Microfinance: Present Scenario and Emerging Challenges
After the pioneering efforts in the last ten years, the microfinance scene in India has reached a take −off point. With some more efforts substantial progress can be made in taking microfinance movement to the next orbit of sustainability. This needs innovative and forward−looking policies, based on the ground realities. This will make this sector vibrant and help achieve its ultimate mission of providing financial services to the poor and thus bridging the increasing gap between the demand and supply.
Providing financial services to the poor and underprivileged sections of the society has been the top most priority on the agenda of various anti−poverty programmes initiated by the Government of India since Independence. It is a well known fact that the Government of India has initiated number of subsidy linked rural development programmes which involve formal financial institutions in the implementation of these programmes. In spite of the best efforts of these financial institutions in reaching the deprived sections of the society living in rural areas, still a large chunk of rural underprivileged poor fail to get their due share from the institutional finance.
Even by early 1990s the share of informal financial institutions (informal sector) was quite high at 39.6 percent of total credit as per the data provided by Reserve Bank of India. It was in this cotext that the need for ultimate financial innovation that should penetrate into rural hinterland and provide formal financial services without any hurdles was strongly felt. It was in such an environment that microfinance emerged as a strong and suitable innovation which fills the existing gaps in the present finance system. Microfinance has almost become a ’buzz− word’ in the financial sector of every nation after the united Nations launched the − International Year of Microfinance in 2005. It got further impetus when Professor Muhammad Younus, the founder of Grameen Bank and pioneer of micro credit for women was awarded Noble Prize for peace. As a matter of fact, the concept of Microfinance is not a new financial innovation in India, Indian formal and informal financial entities have been practicing this concept , of course with different names , for a long period of time
With the initiative of national bodies like National Bank for Agriculture and Rural Development ( NABARD) and Small Industries Development Bank of India (SIDBI) in the beginning of 1990’s the concept of micro−finance came in to limelight. Today the idea of microfinance is gathering momentum to become a major force in India . It is conceived as a powerful instrument to fight against poverty, particularly in rural areas. This paper examines the present state of microfinance in India in enhancing rural credit access particularly to the poor and focuses its attention on some of the pertinent issues that need the considerable attention of the policy makers to make this sector a vibrant one .
Microfinance refers to small savings, credit and insurance services extended to socially and
economically disadvantaged segments of the society. The recent task force on microfinance has defined it as ˆprovision of thrift, credit and other financial services and product of very small amounts to the poor in rural, semi urban areas, for enabling them to raise their income level and improve living standards.˜ At present, a large part of Micro Finance activity is confined to credit only. The focus of the movement is on women who constitute a majority of users of Microfinance services. The concept of micro credit is distinct from Microfinance. Micro credit refers to the provision of credit in small amount with collateral substitute to the poor. Micro credit is one of the constituent part of micro finance.
DEMAND, SUPPLY AND POTENTIAL OF MICROFINANCE SECTOR
Accurate data relating to the demand, supply and potentiality of Microfinance sector in India is not available. Various organizations and individuals, by conducting research studies and surveys have provided rough estimates on this account.
As far as demand for the microfinance and its services is concerned, the Micro Credit Rating International Ltd. (MCRIL), a leading micro credit rating agency provides a conservative estimate for the annual demand to be at Rs.48,000 crore based on 60−70 million poor families with an average household credit demand of Rs.8000. Similarly, a group of microfinance practitioners, put annualized credit usage of all poor families (rural and urban) at over Rs.45,000 crore of which some 80 per cent is met by informal sector. This demand usually comes through numerous sections of the population which include landless labourers, small and marginal farmers, rural artisans, weavers, self−employed persons in the urban informal sector such as hawkers, vendors, workers in micro−enterprises, the people who own and run petty business, particularly the women folk.
With regard to various components of micro financial services, demand for ’savings services’ are higher than ’credit services’ Studies of rural households in various states in India show that The poor particularly the women are looking for a way to save small amounts whenever they can. The poor want a way to save for a variety of reasons such as to protect themselves from illness, calamities, death in the family etc. ’Insurance services’, though one of the essential component of microfinance, is being popularized in recent times only. Awareness towards ’insurance services’ is growing slowly but steadily. Poor people started taking insurance policies not just for the lives of their own family members but for the livestock and agriculture produce as well.
Regarding the supply of microfinance and its related services, Reserve Bank of India data shows that informal sources provide a significant part of the rural credit needs of the rural population. The magnitude of the dependence of the rural poor on informal sources of credit can be observed from the findings of the All India Debt and Investment Survey, 1992, which shows that the share of the non− institutional agencies (informal sector) in the outstanding cash dues of the rural household was 36 per cent.
Over the decades following India’s independence in 1947, Government of India has made concerted efforts to provide micro−financial sector. Co−operatives, Commercial Banks and Regional Rural Banks have made valiant efforts to reach the unreached and neglected rural poor. Specialized institutions like National Bank for Agriculture and Rural Development (NABARD) and Small Industries Development Bank of India (SIDBI) are also actively working in this direction. Some of the Non−Governmental Organizations (NGOs), which later converted into Micro Financial Institutions (MFIs)and Non−Banking Finance Companies (NBFCs) are striving a lot to continue further outreaching the rural poor. These formal institutions provide the credit support to the extent of nearly 56 per cent. Currently, around 66 per cent of the formal supply of funds is disbursed through Self−Help Groups −Bank linkage route, largely from National Bank for Agriculture and Rural Development (NABARD) while the rest comes from Micro Finance Institute (MFls) increasingly backed by commercial banks.
About the supply of microfinance related services, the existing formal financial institutions could not be able to provide access to large number of small depositors to deposit small and frequently recurring saving services because of high transaction costs. As a result of which there exist a huge gap between demand and supply of savings services. In the case of Insurance services they have been increased substantially, though the rate of penetration is rather slow.
Despite these efforts, the World Bank estimates revealed that the Indian microfinance activity currently reaches only 4 per cent of the poor. It is obvious that despite the rapid growth in the past few years, the supply of credit is well below the demand, hence, there is a lot more to be done in this direction. There is a tremendous business opportunity for doing business for formal and informal institutions in this space.
MODELS TO DELIVER MICROFINANCE
Over the years, NGOs, Financial Institutions, Commercial Banks, Co −operatives, around the world have been making every effort to develop innovative microfinance delivery approaches combining the safety and reliability of formal finance with the informal finance. The aim of these models is to provide, thrift, credit and other financial services and products of very small amounts to the poor and thereby improving their income levels and living standards.
Apart from traditional institutions, there are now specialized Microfinance Institutions (MFls), many still registered as NGOs or Co−operatives, a few transformed into Non Banking Finance Companies (NBFCs) or Section 25 companies delivering credit and other financial services through various innovative models. Most MFls promote ’Groups’ as intermediaries for financial transactions but there are different ways of working with the groups. These may be broadly classified as the group model, grameen model, small business village banking model, peer pressure model, village banking model, agency model, and individual model. In majority of these models, the groups usually assume joint responsibility for loans taken by its members, but there are significant differences in the services offered and in the extent of client responsibility in transactions.
As far as India is concerned, it has adopted a ’multi−agency approach’ for the development of its microfinance programme. All the major financial institutions viz, Commercial Banks, Co− operative Banks, Regional Rural Banks, along with NGOs and MFls have been associated with the microfinance programme. These institutions made experiments with various models to deliver microfinance at the doorsteps of the rural poor. Of all the models, the SHG−Bank linkage model and Join Liability Group (JLG) model (popularly known as Grameen model) are the most prominent microfinance models in India.
(a)SHG − Bank Linkage Model
Self−Help Group (SHG) is a small voluntary association of poor people, preferably from the same socioeconomic background. They come together for the purpose of solving their common problems through self−help and mutual help. The SHG promotes small savings among its members. The savings are kept with a bank. This common fund is in the name of the SHG. Bank also issues a loan to the group after rating them based on their savings and internal credit behaviour. The SHGs usually land internally both before and after the linkage takes place. Usually, the number of members in an SHG does not exceed twenty. The SHG−Bank linkage model has emerged as a major microfinance business model in India. This model can be further classified into three groups:
SHG−Bank linkage Model I
Banks themselves take up the work of forming and nurturing the groups, opening their saving bank accounts and providing them bank loans.
SHG−Bank linkage Model II
SHGs are formed by NGOs and formal agencies but are directly financed by financial intermediaries.
SHG−Bank linkage Model III
SHGs are financed by banks using NGOs and other agencies as financial intermediaries.
With a view to strengthen SHG movement there is a tendency to form SHG Federations. Typically, about 15 to 50 SHGs make up a Cluster / Village Organisation (VO) with either
one or two, depending on geography, several Clusters or VOs, come together to form an apex body or a SHG Federation. An SHG Federation is a formal group of informal common interest groups. At a cluster and federation level, there are inter−group borrowings, exchange of ideas, sharing of costs and discussion of common interests. There are typically various sub− committees including loan collection and social issues.
(b)Joint Liability Group Model
In Joint Liability Group Model, a small group of prospective borrowers (typically 4−5) are formed. In the first stage, only two of them are eligible for and receive, a loan from an external lender (MFl). The group is observed for a month to see if the members are complying with the rules of the bank. Only if the first row borrowers repay the principal plus interest over a period of fifty weeks then other members of the group become eligible for a loan. Because of these restrictions there is substantial group pressure to keep individual records clear. In this sense, collective responsibility of the group serves as a collateral on the loan. Grameen model propounded by Prof. Mohammed Younus, the father of microfinance movement in Bangladesh and Noble Laureate, is the basis for this model. Unlike the SHG, the sole purpose of existence of a JLGM is to receive a group loan from a MFL.
NABARD has taken a basic stand towards the SHG−Bank linkage model. Grameen model has not received proper attention so far. It is only after seeing that the RBI made up its mind in favor of Grameen model, of late, some banks have started showing interest.
SALIENT FEATURES OF MICRO FINANCE SECTOR
Some of the salient features of the Microfinance sector in India are outlined hereunder :− 01. The SHG−Bank linkage model is very popular in terms of its scale, geographical coverage, and outreach. This model literally brings name and fame to India in the world of microfinance and elevates it as a house to one of the largest microfinance programmes in the world. SHG−Bank linkage model was started as a pilot project of NABARD and it has become a movement now. Today, over 4,300 NGOs and around 41,000 branches of 549 institutions (including 47 Commercial Banks) are associated with this programme. 02. Among various states in India, Andhra Pradesh occupies the first place in terms of linkage and credit disbursal for the last several years from now. 03. Majority of NGOs and MFls in India are extending their services to the rural poor and targeting women. 04. Studies conducted by NABARD revealed that neatly 31 per cent of the household members of the SHGs were landless agricultural labourers and 54 per cent were small and marginal farmers. Nearly 70 per cent of the bank loans were used for income generating purposes. 05. NABARD studies further revealed that there was remarkable progress in social empowerment of SHG members in terms of self−confidence, involving decision−making, better communication etc. 06. Sa−Dhan, an association of 139 Community Development institutions by conducting a research studies states that current repayment rate of 97.7 per cent for Indian MFls, is much higher to its benchmark of 90 per cent which indicates the soundness of asset quality of Indian MFls. 07. Indian MFls enjoying unprecedented access to banks and other financial institutions, makes them amongst the most highly leveraged institutions in the world. 08. Majority of Indian MFls are close to attain full operational self−sufficiency which have been generating sufficient profits to contribute to capital from their internal accruals. 09. Traditionally, Civil Society Organizations (NGOs) financed all operational and capital costs incurred for small lending activity through donor funds or charitable grants. MFls take on commercial debt for onward lending and raise capital by securitization of assents and portfolio sales. Other avenues available are equity investments, quasi− equity through the partnership models and loan guarantor funds.
10. The kind of strategies adopted by MFls to grow and sustain in the microfinance market is observed. Some MFls offer limited products (mostly loans/credit) across all branches to expand their client base and geographic coverage; other MFls choose to maintain a particular client profile and geographic coverage (location) but diversify their products and services instead. Some prefer franchise route, appoint local entrepreneurs as its franchisees and allow them to conduct business under their name and methodology.
There have definitely been significant advances in microfinance operations in recent years and the concept and practice of SHG−Bank linkage model has now developed deep roots in many parts of the country though the industry has grown in terms of its scale, geographical coverage and outreach, it is still starved of adequate resources to meet the growing demand. Needless to say, a lot needs to be done to strengthen and sustain the movement of microfinance. Absence of enabling stringent entry norms and restriction to accept deposits by MFls, are the major reasons that prevent growth. An attempt is also being made in this paper for pertinent issues that need the considerable attention of the policy makers.
01.Application of the Concept
Concerns have been expressed about the application of the concept. Out of Micro Savings, Micro Credit and other components in Microfinance, it is only the Micro Savings and Micro Credit aspects that have been carried out by MFls in India. Micro Insurance, Micro remittances and Micro pensions, however, are still in experimental stage.
02.Weak Microfinance Institutions
Normally, Microfinance Institutions (MFls) play a vital role in strengthening the programme of microfinance. Unfortunately, most of the MFls which have been operating in India suffer from weak governance, defective management structure, absence of adequate internal controls and financial discipline. This also results in lack of financial transparence on their part, making their regulation much more difficult.
03.Absence of proper Legal and Regulatory Mechanism
An enabling policy for legal and regulatory framework is pre−requisite for the success of microfinance in any country. If this sector were to be scaled−up, the government would need to play a positive role in regulatory framework for microfinance. Unfortunately, this is lagging in India.
Another area of concern is that microfinance is biased towards South and has not provided a balanced access to credit for the poor in other regions. This promotes regional imbalance and aggravates the regional disparities. For instance, 58 per cent of NABARD’s clients live in Southern India and 78 per cent of loans facilitated by NABARD were disbursed in South India.
At present, MFls tend to be rigid on product features such as loan amount, repayment schedule, and loan tenure, saving instruments, insurance products etc. MFls need to explore innovative products that suit the requirements of rural poor, particularly women.
Transaction cost is a cause of concern to most of the MFls because of service delivery at the door steps of the consumers with little or no deployment of technology solution in the face of rising competition, public scrutiny and political interference.
Qualified, skilled and experienced manpower is in grave shortage in this sector. This sector is not able to attract required and capable talent despite offering of attractive pay packages. This is largely due to the fact that microfinance is still not perceived as a viable business opportunity and professional workplace.
Long−term debt and equity investments can help the MFls to maintain current growth while maintaining capital adequacy norms. But getting long−term debt and equity investment is a major challenge to the MFls in the given legal and regulatory environment.
09.Unorganized sectoral tendencies
Informal sector is still a dominant sector when compared with formal one even in the field of microfinance in India. As a result of this accurate data relating to savings and deposits, credit, services, insurance, NPAs recovery, MFls etc. is not available. Policy making and regulatory control become Herculean tasks for people at the helm.
10.Interest rates and Service fee
Interest rates and Services fee charged by MFls are the other issues of great concern and major challenge for this sector in the face of rising competition, public complaints against them of misbehaviour and malpractice such as hidden charges and effective rates of 35−50 per cent on a declining basis in the southern state of Andhra Pradesh.
After the pioneering efforts in the last ten years, the microfinance scene in India has reached a take−off point. With some more efforts substantial progress can be made in taking microfinance movement to the next orbit of sustainability. This needs innovative and forward−looking policies, based on the ground realities. This will make this sector vibrant and help achieve its single−point mission of providing financial services to the poor and bridge the increasing gap between the demand and supply.
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