At last, recognition to micro finance

The Budget has received considerable media attention, from the initially euphoric to cautious to critical, in the days succeeding its presentation. Subsequent political events overshadowed the finer calculations on the impact of abatement versus the reduction of excise; the introduction of countervailing duties viewed against the reduction in customs, and the up and down dance in petroleum duties. Hidden somewhere has been the steady rise in retail prices, the threat of increases in prices of edible oils (perhaps due to tariff interventions), and the fear of price hikes in LPG and diesel. But the past is prologue, and the media has moved on to more current crises.

Meanwhile, an important initiative has not received the attention it deserves. The Budget speech, for perhaps the first time, recognised the service that micro finance institutions have been rendering to rural society. The finance minister announced that commercial banks would appoint MFIs as banking correspondents to provide transaction services on their behalf; that qualified NGOs would be allowed to use the External Commercial Borrowing window to access credit; that there would be a Micro Finance Development and Equity Fund with a corpus of Rs 200 crore and that a suitable legislation for MFIs would be introduced.

Rural self-help groups and micro finance institutions are only two decades old in India. These were originally conceived as village women forming small informal groups, of say 25, for mutual credit support. The movement received governmental support in Tamil Nadu in the late ?80s, which helped the initiative grow. Government support was in the form of seed money, training for the group leader with an NGO, and an initial capital, often no more than Rs 10,000, to get the credit activities started.

These groups would meet regularly and small loans would be made available to members, usually with short repayment periods. The focus was on consensus in decision-making and transparency in disbursement and return. The process helped to develop strong bonds within the group members, which could then be leveraged to improve other indicators like infant mortality, sanitation and nutrition. Under a benevolent administration and a dedicated NGO, these groups thrived, and over the next decade, endowed members with a sense of pride, independence and economic well being. Several models developed ? groups that used funds for normal economic needs like purchase of seeds and fertiliser, to groups that developed unique employment generation activities like rural handicrafts and weaving.

India currently has over 500,000 groups, with the majority being in Tamil Nadu, Karnataka, Andhra Pradesh, Maharashtra, Gujarat and Rajasthan. Their total lending exceeded Rs 5,000 crore last year. Given the flexible lending process and the quick availability, there is little murmur about the interest rates charged. NGOs assist these groups in managing finances, accessing the administration, and in income generating activities. Among the more prominent is Sewa.

With growing sophistication of needs and uses, there is demand for increasing the range and size of the activities. This is possible only through institutional finance. Banks like ICICI have pioneered mechanisms of lending to such groups, but other banks have been cautious about lending to such informal, unregistered, and often, unlettered entities. To be able to accept deposits, the groups need to be regulated by the RBI, but can scarce meet the regulatory norms. For access to funds, they have little collateral but their honesty in repayment.

Against this backdrop, the FM?s announcement becomes significant. By recognising the group as an entity that can intermediate between banks and its members, he has opened a window of access to organised credit. The fund could be used to help defray the higher administrative costs inherent in the management of micro loans. Allowing qualified NGOs to access ECBs would, apart from easing credit availability, help stop the flow of funds from so-called charitable overseas funds that may have other agenda, including religion. Providing for micro insurance will deepen the reach of insurance into rural areas, a much needed facility.

In sum, a novel initiative that needs to be followed through early into action. Those who have worked closely with these institutions would also like a few concerns to be addressed. The first relates to the high management and interest costs. Under the argument that no credit is more expensive than no credit, interest charges and costs of management are unconscionably high. One hopes the RBI regulations would address this.

Another issue is the exploitative nature of some of the organisations working in this field. Not all NGOs have purely an altruistic or service motive, and it is important to recognise and regulate this, without undermining the inherent strength of the movement. The new legislation that is being proposed needs to address this.

There is also concern about regional disparity. There is little evidence of success in several states, while others have a dense population of these institutions. It is important to find out the reasons, and provide incentives for greater geographical dispersal of the success stories.

Finally, if these institutions become the ultimate purveyors of rural credit, the relative role of banks would need to be spelt out clearly, so they could act in synergy.

These MFIs can become the vehicle

of rural empowerment, especially for rural women. There is no greater proof than to watch the TV programme on a Tamil channel every Sunday, where these rural, often uneducated, women discuss issues with a large audience with confidence and self-assurance.

The writer is a former finance secretary and economic advisor to the PM