(Weekly Organ of the Communist Party of India (Marxist)
October 31, 2010
The Stranglehold of Microfinance
OF late microfinance is being viewed as a prime tool in achieving poverty reduction and inclusive growth. Particularly after Grameen Bank fame Mohammd Yunus was bestowed with Nobel Prize, this illusion became widespread resulting in a major spurt in microfinance institutions across the world. The proponents are focusing on turnovers, repayments and profits as the indicators of its success, neglecting the ramifications of microfinance institutions (MFIs) on poverty reduction or inclusive growth. Microfinance as a vehicle of poverty reduction mechanism has its own limitations. At best, it can play only a complimentary role rather than a key role, provided, it is governed under panchayati raj system and borrowers command ownership of resources of income generation. Realising this limitation, the Communist Party of India (Marxist) correctly assessed, “Conceptually, the government’s and the World Bank project of microfinancing and SHGs serve as an alternative to rural credit which has drastically declined after liberalisation. SHGs cannot be a substitute for institutional rural credit. Such an approach must be opposed.” [On Certain Policy Matters, Document adopted in CPI(M) 18th Congress in 2005]
Recent incidents in Andhra Pradesh come as a rude
shock to the proponents of financial inclusion through microfinance.
incidents resulted in suicides of 57 people, out of which, 17 are the
of the world’s largest MFI, SKS Microfinance. As more than 30 of them
the intensity of the shock is such that the government of Andhra
been forced to proclaim an ordinance. The Reserve Bank of
The concept of microfinance is having its roots in the
neo-liberal project itself. As neo-liberalism gripped the minds of
makers across the continents, the governments started retreating from
welfare state. Retreat of development finance from provisioning of
financial access forced vulnerable sections of people to face financial
exclusion. This resulted in widespread struggles questioning the
neo-liberal project, such as in
Providing small loans to individuals, possibly within the groups as capital investment to enable income generating opportunities is the essence of microfinance. To be eligible under microfinance schemes, the potential beneficiaries were asked to form into groups by mobilising their initial thrifts within each village. In this way, the duration between the formation of group and their eligibility for loan helped private lending agencies to gauge their cohesiveness and also the saving culture.
Currently MFIs are having global assets worth $50 billion and are not damaged much by the ongoing crisis of financial capitalism. This proves the resilience of this industry. By the end of the 20th century, governments appropriated the conceptual utility of microfinance by making it as a centre piece in its developmental strategies focussing on women. This also helped the governments to manage the grassroots who are disgruntled with the consequences of structural reforms. This role of SHGs is nowhere more evident than in the state of Andhra Pradesh when Chandrababu Naidu used SHGs as powerful instrument to shift the tide towards TDP during the 1999 general elections.
Another important aspect of the MFI as a developmental tool is turning the non-governmental organisations into self-sustainable entities. With this, the whole concept of NGOs has undergone a major change as they shifted their orientation from service to market and also from deemed agencies of transformation into potential counter hegemonic social forces through microcredit. They are gradually adopted into the circuits of international finance capital through the generous funding from international agencies. As neo-liberal project progresses, the popularity of NGOs as vehicles of development also has gone up. This also led to a standardisation of NGO pattern from group of social workers to CEO headed line department with technocratic professionals heading various departments. We can see this shift in all the NGOs active in MFI business.
Once NGOs were co-opted by finance capital, gradually
they are transforming themselves into banks, a phenomenon that began
Grameen Bank. In
The institutionalised origins of rural credit in particular and credit in general goes back to the 1970s when the welfare state took initiative in expanding the outreach and intensity of credit as a source of rural development. In continuation, in the post nationalisation period, Indian banking system's depth as well as outreach increased enormously. This growth is reflected in its commitment to increase the bank presence in rural areas and in its efforts to reach the most vulnerable sections of the society. A mandate for all nationalised banks to expand their operations at least by 25 per cent in rural areas helped to meet the first characteristic where as devising the concept of priority sector helped banking industry to mould their orientations into social banking. Priority sector includes emphasis on directed lending to sectors such as agriculture and small scale industries and also members of historically disadvantaged sections of society. Put together, nationalised banks are mandated to lend 40 per cent of their total lending to these sections/sectors and out of that 25 per cent must be disbursed to individuals belonging to weaker sections. The newly conceived program of Integrated Rural Development Program (IRDP) became the policy vehicle to redirect the credit to priority sector. Out of total bank lending, priority sector lending reached nearest to its target only in 1987 and from then onwards witnessed gradual decline. Particularly with the beginning of restructuring of Indian economy, total lending to priority sectors came down to nearly half of the '87 peak.
This deterioration is linked to the change in RBI outlook
about social banking as a result of the government accepting Narasimham
Committee recommendations. In policy terms, it implied that the
agreed to direct lending initiatives based on need, business prospects,
profitability and financial viability, minimising operations cost. In
period, National Sample Survey Organisation surveys in two rounds, 1993
1999 shows that in rural areas 72 per cent of households are indebted
informal sources of lending. Out of that 72 per cent, loans raised
informal money lenders stood at 22 per cent and pawn brokers stood at
21 per cent.
The credit is redirected from weaker sections
and sectors of society to capital markets and consumer credit.
resulted in excluding the vast sections of people both vulnerable and
vulnerable people from accessing the financial services thus leaving
open for the entry of private financial intermediaries. Exactly this
time when Chit fund companies flourished across the country. Chits like
Margadarshi in Andhra Pradesh and Sriram, Sundaram Finance in Tamilnadu
At the same time, influenced by the changes in
international policy scenario, governments both at the centre and in
adopted the concept of micro-credit modelling around Self-help Groups
NABARD championed this concept in
At this juncture, institutionalised money lending in
the form of MFIs entered the scene after realising the potential of
sector. They replaced SHGs with joint
lending groups (JLGs). In case of SHGs, there is no need of collaterals but they have to run around the banks for
loans. In case of MFIs, different types of collaterals starting with
cards, gas connections to valuable items at home are initiated. As MFIs
the business of advancing capital for profit, they hunt around the
(To be continued)