Wednesday, March 9, 2011

Microfinance : Alleviation or Exploitation ?

The functionality of micro-finance (MF) is not as easy as the meaning of the term is, at least in the Indian context. The reason behind the rise of MF in India is dated back to the medieval era, when the money lending practice was widely prevalent.

With growing settlement in the British regime, money lending became a tool for the rich zamindars to become richer. For its financial growth, the British applied more and more tax on the farmers, just to take the wealth away from India, to their own country. Peasants were forced to pay the astronomical amount of tax to the British if they could not reap the cash crop in time. Due to the heavy amount of taxation, when the peasants failed to pay by themselves, they took the help of “money lenders”.
With multiple credit sources and huge amount of credit, the peasant failed to repay to the money lender. Money lenders started exploiting the peasants and charged even higher interest rate than earlier. Result was, the peasant either committed suicide or the goons of the money lenders took away the remaining wealth of the peasants.

British left our country in 1947 but after so many years, the concept of money lending still exists. But preference of the poor people has changed. Money lenders now are charging around 50% interest or more than that. In some cases it is greater than 100%. Result is known to everybody. People are either dying because of no job, unavailability of any source of income or lose their family wealth because of forceful occupation of money lenders if ever they had borrowed from them.

Considering this situation and to alleviate the poor, government have made a plethora of policies and asked the national and private banks to cater to the group of backward and remote villages either for farming or any self entrepreneurial initiatives. Initially some implementation was there on pilot basis but later these concerned financial institutions started withdrawing from the same.
There are some reasons to it like high cost involved in data processing for each credit, unavailability of any collateral security of the borrower, absence of any regular source of income for the poor are the major reasons. National banks started to withdraw after the withdrawal of private entities because of the liberalization of the banks resulted in comparison of performance of both public and private sector banks.

This provided the path for Microfinance Institutions. These institutions started off well because of their flexible recruitment practices, relying on group lending which includes peer monitoring and peer pressure to repay the amount on time. This is the reason why this concept succeeded.  
Seeing this as a great medium of making capital the financial institutions joined too. They just lend money to the most favorable MFI which can fetch more profit for them. Without really being present in the picture they just tried to fetch as much money as possible. Even NABARD chief general manager in Karnataka has pointed out that banks now favour lending money to MFIs than Self Help Groups (SHG).

Self Help Groups (SHG) being small and homogenous is controlled by the borrowers themselves. They play a key role in the development of the SHGs by attending, organizing and participating in making the rules related to interest payments and repayment schedules. So these groups are more characterized by self-reliance and self-management but limited to small group of people instead of advocating the entire poor mass.

Getting a great financial support these intermediaries like MFIs expanded their base by including more and more borrowers in their list, which they know will be ready to pay in any condition or with using any forceful means. Coming under these burdens the borrowers often seek more lending. And again the same story repeats itself.

In recent times due to this unorganized structure and functionality of MFIs government of Andhra Pradesh introduced some regulations in this sector. Among all it made the MFIs to register in a list maintained by the government, there is a cap to the interest rate that a MFI can charge to the borrower etc. Such moves were welcomed from various spheres but much more to be done if the MFI concept is really needed to be recognized as a tool for 'removing' poverty in India.

Recently Dr. Mohammad Younus was sacked from the post of MD of the popular and role model MFI Grameen Bank which received the Nobel peace prize in 2006. He is known as the founder of the concept of MFI. He started the Grameen Bank project in 1976 keeping in view that it will help the poor to be self sufficient. It has over 1000 branches in every province of Bangladesh, borrowing groups in 28,000 villages, 12 lakh borrowers with over 90% being women. It has an annual growth rate of 20% in terms of its borrowers. The most important feature is the recovery rate of loans, which is as high as 98%. A still more interesting feature is the ingenious manner of advancing credit without any "collateral". But recent accusation of the government of Bangladesh that he was using the MFI which is half owned by the state as his own property and was sacked from the MD role.

If government at all wants to alleviate the poverty in India and keep this concept of MFI to be the tool behind the same it has to bring the formal financial institutions into the fray. By lending the intermediary MFIs the formal institutions can save the transaction cost and gain access to rural and remote areas. Lending in large scale is not possible for the organizations like MFIs alone, which is a major reason for the exploitation. The MFIs should not only be involved in lending but also in saving schemes, considering these savings as collateral for the borrowers. Currently Co-operative societies like Thrift and Credit co-operative societies are already gaining momentum but more participation of the formal institutions is needed.

Eventually it would be ideal for the MFIs to make the poor more bankable and enhance their creditworthiness to enable them to qualify for long term credit from formal sector. MFIs need to contribute a lot to this by building financial discipline and educating borrowers about repayment requirements.

Somya Ranjan Pradhan has elucidated the tragectory of MFI's in India and has suggested areas of improvement. If you wish to add more, send him a mail at

No comments:

Post a Comment