More than 40 years after bank nationalisation and the establishment of regional rural banks in 1975, over 120 million households in the country are outside the purview of the formal financial sector. Most of them remain untouched even by the microfinance institutions (MFIs), which began operating in the 1990s. Now may be the time to think harder about how to make microfinance more effective.

The most important models of MFIs are the self-help group model and the joint liability group model, with weekly or fortnightly repayment schedules. It is estimated that there are over 3,000 MFIs and microfinance-linked NGOs in the country. According to Crisil, MFI?s outstanding loans reached Rs 114 billion by March-end 2009, from Rs 60 billion the previous year.

Most of the microfinance credits are used for taking up an economic activity, paying for additional and unexpected family consumption expenditure, mitigating the vulnerability and income shocks after an illness in the family or natural calamity or crop failure. For the poor, MFIs are safer and more affordable than the local money lender.

But when compared to the availability of money to those who have access to the formal banking system, the poor have to pay a lot for little money. Though it is said that MFIs lend under joint liability method at 12% to 18% and under the SHG system 18% to 24%, the poor will not get any loan for less than 25% while their better-off can get it even as low as 7% to 4% from banks. Any government intervention to put a ceiling on the MFI rate may boomerang on the poor. The MFIs say 25% is the minimum viable rate for them. They get the money from banks and other soft lending institutions like Sidbi only at 14-15%. Administrative and transaction costs and a subsistence-level margin together will range from 8% to 10% at the lowest. This would necessarily make the lending rate 25%. The only viable proposition to reach the poor is to make funds available to the MFIs at concessional rates like agricultural loans with a mandate to regulate costs attached to disbursal and collection.

joseph.vackayil@expressindia.com