Common knowledge suggests that these are bad days to be a Micro Finance Institution in India. What common knowledge does not suggest is that yet again these bad days have been set in through bad planning and regulation. From interest rates to costs of operation, from multiple lending to multiple borrowing, from JLG to BC/BF model, everything seems to be under scanner. Figures from NABARD suggest that total lending in the last 4 years through the SHG-Bank Linkage model has been more than twice of what has been disbursed by the MFIs. And hence it is bewildering to notice how the whole blame has been shifted on to the MFIs just because a MFI went public and listed itself on a stock market. In the period of 2007-2010 the no. of SHGs linked with credit increased at the rate of 18%, while per SHG loan outstanding increased at the rate of 32%, raising serious doubts over the financing of the repayment. The whole financial inclusion drive with micro finance as the engine has taken a beating due to proliferation of funds as consumption loans rather than production or livelihood loans.
Broadly, the problems may be categorized as demand side and supply side problems. And both these problems arise because the whole cycle of credit delivery and repayment is not completed. Looking at demand side problems, when the credit is not utilized for creating assets and increasing productivity, and is rather used for consumption, the repayment becomes a problem. So it becomes important for all the credit delivery institutions to propagate capacity building and ensure better marketability of their produce. Also the poor need saving facilities and a better way of managing money. Restriction on the MFIs to open savings accounts for their customers only exacerbates the problem in hand. Farmers need loans on which repayment can be made every 6 months. So a system that requires weekly payments will fail.
Supply side problems cover issues such as technology, financial literacy, product innovation and policy revamp. Technology can be a big enabler in filling the gaps where banking cannot reach through the traditional brick and mortar branches. The poor, generally illiterate, need to be made aware of the financial products available to them and how best to utilize them. Also since the amount of money transacted is less, the same financial products, the ones for the rich, will not work. Insurance policies that allow for weekly payments in smaller amounts will attract more customers than the traditional schemes.
Policy can act as an umbrella for all these changes. A major shift would come with the realization that the area of financial inclusion need not be restricted for not-for-profit organizations. A recent change in regulations that allowed for-profit institutions as Business Correspondents saw two giants of Telecom Industry and Banking Industry, Airtel and State Bank of India, come together for a joint venture. More such changes are required and the market needs to be opened up. Also the government needs to consider the cost of opening bank accounts, cost of transactions and in totality the cost of financial inclusion well in knowledge of the fact that certain accounts will remain inoperative owing to the poverty levels and unless such costs are provided for, or business opportunities to cover these costs are created, financial inclusion will remain a government priority sans private players.
The Actual problem is not the SHG model but the MFI led model.SHGs is doing a good work and most of time the loan given serve the guanine purpose and interest rate charged is 10-14 % which is quite cheap for a poor. On the other hand MFIs charge somewhere from 30-50 % pa.
ReplyDeleteThe growth rate of MFI model is above 100 % in last year’s while the growth rate of SHG is around 30 %. The main problem is not the 100 % growth rate but its un-sustainability in long term. Private equity funding and investment by HNI in MFIs forced them to adopt a model which was mainly focused on the increased credit delivery (by geographical expansion and increased penetration) without proper capacity building of borrowers at grassroots level. They turned a blind eye to end use of loans and livelihood creation (Original motives of MFIs) disappeared from their objective.
The simple logic is if return on the investment by customer is less than interest rate charged by MFI (which could be in range of 30-50 % pa) how can he repay back?
Well, Technology can play a role but its role is already explored in large way. If you would see the ROI (Return on investment) of MFIs in last year’s were in range of 5-20 % while that of Commercial banks are in range of 1-2 %. This shows the greediness and profit-centric motives in name of social welfare.
Financial literacy is essential but what is required is increased credit options for the lower strata of society. Removing the restriction of cap on interest rate for loans under the amount of 2 lakhs in recent months by RBI will increase competition in market by banks as they will try to expand customer base. Poor borrow from the MFI as it is still cheaper than moneylenders who charges abnormally high rates.
Solution lies in the holistic approach to create sustainable livelihood by utilising all the forces (Public and private) to eradicate the poverty. The Mission Mangalam (http://www.narendramodi.com/post/Davos-in-Action-India-Inclusive-through-Mission-Mangalam.aspx) by Gujrat Government can be a example in right direction.