Weak links in microfinance

For many policymakers, microfinance has been an essential component of their strategy to achieve financial inclusion. Now that driver is stuck in a host of problems, thus creating a hiatus between policy intent and realisation. Not too long ago, the former Deputy Governor of the Reserve Bank of India, Ms Usha Thorat, in a speech in Kuala Lumpur, meshed microfinance into the larger context of inclusive growth. In reality, however, the foundation stone of the contemplated edifice is wobbling.

It is shaky because the links in the chain that create the structure of microfinance are becoming increasingly fragile. Microfinance institutions typically rely on funds from banks to disburse microcredit to needy borrowers. While some MFIs have been able to raise a major part of their funds from the market, a large number depend on institutional bank funds refinanced by Nabard. Ever since the Andhra Pradesh Government put a stop to the practices of private MFIs in a State that accounted for a third of the business, and following the RBI-inspired Malegam panel's report on regulating their operations, banks have become increasingly edgy about lending to MFIs. As a result, the MFIs are in a bind: On the one hand, their borrowers are finding it difficult to repay and, on the other, the MFIs find their funders — the banks — reluctant to finance their activities for fear of pouring money down the drain.

Just how critical the problem has become is evident from a report in this paper that quotes a senior MFI official complaining of mismatch between the repayment of Rs 250 crore to banks and Rs 140 crore raised through non-bank sources such as convertible debentures and securitisation. Almost three-quarters of all funding for MFIs comes from commercial banks and when that spigot shuts, as it has now, microfinance is in trouble.

So is the financial inclusion and inclusive growth canvas that the RBI and North Block officials love to dream of painting. Right now, all hinges on the Malegam panel's nostrums and the speed with which legislation can institutionalise a context for microfinance to work efficiently. Till then, the chasm between intent and practice will continue to measure the failure of inclusive growth.