There is now mounting hope that micro finance can be a large scale poverty alleviation tool. Banks too are shedding their old reluctance to lend to the poor, and are looking to tap the expertise of micro credit groups to create a new market. India has one of the largest networks of bank branches in the world, but the hundreds of millions of poor in the country are largely out of it. Banks were nationalised three decades ago with the hope - and promise - that their services would reach the poor. But that goal is not even close to being met today. With 52,000 commercial bank branches, 14,522 branches of regional rural banks and 100,000 cooperative bank branches, the country is teeming with institutions that should be able to meet the credit needs of the people. But if you are poor, you're also probably out of luck with the banks; it is tough persuading them to even let you open a bank account.
The consequences have been devastating. Consider these numbers: 75 million households in India depend on moneylenders to meet financial needs; almost 90 per cent of people in rural India have no access to insurance; 50 million households are landless and need small credit to start some economic activity. And even families earning Rs.4000-5000 a month in urban areas spend huge portions of their earnings to service debt.
But out of necessity and enterprise, those locked out of the banking world have found a way out. It is called micro credit - the extension of small loans to individuals who are too poor to qualify for traditional bank loans, as they have no assets to be offered as guarantee. In India, micro credit has worked largely through self-help groups. Predominated by women, these are formed with simple rules - save, accumulate and give loans to each other. Globally, it is slowly proving one of the most effective strategies to neutralise poverty. Micro credit lending institutions are currently estimated to reach some two million households in India.
Can a mere five hundred rupees change a life? This sounds implausible, as prices spiral by the day. But in numerous villages in India, this miracle is quite real; millions of poor women are today using small loans to rewrite their present and future. Many of them have not ever seen the corridors of a high school, but are using common sense to propel their entrepreneurship and group business activities. Dr. C. Rangarajan, Chairman, Economic Advisory Council of the Government of India, points out, "Micro credit can aid employment and sustain households giving them opportunities they never had before." It is called micro credit with good reason. The size of the loan is typically small. The borrower is usually battling against poverty. The repayment schedule is simple and short. And, the activity for which the loan is taken is often of a small nature. But poor women, who are in the forefront of the micro credit movement, use the small loans to jumpstart a long chain of economic activity from this small beginning. As they have enormous pride in their integrity, they repay quickly and reliably, not wanting to be seen as defaulters. Then, they begin again, this time with a bigger loan - and keep expanding their profit base until they do not need the loans any longer.
Micro credit has given women in India an opportunity to become agents of change. The movement has made them more confident than ever helping them to explore new horizons, new dreams. The most active states are Andhra Pradesh and Tamilnadu. Other states where such self-help groups are making a dramatic difference are Karnataka, Himachal Pradesh and Uttaranchal. Sheila Dikshit, Chief Minister of Delhi, says: "Micro finance will be the future mantra for alleviation of poverty. I have met women who say that 500 to 800 rupees makes all the difference as it dramatically changes their standard of life."
A late start, and a long way to go
That is the positive side of the story. The negative one is that India's demand for micro credit is Rs.500 billion, and only Rs.18 billion of this amount has been generated so far; there is still a long way to go. Nearly 7.5 million poor households in India desperately want access to financial services to meet immediate needs. Almost 36 per cent of the country's rural households have to look for credit outside the formal sector. A World Bank study of over 6000 families in Andhra Pradesh and Uttar Pradesh, two of India's largest states, shows that 87 per cent of them have no access to credit, 85 per cent had no access to insurance and 56 per cent borrow from moneylenders. The poor need banking services more than credit, as they need to safely secure their little savings or remittances coming from their men folk who migrated in search of work.
The chief culprits are the banks, who continue to see the poor women - rural as well as urban - as unworthy of credit, and is only slowly awakening to the possibilities. Points out Jayshree Vyas, Managing Director of the SEWA Bank at Ahmedabad which mainly has self employed street vendors as account holders: "We started a bank as the women demanded it. They wanted a place to put their savings. The banking sector earlier never respected self-employed women." Today, the SEWA bank in Ahmedabad is a model for others to replicate. It has deposits of over Rs.100 crores got from nearly 250,000 women. It is the biggest poor women's bank in the world.
Even the few banks who now belatedly recognise the potential in rural banking lack the capability to serve this market, which has been neglected for so long, and need intermediaries to help build their capacity to do business with small borrowers. V.K. Chopra, Chairman and Managing Director, Corporation Bank, admits, "Lending without any collateral for commercial banks to the poorest of the poor in rural areas is very difficult as banks do not have the expertise or facilities in these areas. That is why micro finance institutions should step in. Today's banks are flush with money. If micro finance institutions are strong, banks will readily lend to them."
That there are significant opportunities for banks in micro credit is now unquestioned. Banks like ICICI are exploring how it could reap the benefits from the micro finance revolution. Nachiket Mor, Executive Director, ICICI says: "A lot has been done in Andhra Pradesh, but we want to build 250 micro finance institutions to build a network in 600 other districts each one serving a million households. It will involve around Rs. 200,000 crores and it is not an unreasonable dream." Mor feels that the micro credit movement must now move beyond their members and look at financing for roads and water.
The larger banks also need the micro credit institutions for other reasons, besides expanding their opportunities. The micro credit institutions have considerable experience in dealing with the cultural realities of life for the rural poor. Every self-help group and micro financing institution in India has been through a great learning experience in the last few years. Every day has been an experience. Women need to guard their savings even in a bank fighting off pressures from the family. Says SEWA Bank's Vyas: "We found women begging us not to send them any letters or bank statements. They even asked us to keep their passbooks, as they did not want their husbands to know they had money, as then they would be pressurized to withdraw it. More often than not, it would be spent frivolously on gambling or alcohol." Large banks are wary of this cultural minefield, and will look to their micro credit partners for help in steering the course.
Even the few banks who now belatedly recognise the potential in rural banking lack the capability to serve this market, which has been neglected for so long, and need intermediaries to help build their capacity to do business with small borrowers. V.K. Chopra, Chairman and Managing Director, Corporation Bank, admits, "Lending without any collateral for commercial banks to the poorest of the poor in rural areas is very difficult as banks do not have the expertise or facilities in these areas. That is why micro finance institutions should step in. Today's banks are flush with money. If micro finance institutions are strong, banks will readily lend to them."
That there are significant opportunities for banks in micro credit is now unquestioned. Banks like ICICI are exploring how it could reap the benefits from the micro finance revolution. Nachiket Mor, Executive Director, ICICI says: "A lot has been done in Andhra Pradesh, but we want to build 250 micro finance institutions to build a network in 600 other districts each one serving a million households. It will involve around Rs. 200,000 crores and it is not an unreasonable dream." Mor feels that the micro credit movement must now move beyond their members and look at financing for roads and water.
The larger banks also need the micro credit institutions for other reasons, besides expanding their opportunities. The micro credit institutions have considerable experience in dealing with the cultural realities of life for the rural poor. Every self-help group and micro financing institution in India has been through a great learning experience in the last few years. Every day has been an experience. Women need to guard their savings even in a bank fighting off pressures from the family. Says SEWA Bank's Vyas: "We found women begging us not to send them any letters or bank statements. They even asked us to keep their passbooks, as they did not want their husbands to know they had money, as then they would be pressurized to withdraw it. More often than not, it would be spent frivolously on gambling or alcohol." Large banks are wary of this cultural minefield, and will look to their micro credit partners for help in steering the course.
Looking ahead
What will it take for micro credit to become a mainstream mode for lending? One option is to provide other financial services similarly built around small amounts of money, such as micro insurance. There is tremendous scope to design well-adapted insurance products for the poor in the insurance sector as well; this will reduce their vulnerability to environmental influences - weather and pests - as well as diminish the risk should they - or their livestock - become ill unexpectedly. Such additional products will expand the micro finance platform, and even encourage more new directions. Credit schemes specifically tailored for urban areas can also help; urban micro finance, unlike its rural counterpart, has not mushroomed despite the rising numbers of urban poor.
The potential of micro credit to tackle poverty should not blind us to the fact that lending to the poor has to be regulated just like other lending, perhaps even more carefully considering their already weak economic standing. Some experts believe that as the movement spreads and grows, it will be apt to have a regulator in place. Titus says: "We need some ground rules. The movement must not be allowed to degenerate as it expands." Mahajan says that unless a responsible regulator is in place, very little will happen with savings. But many others are wary of regulation, and remind us that micro finance must be allowed to blossom without any interference that could choke off its potential. Malcom Harper, Professor Emeritus, Cranfield Inenstitute of Management, is of the view that the greatest challenge is to keep politicians out of the way as the movement grows, as they will just see it as a way to distribute money and not empower people.
But regulation is likely sooner or later. Self help groups today handle Rs.5,600 crores of disbursement. Just four micro finance institutions in Hyderabad alone have disbursed Rs.1400 crores. The National Bank for Agriculture and Rural Development forecasts that by 2008, about one million self-help groups would be taking loans from the bank, with a total membership of around 17 million people. Over a quarter of poor Indian households will by 2009 likely have access to formal financial services if current trends continue. With such large amounts and widespread participation comes inevitable government responsibilities to check unethical practices.
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