Though India is one of the largest emerging markets for microfinance in the world, it covers only one fifth of the country’s 75 million poor in need of financial assistance. And of the total micro-credit demand estimated at Rs 150,000 crore, the actual disbursement till now, according to the RBI, is only Rs 8,000 crore.
That is the potential of microcredit in India. Sensing a large untapped market, even domestic and foreign retail banks are aggressively focusing on this sector. But the biggest challenge is to translate microcredit into micro-enterprise in India. The average loan amount per person is around Rs 4,000 and around 60 per cent of the sector is concentrated in three south Indian states – Andhra Pradesh, Tamil Nadu and Karnataka. In most rural areas people still borrow to meet their daily consumption needs, and not to fund an income generating enterprise.
“Indian microfinance has to now move from subsistence creation to livelihood creation and livelihood finance,” says Vipin Sharma, programme director, Micro Finance, Care India, which runs a microfinance institution (MFI) called CASHE.
In fact, a World Bank study outlined that to make the model attain wider reach and sustenance in India, the sector should focus on improving governance and internal transparency. The report says that the government should enable MFIs to scale up operations and expand to other needs of borrowers like savings, insurance and remittances.
The number of self help groups (SHGs) in the country has grown in a haphazard way promoted by NGOs, government institutions and commercial financial institutions. The induction of SHGs into the formal banking system has also been stalled by the lack of a formal regulatory framework.
To regulate the sector, the Centre is now planning to bring out legislation in the next couple of months. “The Bill will focus on developing the microfinance movement and if things go well, microfinance will soon replace the informal channels of credit borrowing and lending in rural India,” says Vinod Rai, special secretary in the government’s Department of Banking. He adds that the credibility of MFIs, their transparency and utility will determine who will ultimately win in the long run.
But MR Rao, chief operating officer of SKS Microfinance India, a MFI, adds a line of caution. “The new legislation should make sure that only genuine players stay in the sector, should not kill the competition and provide a level playing field for all players,” he says.
To enable MFIs to scale up their operations and diversify their portfolio requires a regulatory mechanism and the central concern is acceptance of client savings. Currently, if MFIs want to mobilise client savings they have to register as a non-bank financial company (NBFC) with a startup capital of Rs two crore. This typically is beyond the reach of most MFIs.
In fact, a CARE India report titled Microfinance in India: A State of the Sector refers to the absence of savings in Indian microfinance as “walking on one leg”. “The absence of savings has unfortunately been one of the distinguishing features of Indian microfinance and prevents it from providing a financial service to the poor which is as valuable to them as microcredit,” the report outlines.
The poor in rural areas put their savings into chit funds mostly run by fly-by-night operators. “Enabling MFIs to mobilise savings and deposits with proper regulatory safeguards will reduce the poor’s vulnerability and would make the institutions sustainable in terms of source of funds in the long run,” says Sharma of CARE India.
Secondly, there are strong synergies between microinsurance and microcredit. Insurance offers safeguards to assets created under microcredit programmes. It also protects savings from being wiped out by shocks arising out of sickness, death, accidents or droughts.
“The most important product that MFIs should offer to the poor is insurance because if they are not protected, there are higher chances that they may not come out of the poverty trap,” says Rao of SKS. Though some MFIs have started providing insurance, the coverage is just about five per cent of the total rural poor, according to a study by Chennai-based Institute of Financial Management.
With growing internal migration for work, migrants need a fast, low cost and widely accessible money transfer service to send their earnings back home. At present the options available to a poor migrant are limited. One requirement for an MFI to meet the remittances service is a critical minimum number of migrants. This, CARE India’s Sharma says, can be achieved through innovative means like linking up other MFIs and cooperatives.
Thus, a comprehensive set of initiatives would help transform microfinance in the country from a movement to a sustainable industry in the long run.