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Micro-finance, a success story………R. Balasubramanian
The Indian microfinance sector has played a laudable role in improving the lot of the economically disadvantaged. What’s more, it has unleashedthe potential of the economically challenged, propelling them up the economic ladder.
Over the last two decades, social entrepreneurs, microfinance professionals, government institutions and private initiatives in the country have nurtured the growth of microfinance institutions (MFIs). If the ‘Operation Flood’ initiative was the catalyst that linked village milk producers to milk consumers all over India, the microfinance movement has channelled resources of the banking sector to the economically challenged in towns and villages.
Microfinance has gained in significance in the last few years. It is now on the threshold of a boom. SKS Microfinance Ltd (SKS), the largest MFI in India, has placed the sector on the equity market radar. SKS has 5.3 million members, a network of about 1,630 branches, and a loan portfolio of Rs 3,200 crore as of September 2009. Microfinance has indeed come a long way — from village lanes to Dalal Street is no mean achievement.
EVOLUTION OF MFIs
Globally, the Grameen Bank model of microfinance is well knownand has been replicated in many countries. A number of MFIs in India adopt the Grameen model and other group models to reach out to their target clientele. India, in a way, is unique.
It has a mix of the Grameen model, joint liability group model, franchisee model, and more importantly, the self-help group (SHG) model. The SHG-bank linkage program was initiated by the National Bank for Agriculture and Rural Development in 1992. It is the dominant MFI model in India. The Small Industries Development Bank of India launched its micro credit scheme in 1994 and formed the SIDBI Foundation for Micro Credit in 1998.
Concerted efforts were made to link the sector with mainstream financial institutions. Rating agencies have played an instrumental role in connecting the sector to lending institutions and debt markets. With the proposed initial public offering of SKS, the sector will establish its linkage with the equity markets as well.
NEED FOR REGULATION
Regulation is essential for financial intermediation. The Reserve Bank of India (RBI) provided the necessary fillip to the growth of microfinance. In 2000, the RBI announced that micro-credit loans given by banks directly to individuals or through intermediaries would form part of priority sector loans. This provided an opportunity for the MFIs to access bank borrowings. In 2002, the RBI constituted four informal groups to examine the issues relating to the delivery of microfinance.
In 2004, the RBI expressed concern over MFIs raising deposits. This was because MFIs operate under different legal structures and many of them do not come under the purview of the RBI. In the context of regulation, the timely approval and passage of the Micro Financial Sector (Development & Regulation) Bill would give more recognition to the sector, and in turn, facilitate its orderly growth.
In the Indian context, the SHG-bank linkage programme continues to be dominant, given the wide reach of the banks. As of March 2009, around 86 million poor households through six million SHGs had placed their savings of about Rs 5,500 crore with the public sector banks (PSBs).
A discerning trend has emerged over the last three years. MFIs have widened their network and have absorbed a higher share of banks’ disbursements. Similarly, banks have regarded MFIs as a beneficial medium to scale up their volumes. In 2008-09, MFIs channelled 23 per cent of bank lending towards microfinance against 15 per cent in 2007. In all likelihood, the MFIs’ share could have increased to nearly one-third in 2009-10. The PSBs disbursed Rs 3,700 crore to around 580 MFIs in 2008-09 and had loans outstanding of Rs 5,000 crore to over 1,900 MFIs as of March 2009.
CHALLENGES AHEAD
The sector is at a critical juncture. The emphasis on financial inclusion,focus of banks on the micro-finance sector and the vast, untapped segment in need of small loans – all these offer opportunities for the sector to scale up.
The MFIs are aware of the issues that need to be addressed. These include: imparting counselling on ‘savings-credit-protection’, ensuring that lending rates are competitive and operations are self-sufficient, bolstering capital and strengthening controls in line with growing volumes.
The extent to which the MFIs resolve these issues would determine the future prominence and profile of the sector.
(The author, a finance professional, works for a bank in Riyadh. The views are personal.)
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