Micro-financing has a long way to go

KOLKATA: More than 400 women join the self-help group (SHG) movement in India every hour, according to the National Bank for Agriculture and Rural Development (Nabard), the pioneer in micro-financing in India. Over a whopping 22.50 lakh SHGs have, so far, been offered minimum banking service and Nabard expects to provide credit support to 5.85 lakh new groups by ’07 with 60% of them coming from 13 underdeveloped states.

Undoubtedly, the statistics appear mind boggling. But looking at the larger perspective, barely 31% of the Indian population have bank accounts. But if you just consider adult population, 59% maintain at least a single account.

Such data tends to also vary widely across states. For instance, while Kerala has the largest banking penetration, banking habits continue to take a backseat in the north-eastern states or even in Bihar.

Little wonder then, why Prof Muhammad Yunus, the ’06 Nobel Peace Prize winner and founder of Grameen Bank in Bangladesh, told ET: “India has a long way to go in micro-financing. The micro-credit sector is still in its infancy in India.”

Nabard chairman YSP Thorat is entirely in agreement with Prof Yunus’ observations. “Theoritically, there is no doubt a case for a single micro-finance lending agency. But in India, unlike Bangladesh, no single agency provides micro finance. The real challenge before us is how to unite these agencies,” Mr Thorat said.

In fact, the Rangarajan Committee on financial inclusion, where Mr Thorat is a member too, is deliberating on this issue closely. Incidentally, the Reserve Bank of India (RBI) defines micro finance as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards”.

There are three broad principles, on which the micro-credit schemes have been formulated in India. According to RBI, the intermediate model works on banking principles with focus on savings and credit activities and where banking services are provided to the clients either directly or through SHGs. “There is also a wholesale banking model where clients comprise NGOs, MFIs and SHG Federations.

This model involves a unique package of providing loans and capacity-building support to its partners,” RBI says.The third one is the individual banking-based model that has clients as individuals or joint liability groups. While programme management and client appraisal in this model may be a challenge, it is best suited to lending to
enterprises.

“The SHG model accounts for almost 60% of today’s micro finance business with the MFIs doing the rest. Interestingly, eight large MFIs corner 60% of their total share as of now,” Mr Thorat pointed out.

The Nabard chairman, however, agreed with Prof Yunus’ point on the scope of micro-finance in India. “We can’t say the sector has been flourished fully,” he opined.

But then, the ask is also a tough one for a diversified country like India. The micro-bank model, as followed by Bangladesh, has now entered into the mindshare of policy makers in India.

The Rangarajan Committee has already been busy finding an answer to the points raised by Prof Yunus on India’s micro credit sector. One has to wait and watch for the committee’s report.