After telecom, it's microfinance
With the exception of the mobile telecom, perhaps no other sector has grown as fast and as big in terms of customer base as the microfinance sector in India in the past two decades. Today, the MF sector lends Rs 1,000 crore (11 digits) every month! The story began in 1989, when Chaudhari Devi Lal, then Deputy PM, announced a waiver of all bank loans below Rs 10,000.
After this, banks drastically reduced giving small loans. By 1992, when reforms set in, and banks were asked to focus on profitability and reducing non-performing assets, they got further justification to stop lending to the poor. Many developmental NGOs, like MYRADA in south India and PRADAN in north India, were engaged in promoting livelihoods for the poor, using bank loans. They found it increasingly difficult to raise loans for poor people from banks. Looking for other means for mobilising credit for the poor, they invented the "self-help group" (SHG) methodology.
Since 1997, the SHG-bank linkage model was massively promoted by NABARD all over India and it steadily spread to various states. By 2009, over 4 million SHGs, or over 60 million poor households, were linked to banks with over Rs 24,000 crore loans outstanding. Thus the world's largest microfinance programme in terms of outreach got built in the last decade.
Though an overall success, the SHG-bank programme had several shortcomings, too. It took the members of SHGs a year, and sometimes two or three years, before they got access to bank credit. This was due to variability of response from local branch managers and support or lack of it from the district administration. There were fewer NGOs in the poorer central, eastern and northeastern states and SHG-bank linkage there remained weak. The average amount of loan per member was small, often below Rs 2,000. This was not adequate for significantly enhancing income of the household.
BASIX was begun as an alternative to the NGO model. In 1996, BASIX established Bhartiya Samruddhi Finance Ltd. as a non-banking finance company (NBFC), creating India's first RBI-regulated microfinance institution (MFI).
But as the microcredit operations of MFIs grew, it became clear that unless commercial banks started lending to them, there would always be a shortage of funds. Thus in 1999, with advocacy from Sa-Dhan, the newly established MFI association, RBI Governor Jalan set up a task force, whose recommendations, adopted by the central bank in 2000, changed the play dramatically. First, the RBI permitted banks to lend to MFIs, whether they be NGOs or NBFCs; second, it allowed these loans by banks to be treated as priority sector, and third, RBI did not impose any restriction on lending rates. This led to a significant increase in funding to MFIs since 2001.
Many changes happened in the sector in the last decade. First, MFIs began growing in the poorer states, with BASIX expanding its NBFC operations to states such as Orissa and Jharkhand, while SHARE went to Chhattisgarh. The scope of services also began to expand. SKS decided to focus purely on microcredit. In 2005, SKS became an NBFC and by using corporate methods of scaling in new geographies and urban areas, it is set to become the largest MFI in the world in 2010.
Looking forward, what is in store for microfinance? The current frenetic pace of growth of some MFIs is bound to slow down as the easier-to-expand areas are covered and operational constraints set in. The RBI and banks are also likely to tighten credit, as they find that rampant growth of MFIs is not necessarily translating into enhanced access for the excluded, but into over-indebtedness of the more enterprising borrowers in well served areas. Having said this, the sector has come of age and is bound to grow, and it will overcome these hiccups.
Almost all major MFIs are becoming NBFCs and are getting more closely regulated by the RBI. As they receive equity from private investors, MFIs will increasingly become Boardled and professionallymanaged rather than being managed and led by the founders alone. They will also be increasingly relying on technology for recording and monitoring transactions and reducing costs. Recently, 30 top NBFC MFIs came together to join two credit bureaus to minimise over-lending.
In the long run, MFIs will probably resolve into two segments— the developmental MFIs and commercial MFIs. Developmental MFIs will be more focussed on the poor and on social impact, and offer more broad-based financial services such as microinsurance and remittances. Many of them will go beyond financial services and take a livelihood approach. They will have to increase their reliance on funding sources sympathetic to these approaches— such as philanthropic foundations, social investors and governments.
On the other hand, the commercial MFIs will focus on microcredit to those slightly above the poverty line. They will diversify in lending to include housing and personal loans. Their portfolio will grow and they will become increasingly dependent on banks for funding. Some of them would attempt to get a bank licence so as to mobilise deposits, but this will not be a common possibility. Eventually, many of them will get acquired and become specialised divisions of banks catering to the "base of the pyramid", but in search of the fortune there. They will be able to attract private equity and a few may also have IPOs on the stock market.
Both forms of MFIs are a valid solution to widespread financial exclusion in India. If we have to ensure access to basic financial services (bank accounts, savings, credit, insurance, remittances) to all 220 million households, 120 million farms and 50 million microenterprises, then the financial sector will have to accept microfinance as the mainstream of finance, just as mobiles with pre-paid top-ups of Rs 10 have become the mainstream of telecom, to the point where telecom numbers will now have 11 digits!
— The writer is the Founder and CEO of BASIX Group
