"The Hindu" editorial on Micro-finance

This was published in The Hindu on March 14, 2005. The link is here.

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SELF-HELP GROUPS AND MICRO-FINANCE

The slew of measures announced in the Union budget will go a considerable way in bolstering the system of dispensing credit by micro-finance institutions (MFIs) in conjunction with self-help groups (SHGs) and non-governmental organisations (NGOs). There is a welcome recognition in the Finance Minister's speech of the role MFIs have played in catering to the credit needs of the poorer sections of rural society. This is a function mainline banks in India and most other countries have been unable to do on their own. Since February 2000 when the Reserve Bank of India gave priority sector status to loans provided by banks to the MFIs, the activity has been mainstream. Experience of operating a micro-credit model pioneered by the National Bank for Agriculture and Rural Development (NABARD) during 1991-92 has shown that establishing a linkage between an SHG and a bank is the best method for bringing SHGs into the ambit of formal banking especially because it infuses a degree of professionalism into the services offered to the rural poor.

The budget has ambitious plans to extend the target of credit linking for 2005-06 from 200,000 self-help groups to 250,000. The Government hopes to enhance the beneficial role of the MFIs as an intermediary between banks and rural borrowers. Commercial banks will be allowed to appoint MFIs as their "banking correspondents" for providing a variety of services on their behalf. That will vastly increase their reach and remove some of the intractable rigidities that have stood in the way of the spread of rural banking. Close to 70 per cent of the rural poor do not have a bank account and 87 per cent do not have access to credit from a formal source. The proposal to appoint MFIs as agents for micro-insurance products will help spread the insurance habit and enable them to earn a fee income. Another significant proposal is to let the eligible MFIs seek equity support from the redesignated Micro Finance Development and Equity Fund, which has a corpus of Rs. 200 crore.

Originally confined to the southern States, micro-finance is fast spreading to the rest of India. For the banking system, the SHG linkage has been a winning proposition. It has resulted in lower transaction costs, negligible defaults, and the generation of enormous goodwill. The MFIs have been adept at providing customised solutions based on their understanding of local conditions. However, a number of weaknesses remain. Banks have not yet standardised their approach towards micro-lending. A lack of infrastructure and design facilities and also worthwhile distribution channels for marketing the products has constrained growth. A number of initiatives are needed to keep the micro-finance system on track. The goal is to make it a dispenser not just of credit but of a variety of social goods and services to the rural poor.