Dhan - who uses a single name - set out on his entrepreneurial journey in the ever growing semi-legitimate urban sprawl around Delhi by buying a second hand auto rickshaw with Rs 21,000, put together informally. After a time it was "repossessed" by a financier who had loaned money to the previous owner. After five years the latter still owes him Rs 6,500.
But this setback did not stop him. He thereafter became successively a car driver, bought a second hand Maruti van and a new van with what came from the old van and collateral of the extremely modest home where he and his family lived. The two major hurdles that stand out in his journey, narrated by Meera Mitra1, are the high cost of informal finance and having to pay off rent seekers.
Shankar - who, similarly, has an single name - is from Samastipur in Bihar. He came to Delhi in tow of a fellow villager, moved from home to home and economically up the ladder from "poor" as a the earner of a daily wage to "not so poor" - to halfway to a "regular" job as a security man in an office on contract employment. Being frugal helped. He also made a bit from moneylending. Thereafter he decided to become the owner of a shanty on 12.5 square metres, with just four walls and a tin roof - for Rs 80,000 plus 10 per cent paid to an agent who regularised his title to the land.
The money came as loan from relatives and recalling loans he himself had made - some at five per cent per month and some at no interest to gain equity. There was no question of approaching banks as his papers were not in order. He has over time added a new line of business - making remittances for fellow migrants with the help of the cellphone and bank accounts at Delhi and his village. In these narratives and others, Ms Mitra notes that the greatest need for the hard working and enterprising poor is reasonably priced credit and shelter.
What is the institutional support available, even if on paper? There is also a narrative on how two self-help groups (SHGs) of women with low family incomes journeyed from collecting small amounts in tin boxes to opening bank accounts, making a great success of running a food stall at a Diwali mela and then to the more steady business of supplying mid-day meal dabbas to companies. But these groups were lucky in being guided by NGOs who knew the task at hand and also supported by a corporate CSR programme. Significantly, recoveries from bank-linked SHGs are far below the 95 per cent-plus achieved by large microfinance institutions (MFIs). In West Bengal recoveries from SHGs are 60 per cent!
The microfinance scenario today looks far brighter than when it was struck by the Andhra Pradesh crisis in 2010. But what is the reach and spread of even the successful MFIs? They offer "a single product - monthly/weekly installment loan of a one or two year tenor," notes Samit Ghosh, the founder of Ujjivan, in 'The Case of Microfinance in India'2. Such offerings "had both limited use and attraction to the majority of the target market."
Though Ujjivan is one of the best run MFIs in the country and now one of the largest, in a 2009 study it was "alarmed" to find the industry suffering from customer dropouts as high as 20-25 per cent annually. While 10 per cent were dropped by the groups themselves because of poor credit risk, customers also found the practice of group guarantees and weekly group meetings irksome. Ujjivan gave customers the choice of monthly meetings and repayment cycles and getting out of group guarantees. This reduced the dropout rate to 18 per cent, which was also low. More important, it found that even after operating in an area for five to seven years it could reach a maximum of a fifth of potential customers. Clearly, microfinance has a long way to go.
The government has now introduced what looks like a new distraction, Mudra Bank, as both a regulatory agency for the entire sector and to work as a refinance source. There is little logic in taking away the regulation of large MFIs from the Reserve Bank of India, which appears to be doing a decent job. As for NGO-sponsored groups, if nationalised banks cannot achieve a good recovery rate for self-help groups, how will a new government entity do any better?
A lot of hope must therefore rest with the small local banks which RBI will begin to license soon. With grassroots links they would be ideally placed to assess the credit risks that entrepreneurs of the type depicted above represent and offer credit at a scale which can truly promote financial inclusion. For such credit to flow smoothly it is vital for it to be professionally administered and kept at an arm's length from government.
1. Meera Mitra, Breaking Through: India's stories on beating the odds on poverty Rainlight Rupa, 2015
2. In Jan Hagen and Ulrich Schurenkramer (eds.), Client Centricity: Relationship Management in Banking, Murmann Publishers, Hamburg, 2015
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2. In Jan Hagen and Ulrich Schurenkramer (eds.), Client Centricity: Relationship Management in Banking, Murmann Publishers, Hamburg, 2015
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