Status of microfinance sector in india

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Information about Status of microfinance sector in india

Published on March 8, 2014

Author: drnareshsingh


In the draft report prepared by Jonna Bickel & his team (GIZ - NABARD Rural Financial Institutions Programme) the question "Which abilities in the Financial Capability concept do you consider most relevant for use by your organization?" has been addressed in well researched manner scientifically, logically and analytically. I would like to express my observations on third (last) question i.e. "How relevant is this concept of rethinking financial inclusion more from a people-centered approach for policy makers?" with a request to included my observations in the report. These observations are based on my continuous research and project management experiences of last 20 years in the field of microfinance; initially with my field work for Ph.D. in Bangladesh in early 1990s, later on my association with SHG-Bank Linkage Programme in 1994, MFI Model Trainings, Micro Insurance Trainings, developing microfinance curriculum for PGDM / MBA Programmes and finally helping some MFIs in institutions building processes as members of Advisory Board / Independent Director. I also wish to clarify that at present am not associated with any MFI in the capacity of Advisory Board / Independent Director. This decision I took by myself because my moral values did not allow me to associate with unethical and malpractices being done by MFIs on the name of providing support to poor people. My observations are as follows. SHG-BANK LINKAGE APPROACH: A commonly agreed preposition worldwide holds that access to credit by the poor people is an important intervention for poverty alleviation though not ‘the only’ intervention. While Grameen Bank Bangladesh verified this preposition in 1982, a decade after in 1992 Self Help Group (SHG)-Bank Linkage Programme was started in India. This is one of the largest programmes of microfinance world over. There are certain apprehensions whether this programme has helped poor people in improving their quality of life. It is evident from the fact that average loan size per household is still below Rs. 10,000/- which is a very meager amount for starting any income generating activity by the poor family in India. This amount is also very meager to meet the basic consumption needs or repay the debt of moneylenders by the poor family. The programme has also not kept pace with the delivery systems as still many bankers are reluctant to open the accounts of SHGs and provide them loans in rural areas irrespective of the clear-cult guidelines of RBI & NABARD coupled with the support of NRLM Programme of Ministry of Rural Development. In some cases branches of banks also force NGOs / SHPIs to provide informal guarantee for the repayment of loans of SHGs. The grant amount provided by NABARD to NGOs/ SHPIs is Rs. 7,000/- per SHG. This amount is given in five installments by NABARD with so many anecdotes as if it is a family planning programme and not really a programme of microfinance. NABARD & RBI should consider seriously on this issues as it is a programme of community mobilisation and empowerment of poor people and such processes takes very long time. Grant of Rs. 7,000/- per SHG with so many anecdotes will not serve the purpose. WHOLESALER-RETAILER MODEL: Small Industries Development Bank of India (SIDBI) launched its microcredit scheme in 1994. In 1999 it created SIDBI Foundation for Microcredit to create a cadre of selected Microfinance Institutions (MFIs) through wholesaler-retailer model and at the same time strengthening capacity of selected management institutions in terms of training, research and consulting. However, SIDBI could neither scale up its operation nor it could make impact on the management institutions. Training programmes started by management institutions could not become self-financing because of reluctance of MFIs to pay

for training. Students of such management institutions were also reluctant to joint microfinance sector because of low salary as compared to corporate sector. Besides NABARD and SIDBI, other important players of microfinance are Rashtriya Mahila Kosh, sectoral National and State Financial Corporations, private banks like ICICI bank, Citibank, ABN Amro bank and funding agencies. These apex financial institutions and funding agencies including NABARD and SIDBI are providing support to about 1000 MFIs in India with different operational strategies. So far these MFIs could not cover 10% of the total microfinance business in the country. While on the one hand SHG Programme is focusing on outreach, the wholesaler-retailer model stresses on commercial banking. Both have the same side of the stone to project. The plight of the poor remains to be poor as ever. Both programmes ignore the ways to provide means of livelihoods and a quality of life to the poverty stricken lot. We need to understand that credit delivery is not ‘the only’ intervention for poverty alleviation and employment generation. What becomes mandatory is to provide them with livelihoods support complimented with credit delivery as well. Andhra Pradesh was said to be the leading State in the fields of information technology and microfinance. Yet the irony lies in the fact that a number of MFIs’ borrowers were reported to commit suicide from the so called ‘leading’ State. Some MFIs such as Spandana, Share Microfin, and Asmita etc. had come into bureaucratic and political controversy for charging high interest rates. Questions were also being raised on how Spandana has been rated so high on financial indicators by microcredit rating agency M-CRIL; just ignoring the social performance of it. What remains a ground reality is the fact that in the microfinance sector policy makers, practitioners and researchers dwell in their own world moving away from the ‘make belief’ world of the poor. With no positive networks being developed for the growth of this sector, the upliftment of this sector remains a dream. Sa-Dhan, the network of MFIs in India could also not make much head-away at policy and advocacy level to promote the sector. It is because of the fact that Sa-Dhan was under very high influence of M-CRIL microcredit rating agency and because of its commercial approach towards microfinance sector M-CRIL diluted the whole positive environment of SHG-Bank Linkage Programme and growth of microfinance sector in India. The adverse impact on the microfinance sector was that “The Microfinance Bill” was supposed to be passed in the winter session of 2006-07 in Parliament but it could not see the day because of such dirty politics at advocacy level. What we have now on the name of policies of microfinance, some customary declarations in annual budgets and some guidelines. The Micro-finance Institution Development and Regulation Bill (MFIDRB), 2012 was introduced in the Parliament in 2012 and is currently being examined by the Parliamentary Standing Committee on Finance (PSCF). MONEYLENDING SYSTEM ON THE NAME OF MFIs & BCAs: Present situation of microfinance institutions and business correspondents agents in India is that they are acting like traditional moneylenders and exploiting poor people. These MFIs & BCAs (NGOs) are operating in urban areas having their nexus with builders / political leaders and religious gurus as their investors. They are getting weekly repayment of installments. Side-by-side they also operate their Credit Cooperative Societies and forced the clients to deposit money in their cooperatives on weekly basis along with the repayment installments. They use this money in capitalizing the portfolio of MFIs and further loaning to clients. I calculated effective rate of interest of some such MFIs. It works out about 60% annual on the clients. Their staff is 10th or 12th pass working

on meager salary and incentives. They do not have any understanding of the microfinance sector. Dr. Naresh Singh B.A. (Honours), M.A. (Sociology), M.Phil., Ph.D., MBA (Finance) President Asia-Pacific Entrepreneurship Development Institute 44, Brijeshwari Annex Near Bengali Square, Ring Road Indore – 452 016 Madhya Pradesh, India Cell: 0091-94250-54361 / 62 Email: Website:

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