Financing the marginalised

Poverty alleviation programmes aim at developing entrepreneurship among BPL population with the help of subsidised microcredit in order to reduce their dependence on government support and ensure sustainable self-employment. It needs no telling that financial inclusion is the path to eradication of poverty. However, millions of low-income groups from marginalised sections make a living through both farm and non-farm activities without a subsidised credit. Small farmers, petty businesses, street hawkers, food and refreshment services, beauty and wellness businesses, family-run occupations etc., mostly depend on local money lenders — actually 'loan sharks' — to raise small loans ranging from Rs 1,000 to Rs 1 lakh. The interest rates are normally between 15 per cent to 30 per cent, far higher than those of commercial banks, and the borrowers get trapped in the vicious cycle of debt, so much so that some take their own lives in distress. This is exemplified by many instances of related farmers' suicides. Exploitation of the poor by the moneylenders is an open secret. Studies show that money lenders still control around 70 per cent of rural and urban credit. The Covid-19 has given a severe blow to hawkers, small vendors, and daily-wage earners who, though constituting 30 per cent of the total workforce, suffered 70 per cent of the impact, and are still struggling to bounce back. One wonders if the micro-finance sector has failed to emancipate the poor from the clutches of the money-lending mafia.

Microfinance is a blessing to the poor as it provides collateral-free short duration loans for income generating activities. It is an effective avenue for women empowerment as well. Incidentally, women constitute a large portion of the borrowers in the sector. Microfinance is a diverse industry with different types of around 188 entities providing services of credit and insurance. These are NBFCs, NBFCMFIs and SFBs, Sec.8 companies, trusts, cooperative banks and NGO-MFIs. Two distinct microcredit mechanisms operate in India: Self Help Group-Bank Linkage Programme (SHG-BLP) led by banks, and Micro Finance Institutions (MFIs). The first is completely supported and controlled by the government whereas the second, though regulated by RBI in principle, has diverse business models absent state support.

SHG-BLP is mainly rural in coverage and is a part of Swarnajayanti Gram Swarozgar Yojna (SGSY). National Rural Livelihood Mission (NRLM) is a supportive scheme to achieve universal financial inclusion of SHG households. While on the demand side, it promotes financial literacy among the poor, on the supply side, it coordinates with the financial sector to deliver credit and related services to target groups. According to reports by NABARD, by March 2021, the savings of nearly 70 lakh SHGs (7.5 crore families) out of 112.23 lakh SHGs, touched an all-time high of Rs 37,478 crore and the banks have disbursed loans of Rs 58,071 crore. However, the fact remains that more than 50 per cent SHGs are still not credit linked, which points out that real financial inclusion still eludes half of the target groups. Moreover, financing 7.5 crore BPL families through SHGs is a commendable achievement but cannot be representative of the four times higher BPL population in the country. The reason is that outreach of MFIs in India is less than 10 per cent in comparison to more than 60 per cent in our neighbouring country Bangladesh.

The poor and marginalised classes still approach moneylenders as they seem to be disillusioned with the MFIs regarding timely and hassle-free credit support. Though NABARD's report claims a promising year-on-year growth of 17 per cent in microcredit total loan portfolio (of 2,47,839 crore), it does not reflect the percentage of commensurate coverage across regions, especially where the urban poor reside. There are around 188 different entities in the microfinance industry with 5.93 crore borrowers, with a loan portfolio of Rs 2,59,377 crore. But complacency will be a mistake in the wake of persisting problems. With commercial banks being the major player with 44 per cent of operations, inadequate financial literacy is an impediment; and banks seldom reach out to poor borrowers. Secondly, NBFC-MFIs with 31 per cent, SFBS with 16 per cent and NBFCs with eight per cent of participation, do not ensure that even half of the poor entrepreneurs, mainly in Urban areas, can receive credit because firstly, the financial strength of these institutions depends on the loans they borrow from commercial banks and, secondly, the business returns are uncertain due to delays in repayments by the borrowers. In unforeseen situations like the pandemic, the MFI sector is the first to bear the brunt. For instance, loans distributed by the sector in 2020-21 are lower (553 lakh) compared to 2019-20 (735 lakh), with corresponding amounts 2,00,081 crore for 2020-21 and 2,54,754 crore for 2019-20. The recovery rate has plummeted to 85-90 per cent from the pre-pandemic 98 per cent. The non-profit MFIs with just 1 per cent share in services can hardly make a difference.

Microfinance sector is a victim of disarray; there is no proper data available even to initiate reforms. For example, only 15 per cent of the SHG's member-level data is uploaded by the banks on CIB (Credit Information Bureau). Secondly, there is no reliable valuation system to help market decisions. Regulation of the sector is the main issue. Though RBI is the main regulator for the MFI sector, commercial banking consumes its maximum time, leaving little for the microfinance industry; virtually no full-time apex body exists for regulation. In spite of diverse models like SHGs, JLGs and individual units in operation, there exists no uniform control. For instance, while NBFCs and NBFC MFIs are directly regulated by the RBI, Sec. 8 companies do not have to register with RBI. Cooperative societies and trusts function as per their respective laws, but are bound by norms meant for NBFC MFIs to access bank finance. Similarly, lack of uniform guidelines is another issue. For example, banks are exempted from guidelines applicable to NBFC and NBFC MFIs, and they can lend to borrowers who were not qualified under the guidelines. It leads to overconsumption. With regard to working capital, unlike the NBFCs, MFIs are not permitted to collect public deposits, which makes them entirely dependent on commercial banks, and ridiculously, funds are often released at the end of the financial year. The coverage also suffers from regional imbalances. For example, around 60 per cent SHG credit linkage is only in southern states. The industry doesn't even have a proper IEC system to educate borrowers.

Strengthening of the microfinance sector is crucial to relieve the poor from the stranglehold of moneylenders. The sector has a pivotal role to play in eradication of poverty by harnessing the nation's demographic dividend and capitalising on the entrepreneurial potential of people. Financial inclusion will be meaningful only when credit is extended to maximum beneficiaries across the length and breadth of the country. MFIs need to adapt corporate models in order to diversify products and services and reduce transaction costs. It will also guard against over-indebtedness and make businesses competitive. MFIs must endeavour to ensure expansion and reach out to the masses. Perhaps government subsidies are necessary to reduce higher interest rates (12-30 per cent) vis-a-vis commercial banks (8-12 per cent). The sector needs uniform and effective regulatory mechanisms to improve the performance of institutions. The silver lining is the Pradhan Mantri Jan Dhan Yojana (PMJDY), rolled out in 2015, thanks to which, the unbanked population that was 557 million in 2011, was reduced to 233 million in 2015. Today, the scheme has succeeded in creating 20.38 crore accounts with a total deposit of Rs 30,638 crore, which is a promising sign for the future of the microfinance sector. Still many more governmental interventions are necessary.

The writer is a former Addl. Chief Secretary of Chhattisgarh. Views expressed are personal.