Of the two vital ideas that were formulated by our founding fathers, unity in diversity and equality of status and opportunity, we can justifiably...
Of the two vital ideas that were formulated by our founding fathers, unity in diversity and equality of status and opportunity, we can justifiably be proud of India’s record on the first. Any bouts of divisiveness have been the exception rather than the ethos. On equality, sadly, the record is in stark contrast. Over 400 million Indians continue to wage a daily battle with abject poverty. This is surely an unacceptable collective failure.
It is, therefore, heartening to note that inclusive growth and financial inclusion are today’s mantras. If 67 years on, half our population remains unbanked and excluded from the financial system, the architecture needs immediate and substantial change. Rather than a blame game, we need a new game. One that is enabling, yet protective. That leverages technology (especially the ubiquitous mobile phone) and all possible distribution channels. That creates an opportunity rather than an obligation.
In this landscape, microfinance institutions (MFIs), together with other business correspondents (BCs), are crucial enablers as they have successfully created cost-efficient, large-scale, technology-driven entities. Their role is even more critical in bridging the glaring regional disparities (the smaller urban states being the best served, i.e. Delhi/Goa, and the large, rural and less accessible states, i.e. Bihar/North East, being at the bottom end) and the last-mile chasm. Therefore, although there have been some unfortunate, highly publicised cases, the achievements of many stellar MFIs have remained largely unsung. To cite just a few examples:
l Better-known surely is the first MFI to get one of the two coveted bank licences last year, Bandhan. This is a super achievement which should be a path-breaker for other appropriate MFIs to follow. Bandhan already has a loan book of over R7,000 crore and covers more than 60 lakh poor borrowers but this new avenue, opened by RBI, will surely take it to a whole new level.
l Even in the more difficult urban space, Janalakshmi and Ujjivan have made excellent progress.
And to put the eternal canard to rest, the infamous, perceived, high interest rate charged to the poor. I dare say that even some of the largest MFIs have a cost of funds of approximately 14.5%. Bring that much closer to 10.5% (PLR) and the poor would incur, and benefit from, virtually the same interest rate as you and me! In large measure thanks to the tremendous efficiencies the calibre MFIs and BCs have achieved and the fact that the default rate on MFI loans is 1/10th that of the corporate sector. The supportive policy changes by the regulator, including the recent guidelines on small finance banks, have further provided stability and credibility to what is undeniably a key stakeholder in the financial services architecture of the country.
To conclude, let a 100 flowers blossom. The challenge is so enormous and so incomplete—90% of the last mile is still to be traversed—that every channel, every player should be welcomed. From the public sector banks who are the marathoners and stay when many flee, to all the new kids on the block, all should be welcome.
By Bahram N Vakil
The author is a founding partner of AZB & Partners and director of Cashpor Micro Credit.
He spoke on ‘Examining Microfinance’ at the recent Harvard US-India Conference 2015 held in New Delhi by students of Harvard College