Bonanza of well-regulated micro finance

October 21, 2014

A bonanza according to Oxford Dictionary is a situation in which people can
a!e a lot of oney or be "ery successful#$ %ecent de"elopents in &ndia
show the bene'ts an econoy can obtain by ha"ing in place a well(
regulated regie for the icro 'nance industry$
A bonanza according to Oxford Dictionary is a situation in which people can
a!e a lot of oney or be "ery successful#$ %ecent de"elopents in &ndia
show the bene'ts an econoy can obtain by ha"ing in place a well(
regulated regie for the icro 'nance industry$
&n
&ndia
icro
lenders are strictly regulated by the %eser"e )an! of &ndia* borrowing
custoers are barred fro ha"ing ore than two siultaneous loans with a
cobined "alue of %s$ +0,000, the burden is placed fairly and s,uarely on
the icro lenders to ensure that this regulation is coplied with$
-he icro 'nance industry has in operation two credit bureaux, with around
1.0 illion client records in its data base$ /icro lenders are able to chec!
up prospecti"e borrowers past history and current obligations fro these
bureaux$ -he %eser"e )an! of &ndia has also placed liitations on the pro't
a!ing of icro lenders by capping gross interest argins for larger icro
lenders at 100 and at 120 for saller operators$ As a result &ndia#s
a"erage icro loan lending rates are now around 21 0 to 240, said to be
aong the lowest in the world$
Alo! 2rasad, 3hief 4xecuti"e of the
/icro'nance &nstitutions 5etwor!, which
represents &ndia#s 46 largest icro'nance
copanies, says7 8-hey are a!ing decent
oney$ -he distinction is between pro'teering
and a!ing decent pro'ts$ 9ou are loo!ing at
a refored industry$ :e are once again
loo!ing at a pretty rapid growth story$ )ut this
tie the ,uality of growth is superior$;
/icro'nance crisis
&n October 2010, &ndian icro lenders and
their ban!ers and in"estors, were sent into a
tailspin when <tate authorities in Andhra
2radesh ordered an iediate halt to all
icroloan reco"eries, after a spate of suicides
by o"er indebted borrowers$ At that tie
ore that 100 of &ndia#s total icroloan
portfolio of %s$ 200 billion was concentrated
in the state$ <e"eral large players essentially
collapsed$
-he crisis exposed how soe unscrupulous
icro lenders had aggressi"ely chased growth by pushing loans to any
unsophisticated custoers who were already obligated to other icro
lenders = and were in e>ect using funds borrowed fro a recent lender to
pay o> older debts to other icro lenders? -he decision to ipose a
regulatory regie was ta!en after this crisis hit$
-he recent restrictions on /@& by the political and adinistrati"e authorities
in )atticaloa District reAect this worry of o"er(borrowing, which is said to be
an issue in Ban!a too$
&ndeed the &ndian icro lending industry has coe so far that recently the
%eser"e )an! granted in principle appro"al to a :est )engal(based icro
lender = )andhan @inancial <er"ices = to obtain a uch(co"eted ban!ing
license$
-he %eser"e )an! is now 'nalising rules for a new niche category of sall
ban!s# to ser"e the poor, and has proised ,uali'ed institutions that they
will be ha"e licenses "irtually on tap, once the schee is 'nalised$ -he
founder of )andhan 3handra <he!har Chosh, who started the icro lender
in 2001, says7 8@or a icro'nance copany getting a ban!ing license is li!e
achie"ing the Doly Crail$;
%aghura %aEan, the Co"ernor of the %eser"e )an! of &ndia, wants these
new sall ban!s# to penetrate po"erty(hit rural areas to proote lending
and sa"ing aong farers, sall businesses and others who traditional
ban!s ha"e been reluctant to ser"e$
-hese borrowers ha"e to resort to exploitati"e "illage oney lenders who
charge up to 2000 a year as interest for loans$ )andhan plans to open F00
branches in 22 states and start with at least 10 illion sa"ings accounts$
Gnder the ban!ing license conditions, one in four branches ust be in
towns with fewer than 10,000 people$
2eople#s :ealth progra
At present Eust 1+0 of &ndia#s adult population of 1$1 billion people, ha"e
ban! accounts$ A situation which the %)& has called pathetic#$ %ecently
2rie /inister 5arendra /odi launched a 2eople#s :ealth progra,
targeting the opening of 1+0 illion new ban! accounts$ -he plan is to ha"e
two accounts per household, including one in the nae of a woan$ -he
target is the F+ illion poor &ndian households$
4ach account will ha"e a local debit card = %u2y#$ -he accounts will o>er an
&ndian %s$ +,000 o"erdraft facility after six onths$ Co"ernor %aEan of the
%eser"e )an! has described this crusade of including the poor within the
ubrella of the foral ban!ing syste as a oral and econoic
iperati"e#$
Analysts say 2/ /odi is prooting the schee because he wants to
prepare for an e"entual introduction of direct cash transfers of social
welfare bene'ts to the poor$ -he current subsidy regie for food and fuel
for the poor is ineHcient and abused by the corrupt and bloats &ndia#s 'scal
de'cit$ A shift to cash deposits into a ban! account will refor the syste
and a!e it ore eHcient$
Iahangir Aziz, 3hief 4conoist at I2 /organ, coents7 8-his
is a critical step towards using cash transfers for the poor as a
eans of deli"ering po"erty alle"iation bene'ts and subsidies$
-he urgency and speed with which it is being rolled out is
because this is the easiest way of reducing subsidies without
running into political opposition$;
2/ /odi has personally eailed ore than F2+,000 branch
anagers of <tate ban!s ephasising the iportance of
'nancial inclusion and appealing for their cooperation$ Alo!
2rasad of the &ndian /icro'nance &nstitutions 5etwor!
coents7 8&t is a big abitious goal, and a lot of push is
being gi"en to this, with the 2rie /inister personally
in"esting e,uity in the atter$;
&ndia#s icro lenders, who ha"e a cobined J +$+ billion outstanding loans
to ore than 10 illion borrowers, but are barred fro holding custoer
deposits, ha"e pledged to help ban!s open accounts for all their existing
custoers$ /any are expected to becoe )an!ing 3orrespondents,#
essentially ban! agents epowered to open accounts, ta!e deposits and
allow cash withdrawals on behalf of partner ban!s$
<ri Ban!a
-he present situation in Ban!a, where icro lending by institutions other
than licensed coercial ban!s, co(operati"es, 'nance copanies, pawn
bro!ers and oney lenders is "irtually unregulated, needs to learn urgent
lessons fro the &ndian experience$
-he @inance )usiness Act has placed restrictions on use of the word
@inance# by entities and pro"ided soe exceptions or extensions of tie by
a paper notice by the /onetary )oard, which soe analysts say aounts to
a de facto aendent of the Act? As a result, deposit ta!ing by icro
lenders which are not in the categories entioned abo"e are in a legal
"acuu$ -his is not sustainable$ <ri Ban!a has to draw lessons fro the
&ndian experience$ -his is a great pity as icro lending has a long history in
Ban!a, a positi"e one in the context of alle"iating po"erty$ -he regulatory
lacuna is a huge drawbac!$
&n <ri Ban!a, 3o(operati"e %ural )an!s were introduced to proote sa"ings
aong ebers and began a sall loan schee, to support the standard
of li"ing of the borrowers and also what was then called cottage industries
to 'ght the curse of rural indebtedness to the usurious "illage oney
lender$ 2riarily these were traditional crafts or ser"ice pro"iders in the
counity who needed to raise operating capital and found the 3o(
operati"e %ural )an! a ore reasonable a>ordable alternati"e source of
funds to the usurious "illage oney lender or the pawn bro!er$
-he 'rst co(operati"e %ural )an! opened its doors in /eni!hinna in the
Kandy District in early 1L00$ :ith the co(operati"e o"eent being
allowed to run autonoously with the light hand of the <tate in a regulatory
ode, the o"eent spread rapidly to all parts of the island$ Beading and
respected ebers of the counity were in"ol"ed in de"eloping the co(
operati"e o"eent$
Dowe"er, in the early 1L.0s, the autonoy of the o"eent was
negati"ely a>ected by the 3oissioner of 3o(operati"e De"elopent
being gi"en enhanced discretionary powers o"er the co(operati"es by an
aendent to the law$ -he increased politicisation of the adinistrati"e
achinery of the Co"ernent led to unprecedented political interference in
the co(operati"es and resultant corruption, nepotis becae rapant and
decent citizens refused to get in"ol"ed, lea"ing the 'eld to political stooges$
-his is the sad story of de"elopent in any 'elds$
:hile the 3o(operati"e %ural )an!s paid an iportant role in po"erty
alle"iation, it is debateable whether their target was the absolute poor and
arginalised or the ore well o> ebers of the counity$ Dowe"er, the
iportance of the 3o(operati"e %ural )an! as a secure place where the
poor could sa"e oney securely in the counity itself and raise a loan in
an eergency or for econoic acti"ity should be noted$
@ortunately around the tie the co(operati"e o"eent was losing its
credibility and the una"ailability of a secure institution to sa"e oney and
draw eergency loans or funding for econoic acti"ity was becoing an
issue, two parallel de"elopents too! place$ <tate(owned ban!s went on a
huge binge of opening branches and one of the the 5ational <a"ings
)an!, the successor to the 2ost OHce <a"ings )an!, aggressi"ely
can"assed the opening of sa"ings accounts aong the rural and urban
poor$
Again, whether it was the 'nancially better(o> ebers of the counity
who engaged with these institutions is the issue, rather than the poor and
arginalised$ & recall one rural farer telling e that he felt challenged by
the need of getting passed the ared security guard at his local branch of
the <tate ban! to get inside?
4ntry of non go"ernent institutions
-he other parallel de"elopent was the eergence of non go"ernent
institutions into the area of icro 'nance$ -hese inter"entions were based
on the highly(successful Craeen )an! inter"ention by 2rof$ 9unus in
)angladesh, in 1LF4$ &t was based on collateral free, group lending with
inter se guarantees and ar!et rates on interest$
:oen bas!et wea"ers li"ing in poor counities around 3hittagong
Gni"ersity, where 2rof$ 9unus was teaching econoics were borrowing
operating 'nance fro uncurious "illage oney lenders and this left the
hardly any pro't and the end when they ar!eted their produce$ 2rof$
9unus ad"anced the the cash, J 2F to 42 ipo"erished woen, to buy
raw aterial, at the going coercial rate of interest, was far below the
local oney lenders usurious rates, and the woen were able to repay the
loan to the 2rof$ after a!ing a uch better pro't$
&nstead of collateral, the security for the indi"idual loans was the group
guarantee, the sall group of bas!et wea"ers pro"ided the certainty that
they would not let a eber default, and in the e"ent of a default, due to
death, sic!ness or such econoic shoc!, the others would contribute and
support the defaulting borrower$ 9unus and the Craeen )an! won the
200. 5obel 2eace 2rize$
5ow icro lending has orphed into a global enterprise ha"ing an acti"e
loan portfolio of J 61 billion and in"ol"ing L1 illion borrowers, according to
the /icro'nance &nforation 4xchange$
&n Ban!a the counity de"elopent organisation <ar"odaya was the
pioneer in setting up such a sa"ings and credit o"eent for the poor and
arginalised ebers of the counities they wor!ed in$ &nternational
donor agencies both go"ernent and pri"ate supported this initiati"e and
in tie it de"eloped into an organisation called <ar"odaya <44D<$ -oday it
is registered as the Deshodaya 'nance copany and is aong those being
consolidated#$
<aller initiati"es
Other saller initiati"es of this nature were also being de"eloped in "arious
parts of Ban!a$ -he other Co"ernent(led initiati"e resulted fro the
expansion of "ocational and technical training in the late 1LF0s by the
expansion of the 5ational Apprentice )oard M5A)N, the 5ational 9outh
<er"ices 3ouncil M59<3N and other "ocational and technical training
institutes$
:hen the output of these progras reached the ar!et, the econoy had
not expanded ,uic!ly enough to absorb their s!ills$ &t was only when the
Accelerated /ahaweli De"elopent <chee, the housing de"elopent
progras and foreign eployent in west Asia hit full pace, were they
absorbed fully$
&n the interi, it was decided to pro"ide to those who interested, aong
these s!illed trainees with funding to start up their own sall scale ser"ice
businesses$ -he 5ational 9outh <er"ices <a"ings and 3redit 3o(operati"e
M59<3ON was begun with this idea, s!illed youth in"ested in shares in
59<3O and they could borrow in proportion to their in"estent, on a
collateral free, inter se guarantee pro"ided by other ebers$ Boans were
also pro"ided to purchase a basic tool tic!et, which was an attraction for
contractors to eploy the$
@or those who wanted to start an enterprise, with the assistance of the
&nternational Babour Organization M&BON, the <all <cale 4nterprise
De"elopent Di"ision M<<4DN of the /inistry of 9outh A>airs and
4ployent was set up to pro"ide business training based on the highly
successful odel of <tart 9our )usiness# based on a progra conducted by
<weden#s 3haber of 3oerce for their ebers and prooted
worldwide by the &BO$
<eeing the success of these initiati"es the 3entral )an! of <ri Ban!a also
started the &suru progra funded by the Iapanese Co"ernent, sall
groups ta!ing sall loans for econoic acti"ity through collateral free inter
se guarantees$
Ianasa"iya progra
-he next big initiati"e was the po"erty alle"iation proEect of the Ianasa"iya
-rust @und, a ultipronged integrated approach to po"erty alle"iation
through, counity infrastructure proEects selected by the counity,
ipleented by counity participation with a cost contribution, a
nutrition inter"ention, a icro credit facility and a counity obilisation
fund$
-his was ipleented through partner organisations in the counity$
O"er 100 counity organisations which had no pre"ious experience in
icro credit were inducted into the 'eld through this initiati"e$ -his was
probably the largest expansion of icro credit e"er, in Ban!a$
At this sae tie, the Ianasa"iya 2rogra of the Co"ernent was
launched, which was designed to gi"e a poor faily a onthly grant, for a
'xed period, to held the to graduate out of po"erty$ -his progra
reAected the arguent that icrocredit is no panacea to an extreely poor
faily, which are thereby being put under a debt burden, out of which they
cannot escape, and that initially a icro grant will help the ore$ -his
sae concept was carried through into the <aurdhi progra and its
successor Di"i 5egua, but there was no tie liit for the icro grant, it
was open ended$
)andhan
A study by 4sther DuAo, an econoist at the /assachusetts &nstitute of
-echnology, presented at Dar"ard Gni"ersity, seeed to strengthen the
arguent for one(o> icro grants rather than icro credit$ DuAo e"aluated
a proEect ipleented in the &ndia state of :est )engal by an &ndian icro
'nance institution called )andhan, yes, the "ery sae one, which has now
recei"ed a ban!ing license fro the %)&$
)andhan ipleented a progra designed by )%A3 of )angladesh*
wor!ing with failies li"ing in extree penury, )andhan ga"e each of the
a sall producti"e asset = a cow, a couple of goats or soe chic!ens$ &t also
pro"ided a sall stipend to reduce the teptation to eat or sell the asset
iediately, as well as wee!ly training sessions to teach the how to tend
to anials and anage their households$
)andhan hoped that there would be a sall increase incoe fro selling
the products of far anials pro"ided, and that people would becoe ore
adept at anaging their own 'nances$ &n fact DuAo#s research showed the
results were uch ore draatic$ :ell after the 'nancial help and the
handholding had stopped, the failies of those who had been randoly
chosen for the )andhan progra were eating 1+0 ore, earning 200 ore
each onth and s!ipping fewer eals than people in a coparati"e group$
-hey were also sa"ing ore$
-he e>ects were so large and persistent that they could not be attributed
only to the direct e>ects of the grants* people could not ha"e sold enough
il!, eggs or eat to explain the incoe gains$ <o what was the real
reasonO DuAo#s research showed that the recipients wor!ed 260 ore
hours* ostly on acti"ities not directly related to the assets they were
gi"en$ -he researchers found that the bene'ciaries# ental health ipro"ed
draatically, the progra had cut the rate of depression sharply$
DuAo argues that the progra pro"ided these extreely poor people with
the ental space to thin! about ore than Eust scraping by or sur"i"ing
day(to(day$ &n addition to 'nding ore wor! on existing acti"ities, li!e
casual agricultural labour, they also started exploring new lines of wor!$
DuAo reasoned that the absence of hope had helped to !eep these people
in penury* the )andhan inter"ention inEected a dose of optiis into their
desperate li"es$ :here the grants coponent is not one(o>, but paid e"ery
onth, there being no exit echanis, a dependency syndroe is created
and the brea!out of po"erty rarely achie"ed$
Bessons for Ban!a
<ri Ban!an policya!ers need to study, learn and internalise urgent lessons
fro the &ndian experience, in regard to the bonanza in total 'nancial
inclusion achie"able through the proper and e>ecti"e regulation of icro
'nance$
/icro entrepreneurs are the initiators who later blosso into sall and
ediu businesses$ -he cutting(edge s!ills pic!ed up in nurturing a icro
enterprise, through the ris!y initial phase, is the !indergarten, the boot
cap, of sall business de"elopent$ -he sur"i"ors, who pull through are
the ones who ha"e to be cherry(pic!ed and supported, with all the facilities
being trupeted for sall and ediu businesses$
Gnless this fundaental econoic truth is understood and the foundation
for business de"elopent laid through a positi"e icro lending
en"ironent, the whole push at the </4 le"el, notwithstanding all the
recent high le"el song and dance, is dooed to be a non starter$
<ri Ban!a has the infrastructure, through a <tate and non <tate icro
'nance institutional structure, but the law, the regulatory regie, has to fall
into place, as in &ndia$ &f the next phase of 'nancial inclusion is to be
achie"ed and the natural business s!ills and ingenuity of the poor,
arginalised and excluded is to be gi"en an opportunity for a full Aowering$
-hen only will the econoic bonanza be achie"ed$
M-he writer is a lawyer, who has o"er 10 years of experience as a 34O in
both <tate and pri"ate sectors$ De retired fro the oHce of <ecretary,
/inistry of @inance and currently is the /anaging Director of the <ri Ban!a
)usiness De"elopent 3entre$N