Microfinance & Development

More than subsidies poor need access to credit. Absence of formal employment make them non `bankable'. This forces them to borrow from local moneylenders at exorbitant interest rates. Many innovative institutional mechanisms have been developed across the world to enhance credit to poor even in the absence of formal mortgage. Over the last ten years, however, successful experiences in providing finance to small entrepreneur and producers demonstrate that poor people, when given access to responsive and timely financial services at market rates, repay their loans and use the proceeds to increase their income and assets. Community banks, NGOs and grassroots savings and credit groups around the world have shown that these micro-enterprise loans can be profitable for borrowers and for the lenders, making microfinance one of the most effective poverty reducing strategies. Microfinance offers a promising institutional structure to provide access to credit to the poor, the scale problem needs to be resolved so that it can reach the vast majority of potential customers who demand access to credit at market rates.

Since independence, India stressed on providing financial services to the poor and underprivileged. The commercial banks were nationalized in 1969 and were directed to lend 40% of their loan-able funds, at a concessional rate, to the priority sector that include agriculture, rural activities and the weaker strata of society in general. The aim was to provide resources to help the poor to attain self sufficiency.

To supplement these efforts, the credit scheme Integrated Rural Development Programme (IRDP) was launched in 1980. The collateral and paperwork based system shied away from the poor. The vacuum continued to be filled by the village moneylender who charged interest rates of 5 to 30% per month. It was in this cheerless background that the Microfinance Revolution occurred worldwide. In India it began in the 1980s with the formation of pockets of informal Self Help Groups (SHG) engaging in micro activities financed by Microfinance. At present, a large part of micro finance activity is confined to credit only. Women constitute a vast majority of users of micro-credit and savings services. Self Employment through Microfinance was perceived as a powerful tool for emancipation of women.

In spite of the optimism generated by the expansion of SHG credit and the high recovery rate there is a gap between actual per capita credit provided to the poor and the demand (NABARD). The out standings of the SHG programme in March 2003 were around Rs 10 billion which met only 2.2% to 6.6% of the projected demand. Though there is limited data on the accessibility of the poor in India to Microfinance programmes, available evidence suggests that 80% of the poor do not have any savings and 91% are without any formal credit. In a country of one billion, where 25% of the population (January, 2004, CIA World Fact book) are below the national poverty line, and even among those above the poverty line, very few can afford to pay these kinds of interest rates. Prevalence of high interest rates is because timely availability of credit is more important than cost of credit per se.

MFIs still need to meet the challenges of financial problems leading to setting up of inappropriate legal structures, lack of commercial orientation, lack of proper governance and accountability and their isolated and scattered operations.

Microfinance remains a powerful tool for development. Over the last few years, the Government of India has been encouraging micro-finance as an alternative to IRDP type of poverty alleviation programs because of the sustainability of micro-finance activities