Policy makers have woken up to the fact that their poverty alleviation programmes, mandatory priority sector lending by banks, and many other government schemes have hardly made a dent in improving the living standard of those below the poverty line.
Micro-finance is now fast gaining recognition; especially among poor nations and developing countries like ours, as not only a solution but also an antidote to prevent recurrences of heading back below the poverty line.
The approach is daring and more known for not only its frontal-attack approach in tackling poverty from its roots but also in creating a sense of responsibility among those living in the dark, as to how they, themselves, can help in wiping out the curse of poverty. In a country like ours, where one third of the over one billion population lives under the poverty line, micro-finance is the biggest saviour that is all set to bring about a revolutionary change among the lives of many underprivileged people.
This is perhaps the first time in history where banks, policy makers, NGOs, self-help groups (SHGs) and the beneficiaries have come together to attack the root cause of poverty-deliverables.
What long drawn poverty alleviation programmes under priority sector lending and rural banking could not achieve in the past, delivery channels under micro-finance activities of banks will be able to tackle successfully, opine bankers unanimously.
Take the example of the country?s largest government bank, the State Bank of India. The bank today claims to be among the first to link credit to SHGs.
?SBI is a prime driver for the movement,? says OP Bhatt, chairman of SBI. SBI, with a share of approximately 47% of total SHGs financed by commercial banks, is far ahead of others.
The bank has successfully initiated various innovative initiatives toward widening its SHG network. To list a few, it has sensitised the entire staff in rural and semi-urban branches towards the programme and launched its housing loan product for SHG members.
According to committee findings, 73% of farm households still have no access to formal credit sources. This is despite the fact that state-owned banks have disbursed agricultural loans of over Rs 2 lakh crore in 2006-07. The report suggests that a large number of farmers prefer to access credit from non-institutional sources, primarily because it is less cumbersome.
The banking regulator, the Reserve Bank of India (RBI) is also constantly providing the much-needed impetus for the growth of micro-finance in the country.
Pointing out that the subprime mortgage crisis shows that efforts to enhance profits could run a risk of predatory and irresponsible lending, the RBI deputy governor, Usha Thorat says financial inclusion by involving self-help groups in low income communities is a way of handling this challenge.
?Banks are special and the banking license, which enables banks to be highly leveraged institutions, casts responsibilities on them, to make available basic banking services to all,? she says.
At the same time, sustained growth of their balance sheets would imply that they penetrate remote and untouched segments of the population requiring investments in technology and skills for scaling-up.
The use of local community-based organisations and social capital such as SHGs in low-income communities is a way of handling the challenge of predatory and irresponsible lending.
Thorat further explains that financial inclusion also points out to the fact that interest rates, while covering cost and risk, should not be so high as to add to the risk of default. There is thus a need to ensure a fair balance between sustainability of operations through coverage of costs, and interest burden on the borrower, she said.
Bankers further explain that a uniform banking pattern or a unique financial product would obviously not work. Products need to be designed and packaged taking into account local culture, customs, language, literacy, and social indicators.
Also, rural households need to be provided credit in a composite way, covering all their needs, including life-cycle needs, as the traditional crop loans, term loans, housing loans, consumption loans bouquet may not work.
Government banks with their large network across the country have now turned out to be a boon for achieving financial inclusion and micro-financing businesses.
?I believe, fuller utilisation of the existing capacity can itself give huge dividends. Given the existing number of nearly 48,000 rural and semi-urban branches, an increase of loans by Rs 1 crore per branch could imply additional profits of about Rs 480 crore to the banking system,? says Thorat.
Regional offices of banks may need to be delegated with appropriate powers for product design, while ensuring consistency with board policies, she says.
KC Chakrabarty, chairman and managing director, Punjab National Bank (PNB), too realises the importance of linking credit to self help groups, so as to bring about entrepreneurship quality among such groups. ?We want to take micro-finance from the levels of micro-credit and finally toward micro-entrepreneurship,? he says.
PNB wants to achieve financial inclusion in the entire Indo-gangetic basin, for which it has already launched 13 pilots programmes. Adds MD Mallya, chairman and managing director, Bank of Maharashtra, ?Micro-finance will mainly ensure credit linkages to these SHGs.?
The bank?s outstanding loans to SHGs, as on date, was Rs 90 crore and recovery was 95%. The bank provides loans to SHGs at an interest rate of 10.5%. Even city-centric foreign banks, known to be profit-oriented, are now identifying micro-finance as a thrust area.
Standard Chartered Bank, the largest foreign bank in the country, plans to ramp up its activities in the micro-finance space in the coming months, says Neeraj Swaroop, chief executive officer, India, Standard Chartered Bank.
?We will increase our exposure as well as the number of micro-finance institutions (MFI) partners. Micro-finance is also a commercially attractive proposition. The aim is to increase our exposure to about Rs 500 crore by March 2008,? says Swaroop.
According to Moumita Sen Sarma, vice president and head of micro-finance, India, ABN Amro Bank, micro-finance opportunities in the country are very good. ?But there exists a huge gap between market size and its realisation. There are not enough strong large MFIs to bridge the gap. Banks are waiting with money but there are not enough MFIs at the ground level to make use of this opportunity,? she says.
Surely, with its virtuous circle, micro-finance is now a win-win proposition for securing double-digit growth for the Indian economy.