Delivery of credit at the doorstep of those who are not covered by the formal banking business, coupled with capacity building, is one of the ways for achieving financial inclusion. Such a financial inclusion of the poor can be more fruitful if the credit disbursed can help them become entrepreneurs than meeting only their consumption needs. The process can also be accentuated if the disbursing microfinance institutions (MFIs) inculcate a habit of savings by attracting deposits and come out with insurance products covering various risks.
The Nobel Laureate from Bangladesh and the founder of the Grameen Bank movement, Muhammad Yunus, has termed the microfinance disbursement as a social business in contrast to the commercial business of banks and financial institutions. There should be a separate regulatory authority for MFIs as distinguished in character from that for the commercial banks. The regulatory authority for MFIs should evolve guidelines keeping in view the objectives of socio-economic development of the poor, he suggests.
According to Yunus, MFIs should be self-sustaining, be allowed to attract deposits, provide insurance and pension fund, and should be capacity building.
If MFIs are owned by borrowers, there should be no payment of licence fees. MFIs can source funds from banks. He is, however, not in favour of MFIs sourcing funds from outside the country. Funds should preferably be mobilised and distributed locally, he opines.
The interest rates should preferably be lower. MFIs should ultimately be owned and operated by borrowers, as is in Bangladesh. There should not be any scope for individual profit in MFIs. All profits should be ploughed back in the MFIs for meeting the costs of transactions, he suggests.
According to Yunus, this is the right time for the microfinance movement to grow and spread in India. It can counter the adverse impact of the current global financial crisis and provide jobs and self-employment to many.
He holds the global banking and financial institutions responsible for the current global economic crisis as they have befooled the investors via mere paper transactions. Banking regulations should clearly distinguish between gambling and business. There should be proper in-built mechanism to prevent the business from running into trouble and insurance schemes should be in place for protecting deposits. The government should not bailout these institutions by doling out public money, he says.
The microfinance institutions should cater to the real economy and livelihood of millions of poor. The developing countries like India and Bangladesh have been largely insulated from the adverse impact of the current global financial crisis due to the presence of the real economy, he says. In Bangladesh 80% of the poor are covered under microfinance. The remaining 20% are expected to be covered within the next two years.
India has been able to cover only 20% people under it and needs to speed up, he suggests.
In India, a Bill for regulation of MFIs is pending in Parliament since 2007. The proposed legislation has been delayed on the issue of lowering of interest rates. A joint secretary in the banking division of the finance ministry, Amitabh Verma, says the government is very keen on MFIs lowering their interest rates. The MFIs should carry out their operations without any subvention of interest rates by the government. Bangladesh has set up a regulatory authority for the Grameen Banks and another legislation for approval of MFIs as social banking institutions is pending for approval.
Citing a few instances of social business, Yumus said, students in Bangladesh were given loans, most of who have opted to become entrepreneurs after they complete their studies. Interest-free loans of 1,000 taka were given to 1,00,000 beggars, 15,000 of which have stopped begging and set up small business. Loans without any interest was an exception in case of beggars. As a general principle, MFIs should charge interests on loans to cover their transaction costs. Prudence suggests that cost of transaction should be minimised and interest rates should be kept low.
MFIs in India, however, allege that their interest rates are higher (mostly in double digits) as they have to cover the costs of transactions and capacity building. According to Amitabh Verma, banks refinance rates to MFIs are not likely to be less than 7%. Also, the government may not be in a position to render subvention on loans. Therefore, the MFIs should find novel ways for covering or hedging their costs.
MFIs apex body Sa-Dhans executive director Mathew Titus said; The microfinance sector in India is going through a difficult and a challenging phase. Extraordinary growth, global credit crunch and increased awareness of social impact pose a challenge. It is an opportune moment for house keeping and clearing up concerns that have been around for a while. Growth and competition need to be addressed in the common spirit to serve the poor. Transparency is the key property that microfinance must subscribe to.Microfinance in India touched the 33.6 million clients-mark in 2007-08, of which 14.1 million were served by MFIs, according to Sa-Dhan estimate. Other estimates put the client outreach at over 100 million. These estimates may differ but there is an unanimous acknowledgement of the fact that over 90 million low-income households still remain unserved. Therefore, microfinance must grow steadily and steeply. All indicators point to a flattening growth curve. However, these were computed before the global financial crisis and the growth path may even suffer a dent, according to some experts. This means not only unserved clients will have to wait longer but also the existing clients are likely to see their credit flow slowing down and shrinking.
However, microfinance can grow from the perspective of demand only if adequate resources flow to MFIs and self-help groups (SHGs). There are four main options for capital mobilisation --- grants, profits, savings and investment. Grants and profits, however, are unfeasible.
There is no possibility of a steep growth from grant financing at this stage. In a given period, grants are just not large enough. The same holds true for profits that, in theory, can be generated from a granted corpus. If profits are huge enough, the organisation would either cease to be a community development finance by charging in excess of traditional moneylenders or serve non-poor clients. Savings could be a very feasible option, particularly in the long run. Only cooperatives are legally entitled to mobilise savings. Some of the experiences suggest failures of cooperatives. However, cooperative legislations in several states like Andhra Pradesh led to reforms in the cooperative model. The outcome is the legal form of MACS, which is the registration for many SHG federations.
There are about 75,000 SHG federations functioning in India and are an important avenue for managing an ever-expanding number of SHGs. The SHGs federate into a two or three-tier structures and take up a range of services, both financial and non-financial. They have so far not been included formally into the SBLP and have strong points in their favour like cost efficiency and democratic governance. Besides lacking exposure to these relatively new organisations, bankers often raise concerns about level of professionalism of federation management, viability of the business model including dependency on the self-help promoting institution (SHPI) and political interference. The idea of a national-level SHG federation is being debated to address the issue.
Bankers are generally comfortable in extending re-finance to the non-banking financial companies (NBFCs) because equity serves as a lever for credit. Banks are usually concerned over the creditworthiness of MFIs and SHG federations portfolio quality, profitability, governance and viability of the business plan. Incidentally, the involvement of investment funds regularly brings about improvements in all these areas. Bankers rely more on existing systems and structures, though some emphasise on the merits of a long-term relationship, their loan terms are mostly 24 to 36 months. Therefore, it is essential that MFIs and SHG federations go for credit ratings. Meanwhile, Nabard has a scheme for subsidised credit rating for MFIs and SHG federations.