolio of microfinance institutions (MFIs) fell about three per cent during the same period.

Overall, a net increase of Rs 5,100 crore in total outstanding credit was recorded by the sector. However, the average ticket size (loan amount) went up to Rs 7,803 during 2011-12, a rise of about 15 per cent year-on-year.

Financial inclusion

Earlier, releasing the report at a microfinance summit in New Delhi on Tuesday, Finance Minister P. Chidambaram called upon the microfinance sector to work with the Government on financial inclusion and reaching financial services to the poor. “The financial inclusion architecture is incomplete without microfinance,” he said.

Chidambaram also said the Government was hopeful that the proposed Microfinance Institutions (Development and Regulation) Bill will shortly be cleared by the Parliament's Standing Committee and will be brought to the House for “early passage.”

Stating that the Government’s role is to provide both an enabling policy framework and the funds required for the sector's growth, Chidambaram said the proposed Bill should provide overarching policy support and guidelines for the healthy development of the sector.

Asserting that microfinance institutions can play the role of a catalyst in broadening the scope of services from “micro credit to micro finance” and broadening services to include savings, remittances and insurance as well, the minister exhorted the sector to set special targets to reach out to the poor.

Credit bureaus

He asked the sector to pay special attention to areas in the North-East, West Bengal, Bihar and UP, where microfinance was either not present or was poorly represented.

He said that the development of “responsible financial practices”, including “financial transparency, interest rate rationalisation and 'respectful' recovery practices” remained as key challenges for the sector, particularly after the “unhappy developments” in Andhra Pradesh.

He also said the sector needed funds “in line with growth” from banks and financial institutions, and added that the sector needed to ensure that data is shared with credit bureaus to ensure against multiple or over borrowing by the same client.

Raghavan.s@thehindu.co.in

(This article was published on November 27, 2012)
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