|
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 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. But the most ambitious attempt at financial inclusion for more than a decade now has been the self-help group (SHG) model. The SHG approach to microfinance was pioneered by the National Bank for Agriculture and Rural Development (NABARD) and is today one of the most widespread microfinance programmes in the country. Many state governments have competed to create as many SHGs as they can in the shortest possible time-frame.
The argument made for such a “client inclusive” model is in the name itself, “self-help”.
The idea is to empower women (most of the SHGs in India are women-based) by mobilising them to meet their needs in a holistic manner. Typically, an NGO working in the area forms these groups, consisting of 12 to 20 members. These small groups are encouraged to meet frequently and collect small thrift amounts from their members. Through group dynamics, decision-making and funds management, the sense of empowerment is promoted.
The group is not merely a savings and loan association, but serves as a collective conduit that provides a platform for a range of issues such as watershed development, awareness building and family planning. It is incorrect to argue against the potential of SHGs from a social development point of view, but they are not necessarily the best delivery model for financial services to the poor. Compared to the microfinance model, the SHG model lacks financial viability and scalability, and thus the ability to be effectively delivered on a sustainable, scalable basis across India.
The SHG-bank linkage model’s very survival is partially explicable because it utilises the existing rural and co-operative banking system and thus gives the government a justification for having created this infrastructure and to maintain it (largely recapitalising these institutions every three to five years) and also because it provides a valuable target-driven initiative that can be politically manipulated almost indefinitely. Thus in each year’s budget, in the name of financial inclusion, there are revised targets to further scale up the SHG-bank linkage programme.
Isitreallyjustifiedtobankona system that hasn’t performed for almost four decades, and being completely closed to new models of microfinance? Diverse microfinance needs of people in different parts of India and the large supply-demandgapcaneasilyabsorbmultiple models. The key point is to realise that scalability is the biggest hurdle in meeting the microfinance needs of the poor and should form the core of all policies and models that are being promoted. Any serious institutional inflexibility on the part ofgovernmentagenciestowards private MFIs will do irreparable damage to the nascent microfinance sector in India.
The RBI should instead focus on establishing an effective public regulator for private MFIs and private-sector financial inclusion service providers, through engaging in effective consultations with MFIs, bankers and other key stakeholders.Therightsolutionforfinancial inclusion has always been nationwide microfinance regulation, governed by the RBI. The government should usethiscrisisasanopportunityto carry out such systemic change.
Such an overhaul would pave the way to savings/deposit acceptance mechanism by MFIs and proactive functional guidance from the likes of the IRDA for insurance and the PFRDA for pensions, in order for MFIs tobecomeeffectivechannelsfor non-creditservices.Financialinclusion is a critical priority for the development of India. If the government is willing to deploy some political capital in such a strategically important area, it could turn this crisis into the systemic change we need. The writer is the founder of a social venture capital fund
|
|
|