Keya Sarkar: Half measures on micro finance

OUT OF FOCUS

When planning for a new business, or expanding an existing one, it is normal to attempt an estimate of what the present demand-supply gap is and what it is likely to be in future More often than not such estimates or projections are incorrect or do not materialise.

But that does not diminish the need for the rigour or discipline of attempting them. Only when we know where we want to reach can we estimate what kind of resources would be required to accomplish it.

In the case of the microfinance industry, the planning at a national or a macro level, from whatever I have read or discussions I have sat in on, does not seem to follow this business plan discipline.

While it is common knowledge that micro credit or small loans in our country are not getting disbursed at the rate that is being demanded by our 600-million poor, what is not articulated is what our national target should be if we were to correct the shortfall. All that is repeated is that micro credit needs to be augmented.

The current annual disbursement is no more than Rs 3,000 crore. Whether this figure should stand at Rs 10,000 crore, or Rs 20,000 crore, or in fact Rs 50,000 crore (this is the current demand estimate) in five or ten years is an unanswered question.

The finance minister made a reference in his Budget speech regarding augmenting the flow of micro credit. I quote: "At present, micro finance institutions (MFIs) obtain finance from banks according to guidelines issued by [the] RBI. MFIs seek to provide small scale credit and other financial services to low income households and small informal businesses. [The] Government intends to promote MFIs in a big way. The way forward, I believe, is to identify MFIs, classify and rate such institutions, and empower them to intermediate between the lending banks and the beneficiaries. Commercial banks may appoint MFIs as 'banking correspondents' to provide transaction services on their behalf."

The finance minister's wish is the RBI's command, and subsequent to this year's Budget speech, the RBI set up an internal group with H R Khan, chief general manager and principal, College of Agricultural Banking (CAB), RBI, Pune, as its chairman. Its terms of reference are:

examine the issue of allowing banks to adopt the agency model, by using the infrastructure of civil society organisations, rural kiosks and village knowledge centres to provide credit support to the rural and farm sectors and to suggest operating guidelines therefore;

examine the feasibility and modalities for appointing "banking correspondents" to function as intermediaries between lending banks and beneficiaries;

identify steps to be taken to promote micro finance institution (MFIs) and propose a system for their classification and rating; and

examine the extent of regulation, if need be, of MFIs.

In the 96-page report (with annexures), which is largely a cut-and-paste job, nowhere does the group dwell on disbursal requirements and hence personnel requirements. It is almost as if it is amplifying what the finance minister had said. If Chidambaram believes that the way forward is through banking correspondents or partnerships, then this report is only to give it the RBI's stamp of approval.

The report says: "... Out of these structural and operational constraints has evolved the 'Partnership Model' which has been popularized by the new generation of private sector banks. In this model, the unique innovation is that the MFI evaluates, recommends, originates the loans, helps in disbursal and subsequently tracks and collects the loans. However, the loans sit on the books of the bank and not of the MFI. This model has overcome the constraints of capitalization of the MFI and the double exposure that the banks are exposed to. For the services that the MFIs provide a service charge is collected from the borrowers by the MFI. It also provides First Loan Default Guarantee (FLDG) to the bank to a certain extent (8-15%) of the limit sanctioned in the form of a security deposit with the bank so as to maintain its stake in the loan portfolio. Since MFIs find this deposit amount too large to mobilize, further innovation by providing the FLDG amount as an overdraft limit to the MFI has also been tried out."

While there may be argument with the Khan Committee's acceptance of Chidambaram's suggestion, the worry is that in both cases the suggestion may have come from one bank.

While the committee talks about the partnership model being popularised by "many new generation private sector banks", it really means ICICI Bank.

This private sector bank, with its aggressive micro credit disbursal targets (estimates in the market range from Rs 500 crore this fiscal to a ridiculous Rs 20,000 crore), has found that there are not enough sound MFIs to route this refinance and is hence keen on the partnership model.

Of course, the partnership model has the advantage of not being constrained by the capitalisation of the MFI and also the potential of the micro loans being securitised at some point since they are on the books of the bank.

But it would be unwise to launch the model without a wider acceptance from the banks and micro finance organisations for which it is meant. There is always a downside of letting any one player dictate policy.