By Pawan K. Bhura,Assistant Professor, Department of Commerce, Shyam Lal College( E), University of Delhi, Delhi, India : For the developing countries like India, microfinance has come as a breakthrough in the philosophy and practices of poverty eradication, economic empowerment and inclusive growth. Yet given the enormity of economic compulsions and complexities in developing countries, microfinance is an unfinished agenda. The main objective of the present paper, therefore, is to analyse and discuss the adequacy of the role played by RBI in eradicating poverty and empowering the marginal man (Aam Aadmi), by offering access to financial facilities through microfinance.
The typical microfinance customers belong to low-income group, which does not have access to formal financial institutions. Therefore, there is a tendency among development thinkers and practioners to gauge the impact of MFIs purely in monetary terms, i.e. eradication of income poverty. This is not only a partial view of the potential and purpose of microfinance but also a cause of unbridled growth of MFIs.
MFIs have the capacity and responsibility of empowering the most vulnerable, such as women, rural artisans etc; to allow the not-yet-economically-active to become so; and to create community-based structures that build mutual support and trust.
The present paper argues that MFIs by releasing the true potential of its members through social intermediation can ensure building an inclusive society.
MFIs have the advantage of combining the good features of both formal and informal credit, even improving productivity and credit-worthiness through the ethics of repayment. The plight of farmers in India and the scenario of suicides need to be examined in this context.
For microfinance, therefore there is an ethical and economic justification for looking beyond income poverty or to move from financial intermediation to social intermediation. Hence, today we need to not only evolve new products or services under the gamut of microfinance but also explore new frontiers of development, social and economic. This hinges on human development in terms of infrastructure for health, education, skill and enterprise. This is also in-keeping with the Millennium Development Goals (MDGs).
The positive signs are already visible. Several MFIs have recognized the need to be socially relevant and active in order to be commercially viable and useful.
Microfinance in India: Microfinance in India comes in two broad flavours: the home-grown self-help groups (SHGs), and the Microfinance Institutions (MFIs) that are typically “replicators”, primarily of the Grameen model but also of such models as ASA. MFIs have three features of interest.
First, the average loan size is small.
Second, the bulk of MFIs follow rigid lending policies.
Third, with the exception of portfolio problems, the MFIs report a remarkably high portfolio quality, including “the 100 per cent recovery rate,” a figure that can astonish anyone familiar with banking anywhere, let alone banking in rural India with the poorest clients.
We believe that the explanation of this combination of small loan sizes and extraordinary high recovery rates (despite rigid repayment norms) lies partly in the fact that borrowers are allowed to raise money from multiple sources (commercial and cooperative banks, MFIs, SHGs and money-lenders).
Previous research has highlighted multiple borrowings across mainstream banking, microfinance and the informal sector; recent research shows that clients borrow from multiple sources, even within the microfinance sector. As a useful by-product such a multiple borrowing policy allows the microfinance sector to report large client numbers (with the same client reported by several institutions); fulfilling outreach targets in a cynical fashion.
Indian microfinance covers several million borrowing clients, and is amongst the fastest growing globally. Five Indian MFIs were ranked in the top twenty fastest growing MFIs in 2005 (Microfinance Information Exchange Report, 2006). The growth in the number of clients outstrips growth in the aggregate loan portfolio. In 2006-07 for instance, some of the leading MFIs witnessed an 80 per cent per annum growth in terms of numbers of borrowers against a growth in terms of aggregate portfolio size of 40%.
Microfinance institutions, in India, were typically structured as not-for-profits till a few years back; but there is an increasing tendency to use the for-profit Non-Banking Finance Company (NBFC) model, with the Grameen model dominating (Grameen MFIs have 50% of the total Indian MFI clients).
The NBFC model has the advantage that it can attract both equity funding from venture capitalists and loans from commercial banks; facilitating rapid growth. The loan size of a typical MFI is small. While the average loan disbursed was Rs 6,391, the average outstanding balance was Rs 2,600. Indian microfinance clients have miniscule loans compared to the international average. The average loan size is 15% of local per capita income (the average in Asia is 21%).
Transactions costs, while high by standard banking norms, are amongst the lowest in global microfinance and have declined steeply in the recent past: the cost per borrower was Rs 425 in 2007 compared to Rs 621 in 2003. A major driver of low transaction cost has been the high staff productivity at 273 borrowers per staff member in 2007 (compared to 146 in the year 2003)
This has often been achieved by standardizing processes and reducing touch time with clients. In relative terms, for the typical Grameen MFI, the ratio of operating expenditure to the gross loan portfolio has reduced from 33.4% in 2003 to 21.1% in 2005 and to 16.4% in 2007v. While this reduction partly reflects economies of scale, it also reflects tokenism in group processes. There is evidence of entrant MFIs opening branches in areas where there are existing MFIs, to take advantage of the awareness and exposure to the group lending methodology among clients. This also lowers the costs of group formation and training for the entrant MFIs.
The need to show very high repayment rates reflects the growing commercialization of this sector, where Indian MFIs again lead the pack, having a commercial funding ratio of about 75% (Microfinance Information Exchange Report, 2006).
Conclusion:
In the last decade, MFIs in our view are executing lending by increasingly shifting away from banking as conventionally defined. The existence of multiple borrowing among the MFI clients implies that repayment, to a greater or lesser extent, is dependent on the borrower’s ability to raise a new loan to repay a prior borrowing.
At a macro-level the consequence is that the total outstanding to the financial system is higher than if a single “right-size” loan was provided. This “additional loan” covers two amounts. The first is the enhanced transaction cost the borrower faces, as a consequence of multiple (rather than a single) loan. The second is a potential “delinquent” amount.
The portfolio-at-risk is effectively financed by the financial system and is masked. This is like a game of musical chairs, with multiple sources of financing the music stops rarely. When (we are not using the more optimistic ‘if’) the music does stop, the accumulated delinquency will suddenly show up. Again, taking recourse to finance vocabulary, the delinquency has been securitized and funds raised against it.