Microfinance in the empowerment of Scheduled Tribes & Women

- Livinus Kindo

1. Approach
Micro-Finance has proved extremely effective in providing an informal and nonconventional credit mechanism to act as a better channel of credit dispensation and mobilization to the needy and the deprived sections of the society. Micro-Finance credit channel touches more or less the same sect of clients and borrowers that the traditional Money Lenders touched in the Tribes dominated areas of Odisha and of Sundergarh district in particular. The reasons that compelled the tribes to borrow from the Money Lenders, namely consumption and emergency needs, continue to dominate the financial market in the areas and the private Money Lenders do operate in these areas. Micro-Finance credit mechanism has identified the clients via such a need-based approach, no doubt, but canalization of credit to the clients has been made production oriented and sustainable to enable the clients to repay the loan through value addition. Thus, the Tribal clients learnt productive use of loans through the personal approach and persuasive methods of Micro-Finance units operating in the areas. Tribal Women played a silent and subordinate role in the family as regards money management by the family tradition. They played the role of custodian of fund not handling the use of the same either productive or otherwise. Money lenders never took the tribal women as stake holders in the loan transactions. Since ornaments are rare as an apparel among tribes, the first charge on the defaulted loan of the Money Lenders was the utensils and immediately the other movables. Through the training and persuasion by the Micro-Finance units, most of the tribal clients consisted of women who were handed over loan as cash, took decision on investment, took stock of value addition and directly made the repayment of the loan. This process of stake holding by the women of the clients family has had unprecedented socio economic empowerment of the women in the tribal society. Women empowerment is also evident in the non-tribal society as well and researches in the field have proved it. Looked at from this positive angle, micro-finance in the tribal areas has become indispensable both for credit-widening and credit-deepening among the tribes. Mega banks have favourable profit-orientation in the ongoing market dominated structured economy and only the Micro-Finance can ensure them a relationship of preferred clients. The tribes believe and thrive on personal relationship among themselves as also with people outside. Mega banks both public and private are through and through commercial and therefore by virtue of the very charter they are entrusted with, cannot expose themselves to the vulnerable class of the society who

dont have ostentatious collateral for availing loans of any size, as all loans to tribes, women and other underprivileged class become highly risk-sensitive loans. Only alternative for the Scheduled Tribes to avail loan will therefore be the usurious Money Lenders. 2. Organizational Structure of Micro-Finance In India, Micro-Finance units; in the nature of Registered Societies(NGO), NonBanking Finance Companies(NBFC), Section 25 of the Companies Act, Trusts etc, all function as individual entities rather than as combines or federates as interlocking operations units. They work out their viability on single balance sheets and are evaluated through RBI norms as independent business entities. The clients are motivated through training to work as group entities jointly liable for the fund management through peer-function and peer pressure. No collateral is kept as bank/credit guarantee like the mega banks, save the proof of residence and some very rough evidence of business. Micro-Finance is given to the clients almost in good faith. Personal relation in the day-to-day working of the financial operation binds the lender with the borrower. In other words, unlike the mega banks, Micro-Finance entities treat every client as preferred client. Every field officer knows the clients through weekly contacts.

3. The credit delivery system in the Micro-Finance structure is vastly improved

Compared to any other in that in the otherwise utopian paradigm of service to the doorstep of the Government in all the slogans, MFIs do deliver credit to the door step of the client. In this process of dispensation, clients are not required to stand in queue to avail service. Moreover, they are saved of the transaction cost that has become almost unbearable in the Government and mega banks credit delivery system. This sort of modus operandi in any financial dispensation/banking structure will be certainly a prized possession. 4. Operational structure of Micro-Finance As the groups are formed in manageable numbers of 10, 15 or 20, each member knows her peer personally in terms of reliability and therefore, member contact becomes the key instrument in the operation of the Micro-Finance units. Though several MFIs engage intermediaries in advancing and collecting of loans, the socialinvestment oriented MFIs supervise their financial operations through their own Finance Service Officers(FSO). This involves a very high order of transaction cost that allows profit only on attaining the economies of scale. This is a catch that the Malegam Sub-Committee has to recognize. I. The flow of fund to the MFIs is dependent on the evaluation of the MFIs on profitability based on ratings. The social evaluation of a credit to the distressed and under privileged borrower is still not based on quality of life 2

index and therefore the ratings down play the MFI that has improved the production orientation of a loan or improvement of the family health due to intake of better nutrition etc. II. Group oriented structure of the MFIs, being the strength of the institutions against normal security and collaterals has to be retained to enable the poor and marginal borrower to avail finance in the affordable scale. The group oriented financing structure should be retained. III. Engagement of agents, intermediaries, middlemen etc in financial dispensation by the MFIs is a necessity in the economizing of operating cost of the big MFI companies in order to ensure profitability in evaluation. But, this entails an insurmountable risk of distant management of the clients treating them as non-preferred borrowers. This phenomenon alienates both the lender and borrower from each other. Agents of any sort should be discouraged. 5. Cost of credit and the Rate of Interest In any credit delivery system, cost of credit determines the demand-supply equations depending on the ceteris paribus axiom. Never has free credit been dispensed to attain the desirable end of credit dispensation. Therefore, every credit has to have cost to benefit both the lender and borrower. Cost of credit is an important element in the price of liquidity preference called rate of interest. In the real cost of credit the incidence of transaction cost is added to determine the actual rate of interest. In the MFI credit dispensation, there is a constant complain of high rate of interest compared to mega banks. There is a demand for capping of interest of the MFIs. To appreciate the need for higher rate of interest, one should understand that such a need arises to meet the cost of borrowing credit, the transaction cost, the administrative cost of the credit deliver system and the profit margin of the MFI. As explained, the MFIs have to deliver credit at the door of the client, absorb the risk element of the collateral security in the peer function of the group lending and incur high transaction cost to establish personal lender-borrower relationship, and therefore, the rate of interest has to be higher than mega banks till the credit transactions reach the level to reap the benefits of economies of scale. In the analysis of the rate of interest, only alienable element that can be varied is the margin appropriated by the MFIs to increase their profit. This element is variable and with the attainment of the economies of scale the flow becomes automatically proportionate to the volume of business. Until the volume of business is large enough to reap the economies of scale, no interest capping is possible as the MFIs will provide service at the door of the clients with heavy loss. Once the MFIs reach the level of economies of scale, let us say with an outstanding of Rs 20 crores, the maximum rate of interest can be 25%. The next possible strategy to impose a cap on the rate of interest could be to subsidize the cost of fund by Government or RBI through risk stabilization fund to be given to the public sector mega banks.

The third area in which frugality can be practiced is imposing a self restriction on the margin by the MFIs themselves. The sub-committee may consider one or two of the options leaving the third to the MFIs.

6. Loan Recovery System

The MFIs normally realize loans through a well set training structure in which the clients agree to commit themselves in the periodicity of repayment. It is based on persuasive strategy. Now it is weekly installment for a good reason that the impact of loan repayment is not felt as arduous mental burden though the incident in terms of loan amount is transparent. Reduction of the periodicity to monthly repayment will create mental resistance in terms of the impact of the loan incidence. The percentage of repayment will reduce to take advantage of the pleasure of default by the unwilling clients. The sub-committee may not consider altering the periodicity of repayment unless sounder logic is propounded. No coercive tactics should be allowed in loan recovery and complains on this account should be severely dealt with.

Summary
Micro-Finance has to play the role of the most efficient credit dispenser for the tribes and tribal women. i. ii. iii. iv. v. to ensure production oriented credit end use, changing their mind set from use of credit as only for consumption and emergency, to ensures a cordial lender-borrower relationship through ensuring credit deliver at the door-step of the client, to save them of harassment and heavy transaction cost by dispensing the collateral security necessary in the bank loans through group functions that generate peer pressure, to ensure empowerment of the tribal women by making them stake holders as clients who take loan related decisions themselves, to ensure unit viability by weekly repayment schedules that reduce the impact of the loan burden of the clients who make repayments in a disciplined manner. (About the Author- Sri Kindo is a retired IAS officer, presently Chairman of Sambandh Finserve Pvt Ltd. He was Registrar Cooperative Societies, Orissa)