Monday, March 23, 2009

Micro finance: A Panacea of Sustenance

Micro finance notionally stand with social aspects of economic requirements for marginal or weaker sections,both at the rural and urban spaces. It caters the micro credit for immediate requirements of initial capital for farming activities as well as for lower scale entrepreneurial activities.It introduced superb social binding over its recipients with it's theoretical aim to promote group effort during the attainment of specific enterprise.
Popularly these groups are known as Self Help Group(SHG) can be regarded as a forward move with community involvement as a key specialty potential in strengthening the social fabrics and further ushering towards the more regulated social development.

Micro finance as a concept reemerged and gained popularity in 1970’s in East Asian and South Asian countries like Philippines , Bangladesh etc: later caused for the social orientation of banking in developing nations. By which affect the formation of rural banking (Gramin Bank) in Bangladesh and India infused immense hope for inclusive development in these countries.
Dr. Muhammad Yunus received accolades and numerous international awards for his extraordinary accomplishment, so much so that many believe that Micro finance as an institution began only in the 1970’s and that too only in Bangladesh. In fact there have been also earlier claim of successes like William Reiffcisen’s village banking movement; another noteworthy was caisse populaire of Alphonse Desjardins in France were amongst the notable instances where considerable improvement was brought in the condition of the extremely disadvantaged peoples.

Such early conceptions were not entirely hypothetical, though all the previous success of Micro financial activities were not operationalised in an organized banking system,so, such initiative were largely remained confined beyond the institutional pattern.
So, seeing huge success of Gramin Bank in Bangladesh under the visionary leadership of Md Yunus and satisfactory success of Indian Gramin Banking (RRBs) in their goal; now this so far untapped sector is drawing fresh insights from commercial banking NBFC and NGOs.Over the years,Micro finance has emerged as promising way to check the poverty and empowering the underprivileged especially Women, Unemployed and Disabled.
In India a measure policy initiative was made by NABARD in 1992,for SHG-Bank linkage as a pilot project which in course of time grown into one of the largest micro finance programme in the world.

The NABARD is planning to start a MFI to take financing to the” poorest of poor”. The venture will be launched in partnership with Commercial Banks(49%) and NABARD(51%). NABARD will also launch a Financial Advising unit to help bring down the high incidence of farmers suicides.
Despite observing high growth of rural credits and other small segments of lending in last decades the formal sector, nevertheless Microfinance accounts for less than 40% of the agriculture and rural credit; these demonic reality still haunts the welfare aim of institutional finance.Another alarming area of concern would be the burgeoning SHG and Microfinancial organizations becoming a favourite hobby horse of the NGO for exorbitant business that is going to be a grave challenge for original conception behind this movement. Most of them fail on all the basic criteria. Such tendencies needs an immediate cure through stringent regulatory mechanism…

Recently the Government is also proposing a legislation by which it will be able to regulate the Micro financial institutions to ensure fair, equitable and ethical practices and democratic functioning but that regulatory checks must be timely implemented before loosing the essence behind this social venture.Legislation also propose a ceiling of Rs50,000 by MFI; which is considerable in rural segments of Micro credit but will not be suffice in enterprise finances. NABARD would be its regulator.
In some more forward move banks must approach to a customized savings products targeting the poor. NGO should assist SHG to usher in flexible savings options too likewise banks and MFI should deliver agricultural seasonal loans with flexible repayment options through groups on a pilot basis.

Here it’s a chance to create a Micro financial promotional agency on the lines of Pali Karma Sahayak Foundation (PKSF) of Bangladesh programmes.Government must consider making NABARD MCID (Micro Credit Innovational Department) an autonomous promotional body. Having lower competitions among MFI is an another area where the India lag behinds from Bangladesh. Here some innovations are needed in Indian financial sector to infuse competition in Micro financial segments.
This is need of hour to innovate the existing products and introduce to some new product lines. Such some products which has called attention in Bangladesh can be also effective in India because of having many common grounds between two countries, some of those are: -
I. Risk Mitigation – As their insurance programmes are community managed on the basis of mutuality, they do not extend cover for risk of a co-variant nature, such as flood cover and crop failure.
II. Flexible Savings – To cope with food insecurity, employment insecurity etc.
III. Agricultural Finance- This product is already exists in India; only it needs more optimization for better needs and outcome.
IV. Larger Individual Enterprise Loans- This segment has drawn attention from policy makers like Dr Arjun Sengupta, chairmen, National Commission for Enterprise in the Unorganized Sector (NCEUS) expressed his views “If Micro finance properly nurtured and strengthened the unorganized non farm sector can be a pertinent tool of employment creation, poverty reduction and faster inclusive growth and would go a long way in closing the widening devide between urban and rural India.

NCEUS targeted fund corpus of 1,000 crores by 2011-12,target group for this corpus are small enterprise and the unorganized sector covering non farm activities employing less than 10 workers, primarily those with investment in plant and machinery not exceeding Rs5 lakh (excluding land and building at 2004-05 prices) if engaged in manufacturing and investment in plant machinery not exceeding Rs 2 lakh if engaged in non manufacturing.
However the upper limit of financing by the fund would be for enterprise with investment in plant and machinery not exceeding Rs25 lakh if engaged in manufacturing and investment in equipment not exceeding Rs 10 lakh if engaged in non manufacturing activities. As the commission cites the third census of SSI(2001-02);98% of all the manufacturing non agricultural small enterprise employed less than 10 works with an average capital investment of Rs1.47 lakh, quite a good number of them are also engaged in service business and trade.

Despite having all such arrangements, they hardly received about three percent of gross bank credit during 2002-03 to 2004-05 against the RBI priority sector plan that Micro enterprises should get 60% of total credit to SSI, they have been getting just about 40% and this had skidded to 34% in 2004-05.Even more surprising within the non farm, unorganized sector, the most vulnerable group is the smaller size micro enterprises with investment up to Rs 5lakh.
Here it will be quite imperative to channelize better policy options to minimize the suffering of this sector and enabled them for more healthy functioning. It could be a major area of employment generation, which follows by its stabilizing factor to domestic economy, So Government must also leveraged corporate to enter in Micro financial sector in more efficient and regulated manner-away from exorbitant aim of business.

Present presence of Corporate is still standing in obscure proportion, hope they will more motivated in near future with obeying the regulatory norms.In recent years Indian financial institution specially the Regional Rural Banks, some commercial Banks and to some extant Co-operative Banks displayed healthy trends in delivery of Micro credits in rural areas for farming and other employment generation programme. With merger and consolidation, RRBs being able to systematize restructuring of its business and healing from previous loss, now strengthening RRB; would indeed influence much stoutly to Micro finance programmes in near future.
Its huge branch network and strong presence in rural areas would be the most strategic factor in rural credit disbursement.Having tuned negatively for their poor financial structure and inefficient management system ; Co-operative Banks lost much of its reputation as pioneer of Micro financial movements.

Though implementation of Vaidyanathan committee is infusing some new hopes for their strategic revival. If it will able to regain its potential glory then, of course the task of mushrooming productive Micro credits would become much smooth.In present circumstances of financial meltdown, it would be desirable for Indian policy makers to stressed more on domestic financial features ; because it’s sheer domestic demand which is catalyst in sustaining the growing economy.
Hope the Micro financial programme along with other Priority sector programmes would get more attentions from policy front irrespective of any political rotations...besides RBI and NABARD have to keep vigil alive to not let deviate the social orientation of Microfinance for exorbitant greed of business by Corporates.

Atul Kumar Thakur
New Delhi
23rd March2009

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