"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.

Microcredit and Microfinance

In continuation of the previous post, I would like to add these:
For further readings:

• You will find here the documents and resources on microfinance in India
• Frequently asked questions on microfinance (You will find here the difference of microcredit and microfinance)

In the General Budget 2005-2006 presented today, Government of India has proposed to increase the Microfinance development fund to Rs.200 crores.

Prof. Muhammad Yunus

One does not always need to have large money to help people. The poor but skilled people need very small money to help themselves come out of deprivation. They might not possess anything for collateral. Banks do not give loans to them. Local moneylenders squeeze these people. The scene seems to be very familiar. Professor Yunus, the economist, happened to meet such people. When he met Sufia Begum way back in 1974, he never knew it would change his life and that of others. Professor was on his visit to a local village in a famine gripped Bangladesh. Begum would weave bamboo stools from morning to evening to earn fifty paise profit in each stool. Professor also learnt that the moneylenders had not allowed Begum to increase the selling price as a part of her repayment of loans. Then he made a list of people who needed a small amount of money and found out they needed only 1500 Bangladesh Taka (roughly Rs.1100/-). He was shocked. People normally talk of investing millions and millions of Takas for economic development. But these people needed only a little. He lent that money to them and asked them to repay whenever they could afford. He also realized that this was just an emotional and personal response but what these people needed was an institutional mechanism. Grameen Bank, banking for the poor, was born. The implementation of micro-credit was also born.

For Further Readings:

• Read his interview here
• Website of Grameen Bank
• Paul Sinclair's article on Prof.Yunus
• His book: Banker to the Poor - Micro-Lending and the Battle Against World Poverty
• An article on micro-credit by Prof.Yunus