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Dealing with the poor: a business opportunity

Keya Sarkar | September 26, 2003

Numbers just out for the banking sector for the first five months of this fiscal seem a cause for concern. Falling interest rates have led to a deposit growth of only Rs 87,649 crore (Rs 876.49 billion) in the first five months, as against Rs 1,23,874 crore (Rs 1,238.74 billion) in the corresponding period last year.

But more alarming is that credit growth has been only Rs 2,785 crore (Rs 27.85 billion) in the same period, as against Rs 66,271 crore (Rs 662.71 billion) last year in the corresponding months.

It is against this backdrop that micro-finance practitioners assembled in Delhi on the 12th of September for their annual conference under the aegis of Sa-Dhan, the Association of Community Development Finance Institutions.

Strangely their concern was in complete contrast to that of mainstream financial players. The micro-finance institutions were complaining of a lack of funds, despite the availability of bankable assets.

Estimates show that there are about 75 million poor households (of which 60 million are in the rural areas and 15 million in urban areas) and these have an annual credit requirement of about Rs 50,000 crore (Rs 500 billion).

Against this, disbursals last fiscal were less than even Rs 1,000 crore (Rs 10 billion). Even this meagre portfolio of micro-credit has been declining sharply in recent years.

At the end of 2001-2002, the share of agriculture in the outstanding credit of scheduled commercial banks was under 10 per cent, which is less than even personal loans (for housing and consumer durables).

Going forward, the focus on financial performance will imply that the importance of small loans for farm and non-farm activities can only decline.  In 2002, 45 per cent of the borrowers of scheduled commercial banks were from rural areas, but they accounted for only 13.4 per cent of their outstanding loans.

For metros, the corresponding numbers were 15 per cent and 54 per cent, respectively. With their focus shifted to financial performance, the banks will naturally shift their portfolio to the low cost urban segment.

N S Sisodia, banking secretary, ministry of finance, who delivered the keynote address, did in fact own up to the government's change in priorities.

"What brings me here is not knowledge, but ignorance" he said, admitting that he had little knowledge about micro-finance or financial instruments suited to the poor. He said, "although micro-credit has been offered to the unorganised sector, it was mainly through the government or government- supported programmes.

The provision of micro-credit through Self-Help Groups was initiated in a significant manner in the early 1990s. Since then, the movement has come a long way. By March 2003, more than 717,000 Self-Help Groups covering 11.6 million rural poor households have been financed by banks. The total credit disbursed is over Rs 20,408 crore (Rs 204.08 billion).

This SHG Bank Linkage Programme has emerged as the largest and fastest growing micro-business programme in the world. Repayments by these Self-Help Groups have been over 95 per cent.

Over 90 per cent clients are women, who are otherwise deprived of any credit support. Banks now realise that there is a strong business opportunity in dealing with the poor."

But do they? Vijay Mahajan, co-chair of Sa-Dhan and CEO, Indian Grameen Services, in his speech following that by Sisodia, alleged that the mainstream financial services had turned their back on two-thirds of the borrowers.

Mahajan pointed out that of the 110 million agricultural holdings in India, 80 per cent were small and marginal. In addition there were 35 million non-farm enterprises. Of a total of about 145 million productive enterprises, the banks had touched only about 37 million.

Unlike the Integrated Rural Development Programme and the 1980s style loan melas, what the micro-finance practitioners advocate is sustainable lending. They are proposing that rates of interest charged on micro-credit should reflect the higher cost of administering micro loans, and should therefore be higher than the rate charged to the corporate sector.

That Sisodia too is alive to the debate was evident. He said, "Even today, interest rates charged by MFIs are not considered acceptable by many. In an era where interest rates are falling and banks are profitably lending to SHGs at sub-PLR rates, MFIs are charging interest rates of 30-40 per cent."

But with ample evidence to show that banks are turning away from small loans, isn't it time to conclude this debate? Micro-finance institutions argue that what bankers and the media term 'usurious' needs to be viewed in the context of alternatives. For the small enterprise, the alternative is the money lender.

So in a situation where availability is more critical than price, is it just political expediency, which is the cause of this fixation on price? This concern is truly inexplicable, as Mahajan pointed out, when government-run post offices charge 5 per cent for money transfers.

In these days of  'at par' banking facilities, ATMs and electronic transfers, the postal department is used only by the less affluent for their monetary transactions, so isn't this service fee "usurious"?

But increased lending to the poor will not be easy. Challenges have been debated and documented.  Besides the legal, regulatory and financial challenges for NGOs  (over 500 are involved in micro-finance activities, they are usually registered as societies and trusts with no equity capital and consequently can never be 'capital adequate' in leveraging debt), there is a huge need for capacity building.

If a little over 700,000 SHGs can absorb annual credit disbursements of less than Rs 1,000 crore (Rs 10 billion), how many SHGs will be required to absorb Rs 50,000 crore (Rs 500 billion) to touch 75 million households?

Where are the NGOs that will organise these SHGs, and where are the people to run these NGOs and who are sensitised to rural livelihoods?

That the micro-finance sector feels this lack of skill is evident from the fact that two of the most successful MFIs, Sewa and Basix, have now set up schools for livelihood education.


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