Microfinance Development Strategy for India

Author(s): Anil K. Khandelwal

Source: Economic and Political Weekly , Mar. 31 - Apr. 6, 2007, Vol. 42, No. 13, Money,
Banking and Finance (Mar. 31 - Apr. 6, 2007), pp. 1127-1129+1131+1133+1135
Published by: Economic and Political Weekly

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 Microfinance Development
Strategy for India
Due to the nature of the expansion of banking services in the country and constraints
on banking entities, microfinance and microfinancing institutions have gained immense
relevance today. The inicrofinance activities of banks lhave grown to new heights.

ANIL K KHANDELWAL

poverty. In Indonesia, the Indonesian People's Credit Banks

It would be nice if the poor were to get even half of the money
that is spent in studying them. (BPR) or The Bank Perkreditan Rakyat was set up in 1895. The
- Bill Vaughn
BPR became the largest microfinance system in Indonesia with
close to 9,000 units.
However, in its most recent incarnation, it can be linked to
Microfinance: A Concept several organisations that were set up in the 1970s and subsequent
decades. Some of the initiatives, which founded the microfinance
revolution of today, can be enlisted as follows:
M ricrofinance today has become one of the most debated
and documented but still much confused buzzwords in In 1959, Akhter Hameed Khan as the founder of Pakistan (now
Bangladesh) Academy for Rural Development introduced the
banking and policymaking fields. In the most simplistic
way, it can be termed as "banking for the poor". Suggested by
revolutionary idea of micro-credit (microfinance), thereby open-
the name, most transactions under "microfinance" involveing smalla new door for millions of destitute and underprivileged
amounts of money. But the connotation of the term has apeople.
much His Comilla Cooperative Pilot Project is considered a
wider meaning. It is claimed to be a powerful tool, which model
can of micro-credit and rural development initiatives in
be used effectively to address poverty, empower the sociallydeveloping countries.
marginalised poor and strengthen the social fabric. And when In 1971, Al Whittaker and David Bussau established Oppor-
it is directed at women, the benefits accruing out of the micro-
tunity International, which provides opportunities for people in
financing activities are expected to multiply manifold. That is poverty to transform their lives by creating jobs, stimu-
chronic
why it is supposed to be changing lives of people in every lating
part small businesses, and strengthening communities. Small
of the globe. Today, microfinancing is considered to be a loans
more ranging from $ 25 to $ 500 helped poor families lift
subaltern way of providing financial assistance to our less themselves
privi- out of poverty with dignity. In 1973, ACCION Inter-
leged brothers and sisters. national, started to focus on providing economic opportunities
In India, microfinance has been defined by the Task Force on people instead of working on construction/infrastructure
to poor
projects in order to create lasting improvements in the lives of
Microfinance as "provision of thrift, credit and other financial
those they were helping. In 1976, Muhammad Yunus founded
services and products of very small amounts to the poor in rural,
the Grameen Bank (GB) to make loans to poor Bangladeshis.
semi-urban or urban areas for enabling them to raise their income
levels and improve living standards. As per the definition As of ofDecember 2006, it has 6.91 million borrowers, 97 per cent
International Labour Organisation (ILO), microfinanceof iswhom
an are women. With 2,319 branches, GB provides service
economic development approach that involves providing finan- in 74,462 villages, covering more than 89 per cent of the total
cial services through institutions to low income clients. villages in Bangladesh.
The way in which the banking sector has evolved the world In the 1980s FINCA International started micro-credit facilities
in
over has not been truly inclusive. So, people with no or meagre Bolivia. John Hatch, founder of FINCA, named this as "villag
banking".
physical collateral get completely marginalised. However, it is In India too, the National Bank for Agriculture an
heartening to see that of late policymakers across the globe Rural
have Development (NABARD) finances more than 500 bank
realised that it is difficult to sustain the growth momentum that
unless on-lend funds to self-help groups (SHGs). SHGs compris
20 or fewer members, of whom the majority are women from
the marginalised masses are brought into the mainstream economy.
This has increased the general level of interest in newer theandpoorest castes and tribes.
innovative ways of providing financial and banking assistance Some of the most recent strategic policy initiatives in the area
to marginalised people. of microfinance taken by the government and regulatory bodie
in India are as follows: (1) Working Group on Credit to the Poo
Actually in some form or the other, the concept of"microfinance"
through SHGs, NGOs, NABARD, 1995; (2) The National
always existed in almost each and every society. But as a more
formal and modern process, the history can be traced back Microfinance
to Taskforce 1999; (3) Working Group on Financia
portions of the Marshall Plan at the end of second world Flows
war to the Informal Sector (set up by the PMO), 2002
(4) Microfinance Development and Equity Fund, NABARD,
in the middle of the 20th century or even back to the mid-1800s
and the writings of abolitionist/legal theorist Lysander Spooner
2005; (5) Working Group on Financing NBFCs by Banks-RBI
who wrote about the benefits of numerous small loansIn(for addition to the initiatives taken by the central government
entrepreneurial activities) to the poor as a way to alleviatevarious state governments like AP, MP, Rajasthan, Bihar and

Economic and Political Weekly March 31, 2007 1127

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Orissa have also developed certain platforms for the microfinance friends. Compared with other sources of capital that can fluctuate
services. depending on the political or economic climate, remittances are
Similar programmes are evolving in Africa and south-east Asia a relatively steady source of funds.
with the assistance of organisations like Opportunity Inter- There are several microfinancing institutions (MFIs), non-
national, Catholic Relief Services, CARE, APMAS Oxfam and government organisations (NGOs), self-help groups (SHGs),
Ford Foundation. banks and other institutions, which are actively engaged in
The concept of microfinance today has become a major
microfinancing activities with innovative methods.
credit disbursement mechanism in many parts of the world.
Today, the term microfinance refers to loans, savings, insurance, II
transfer services and other financial products targeted at low- Relevance of Microfinance to India
income clients. Microfinancing generally cover the following
activities:
Analysing Indian Credit Needs
Micro-credit: It is a small amount of money loaned to a client
by a bank or other institution. Micro-credit can be offered, oftenAt present, micro lending to the economically active poor -
without collateral, to an individual or through group lending. both urban and rural - is pegged at around Rs 7,000 crore in
Micro-savings: These are deposit services that allow one to savethe Indian banks' credit outstanding. As against this, according
small amounts of money for future use. Often without minimum to even the most conservative estimates, the total demand for
balance requirements, these savings accounts allow householdscredit requirements from this part of Indian society is somewhere
around Rs 2,00,000 crore. So, there is a need for a mix of banks
to save in order to meet unexpected expenses and plan for future
investments. and other intermediaries who can help to meet this demand-supply
mismatch.
Micro-insurance: It is a system by which people, businesses and
other organisations make a payment to share risk. Access toThis is a huge gap, which the Indian banking industry alone
insurance enables entrepreneurs to concentrate more on deve- can never be able to fill in. Deprived of these banking facilities,
loping their businesses while mitigating other risks affectingthe rural and semi-urban Indian masses are still relying on
property, health or the ability to work. informal financing intermediaries like moneylenders, family
Remittances: These are transfers of funds from people in one members, friends, etc. According to one estimate, moneylenders
still meet more than 56 per cent of rural people's credit needs.
place to people in another, usually across borders to family and

Call for Papers

Asian Political and International Studies Association (APISA)

Third International Congress

On
Asian Conceptions of Justice
(23-25 November, 2007, New Delhi)
Jointly convened by Developing Countries Research centre, (DCRC), University of
Delhi, Jamia Millia Islamia, New Delhi, and Centre for Policy Research New Delhi.
The four sub-themes of the Congress are Conceptions of Justice in Asia, Social Justice, Transnational Justice & Corrective
Justice.

Panels that incorporate key research questions include: Normative Conceptions of Justice; Asian Conceptions of Justice; Feminist
Conceptions of Justice; Subaltern Perspectives on Justice; Environmental Justice; Transnational Justice; Humanitarian Aid;
International Human Rights Organizations; Cosmopolitanism; Global Civil Society; Just Wars; Distributive Justice; Resource
Transfers - Taxation; Pensions; Social Security; Social Policy; Labour and Peasant Insurance; Affirmative Action Policies;
Welfare Policies; Institutions; Governance; and Development.

Paper presenters and panel organisers are requested to send the theme of their panel or the title of their paper along with an
abstract (approx 500 words) and a short CV by 1st June to the conference secretariat by email and a hard copy. Final papers are
due by 1st September. Limited subsidies for travel, registration and accommodation will be available on a competitive basis.

Contact Address: Prof. Neera Chandhoke (Chair); Mr. Dhruv Pande (Research Associate), Third APISA Congress Secretariat,
Developing Countries Research Centre, Academic Research Centre, Guru Teg Bhadur Marg, University of Delhi, Delhi 110007,
India, Email: [email protected], [email protected]

Congress Secretariat Website: www.dcrcdu.org, APISA Website: http://www.apisanet.com

1128 Economic and Political Weekly March 31, 2007

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 Figure 1: Skewed Bank Expansion Figure 2: Per Capita Outstanding Credit
160000

| 80 120 140000

70 A 100 i 120000

g~
) - -60
- co nO
100000
Co 50 *U) 80000
60 co
03
(rJo 60000

40000

a0) U)20 20000

co 10

? - a, * B** - - - _ -
Cn CZ mhas
no doubt that the share of institutional credit C) -Cto
X c, c X: U n D E C
improve

share of institutional credit is much more now (Table 1).

of Chhattisgarh, Uttaranchal and Jharkhand respectively. Population

Source: Economicmasses
further.
Soun-banked Surveys,
That RBI, (SDP
through data for 2003-04).
isMFIveys,
why more
RBINGOs, as per 2001 Census.
and more emphasis has now been
SHG(SDP data for 2003-04).other

Table 1: Distribution of Indebted Rural Households: Agencywise

plarcentage on providing finance anUsed other banking optionsate to NStheDP
Credit Agency Percentage of Rural Households
The abve survey
Whatever
households. resultm
be
This shows theo quantum
t - better
a cmparatively in stitutionalc
of of
penetration c redit
non-institutional
the credit, there is
Government 6.1
nacc dounted for around two-thirds of institutional credit hasrequirement of ruralove
Cooperative societies 21.6
further.ofnca
nshare That is why more andcredit
institutions.al more emphasis
is much has
morenownow
been(Table
Commercial
1). banks and RRBs 33.7
Insurance 0.3
Provident fund 0.7
Other institutional sources 1.6
All institutional agencies 64.0
All-India DSource: Economic Surveys, RBI, (SDP data for 2003-04). Landlord 4.0

a uin th
banking ande financial
last d ecade. The in
institutions share
rural of oney
India. redit re ree in thte toal Agricultural
n moneylenders 7.0
Professional moneylenders 10.5
Relatives
and friends 5.5
bankingthe 1990s and refinancial institutions in 2001 (as shown in the latest Others 9.0
Whatever the uant e noti, thnae sharediere of er n nn n
All non-institutional agencies 36.0
credit has come disbursing mecby hanislmost thave same percentagin the ast 50 yearsAll agencies 100.0

Source: Debt and Investme

durin the last decade. Though, the share of moneylendcooperas in thive societiesn
is increasing continuously, the growth has fldeclining till 1981, starttened during upthe fro Table 2: Relative Share
(in per cent)
lastthre decades. One more tarting 201 as so n the a t e ot
tAll-India Debt and Investment Surveys,AIDIS-192 was th Sources of Credit 1951 1961 1971 1981 1991 2002*
financi t a tio , te ar o om rmal creit diuremnt our ial
Non-institutional 92.7 81.3 68.3 36.8 30.6 38.9
Of which:
asdun ths o the sharequire of physic colltera tie anin anete
Moneylenders 69.7 49.2 36.1 16.1 17.5 26.8
ianil isi s foinng continuous ly te rot as lattened. Fr nInstitutional
the ho 7.3 18.7 31.7 63.2 66.3 61.1
Of which:
agenies like landlordse moneyeners t relative sha,e ouCooperative
frenet societies, etc 3.3 2.6 22.0 29.8 30.0 30.2
the All-India Debt and Investment Survey, AIDIS-n1992 was that Commercial banks 0.9 0.6 2.4 28.8 35.2 26.3
(Table
the ee).bl hos
households withwa th a ler
lower aset
asset sizesize
werewerne
unable of one
to find indUnspecified - - - - 3.1
Total 100.0 100.0 100.0 100.0 100.0 100.0

Note: * AIDIS, NSSO, 59th round, 2003.

Onwas due to the ecqut, which needs mention, isal the purpose or reason
finin staitutiona or tist bing cn lok atr the finingousholsSource: All India Debt and Investment Sur
thudy commlessioned bythan Rs 2Asia0,000 worth of physical Department ofs, the most
Table 3: Distribution Based on Asset Size of Rural Households
convenient
World (though
Banknvenient costly)
(1995). The sourcethat
ostudy observed of the
credit
priorit was non-institutional
was non-institutional
(in per cent)
agencies like landlords,m enders, relatives, friends, etc
Household Assets Institutional Non-institutional
(Rs '000) Agency Agency All
One more aspect, which needs me n tion, is the purpose or reason
Less than 5 42 58 100
5-10 47 53 100
10-20 44 56 100
20-30 68 32 100
different types of financial services among the rural poor was
30-50 55 45 100
50-70 53 47 100
in the order of consumption credit, savings, production credit
70-100 61 39 100
and insurance. Not only did consumption constitute two-thirds 100-150 61 39 100
of credit usage , but even within consumption credit, almost
150-250 68 32 100
three-fourths of the de mand was for s hort periods to meeting250 and above 81 19 100
All Classes 66 34 100
emergent need s such as illness and household expenses during
the le an season. Source: Debt and Investment Survey, Gol, 1992.

Economic and Political Weekly March 31, 2007 1129

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 While almost 75 per cent of the production credit (which deposits to SDP. If banks wish to expand into those areas where
accounted for about one-third of the total credit availed of the potential of deposits has been relatively untapped, they
by the rural masses) was met by the formal sector, mainly would
banks have to expand in states such as Andhra Pradesh,
and cooperatives, almost the entire demand for consumption
Haryana, Chhattisgarh, Madhya Pradesh, Orissa and Rajasthan.
credit was met by informal sources at high to exploitative The data on "bank credit utilised to SDP" gives more predict-
interest rates that varied from 30 to 90 per cent pa. Dueable to
results, with the north-eastern states at the bottom of the
the inability of poor borrowers to offer any security forladder
theiralong with Bihar and Jharkhand, while the southern states
do very well. Gujarat's relatively low rank is probably because
small consumption loans, they were unable to take short-term
consumption loans from the formal banking system businesses
even there have access to different sources of funding
besides commercial banks such as non-banking financial
though the RBI guidelines did provide for granting of consump-
tion credit by banks. Consequently, a large number of the
institutions, cooperative banks and equity.
This skewed banking expansion is also reflected in the per
rural poor continued to remain outside the fold of the formal
banking system. capita credit outstanding of some of states and union territories.
Here, we can see a huge disparity in the per capita outstanding
Banking Expansion credit in Chandigarh and Delhi on the one hand and the rest of
the states on the other. Bihar and Jharkhand stay at the bottom
Increasing access to credit for the poor has always remained
of the list here with just Rs 1,937 as per capita outstanding credit,
whereas, the figures for Chandigarh and Delhi surpass the "one
at the core of Indian planning in fighting against the poverty.
Starting in the late 1960s, India was home to one of the lakh" mark.
largest
Due to the nature of the expansion of banking services in the
state interventions in the rural credit market. This phase is known
as the "social banking" phase. country and constraints on banking entities, microfinance and
It witnessed the nationalisation of existing private commercial
microfinancing institutions have gained immense relevance today.
banks, massive expansion of branch network in rural The areas,
microfinancing activities of banks and self-help groups have
mandatory directed credit to priority sectors of the economy,
grown to new heights. Table 4 shows the figures till March 2006.
It depicts how much the SHG-bank linkage programme initiated
subsidised rates of interest and creation of a new set of regional
rural banks (RRBs) at the district level and a specialised by apex
NABARD has helped millions of Indians in improving their
bank for agriculture and rural development (NABARD)lifestyleat the and also contributing to the development of the economy.
national level.
These measures resulted in impressive gains in rural outreach III
and volumes of credit. The branches of commercial banks and
International Experience in Microfinance
the RRBs increased fiom 8,321 in the year 1969 to 68,282
branches as at the end of March 2005. The average population Microfinance has changed many lives in diverse societal settings
across the globe. It is being exploited as a tool for financial
per branch office has decreased from 64,000 to 16,000 during
liberation in underdeveloped, developing and even developed
the same period. This a spectacular growth in providing banking
services to the masses. countries. It tries to create a more inclusive financial universe
However, there are certain under-banked states such asfor the whole society. By trying to bring more people in the
network, an inclusive financial sector allows poor and low-
Bihar, Orissa, Rajasthan, UttarPradesh, Chhattisgarh, Jharkhand,
West Bengal and a large number of north-eastern states, income people to access credit, insurance, remittances and
where the average population per branch office continuessavingsto products. In many countries, the formal and institutional
be quite high compared to the national average, particularlyfinancial
in sectors do not provide these services to the lower income
rural areas. segments of the market. An inclusive financial sector will support
This skewed banking expansion becomes apparent when we the full participation of the lower income levels of the population
to promote economic growth. Now, let us have a look at some
consider deposits of scheduled commercial banks and bank credit
of the best practices across the world.
as a proportion of net state domestic product (NSDP) at current
prices. The NSDP is a measure of the economic activity in the
state and comparing it with the utilisation of bank credit or bank Developing and Least Developed Countries
deposits indicates how much economic activity is being financed
by banks and whether there exists untapped potential for increas-Asia, Latin America and Africa badly need a financial system
ing deposits in that state. Figure 1 shows bank credit utilisedthat
in is more inclusive in nature. The reason behind this is that
there is already a scarcity of capital even for funding the basic
a state as a percentage of NSDP at current prices and bank deposits
in a state as a share of NSDP. It also shows some surprising results.
Table 4: Progress under Microfinance Programmes
For instance, the percentage of bank deposits to NSDP is pretty
Cumulative No of Cumulative SHG
high in Bihar and Jharkhand, or these states are not as under-
Persons Reached Loan Disbursed
banked as thought to be. While it is well known that the north- (In Lakh) (In Rs Crore)
eastern states are under-banked, states such as Andhra Pradesh,
NABARD 1,649.00 11,397.00
Haryana and Rajasthan, too, have a low bank deposits-NSDP
SFMC 26.25 761.81
ratio. In contrast, banks have already tapped most of the potentialRMK 5.48 147.53
of states such as Punjab and Maharashtra as far as bank depositsFWWB 5.29 240.10
are concerned. Total 1,686.02 12,546.44

Hilly states such as Sikkim, Himachal Pradesh and even Source: NABARD, SIDBI Foun
Arunachal Pradesh have a surprisingly high proportion of bank Kosh (RMK) and Friends

Economic and Political Weekly March 31, 2007 1131

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minimum growth. The financial and banking institutions in areas too, Grameen's track record has been astonishing, with very
these countries (due to their inability to acquire enough funds) high payback rates - over 98 per cent. More than half of Grameen
find themselves unable to address the micro-credit demands.borrowers in Baigladesh (close to 50 million) have risen out of
Because of this, several new institutions cropped up in these
acute poverty thanks to their loan, as measured by such standards
as having all children of school age in school, all household
countries, which were addressing the problem of unavailability
of funds to the poor or people with small physical assets. members eating three meals a day, a sanitary toilet, a rainproof
house, clean drinking water and the ability to repay a 300 taka-
Governments, regulators and international institutions have started
a-week ($ 8) loan.
giving assistance to these institutions for a better microfinancing
institutional framework. ShoreBank, USA: There are some communities even in the
Policymakers started realising that these microfinancing developed economies, which are at a comparative disadvan-
institutions are potentially a very significant contributiontage
to in acquiring loans. Milton Davis founded ShoreBank in 1973
for lending to underserved communities and in the development
gender equality and women's empowerment, as well as pro-poor
of micro-credit and microfinance loans benefiting local
development and civil society strengthening. Through their
residents in the South Side of Chicago. Frequently called the
contribution to women's ability to earn an income these financing
"inventors" of community development banking, ShoreBank's
activities have the potential to initiate a series of "virtuous spirals"
of economic empowerment, increased well-being of women and successful community lending models have been the inspiration
their families and wider social and political empowerment. for community development banking institutions around
Microfinance services and groups involving men also have the world.
the potential to question and significantly change men's attitudesOver the last 30 years, loans made by ShoreBank, especially
and behaviour as an essential component of achieving home mortgage loans and loans to small businesses, have con-
gender equality. tributed to the economic resurgence of Chicago neighbourhoods
Thus microfinance programmes targeting women became like
a Kenwood, Chatham, Bronzeville, Austin, and most dramati-
cally, South Shore. Over one-quarter of all mortgage and rehab
major plank of donor poverty alleviation and gender strategies
in the 1990s. Increasing evidence of the centrality of gender
loans in the South Shore area have been made through ShoreBank.
ShoreBank has helped finance the purchase and renovation of
equality to poverty reduction and women's higher credit repay-
ment rates led to a general consensus on the desirability49,000
of affordable housing residences. Between 2000 and 2006,
targeting women. Microfinancing programmes, thus, are it issued nearly $ 900 million in loans to citizens in Chicago,
also
Detroit, and Cleveland.
serving as a tool for "social re-engineering" for policymakers
ShoreBank today has branches in Chicago's South and West
across the world, especially the least developed and developing
countries. sides, Cleveland, and Detroit. It has affiliates in Oregon and
There are several successful examples from these parts Washington
of State, and in Michigan's Upper Peninsula.
ShoreBank's international consulting services have offices in
the world that have been instrumental in improving the living
conditions of small farmers, artisans, pensioners, etc. And Chicago, Washington DC and London, and projects in 30 countries
around
these have been done with a "positive bias towards the the world.
women" of these segments of the society. We will look at some
of them: IV
Gramieeil Bank, Bangladesh: The Grameen Bank is the brain- Key Issues for
child of the economist and Nobel laureate Muhammad Yunus. Indian Banks in Microfinance
In 1976, he experimented with his ideas of micro-credit in the
village of Jobra and other villages. The bank was immensely Now, let us look at some of the major issues, which are related
successful and the project, with government support, was to the microfinance activities and institutions. The issues range
introduced in 1979 in Tangail district (to the north of the
from the necessity to the viability of the programmes itself.
capital, Dhaka). The bank's success continued and it soon
Indian Banks 'perspectives: Risk- return analysis: Risks involved
spread to various other districts of Bangladesh and in 1983 in it
lending to small borrowers imply a high probability of default
was transformed into an independent bank by the legislature of repayments. There are many interesting observations in this
of Bangladesh. regard.
The bank today continues to expand across the nation and still Experience in micro-lending of different social agencies sug-
provides small loans to the rural poor. As of December 2006, gests that poor people are more prompt in repaying debts. For
Grameen Bank branches numbered over 2,319 providing services example, the'repayment for Grameen Bank is 98 per cent; SEWA
is more than 92 per cent, etc. The repayment rate is as high for
in 74,462 villages, covering more than 89 per cent of the total
almost all micro-lending institutions, as the default rate hovers
villages in Bangladesh. It has 6.91 million borrowers, 97 per cent
of whom are women. around a maximum of 10 per cent only.
However, according to the statistics, the default rate for banks
The system is the basis for the micro-credit and the SHG system.
Each group of five individuals are loaned money, but theinwhole
the same segment is as high as 40 per cent. That is why the
group is denied further credit if one person defaults. This banks feel a bit hesitant in providing micro-credit to poor people.
creates
economic incentives for the group to act responsibly (such as the default risk, micro-credit also has yield risks and
Apart from
other members then being able to receive additional price
loans),
risks attached to it. Banks and other formal credit disburse-
increasing Grameen's economic viability. ment institutions are exposed to the following risks and impedi-
In a country in which few women may take out loansments
from in the area.
- Credit
large commercial banks, the fact that most (97 per cent) loanrisk
recipienfs are women is an amazing accomplishment. In- other
High transaction and service cost

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- Absence of land tenure for financing housing people, as Robinson has said - "Microfinance is the next step
- Irregular flow of income due to seasonality - after they are able to work".
- Lack of tangible proof for assessment of income So the prime most task for our commercial banks is to examine
- Unacceptable collaterals such as crops, utensils and jewellery. and identify first the target groups for microfinance operations.
But when we look at the returns that can accrue from this Once identified, they can start their activities by focusing on these
segment, it will be a good business proposition to increasepeople's total needs - as deprived people require much broader
lending to this sector. Looking at the Indian scenario, theinterventions.
size For instance, micro-entrepreneurs with meagre
of the credit requirement is expected to be much more than capital need not just financial capital or services but also a home,
the estimation of the market size of 50 million families and
good health, education for their children, etc. Our banks have
between Rs 30,000 and Rs 45,000 crore. If the dimension
tois
create specialist cells to study the total requirements of these
expanded to include the relative poor rather than only the and come out with tailor-made products and services for
groups
absolute poor, the market size may expand to 50 per cent
them. They must also understand that these groups are hetero-
of the population. This is a huge market that any business
geneous in nature and, hence, the banking products/services
entity can hardly ignore. This is the reason that more and
developed for them have to be highly diversified and target-
more banks and other institutions are coming to the micro-
specific.
credit sector. Close coordination and communication with other banks
Most of the risks mentioned above are mainly operational and institutions that have specialised in different functions lik
in nature. So, the banks should develop a framework thatSIDBI or NABARD is also a must from the risk-management
perspective.
helps in minimising these operational risks. Working in tandem
with the MFIs, NGOs, agri business houses and other organi-Indian commercial banks may be involved in microfinance both
sations with sufficient reach in these areas is an absolute indirectly or directly. In the first case, they can offer operational
banking
necessity. As these organisations work at the grassroot support to microfinance institutions or NGOs; or
level
with the help of a huge volunteer network, they haverefinance
a better a microfinance institution; or participate in the "equity"
understanding of the credit needs of their clients. They
of suchalso
an institution. Otherwise, they can directly create ad hoc
have an idea of the cash flows of the clients. This will helpand services for targeted clients or open branches or
products
windows
in better targeting of the client groups and a low default riskdedicated to microfinance. The staff at these dedicated
in the repayments. Also, these organisations can givebranches
greaterwould also undertake primary as well as secondary
insights in developing products according to the needs market
of the research on the types and size of activities run by
client groups. micro-entrepreneurs and the characteristics of the industries
Barriers faced by Indian banks in microfinancing: The they
barriers
work in.
to our banks are mainly regulatory, policy-related andWhile
opera-microfinance is still an evolving sector in a country like
tional. As per the regulatory norms, there are capsIndia,
on thein many developed countries it is highly commercialised;
partnerships
number of branches or extension counters that any bank can open. are being created, public and private sectors' assets
This puts a serious limitation on banks even when they are wantbeing
to leveraged, and know-how is being shared. The
open more branches in a profitable area vis-a-vis microfinance lessons from some of the best managed microfinance institutions
operations. around the world show that use of certain methods like group
Standard and regulatory requirements with which commercial lending, peer guarantees, step-ladder lending, matching repay-
banks have to comply, particularly regarding unsecured lending, ment terms with borrower cash-flows, etc, have contributed
and interest rates are not particularly suitable for microfinance largely to their success. Also, they have competently used
operations. The organisational structures, procedures, products information technologies and performance-linked incentives for
and methods used by our banks are not suited to microfinance, their staff.
and changing them would be time-consuming and expensive. Our The microfinance portfolio would enable commercial banks
banks' marketing, appraisal and supervision capacity for to diversify their operations considerably. However, the "coor-
microfinance lending is quite inadequate. dinated and collaborative approach" alone would be the right
There are also cultural barriers, which are difficult to overcome. answer to bring marginalised communities into the mainstream
Often the staff of Indian banks would perceive poor people as of the national economy. The continuous flow of innovations
unbankable and would not like to reach out to them. in designing new products and services would produce the desired
results on a sustainable basis.
V The use of computers and telecom equipment is to be encour-
Microfinance Development Strategy aged by PSBs in these branches and institutional investors and
for Indian Commercial Banks directors on these banks' board may conduct sample checks of
operating data and systems in their branches with a fixed
First of all, it is necessary to appreciate that microfinanceperiodicity.
is Also, customer satisfaction audits in microfinance
operations may also be conducted by independent agencies from
not a panacea but is one of the effective tools to help poor people
from a self-development perspective. time to time for improving governance and transparency.
Most of all, the strong and firm commitment of the top
Extremely poor people like people suffering from under
and/or malnourishment, illnesses, lack of skills, etc, cannotmanagement
be of the bank to microfinance operations is the
essential precondition for the sustainability of this business in
a target for microfinance. This is because intervention in the form
of microfinance will not be an efficient solution for them. The any commercial bank. m13J
problems of such people have to be tackled at the government
level through an appropriate mix of welfare measures. For these Email: cmd @bankofbaroda.com

Economic and Political Weekly March 31, 2007 1135

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