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                           Micro-Finance – Uplifting Rural Economy

                                ll over the world, there    a bank by mobilising low cost       tors so that there is no down-
                                are nearly 100 crore        deposit, lending money and          ward migration for them.
                                poor people who have        getting it back after covering          As per the 10th Plan docu-
                        no access to formal financial       all costs and still make a profit   ment, 26% of the population
                        services. Of these, nearly 20       resulting in eradication of pov-    lives below the poverty line.
                        per cent live in India. Micro       erty and unemployment, what         Of this 19.3 is in the rural area
                        finance can be defined as pro-      more can one ask for?               and the remaining 6.7 in urban
                        viding credit, thrift and finance       Micro-finance provides a        areas. Thus there is primarily a
                        related services and products       wide range of financial servic-     huge demand for the micro-
                        of very small amount so as to       es to the poor on a sustainable     finance support in this sector.
                        improve the living standards        basis and is slowly but steadily    This is met by commercial
                        of poor and the downtrodden.        gaining popularity. Micro-fi-       banks, co-operative banks as
                        In the Indian context, at pres-     nance service is provided pri-      well as Regional Rural Banks.
                        ent loans up to Rs. 25,000 are      marily through the following:           Free market economic prin-
                        covered under Micro-Finance.        (a) Formal institutions – Re-       ciples can be used to change
                        A number of small enterprises             gional Rural Bank, co-        the lives of the poor. One has
                        could be covered under these              operatives                    to take a new idea and use the
                        social-oriented entrepreneur-       (b) Semi-formal institutions        Information Technology as
                        ial activities. This concept is           – Non-Government or-          well as the investment bank-
                        based on the understanding                ganisations                   ing clout to take it forward.
                        that the poor are bankable and      (c) Informal Sources - Mon-         Micro-finance is growing very
                        the micro-enterprise finance              ey Lenders and Shop-          rapidly and getting its due at-
                        through repayment incentive               keepers                       tention from banks, financial
                                                                                                institutions,     Non-Govern-
                                                                                                ment Organisations (NGOs)
                              In the broader sense, the aim of micro-finance is to de-          and the Government.
                          velop habits and financial vision among the rural poor, such              In the recent past, the
                          that they are able to save, seek credit and know several fi-          concept of micro-finance has
                          nance related aspects and thus improve their financial posi-          gained significance as it has
                          tion and living standards. The focus of micro-finance is to           emerged as a poverty reduction
R. S. Raghavan            facilitate the shift from induced development from the above          and employment opportunity
 The author is Chief      to initiated development from below. Banks are already doing          tool, having visible impact on
Manager, Vijaya Bank,
Bangalore. He can be
                          their bit towards this end but a lot is yet to be done. The vast      the rural masses. A vibrant
 reached at rsragha-      potential and opportunities of Micro-finance in India are yet         and developed micro-finance
                          to be fully tapped. This article delves into the concept of mi-       sector would impact economic
                          cro-finance in the national and professional context.                 development across the coun-
                                                                                                try and help in distribution of
                        structure, streamlined admin-           As far as rural economy is      wealth among the populous
                        istration and market-based          concerned, agriculture con-         for ultimately narrowing down
                        pricing adopting profit cen-        tributes more than 20 per cent      the gap between the haves and
                        tre approach is sustainable.        of GDP, provides employment         have-nots.
                        This approach leads to major        to 57 per cent of country’s             Commercial banks en-
                        changes in a cumulative cause       workforce and ensures liveli-       courage newer concepts such
                        triggered by credit to rural        hood support to nearly two-         as Micro-Credit, formation
                        masses as well as Small and         thirds of country’s growing         of Self Help Groups & credit
                        Medium Enterprises (SMEs)           population. Agricultural ac-        linking such as SHGs with a
                        to the ultimate benefit of ru-      tivities support rural economy      view to minimise the transac-
                        ral economics. According to         through both backward and           tion cost in rural lending. Be-
                        Mohd. Yunus, founder of             forward integration/linkages.       sides low intermediation cost,
                        Grameen Bank and pioneer            Micro-financing is to focus on      these strategies have twin ad-
                        in micro-credit, if one can run     economically active poor sec-       vantages of high recovery rate

1144 The Chartered Accountant February 2006
                                                                                  Lamiya Lokhadwala

and higher frequency of recy-          The Indian micro-finance          It has really gained mo-
cling of funds. Cohesive group    sector presently consists of va-   mentum as evidenced in the
discipline and peer pressure      riety of micro-finance service     quantum of bank loan and the
are the intrinsic strength of     providers, comprising apex fi-     number of SHGs financed by
the micro-financing activities    nancial institutions like NAB-     commercial banks. By 31st
through SHG.                      ARD and SIDBI, Government          March 2005, the banks in
                                  owned societies like Rashtriya     India had financed nearly 16
Role of Self-Help Group           Mahila Kosh, formal ones like      lakh SHGs involving a bank
    The       Self-Help-Group     commercial banks, regional         loan of nearly Rs. 6,900 crore,
(SHG) is a registered or un-      rural banks, mutually aided        benefiting innumerable poor
registered group of micro en-     co-operative societies, SHG        families.
trepreneurs having a homog-       federations, private sectors           NABARD has managed a
enous social and economic         like NBFCs, money lenders,         Micro-Finance Development
background, voluntarily com-                                         Fund of Rs. 100 crore and it is
                                  etc. At present, there is no one
ing together to save small                                           disbursed for capacity building
                                  appropriate form of legislation
amounts regularly, to mutually                                       in the Micro-Finance Institu-
                                  for institutions undertaking
contribute to a common fund                                          tions (MFIs). In the budget of
and to meet their emergency       micro-finance activity.            Feb 2005, it was increased to
needs on mutual help basis.           As the demand for micro        Rs. 200 crore and it was re-de-
The group members use the         finance has been increasing, in    signed as “Micro Finance De-
collective wisdom and peer        1992 NABARD took pro-ac-           velopment and Equity Fund”,
pressure to get things done       tive steps and launched a pilot    so as to infuse capital fund to
properly. The SHG platform        project of Self Help Group         some of the MFIs.
is built up on the premise that   (SHG) – Bank linkage pro-              There is a broad division
the poor has the capacity to      gramme. In this regard, RBI        of responsibility in micro fi-
save, the poor need credit and    on its part provided a sup-        nance between NABARD and
not charity. Thrift comes first   portive policy framework so        SIDBI to the effect that while
and credit comes later. All for   as to create an atmosphere for     NABARD oversees the linking
each and each for all would       enabling the growth of micro-      programme of banks to SHGs
enhance the team spirit.          finance sector.                    and offers refinance for it,

                                                        February 2006 The Chartered Accountant   1145
                                                                      and prompt financial support.
                                                                      As the income stream is nor-
                                                                      mally small and erratic, micro-
                                                                      finance clients need very flex-
                                                                      ible repayment schedule that
                                                                      may not be comparable to the
                                                                      normal commercial aspects. It
                                                                      is all about making available
                                                                      broad range of financial ser-
                                                                      vices such as Deposits, Loans,
                                                                      Payment Services, Money
                                                                      Transfer, Insurance, etc. to the
                                                                      poor and their business activi-
                                                                      ties. In addition to the normal
                                                                      financial support in the form
                                                                      of easy savings and borrow-
                                                                      ing arrangements, they need
                                                                      insurance cover to protect
                                                                      themselves and their belong-
                                                                      ings, houses, crops, etc from
                                                                      the vagaries of life.
                                                                           Despite large bank branch
                                                                      networks, the finance facili-
                                                                      ties are not easily accessible
                                                                      to the rural folks mainly be-
                                                                      cause of the ‘alien culture’ of
                                                                      the branch level functionaries,
                                                                      who are working on rotation
                                                                      basis and are not very sensitive
                                                                      to the local requirements and
SIDBI lends to MFIs through       addition to the SHG – bank          needs. Thus, there should be
SIDBI Foundation for Micro-       linkage programme, NAB-             locally available single financ-
Credit. The credit linking of     ARD operates a Bulk Lending         ing agency, easily accessible,
banks with SHG is a success       Scheme for supporting NGO           sprinkled with local language
story of micro-finance world-     initiatives involving alternative   familiarity and understand-
wide, notwithstanding the fact    credit delivery mechanisms.         ing. As the majority of mi-
that qualitative changes are to       As far as the banks are con-    cro-finance clients are rather
be carried out and there is a     cerned, SHG is very cost-ef-        illiterate or barely literate, they
long way to go quantitatively.    fective because they don’t have     would prefer simple proce-
The SHG model is based            to deal with various custom-        dures coupled with minimum
squarely on the accumulation      ers and serves as an efficient      paper work.
of member savings both as an      recovery medium as could be              It is often said that among
end in itself and as a means to   made out from the fact that         the poor, many borrow, few
leverage bank loans.              the percentage of recovery is       save and all need insurance
    NABARD has been set up        95 per cent and above.              cover as a risk mitigating mea-
for duly addressing and cater-                                        sure. There is a need for holis-
ing to the credit requirements    Requirement of Micro-               tic treatment of all these prod-
for agricultural and rural sec-   Finance Clients                     ucts from single window.
tors. It has been making sig-          Micro-finance is a bottom-          As micro-credit has proved
nificant and vital contribution   to-top approach to spread           to be a catalyst for empower-
at wholesale level in building    credit among the poorest sec-       ing the poor, such programmes
up micro finance institutions.    tion of populace for their up-      have to be encouraged and
It has also activated a frame-    lift. The demand for micro-fi-      boosted with all the vigour
work for developing SHGs as       nance support originates both       till the weaker sections of the
a community-based financial       from the household for con-         community are reasonably
structures and using them as      sumption needs and micro-           empowered. It is noticed that
channels for lending by the       enterprises for small business      even though the demand for
formal banking system. In         activities. They need quick         micro- credit has been on the

1146 The Chartered Accountant February 2006
increase, problems continue         doubt that lenders may spread
to mar the supply of adequate       their risk when they lend to
credit to this sector.              this particular sector.
    With significant growth in          A study conducted by the
micro-finance activities, the       Indian Bank’s Special Unit for
effective benefit would spread      Micro-finance, Usilampatti,
to various aspects such as lit-     covering southern districts of
eracy, empowerment, entre-          Tamil Nadu, revealed that the
preneurship, employment, im-        identified factors having high
provement in living standards,      risk are clubbing too many
development of rural economy        government          programmes,
and finally poverty elimina-        higher than required loan size,
tion, and would help bring          frequent switchover of the
down the numbers below the          field staff, lack of monitoring,
poverty line.                       non-transparent deals devoid
                                    of good governance, etc. by the
Risk Management in                  SHG/NGOs. As a large num-
Micro-Finance                       ber of activities are conducted
    As in any commercial ac-        through SHGs, the quality has
tivity, risk is inherent in mi-     become the victim of quantity
cro-finance, particularly when      mainly because of the inade-                          supervision/ monitoring.
there are no collaterals to fall    quate supervisory mechanism.                     v    A structured risk as-
back on. Today, the risk man-       The problems faced by SHG                             sessment model may be
agement in micro-finance has        could not be nipped in the bud.                       evolved to capture the risk
assumed greater significance as     Some of the risk-mitigating                           at least on a half-yearly
banks are preparing to comply       measures in the micro-finance                         basis.
with the related Basel II norms.    through SHG are as follows:                      v    In a tie-up with a na-
The portfolio of micro-finance      v    Encourage        short-term                      tional insurance com-
is primarily exposed to credit           loans to build credit track                      pany,     micro-insurance
risk, which is nothing but de-           record history.                                  product may be offered
fault/diminution in the credit      v    Better to maintain peer                          to the SHGs as a cover to
amount released and opera-               pressure by making the                           protect the life/non-life
tional risk, which is the risk of        loan available only for                          risks.
loss resulting from inadequate           part of the SHG group so                    v    Quality internal audit
or failed internal process,              that it is not shared by all                     system should be put in
people and system or from ex-            in the group.                                    place and the important
ternal events. An element of        v    SHGs to take up restruc-                         needs to be explained to
market risk, which is prevalent          turing exercise                                  the SHG members.
in normal commercial activity       v    Migration from group to                     v    Identify the auditable and
is significantly absent, perhaps         individual loan after im-                        non-auditable risks faced
owing to lower value of the              parting certain amount of                        by MFIs and try to mi-
product output, which is mar-            training.                                        nimise the non-auditable
keted through retail arrange-       v    Active SHG leaders are                           risks.
ment. The primary risk type in           to be identified as Field                   v    Create       industry-wise
micro-finance activities is the          Official to prevent the                          bench-marks on the
Operational Risk.                        staff turnover, but rota-                        basis     of     historical
    As lending through SHG               tion of leaders should be                        performances.
by commercial banks is on                ensured.                                       An internal study group
the increasing trend, there is      v    Transparency and good                       appointed by the Reserve Bank
a need to adopt a robust port-           governance are put in                       of India to study the issues
folio approach in this regard            place for ensuring end use                  pertaining to rural credit and
since the SHG lending is out-            of funds.                                   micro-finance has suggested
side the purview of individual      v    Proper MIS is to be en-                     two model-based approaches.
credit risk rating framework             sured for regular flow                      In order to deliver the credit
that are prevalent in banks.             of information on the                       to micro-finance clients, Busi-
This will help in monitoring             functioning of the unit                     ness Correspondence Model
the outstanding SHG lend-                financed through micro-                     for financial services and the
ing portfolio. There can be no           finance so as to have close                 Business Facilitator Model

                                                                        February 2006 The Chartered Accountant   1147
for non-financial matters have       launched to honour leadership,                            books of account, grading
been recommended so as to            entrepreneurial skills and best                           of SHGs.
streamline the credit delivery       practices of micro-entrepre-                        l     Ensure better co-ordina-
mechanism.                           neurs in India.                                           tion between the formal
    E-banking offers tremen-             When the borrower chang-                              financial institutions and
dous opportunity to combat           es from passive recipient to ac-                          the informal ones such as
the bankers concern of high          tive owners, then the develop-                            MFIs.
volume of low value transac-         mental initiatives yield result.                    l     Encourage setting up of
tions. It would increase the         Entry of public sector banks in                           adequate Non-Govern-
volume of business while driv-       micro-finance may to a large                              mental      Organisations,
ing down the marginal cost.          extent bring forth changes in                             Voluntary Agencies, etc.
New technologies facilitate          the life of the poor, given the                     l     Sensitise the banking sec-
more information and reduce          kind of branch network and           Micro-               tor to view micro-finance
as well as spread risk.              the reach they have, resulting       Finance              as a commercially viable
    The MFIs can act as pass-        in distribution of default risk.     attempts             business proposition so as
through agents for the finan-                                             to unleash           to leverage their network.
cial transactions of banks and       Conclusion                           forces         l     Formulate        innovative
certain NGOs or popular in-              Micro-finance attempts to        transform-           schemes to finance mi-
dividuals can assist the banks       unleash forces transforming          ing lives            cro-enterprise through
in the non-financial transac-        lives from debt-driven to self-      from debt-           the largest postal network
tions. Nevertheless, as micro-       driven, so as to cause and trig-     driven to            in India as there is good
finance is a specialised activity,   ger growth in rural economics.       self-driven,         penetration and hands-on
it may be asking for too much        The focus of micro-finance is        so as to             approach available.
to expect commercial banks to        to facilitate the shift from in-     cause and          All said and done, both the
focus attention on rural poor.       duced development from the           trigger        mainstream financial institu-
Even Regional Rural Banks            above to initiated development       growth in      tions and micro-financial in-
and Local Area Banks have            from below that is likely to         rural          stitutions are required to play
not been able to rise to the oc-     change the role of bank credit       economics      an increasingly important and
casion in this regard.               in the rural segment. In India,                     prominent role in nourish-
                                     more than one-third of credit                       ing and developing micro-fi-
Recognition for Micro-               needs in the rural areas are still                  nance sector as social obliga-
Finance                              met by informal and high cost                       tion. Credit needs of the poor
    There is a need to make          resources such as money-lend-                       are increasingly met from the
micro-finance lending to MFIs        ers, landlords, friends and rela-                   emergence of a wide range of
an attractive business proposi-      tives, and as such the scope for                    semi-formal micro- finance
tion for potential lenders, as       the micro-finance to make in-                       initiatives. Considering various
the huge demand for financial        roads in rural segment is quite                     advantages, particularly the fi-
services by the poor can largely     enormous.                                           nancing of the rural poor, low
be satisfied through mobilising          Though India has made                           transactional cost and better re-
capital from the formal sector.      certain in-roads in the field of                    covery performance, the banks
In addition to credit/ financial     micro finance, there are some                       have a great role to play in the
inputs, injecting managerial         vital issues that need to be ad-                    micro-finance sector. Unless
inputs into the activities of the    dressed and these can be sum-                       the poor have access to finan-
target groups would be re-           marised as follows:                                 cial services to meet their needs
quired, as credit alone may not      l     Scaling up the SHG with                       for consumption and produc-
yield the expected results. This           both forward and back-                        tive activities as also for meet-
is possible only through close             ward linkages.                                ing emergencies, any develop-
interaction with the target          l     Capacity building and                         ment assistance would not be
groups. Expansion of micro-                holistic approach to han-                     sustainable. The unparalleled
credit programme by retaining              dle SHG.                                      banking network in India of-
all the distinctive managerial       l     Setting up a supervisory                      fers an excellent opportunity to
aspects is also a challenge to be          body like National Centre                     accelerate, deepen and improve
squarely met.                              for Excellence in Micro-                      the accessibility of financial
    The United Nations had                 Finance                                       services to the poor and to put
designated the Year 2005 as          l     Streamline legal frame-                       in place an inclusive and robust
the “Year of Micro-Credit”.                work to remove the in-                        sustainable financial system to
In India, the Citigroup Mi-                firmities, documentation,                     help the poor to come above
cro Entrepreneur Award was                 stamp duty, records and                       the poverty line. r

1148 The Chartered Accountant February 2006