Keya Sarkar: The widening world of micro finance

OUT OF FOCUS

Two things happened last month, coincidental but in some manner strangely linked. The first was that I drove from Bangalore to Hyderabad to stop at district headquarters along the way to get a feel of the nature of the microfinance business being carried out.

My host was a micro finance company known for its work in the south. The second was that a friend and micro finance enthusiast sent me a paper written recently by YSP Thorat and Ramesh Arunachalam titled "Regulation and areas of potential market failure in micro finance".

While the drive and the meetings with micro finance beneficiaries underscored the need for small loans and immensely increased my appreciation of those administering them, the paper reiterates the need to handle this demand for small loans in a responsible manner.

The drive through Andhra Pradesh was through miles of barren red soil, kept ready for groundnut sowing. As in village after village the farmers spoke of their wait for the rains, it became apparent how micro finance was critical to see them through the long wait.

While many had availed themselves of consumption loans, there were others who had been financed for mobile vending (combs, bangles, to be sold in villages), embroidery job work, buffaloes, and other activities.

What was most impressive was how the micro finance company had created a mini milk route for the farmers financed for buying buffaloes so that it could reach the nearest milk-processing unit before getting spoiled, how the company was working with a village-level fishing cooperative to optimise income, how it was working with insurance companies to figure out what would be the most relevant rainfall insurance.

The impression that stayed was that micro financing called for a level of commitment that goes beyond banking.

And that the demand for such service is huge and what is being met is only a minuscule portion of that. The need for product development is acute.

The realisation was strong that the government, the central bank, bankers and workers in the field, or those in touch with the ultimate beneficiaries, have to think afresh and mere tinkering with existing structures, institutions, or regulations may not be adequate to cater for the target group of 600 million.

But Thorat and Arunachalam talk about how "micro finance as an industry appears to have arrived in India". Considering that cumulative disbursements of loans classified as micro finance add up to only a little over Rs 6,000 crore, one may not agree with this perception.

What is true, however, is that this sector, so far neglected, has been discovered. New companies, new funds, new institutions are being set up to service this sector.

Thorat and Arunachalam seek to bring out possible problem areas if the microfinance sector does indeed gain in importance.

They write: "[W]ith several enthusiastic and well intentioned lenders/investors vying for top 20/30 MFIs and commercial banks pushing the target milestone vis-à-vis the SHGs formed/linked, we are in a phase of burgeoning growth. In fact, in no other industry are such collateral-free large-sized loans with almost the characteristics of public deposits so easily available. While this kind of a situation is a very welcome sign, it means that commercial banks/financial institutions are ready to take a risk vis-à-vis this sector and the various financial intermediaries are equally willing to handle/absorb larger sums of money, without perhaps the administrative and managerial capacity to manage that growth. This is however a serious aspect that could cause market/institutional failures".

The rise and fall of the NBFCs through the 1980s and 1990s have left a deep impression on the authors. They are in the company of many of our policy makers.

But instead of learning from the systemic failures that occurred with the NBFC, and building a regulatory framework to prevent such failures, if the financial sector just gets wary, we will not progress.

And the truth is that failures in the micro finance sector will not be in the league of those brought on by Harshad Mehta or C R Bhansali.

The challenge is to enthuse a whole lot more entrepreneurs to enter this sector, so that banks and institutions do not chase a mere 30/40 MFIs. To me, it is too early to think of failures.

Indians have just got on to the micro finance learning curve. Only failures will ensure that the curve is steep.

While at a macro level Thorat and Arunachalam's fears may be premature, the paper would be a great guide for bankers lending to this sector or donor agencies lending support.

It is rich with anecdotes and examples of how unscrupulous MFIs can play with numbers to create a rosy picture.

At a micro level, a banker has his job to do; he needs to be vigilant. At a macro level, it's time to encourage a mushrooming growth.

There will be failures. But that is necessary if even 20 years down the line there is to be an industry that can offer the poor basic financial services.