| Goodbye, microfinance 12 Aug 2010, 0546 hrs IST,T K Arun,ET Bureau Microfinance is slated to join the ranks of flintstones, the crossbow , gas lamps, the pigeon post and the floppy disk – all excellent in their own time but rendered obsolete by the march of technology. What made microfinance tick? One, failure of formal finance to reach out to the majority , particularly in rural areas. This left the rural lending field to the moneylender, the landlord, the trader or some other ‘informal’ , usually expensive, source of credit. So, when microfinance came up with a loan that was cheap when compared to the informal sources of credit, it found ready takers. Two, the paucity of alternate sources of cheap credit. This made people repay their micro loans. If you spoilt your credit standing , you also spoilt the standing of the people in your group and you lost face, as well. Both these conditions are disappearing. The second factor first. The success of microfinance has led to a rush of microfinance entrepreneurs into rural areas, who push money at all and sundry, to build up a large asset portfolio in a short time. Many rural women find themselves taking multiple loans and finding it difficult to repay most of them. But then, even if you defaulted on one, some other desperate chaser of micro gold at the bottom of the pyramid was at your doorstep with a loan offer. Now, for the reach of formal credit. The traditional banking model is too expensive to reach out to the 78 crore people in the country’s 6,25,000 villages. In fact, banks fail to reach out to even the relatively less-affluent in the towns. This makes the moneylender and microfinance both relevant. India’s rural landscape is set to change dramatically over the next five years. Road connectivity will improve vastly, thanks to multiple rural road projects, the golden quadrilateral and the east-west corridors that cut through swathes of rural India and the supplementary connecting roads these promote. The rural electrification programme will definitely miss its 2012 target but still bring power to large parts of the country by the next five years. This will make it possible for a range of imaging devices to work, the most ubiquitous of which would, of course, be the mobile phone. Phones would provide data connectivity, besides voice. Thoughtless government greed has made 3G spectrum expensive , scuppering broad dispersal of 3G connectivity , but data access will still be widely distributed, even if at low speeds. With broadband wireless access licences being given out sans rollout obligations, whether this would benefit rural areas as it should is up in the air, but some spread is inevitable. Organised retail would be bigger and have greater reach. It would not only procure from rural areas but also have a vested interest in supplying knowhow and inputs to rural producers that would lower costs and improve productivity. Organised retail would have a catalytic role in precipitating productive use of broadband communication possibilities in the rural areas, besides forcing rural producers to acquire more organised forms that can engage with organised retail. All these make it imperative that the RBI, the banking regulator, stop shying away from new technological possibilities for inclusive banking. One, the cost of creating and maintaining bank accounts has come down sharply. All that the banks need to do is to follow the example of the new pension system, which has a common record-keeper who maintains the electronic accounts of savers accessible by six pension fund managers as per the mandate of the individual savers. One agency could create and maintain all small-ticket bank accounts, and each individual could decide which bank he wants to work with. The more exciting technological possibility is to use mobile phones for banking. Phone companies know how to make big money from millions of small transactions. They have a distribution model that reaches out to remote areas. They have a piece of portable equipment, the phone, that combines software and hardware to allow, for example, people to access their bank accounts to transfer value from the account to the phone, and vice versa. The vendors of prepaid cards can handle physical cash, whose need can be reduced with the unique identity scheme and ubiquitous broadband connectivity. Once these technological possibilities are realised, formal finance can reach out to all Indians, anywhere, anytime. An expanded credit information bureau can track individual credit histories to promote good credit behaviour among borrowers and penalise default. All that is holding up this inclusive finance revolution is the RBI’s reluctance to license a mobile phone company to do banking . The reluctance is understandable, but not justified. The RBI could ask a mobile operator with banking operations to create a joint venture with an existing bank to become eligible for a licence. Once such regulatory reluctance is overcome , and electricity and broadband suffuse rural areas, microfinance would die. |