With Rs 28, 000 crores of outstanding loans disbursed to 50 million clients, the microfinance sector has become one of the most exciting in the Indian economy.
Drawing in clients from the remotest villages as well as from the urban poor; from people whose occupations vary from taxi-driving to dry-land farming; working with smart-card and handheld remote devices to manually filled registers, microfinance is set to demand innovative solutions and strategies to meet both short-term issues and long-term challenges.
Three key features mark the progress made in this field. The first is the Microfinance Bill, which is going to be put before the cabinet soon. The second is the National Livelihood Mission, which is going to rework existing programmes. The third is the enhanced sum allotted to the Rashtriya Mahila Kosh, increasing it from Rs 100 crore to Rs 500 crore. While all three are welcome, the devil is in the detail.
What does the policy environment and the budget do for microfinance in the long-term? Bringing in the Microfinance Bill recognizes the need to create some structures in this sector and introduce some supervision.
With such large volumes of cash transactions and disbursement, there needs to be some basic uniformity in preparing and reporting of accounts, as well as supervision of a vast variety of entities. At present there is very little.
Secondly, many of those availing of microcredit are poor and illiterate, participating for the first time in formal credit market transactions. We must recognize that they need to be shown how to participate efficiently.
Putting the required staff and systems in place to achieve this is going to be costly. The increased allocation of Rs 400 crore to the Rashtriya Mahila Kosh, which does give out low cost money, will help microcredit institutions to build a network of retail agents, at least theoretically.
This is welcome, but the recipients of such funds must be assessed properly, and required resources must be made available at the appropriate time.
Thirdly, the budget refers to the Swarna Jayanti Gram Swarozgar Yojna (SGSY) being restructured and given a new name, the National Livelihood Mission. Establishing such a mission will give the microfinance sector some new focus and drive, but its success will be determined by how it is able to use resources to add value to the enterprises the poor manage and use.
The economic slowdown has thrown up some complex problems for poor households, banks and micofinance institutions. Issues relating to markets, skills and resources, the storage of raw material, and the selling of goods and services are some of the key concerns of the poor. Microfinance institutions must be designed to prevent the poor from sliding further into poverty.
The short term and the long term must both be kept in mind while designing interventions.
The writer is the Executive Director of Sa Dhan, the Association of Community Development Finance Institutions