Millennium Post

Need for effective altruism

Despite years of government efforts to meet the credit needs of India’s poor, meaningful assistance continues to be elusive to the most of them. Many therefore wonder if financial inclusion is anything beyond an attractive icing on a jumbo sized credit cake disbursed by India’s banks that melts soon after it has been crafted in the North Block Bakery of Raisina Hills. It is indeed worrisome that 65 per cent of India’s adults are still to have access to a formal bank account. Micro finance institutions (MFI) facilitate financial inclusion of poorer and more vulnerable people as they find the MFIs more acceptable than banks. Micro finance is about empowering the poor to undertake worthwhile economic activity. Most micro finance loans are in the range of Rs 5000 to Rs 20,000 but it could even go up to Rs 50,000. Flight of microfinance sector has however been through turbulent weather and has not been without casualties. A modest microfinance institution (MFI) has been as much vulnerable to hostile environment as the poor borrower’s chick to a wily garden snake. Following the Andhra crisis there has been heavy mortality of MFIs, particularly of the smaller size.

Bharat Microfinance Report of 2013 however speaks of revival of the sector to some extent. The Report speaks of the sector covering 27.5 million borrowers served through 10,697 branches serviced by over 75,700 employees. These MFIs availed of only Rs 12,604 crore in 2012-2013 for operation of which public sector banks made available Rs 5,850 crore while private sector banks financed to the extent of Rs 4,612 crore. Clients were concentrated in states like West Bengal, Tamilnadu, Karnataka, Uttar Pradesh, Maharashtra, Bihar, Assam and Madhya Pradesh. The Report speaks of five MFIs operating across 15 to 20 states while seven operated in six to 13 states; Twenty in three to five states, 26 in two states and 97 only in one state. Loans outstanding in 2012-2013 increased to Rs 23,338 crore from the level of Rs 21,556 crore in 2010-2011. CRISIL had estimated that at the end of 2008-2009, MFIs had outstanding loans of about Rs 11,400 crore and overall disbursements of MFIs during 2008-2009 were around Rs 18,500 crore. The sector surely showed signs of revival and consolidation though the annual disbursement is yet to reach the level of 2008-2009. On the other hand, financial inclusion drive has resulted in the number of Basic Savings Bank Deposit Accounts (BSBDAs) reaching the level of 182 million. Share of ICT based accounts too have increased substantially. Percentage of ICT accounts to total BSBDAs has increased from 25 per cent in March 2010 to 45 per cent in March 2013. With the addition of nearly 9.48 million farm sector households during this period, 33.8 million households have been provided with small entrepreneurial credit as at the end of March 2013. With the addition of nearly 2.25 million non farm sector households during this period, 3.6 million households have been provided with small entrepreneurial credit as at the end of March 2013.

Now Nachiket Mor Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households recommends that all citizens should have bank accounts by 2016.It also suggested that facility for withdrawal, payment and deposit should be set up within a 15-minutes walking distance anywhere in the country and by 1 January 2016, each resident, above the age of 18, should have an individual, full-service, safe, and secure electronic bank account. ‘Payments Banks’, the Report says, would ‘provide payment services and deposit products to small businesses and low-income households’ with a maximum balance of Rs 50,000 per customer. These banks can be set up with minimum capital requirement of Rs 50 crore. It also suggested that Aadhaar card should be used automatically opening a bank account. The Mor panel report said there is a need for relook at the farm sector credit activities and suggested abolition of interest subventions and loan waivers. It felt that government should rather distribute the benefits directly to farmers and banks should do away with the system of lending below their respective base rates to the farm sector. It has suggested raising the priority sector lending limit to 50 per cent, from the current 40 per cent and non-deposit taking NBFCs to work as business correspondents.

Despite the impressive stride towards financial inclusion as the figures mentioned above, exclusion of a large part of population from formal banking services still leads them to the unregulated, informal sector. We, therefore,  need to have an additional approach too. Our approach should be to look after about two lakh borrowers well and intensively through a not for profit MFI Company that would not grow to an unwieldy proportion. Such an entity should have  adequate capital to come from different sources as grant. With two lakh borrowers and with average group loan size of Rs 2,00,000 of varying repayment schedule , total annual disbursement would be around Rs 200 crore. This would no doubt be a difficult task but needs to be accepted by the directors of the company as a sacred responsibility. It is indeed a wonder that SMCS, a Section 25 Company of Odisha which was rated by CRISIL in 2009 as one of the 50 best run MFIs of the country, has a share capital of only Rs 41,300 as on 31 March 2013. It had disbursed Rs 30.13 crore in 2010-2011 which came down to Rs 16.71 crores in 2012-2013 after the Andhra crisis and subsequent drying up of bank loan. This Section 25 Company was able to survive the Andhra crisis, Odisha’s chit fund turbulence and even the Phailin only because of its managerial and operational excellence.

While India’s financial genius and the country’s bureaucracy may continue debating and reeling out new ideas on financial inclusion ad nauseam, there seems little  rationale in not appreciating the role of Section 25 (not for profit) companies working as MFIs.  Many would like to continue in their faith that altruism; not profit, provides a far more effective motivation to finance India’s poor. India needs about 650 Section 25 MFI companies of the size indicated above, to serve 130 million families that need financial handholding to make a difference in the arena of poverty. These Section 25 Companies could operate at the district level. Ironically, the soft interest regime of Priority Sector Lending  is not being extended to the section 25 companies. Nor are the loanees of these MFIs being extended the additional palliative of interest subvention. Nor are these MFI companies allowed to accept deposits. With these facilities, the Section 25 companies would be able to cap the cost of borrowing at 15 per cent instead of the present allowable (applicable to NBFCs and followed generally by the Section 25 companies) limit of 26 per cent. At present bank credit carry 13-15 per cent interest and financiers require margin money of 10 per cent of the loan as well.

No one would disagree with RBI’s definition of Financial Inclusion as the ‘process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low income groups in particular, at an affordable cost in a fair and transparent manner by regulated, mainstream institutional players’. Some would, however,  like to add that India’s poor would prefer an altruistic handholding.

The author is former coal secretary and director of a not for profit (Section 25 company) MFI
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