How to make the concept of microfinance work in India
If before Independence, Netaji Subhas Chandra Bose said “Give me blood and I will give you freedom", then today every unemployed Indian youth says “Give me some money and I will help you build a prosperous India.” Ideas flowing from the remotest corner of the country are equally brilliant but fail to flourish for sheer lack of access to capital. But things are changing. Thanks to the emergence of microfinance. Recent reports reveal an interesting picture. Microfinance is serving 86.2 million clients in India. The portfolio reached Rs 351 billion, according to The Bharat Microfinance Report, 2009 by Sa-Dhan, the Association of Community Development Finance Institutions. Micro Finance Institutions (MFIs) have succeeded to cover over 71 per cent of the 331 of the poorest districts of India in 2009. In total, 413 districts, today, avail the benefits of microfinance all over India. What more interesting to notice is that 93 per cent of the active borrowers are women. And over 7.7 million are from SC/ST or minority groups. Even the growth of MFIs is quite satisfactory. MFIs with portfolio of over Rs 50 crore were growing by 40.5 per cent during 2006-08. Similarly, MFIs with portfolio of over Rs 5 crore to Rs 50 crore are growing by 97.5 per cent. And MFIs with below Rs 5 crore are growing at the rate of 78 per cent. This is raising the debate for consideration of the need, relevance and urgency of a standard regulatory framework for MFIs.
However, certain areas should be considered seriously to make microfinance an effective tool for social transformation. Firstly, as Dr Prakash Bakshi, executive director, NABARD says “saving protection is the first step forward of microfinancing”. People in villages have money and they want secure saving methods which can later work as capital. The NREGA alone created eight crore accounts in the villages. Villagers are getting money from many welfare schemes or small business entities. Secondly, institutions have to ensure the assurance of loans given as per the needs of the borrower and not as per their own whims and fancies and at their own convenience. The repayment procedure of loans should be flexible. For example, the client may earn income after four months post-investment. But forcing him to repay the loan on a weekly or a monthly basis would make it very tough for him to repay. Thus, he would become more prone to defaulting. Moreover, India’s practice of equity capital adequacy ratio against loan is very strict. For example, for a loan of Rs 10,000, a client should have equity capital of around Rs 2, 000 which is very high compared to many other nations. Most importantly, a mere Rs 10,000 one time loan will not guarantee the upgradation of the standard of living of the borrowers. The need of the day is a long term empowerment scheme. All in all, to make microfinancing effective, the country needs a self-regulatory body, more like Telecom Regulatory Authority of India (TRAI) or Insurance Regulatory and Development Authority (IRDA) to ensure accountability and transparency. And who can better justify it other than Mr Chuck Waterfield, CEO & President, MFTransparency as he says “micro-credit is not an exchange of negotiations between two equal parties and thus need monitoring.”
If before Independence, Netaji Subhas Chandra Bose said “Give me blood and I will give you freedom", then today every unemployed Indian youth says “Give me some money and I will help you build a prosperous India.” Ideas flowing from the remotest corner of the country are equally brilliant but fail to flourish for sheer lack of access to capital. But things are changing. Thanks to the emergence of microfinance. Recent reports reveal an interesting picture. Microfinance is serving 86.2 million clients in India. The portfolio reached Rs 351 billion, according to The Bharat Microfinance Report, 2009 by Sa-Dhan, the Association of Community Development Finance Institutions. Micro Finance Institutions (MFIs) have succeeded to cover over 71 per cent of the 331 of the poorest districts of India in 2009. In total, 413 districts, today, avail the benefits of microfinance all over India. What more interesting to notice is that 93 per cent of the active borrowers are women. And over 7.7 million are from SC/ST or minority groups. Even the growth of MFIs is quite satisfactory. MFIs with portfolio of over Rs 50 crore were growing by 40.5 per cent during 2006-08. Similarly, MFIs with portfolio of over Rs 5 crore to Rs 50 crore are growing by 97.5 per cent. And MFIs with below Rs 5 crore are growing at the rate of 78 per cent. This is raising the debate for consideration of the need, relevance and urgency of a standard regulatory framework for MFIs.
However, certain areas should be considered seriously to make microfinance an effective tool for social transformation. Firstly, as Dr Prakash Bakshi, executive director, NABARD says “saving protection is the first step forward of microfinancing”. People in villages have money and they want secure saving methods which can later work as capital. The NREGA alone created eight crore accounts in the villages. Villagers are getting money from many welfare schemes or small business entities. Secondly, institutions have to ensure the assurance of loans given as per the needs of the borrower and not as per their own whims and fancies and at their own convenience. The repayment procedure of loans should be flexible. For example, the client may earn income after four months post-investment. But forcing him to repay the loan on a weekly or a monthly basis would make it very tough for him to repay. Thus, he would become more prone to defaulting. Moreover, India’s practice of equity capital adequacy ratio against loan is very strict. For example, for a loan of Rs 10,000, a client should have equity capital of around Rs 2, 000 which is very high compared to many other nations. Most importantly, a mere Rs 10,000 one time loan will not guarantee the upgradation of the standard of living of the borrowers. The need of the day is a long term empowerment scheme. All in all, to make microfinancing effective, the country needs a self-regulatory body, more like Telecom Regulatory Authority of India (TRAI) or Insurance Regulatory and Development Authority (IRDA) to ensure accountability and transparency. And who can better justify it other than Mr Chuck Waterfield, CEO & President, MFTransparency as he says “micro-credit is not an exchange of negotiations between two equal parties and thus need monitoring.”
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