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MICRO CREDIT-THE ENGINE OF INCLUSIVE GROWTH (Free Available)
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MICRO CREDIT-THE ENGINE OF INCLUSIVE GROWTH

The Self Help Groups (SHGs) methodology was first developed in Karnataka in 1992 to link rural population to the formal financial sys. Now about 8.6 crore households have access to banking through SHGs.

Linking SHGs with bank finance has been identified as a key tool towards achievement of holistic inclusive growth. Despite the vast expansion of the formal credit system in the country, marginal farmers, landless labourers, petty traders and rural artisans belonging to socially and economically backward classes and tribes whose propensity to save is limited or too small to be mopped up by the banks, continues to depend on money lenders.

In order to minimize the dependence on money lenders, NABARD, APRACA and ILO have carried out a study and brought out the concept of SHGs and launched a pilot project supported by refinance. The criteria would broadly be adopted by NABARD for selecting SHGs:

Membership of the group could be between 10 to 20 persons.
The group should be in existence for at least six months.
The group should have actively promoted the savings habit.
Groups could be registered or unregistered.

What is Micro Credit?

Foreseeing the need of sustainable development for the improvised; Muhammad Yunus, the father of microfinance, popularized the concept of micro credit. Micro credit, being part of financial inclusion, is defined as the provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve their living standards (as per RBI Master Circular, 2008). In India, the most flourishing testing ground of social entrepreneurship has been in the area of micro credit, and more recently microfinance. Culling from international literature empirical features of micro credit are:

Quantum of loans is small,
No collaterals are required,
Rural and urban poor are the major borrowers, Ideally loans are used for income-generation through market-based self-employment,
Loans are administered through borrower groups,
Owing to NGOs’ controlling disbursement as well the basic terms and conditions for sanction, they sometimes become private transaction.
Less than 15 per cent of the households have any kind of insurance.
Bankers feel that it is fraught with risks and uncertainties.
High transaction costs.
Unfavourable policies like caps on interest rates which effectively limits the viability of serving the poor.
Lack of an appropriate legal vehicle.

Framework for Micro Credit

In India, there are two routes through which micro credit is provided to borrowers. The first is the “Bank-SHGs linkage programme” by which National Bank for Agriculture and Rural Development (NABARD) and commercial banks promote the formation of SHGs. Banks lend directly to SHGs, which, in turn, open group savings accounts in the banks. The second route is the “Micro Finance Institute (MFI) model”, is the most important institution in the chain.

Why Micro Credit?

Providing credit is in the top priority for policy makers to achieve inclusive growth. Unless we are able to meet the credit needs of our people, we can never hope to grow in a sustainable way. Despite multiple agencies giving credit to the rural sector, the critical gap in rural credit still exists resulting in the exploitation of the rural masses by money lenders. The status of micro credit is as follows:

Considerable gap between demand and supply for all financial services.
Majority of poor are excluded from financial services.
About 56 per cent of the poor still borrow from informal sources.
70 per cent of the rural poor do not have a deposit account.
87 per cent have no access to credit from formal sources.

The SHGs-8ank Linkage Programme

In 1991-92, a pilot project for linking about 500 SHGs with banks was launched by NABARD in consultation with the Reserve Bank of India. Since launching it as pilot project, it has proved its efficacy as a mainstream programme forbanking by the poor who mainly comprise the marginal farmers, landless labourers, artisans and craftsmen and other engaged in small business like hawking and vending in the rural areas.

MFI Model

Microfinance refers to a movement that wants to provide low-income households a wide range of financial services, including not just credit but also savings, insurance and fund transfer. The Indian MFIs are among the fastest growing sector and most efficient in the world today and will continue to develop into an important delivery mechanism to reach out to the poor and empowering women. The role of MFIs is to enhance human capital and to evolve the bankable clients to make poverty irrelevant.

SHGs-bank linkage programme and MFIs model have become an important alternative to traditional lending in terms of reaching the poor and will continue to be an important delivery mechanism as:

Poor people need not just loans but also savings, insurance and money transfer services.
Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks.
Subsidies from donors and government are scarce and uncertain, and so microfinance must reach to the large numbers of poor people.
Microfinance means building permanent local institutions.
Microfinance also means integrating the financial needs of poor people into a country’s mainstream financial system.
The key bottleneck is the shortage of strong institutions and managers.
Donors should focus on capacity building.
Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit
MFIs should measure and disclose their performance - both financially and socially.

What is needed to be done?

Micro credit institutions should fund their loans through savings accounts that help poor people manage their myriad risks. Governments should provide an enabling legal and regulatory framework which encourages the development of a range of institutions and allows MFI to operate as recognized financial intermediaries subject to simple supervisory and reporting requirements. Usury laws should be repelled or relaxed and MFIs should be given freedom of setting interest rates and fees in order to cover operating and finance costs from interest revenues within a reasonable amount of time. MFIs on its own are unlikely to be able to address formidable challenges of underdevelopment, poor infrastructure and governance. It needs:

Appropriate legal structures for the structured growth of microfinance operations.
Ability to access loan funds at reasonably low rates of interest.
Appropriate loan products for different segments.
Ability to innovate, adapt and grow.
Bring out a compendium of small and micro enterprises for the microfinance clients.
Ability to attract and retain professional and committed human resources.
Identify and prepare a panel of locally available trainers.
Ability to train trainers.
Capacity to provide backward linkages or create support structures for marketing.
Finding adequate levels of equity for the new entities to leverage loan funds.

Micro credit institutions should fund their loans through savings accounts that help poor people manage their myriad risks. Governments should provide an enabling legal and regulatory framework which encourages the development of a range of institutions and allows MFI to operate as recognized financial intermediaries subject to simple supervisory and reporting requirements. Usury laws should be repelled or relaxed and MFIs should be given freedom of setting interest rates and fees in order Micro credit is not yet at the centre-stage of the Indian financial sector. The knowledge, capital and technology to address these challenges however now exist in India, although they are not yet fully aligned. With a more enabling environment and surge in economic growth, the next few years promise to be exciting for the delivery of financial services to poor people in India. Micro credit will continue to develop into an important delivery mechanism to reach out to the poor and achieving financial inclusion and empowerment of women. Its role in enhancing human capital is considerable. Tobjective of the micro credit initiatives must be to evolve the bankable clients to creditworthy clients, thus making concerns about poverty irrelevant.