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Six months back, like many others, I was enthralled by the Microfinance ‘success story’ in India. However, as an intern with a leading Microfinance Institution (MFI), on my first field visit- in a scanty, unsightly village in North India- as these microfinance borrowers recounted their tales, I realized that all was not hunky dory.

The women featured in the success stories were still socially suppressed, their children unable to go to school. There were no medical facilities. No safe drinking water. Indigence prevailed.

Now getting back to the origin of the story: Microfinance. For those who are yet to acquaint themselves with this fairly recent feature of poverty alleviation programs in India, here is the bookish definition of Microfinance: It refers to small-scale financial services- particularly credit and savings- given to low income groups, farmers and small scale enterprises.

If you ask me, Microfinance to me is simply a tool for empowering the ‘bottom billion’ of the world with unprecedented financial independence; it is about creating opportunities and livelihoods. However, if employed wisely.

All due credit must be given to the Indian Microfinance industry- it is flourishing. According to the latest State of the Sector Report by Mr. N.Srinivasan, the Self Help Group (SHG)-bank linkage program made credit available to more than 1.7 million SHGs last year. At a time when a liquidity crunch prevailed in the world financial markets, the MFIs in India registered a phenomenal growth rate of 60 per cent.

India emerged as the largest microfinance market in Asia. Yet, beyond these dry statistics and findings, lies hidden the continuing sad plight of more than half of our population- some of them microcredit borrowers, others not.

Of the many obstacles faced by the microcredit industry and its borrowers today, I’d like to highlight a few in this article.

Firstly, a major issue currently is the skewed distribution of MFIs and banks across the country. In 2008, South India had 51.33 % share of SHGs with outstanding loans , while the Northern and North Eastern regions had only 3.81% and 2.85% respectively. This trend has been continuing since many years, reflecting geographical disparities and a deep penetration problem.

The poorest of poor, those living below the poverty line (BPL), still do not have access to loans in many parts of the country. Although the demand is high in North, Central and North-Eastern India, there are just not enough funds from banks and credit institutions to meet these demands.

This will inevitably result in a market failure- a situation wherein the market-based financial system is not able to supply financial services at the socially optimum level. Moreover, over-concentration of MFIs in the South poses further risks. It primarily leads to two consequences- fierce competition and multiple-lending. While some people argue that multiple-lending is beneficial, since borrowers with inadequate loans have access to several sources of finance to fulfill their needs, this may be a ‘short-termism’ approach.

In their quest to lend money to increasing numbers and expand their customer bases, MFIs may be over-burdening their borrowers, which in the long term can impede repayment rates. In fact, excessive lending in a particular region may as well lead to the Microfinance Industry’s very own ‘financial meltdown’.

This brings us to the second important issue- quantity over quality. When asked how they came about setting up the renowned Grameen Bank in Bangladesh, Nobel laureate Mohammed Yunus said: ‘We looked at the conventional banks, and we turned everything around.’

The MFIs today, engrossed in reporting higher growth rates and lost in bureaucratic procedures, need to be reminded that the Microfinance Sector cannot possibly run on the same lines as the commercial banking sector. If you or I raise a loan from a multinational bank, that’s all we’d probably need- the funds.

However, if a poor laborer earning Rs.20 a day borrows money from an MFI or a bank, he wouldn’t instinctively know how to utilize the loan efficiently to build up a decent income. He needs to be taught.

Also, imagine a country producing quality goods diligently, but facing economic sanctions. In such a situation, the country would be excluded from international trade, thus prohibiting trade associated economic growth and falling into a debt-trap. This is exactly what many microfinance borrowers are facing today- albeit naturally at a micro level. Many are unable to supply their products outside confines of their villages.

Apart from providing vocational training to borrowers and encouraging set-up of small scale enterprises, institutions in the sector must ensure that such producers have the vital access to supply-chains.

Additionally, the Microfinance industry must increase availability of savings services providing savers with security, liquidity and returns. In fact, at advanced stages, they should even provide them with further opportunities for investments. These will not only build their asset bases and make more funds available for micro lending, but will also end up producing a ‘multiplier effect’, with increased employment opportunities and higher per capita incomes in the rural economy.

Thus, the Microfinance Industry essentially needs to create a ‘poverty toolbox’ which would, in addition to microcredit loans, include financial literacy programs, widespread capacity building efforts, improved market access for small-scale producers, better savings services and the like. Such an approach would ensure direct involvement of the poor in the working economy and promote sustainability in the Microfinance industry.

Lastly, one of the most crucial issues remains that of defining clearly the role of the government in the sector. There is widespread statistical evidence that the government’s Microfinance efforts as part of the Swarna Jayanti Swarozgar Yojana (SGSY) scheme are producing dismal results.

To understand what went wrong, it is essential to recognize two main categories of poverty-stricken people in underdeveloped countries and the associated Microfinance approaches that must be followed. Firstly, there are the extreme poor- people who are badly malnourished, illiterate, without skills or employment opportunities. This group cannot be provided with microcredit loans immediately- they are ‘noncredit-worthy’.

This is where the Poverty Lending Approach comes in. Under this, the extreme poor move up the economic ladder with the help of government and donor subsidies. It is the role of the State to use its poverty alleviation programs efficiently to make such people credit-worthy by giving them training, education and skills. Only then can they progress towards becoming microfinance borrowers.

Secondly, there are the economically active poor- those who are credit-worthy. For this category, the Financial Systems Approach is appropriate. This applies to the profit-making MFIs and banks in the private sector that must cater to the financial needs of the poor. The government’s role in this case is not to provide subsidies that artificially keep interest rates low in the short term, but to reform its regulation in the formal micro banking sector.

The government must prevent emergence of ‘cartel-like’ behavior and ensure that the MFIs pass on reductions in costs due to economies of scale to their customers by reducing interest rates. Ultimately, the government must utilize efficient means of guaranteeing availability of low cost financial services to all those who need them.

Microfinance, as a poverty eradication tool, indubitably has a tremendous potential to transform millions of lives and promote inclusive growth in developing nations. However, to exploit this potential judiciously, it is time for the private sector and the government to redefine their roles in this transformation story. It is time for microfinance to signify not only having access to credit, but using it well. After all, good Economics is not only about doing the right thing, it’s about doing things right as well.

 Source: www.economictimes.com

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