Use this microfinance mess to move ahead…..GANESH RENGASWAMY
Given past failures in government delivery, the regulator shouldn’t ignore microfinance as a complement to self-help groups
Given past failures in government delivery, the regulator shouldn’t ignore microfinance as a complement to self-help groups
ON THE face of it, India has a deep financial system. Financial assets amount to about $2 trillion or about 160 per cent of GDP in India compared to $12 trillion in China, or 280 per cent of the GDP. India also has a very large network of commercial bank branches -185,000, of which almost half are in rural areas. As a result, India compares favourably in terms of branch density (average population served per commercial bank branch). However, India’s deep financial system is very uneven and has been relatively unsuccessful in improving access of poor people to financial services. As a result of the current Andhra Pradesh crisis and its impact on the microfinance industry, access to financial services for the poor is poised to take a giant leap backwards in the absence of effective and urgent regulation.
The financial regulator in India has, at best, done a mediocre job of providing a viable financial services model that reaches the poor. The RBI’s approach to financial inclusion has been a series of wellmeaning but half-hearted programmes and an avoidance of any systematic approach to address an obvious gap. Eight or nine per cent GDP growth means very little to a vast majority in India, with over 50 per cent of the population still not having any formal saving options, borrowing money largely from informal sources at exorbitant rates (50-100 per cent annual percentage rate), paying upwards of five per cent commission to transfer money domestically, and for whom penetration of life insurance and pension schemes is negligible.
Why has the government failed to provide real financial inclusion, and what does this have to do with the current mess facing the microfinance industry?
The government’s discontinued Integrated Rural Development Programme (IRDP) has been described as the world’s largest microfinance programme. Some $5 billion was disbursed through commercial banks to an estimated 55 million families, each receiving loans of less than $100. If sustainability were a criterion, the IRDP would be judged a colossal failure. It incorporated a massive element of subsidy that resulted in widespread misuse of funds, very low loan recovery rates (less than 30 per cent) and the refusal of commercial banks to recycle loanable funds. Similarly, and around the same time, a network of primary cooperatives and rural banks was established by the government of India to meet the credit needs of the poor, and, eventually, also become dysfunctional. A non-market approach to credit-delivery, corruption and mismanagement have left this vast institutional infrastructure financially crippled, with the cooperatives and RRBs having been recapitalised multiple times to avoid going bankrupt again.