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by Rajen Kumar

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Money

Roller Coaster Ride of Micro Finance in India

Oct 2008

Financial inclusion and unorganized sector have become the buzz words today. For decades, there has been an impending need to bring the most underserved segment of the economy under the fold of formal credit facilities.

A vast majority of SMEs in India have been financially excluded because of inherent difficulties in the process of procurement of credit. The system has a basic requirement of a collateral or security which most small entrepreneurs find difficult to provide. Further, quite often the complex legal and operational procedures coupled with loads of paper work make matters even more difficult for the needy ones. The long and tedious process involved in credit disbursement complicates matters as credit-strapped entrepreneurs are not able procure it when they need it the most.

Such a scenario has prompted many to opt for the informal sources of credit such as moneylenders who have been infamous for their unfair and exploitative practices. However thanks to reforms in banking and financial institutions, the micro finance landscape appears much greener today.

In India micro finance institutions come under three categories

1. Not-for-profit MFIs: these include Societies registered under Societies Registration Act, Public Trusts registered under the Indian Trust Act 1882 and Non-Profit Companies registered under Section 25 of the Companies Act, 1956.

2. Mutual Benefit MFIs: these include State Credit Cooperatives and Mutually Aided Co-operative Societies (MACS).

3. For profit MFIs: these include bodies like Non Banking Financial Companies (NBFCs) registered under the Companies Act 1956 and banks which provide micro finance along with other usual banking services.

Initiatives of the Indian government

The government of India launched the Credit Guarantee Scheme for Micro and Small enterprises (MSEs) in August, 2000 with the objective of making credit available to MSEs, without the requirement of a collateral and third party guarantee. The scheme is being operated by the Credit Guarantee Fund Trust for Micro and Small enterprises set up jointly by the government of India and SIDBI. The credit guarantee scheme was initially approved for one year with a corpus of Rs. 125 crore contributed by the government of India and SIDBI in the ratio of 4:1. This corpus fund is expected to be raised to Rs.2,500 crore during the 11th plan.

Since 2003-04 the government has been operating a scheme of Micro finance programme. Under the scheme, the Government of India provides funds to SIDBI under a Portfolio Risk Fund (PRF) which is used for security deposit requirement of the loan amount from MFIs or NGOs. At present SIDBI takes fixed deposit equal to 10% of the loan amount. Under the PRF, the share of MFIs or NGOs is 2.5% of the loan amount(i.e 25% of security deposit) and balance 7.5%(i.e 75% of security deposit) is adjusted from the funds provided by the government under the scheme.

Role of Apex Financial Institutions in Micro-Finance

The role of apex financial institutions (AFIs) in the area of micro finance is substantial. In India there are three Apex Financial Institutions each with its own unique approach to micro finance. The process of micro finance was initiated by NABARD through the linkage programme of SHGs by mobilizing their own savings. SIDBI is the second important player, providing bulk lending to MFIs. The main focus of SIDBI is creating larger Micro Finance Institutions(MFIs). RMK is the third player providing loans to NGOs for lending to women SHGs.

Witnessing the tremendous growth and potential of the micro finance sector, several other organizations and international agencies have also come in the fray.

Initiatives of banks

About a decade ago banks showed least interest in financing SMEs owing to a huge number of defaulters and lack of support from the government.

However modern banks are slowly beginning to realize the huge potential of the SME segment. This is attributed to several factors. Notwithstanding the numerous bottlenecks it faces, the small industries have registered exponential growth since Independence. At present, there are 31 million small and medium industries in India. The sector is growing consistently and contributes by about 39% to India's manufacturing output and over 34% of exports.

Banks have made significant improvements in several areas such as financial viability, profitability and competitiveness. However, even today the banking sector has not penetrated to the bottom of the pyramid. This strongly calls for coordinated efforts in the area of financial inclusion to help millions of cash-strapped enterprises.

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FICI to be a landmark in the realm of micro finance

Financial inclusion refers to the delivery of banking services at an affordable cost to the vast sections of disadvantaged and low-income groups. Several public and private banks including the micro finance institutions have come forward in this direction to aid the disadvantaged sections.

The much-needed efforts to make Micro finance reach the hitherto neglected segments recently received a shot in the arm with the country's premiere banking and finance institutions deciding to pool in their efforts to help the micro, small and medium enterprises avail of easy credit facilities.

Five financial institutions including banks namely, Life Insurance Corporation (LIC), National Housing Bank, Standard Chartered Bank, Union Bank of India and IFC (World Bank's PE arm) will pool together their efforts to bring financial inclusion to the not so priviledged sections of the country. These institutions will form a company to be named Financial Inclusion Corporation of India (FICI) which will be a non-banking finance company.

The major initiative of FICI will be to finance the micro finance institutions (MFIs) of the country and to influence policy and regulations on functioning of MFIs. Thus FICI will assume the role of a coordinating agency for promoting financial inclusion. However it has been realized that selling finance products to this bracket of customers will require a different type of approach than the usual banking products.

Members of the FICI will pick up a stake of 15-20% each and shall endeavour to bring MFIs in the mainstream of financial services and link them to global investment communities.

A Feather in our Cap

The Indian micro finance story recently got another feather in its cap. In the global ranking of Micro Finance Institutions (MFIs) conducted by Micro finance Information Exchange (MIX) in 2007, India is ranked a leader in microfinance with 14 Indian MFIs in the top 100. The Indian MFI, SHARE illustrates the Indian microfinance success story. SHARE started with 0.2 million clients in 2004 with a portfolio size of US $19 million. By March 2007, SHARE was serving about 10 million clients and had accomplished a portfolio size of US $ 91.7 million.

This success story is attributed to SHG-bank linkage programme which has acted as a catalyst in bringing millions under formal financial systems. Further many NGOs/ MFIs which began their operations in the 1990s have enormously widened their reach and client base. The average loan size for Indian MFIs has grown from Rs.6520 in 2003 to Rs. 8140. in 2007. This has resulted in big players like Reliance, Bharti, Axis Bank etc. coming into the fray.

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