India: Ensuring microfinance’s future prospects
India, April, 27 2012 -
The private sector MFIs have demonstrated a scalable model that can also benefit the rural youth by providing gainful employment
India’s ability to post fast economic growth is heavily dependent on its rural youth (often dubbed the bottom of the pyramid) becoming economically active. If we do not enable and assist this section of our citizens, it can turn out to be a major detriment for the country’s stability and peace. The recent spurt in ultra-Left violence across the country shows that there is simmering discontent among the poor.
My experience with the microfinance model has convinced me about its viability and benefits to bring the required transformation. I have come across many women and their families who have enabled themselves with tiny loans to successfully augment their income.
Across the country, there are scores of families where the next generation has educated itself with degrees. They often support the community to improve their livelihood partly by using income generated from microfinance-funded activities.
However, struggling microfinance institutions (MFI) require large-scale intervention by the policymakers to bring them back to normalcy.
The private sector MFIs have demonstrated a scalable model that can also benefit the rural youth by providing gainful employment. Recent data shows that more than 80,000 rural youth have been employed by MFIs across the country. There are virtually countless tales from many of these young staff members of how working for MFIs has given them and their family social status in their communities.
Nevertheless, there has been a mission drift, so to speak, over the years where the pioneers of the sector failed to manage the pressures of private equity providers who pushed MFIs to pursue unbridled growth to build their personal wealth disregarding consequences of excessive growth. The malaise plaguing the sector is one of shoddy governance coupled with a gross lack of customer sensitivity. This has resulted in lack of transparency and deploying of strong-arm collection tactics which culminated in the Andhra Pradesh MFI crisis.
It is time for the government and the banks to step forward to use this model to further the objectives of financial inclusion. Some of the steps that should be taken include:
• Banks taking ownership of MFI non-banking financial companies (NBFCs). Each of the major banks that hold major debt in these companies can convert that into equity and become majority owners. Alternatively, banks that have NBFC subsidiaries can launch microfinance operations, hiring trained staff from MFI NBFCs.
• The new MFI Act enables MFI NBFCs to offer thrift/savings products. This empowers banks to launch small savings products which today are inaccessible to the poor within the mainstream banking space.
• Money transfer is another area where MFI NBFCs can offer superior services by combining the bank’s network across the country.
• There are further possibilities for banks to graduate seasoned borrowers with successful enterprises to more substantial products such as loans against property and home loans, etc. In short, banks can leverage the group-lending model created by MFIs to create many rural banks modelled on the Grameen Bank across the country to achieve financial inclusion.
Banks will bring in the much-required transparency, holistic customer service and robust governance in the MFI sector while providing the much-required funding support at the same time.
The Reserve Bank of India will also find it easy to let banks-led MFIs offer thrift and other products than private sectors MFIs fuelled by private equity firms. Banks are affected by political intervention and lack of ownership/commitment by the staff who do not have the requisite skills to deal with MFI customers, often resulting in poor recovery rates. Without a doubt, this makes MFIs the ideal vehicle for microfinance as they have consistently demonstrated superior recovery rates of 98%.
The opportunity for banks to take lead in the turning point of the microfinance sector is here. They should act now. The question is that of using this opportunity.