Shanthi Kannan
The Hindu
Date:25/08/2008 URL: http://www.thehindu.com/2008/08/25/stories/2008082550121600.htm
Time was when banks were the only organised lenders for rural customers. Today, micro finance institutions (MFIs) have been gaining in popularity among the un-banked population. And, they are increasingly playing a bigger role in the upliftment of the poor.
Over 1,000 micro finance institutions (covered under the Reserve Bank of India (RBI) regulations) are operating across India. Started as non-profit-making organisation, these have now grown to make a serious splurge into micro credit area.
Though there are enough liquidity in the system, the ability to access loan funds at reasonably lower rates of interest remains a big challenge for the poor and MFIs. In the present high interest rate regime, micro finance institutions are also in a tight situation. Still in its infancy, micro finance is primarily aimed at helping the poor in rural areas by the NGOs (Non-Government Organisations) through socially-oriented projects for women. Though there are little over 1,000 MFIs, only over 100 are sustaining financially, says R. M. Nair, General Manager, SIDBI.
The overhead costs for nationalised banks to set up operations in rural areas are very high and managing the large number of retail portfolios is difficult. This has given room for the growth of MFIs in rural areas. The Union Budget clearly focuses on developing women self-help groups. But the Micro Finance Bill is yet to be passed in Parliament. For the Reserve Bank of India, it is the registration that mattered. All these factors have led to the mushrooming growth of MFIs.
Micro finance has now entered the door steps of the urban poor. The question is: whether these MFIs can sustain with the urban poor?
P. N. Vasudevan, Managing Director of Equitas Finance India, says “there are an equal number of poor in the urban area and they are also in need of money. At present, these urban poor are getting their funds from unorganised moneylenders at an usurious rate of interest." His company has been fully concentrating on the urban poor.
To cut down the delinquency rate of repayment, most MFI´s have laid certain criteria for the poor. The rules insist that these poor should be self-employed, they should be residing at a particular place for more than three to five years and finally they should take the responsibility of liability and form a group.
“Between the urban and the rural poor, the delinquency rate is more among the urban poor. The reason is simple. Poor women in rural areas are highly conscious in repaying the debt,’ says M. Narayanan, Madura Micro Finance.
“Today, the recovery rate is 99.9 per cent in rural areas for Madura Micro Finance. The women self-help groups (SHGs) are consistent in repayment,’ says Mr. Narayanan.
But when funding is done for the urban poor, there is still an element of doubt on repayment. Generally, urban poor are classified as migrants. Whether they will be able to remain cohesive and take the responsibility need to be tested over a period.
The next question is: Does the money reach the end-consumer for a productive purpose? In the first level, nearly 80 per cent of the first time borrowing would reach the end-consumer as a consumption loan and in the second level only it is used for business activity. This cannot be avoided as it is targeted towards the poor, says Mr. Nair.
In the last few years, the Government, banks and venture funds have shown keen interest in this growing sector. It is expected that micro finance institutions will become a huge profit-making organisations over a period.
Banks have earmarked a portion of the credit for funding MFIs at interest rates ranging from 13 per cent to 15 per cent. The MFIs, in turn, lend it to consumers at 20-26 per cent. Thus, MFIs make a gross spread of 10-13 per cent. After allowing for overhead expenses of 4-7 per cent, they secure a neat return of 3-4 per cent, says R. Anand, Partner, Global Tax Advisory Services, E&Y.
Seeing it as an attractive proposition, many venture funds and private equity firms, in the last two years, have started investing in this business. It is estimated that over Rs. 2,000 crore of equity is needed in the micro finance market, of which only Rs. 300-400 crore has come in. So, there is still space for many, says Mr. Nair.
Though all the MFIs are registered with the RBI, the necessity of monitoring and regulating the smaller ones becomes essential. The Government should look at instituting a single regulator for micro finance institutions. This will keep a check on the unbridled growth of this sector, says Mr. Nair.
SHANTHI KANNAN
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