There is an urgent need to overhaul the regulatory and business architecture of India's microfinance institutions (MFIs) with focus on building social capital and expanding financial inclusion as opposed to profit-driven models, experts said on Friday.
"Microfinance 1.0 has failed. It was not the miracle it was touted to be," said Union rural development minister Jairam Ramesh at the HT Leadership Summit 2013 on Friday.
Also addressing the session, Microfinancing: Philanthropy? Or loan sharking?, Arvind Panagariya, Professor of Economics at Columbia University, said microfinance had been pushed in India irrespective of credit worthiness of borrowers, and the recovery methods were coercive.
MFIs in India, which extend small size loans predominantly to the rural poor, have been mired in controversy in the wake of reports about a spate of suicides that were linked to alleged coercive methods adopted by some institutions in states such as Andhra Pradesh.
Panagariya said while micro-credit smoothened out consumption for those with low incomes, studies showed their effect on poverty and education was limited. Micro-credit's role as an income-generating mechanism was "overstated", he added.
Ramesh said there had been no attempt by microfinance institutions to create social capital.
{{/usCountry}}Ramesh said there had been no attempt by microfinance institutions to create social capital.
{{/usCountry}}On the contrary, the bank-linked self-help group (SHG) model was a successful Indian innovation in microfinance. "SEWA (Self-Employed Women's Association) had done well because they went the SHG way," said Ramesh pointing out that public sector banks had disbursed Rs. 20,000 crore through SHGs in 2012-13.
Interview with Arvind Panagariya