People's Democracy

Microfinance and Its Emerging Challenges

Archana Prasad

THE recent debate on the rise and regulation of Micro Finance Institutions (MFIs) has put the focus squarely on the neo-liberal model of microfinance, being followed by the government since the beginning of the economic reforms. The early 1990s saw the emergence of microfinance as a major strategy of poverty alleviation by the neo-liberal state, especially in the wake of the reduction of public spending on welfare programmes. The formation of self-help groups (SHGs) and their links with banks and government schemes was seen as a way of offsetting the problems of the limited outreach and of mobilising capital for self-employment and other income generation programmes. Many of these schemes targeted poor women, who were largely dependent on the informal sector credit from moneylenders. Thus the self-help groups formed under the bank linkage programme attracted many women and more than 70 per cent of the bank and government linked groups were formed by women.

PERSPECTIVES

ON THE SHG’S

It was for this reason that the democratic movement and its organisations were not only forced to take this development seriously, but also develop their own perspective on SHG formation, while recognising the limitation of the neo-liberal model of microfinance. The main critique of the neo-liberal model was built around the fact that it was largely designed to mobilise the savings of the poor for providing liquidity to banks and also for mobilising the savings for self-employment programmes in which the government had started to invest less and less money. In this situation, the formation of the SHGs was becoming a way of absolving the state of its own responsibility towards poverty alleviation programmes. At the same time, many communal organisations and profit seeking commercial enterprises had also started to use these SHGs for their own narrow ends.

In stark contrast to this, the alternative perspective of the Left led governments saw the SHGs as a way of increasing the outreach of the government as well as channellising the government funds to the people. For example, the Kutumbashree, neighbourhood micro-credit programme of the Kerala government, linked the panchayat development with the organisation and livelihood security of women. In West Bengal too, SHGs were given loans at subsidised, low interest rates, and they also received adequate training and marketing support. This showed that the democratic movement’s model of SHGs was concentrated on the democratisation of governance rather than on the withdrawal of government support. By the same measure, democratic organisations working for women’s rights saw the formation of SHGs (for instance, MALAR federation in Tamilnadu) as providing a window of opportunity to mobilise women on social, economic and political issues.

ROOTS OF THE

RISE OF MFI’S

The recent rise and growth of micro finance institutions has only made such SHGs all the more vulnerable in the present scenario of economic distress. According to the State of the Microfinance Sector report of the ACCESS alliance, the MFI operations expanded by 13 times in four years to end the year 2009 at Rs 117.9 billion in outstanding loans. Of its 26.6 million borrowers, poor women and disadvantaged sections form one of the largest sections of the clientele. Whereas there was only one for-profit MFI in the country in the middle of the 1990s, this number had spiralled to 149 registered micro finance institutions by 2009. Of these, about 11 per cent of the large micro finance companies had a disproportionally larger share in the credit market, having 82 per cent of the clients and controlling about 88 per cent of the loan portfolio. This reveals the emergence of new corporate entities and private finance companies who have started to exploit the credit needs of the poor by charging high interest rates. An investigation by a report from the Down to Earth magazine in Andhra Pradesh revealed that whereas bank linked self-help groups were charging interest rates of about 15 per cent from their borrowers, the interest rates charged by the MFIs were at about 60 per cent. This clearly showed that a space had been created for exploitative financial intermediaries for entering the rural and urban credit markets.

That this phenomenon was linked to the refusal of public sector banks and the state to extend the outreach of its formal credit infrastructure is evident from the fact that most of the MFIs are concentrated in the 256 districts where the poor have a demand for credit, but the formal banking system is not able to meet this demand. Of this Andhra Pradesh and Karnataka have the greatest density of micro finance institutions, and more than 50 per cent of the outstanding loans are in the southern states.

This meteoric rise of the MFIs has its roots in the liberalisation of the banking system and its failure to meet the demands of the rural poor, especially women. Initially the MFIs were started in response to the programme of financial inclusion. The SHG-bank linkage programme was started by the National Bank for Agriculture and Rural Development (NABARD) where non-government organisations (NGOs) and not-for-profit institutions played an intermediary role in promoting and facilitating the link between self-help groups and banks. Thus many MFIs started as not-for-profit NGOs and then began to expand their operations to make direct contact with the clients. Thus SKS Microfinance (which is the largest MFI in the country today) started as a not-for-profit institution and converted itself into a non-banking financial company in 2004. Similarly, Sampdana, another of the MFI giants, started with 500 clients and increased its clientele to about 3 lakh in the period between 1998 and 2004 when it became another for-profit company. This conversion of not-for-profit institutions into MFIs was a result of a state policy that increasingly facilitated the penetration of big private capital in this sector. International institutions like the World Bank supported the funders of the MFIs like Basix and the NGOs like PRADAN and SEWA in order to facilitate the demise of public sector banking.

WEAKNESS OF THE

NEO-LIBERAL MODEL

Such policies only exposed the weakness and inability of the current government and bank driven programmes to meet these challenges. Women participating in the bank linkage programme faced difficulties in getting access to bank credit despite the fact that it is they who had formed the SHGs. Thus around one lakh SHGs under the bank linkage scheme are yet to be credit linked even though they have formed the group under the linkage scheme. Further, the bank linkage scheme itself operates in two ways: first where the SHGs are supported directly through the banks on the one hand and, second, where banks lend to the MFIs for onward lending to the SHGs. They believe that this will only increase their outreach. But it is precisely this strategy which has also created the space for a replacement of the banks with the MFIs in some regions. Thus NABARD’s own report on the Status of Microfinance, 2009-2010 shows that while the rate of growth of direct bank support to the MFIs went up by 8.1 per cent during the last year, direct support to the SHGs only went up by around 6  per cent. This shows that the banks found it easier to give bulk loans to the MFIs rather than strengthen their direct links with the SHGs. Further, the ACCESS alliance report shows that the operation of the MFIs expanded by 83 per cent in the last two years whereas the expansion of banking operations was only half that rate. This shows that the roots of rise of the MFIs lie in the slow growth of public sector banking and their reluctant and tenuous links with the SHGs.

The second important factor that led to the rise of the MFIs was the failure of the poverty alleviation programmes that relied on the SHGs as the main mobilisation strategy. The Andhra example is well known in this regard. Here the withdrawal of low interest rate based self-employment programmes has led to the increasing operation of the MFIs. Further, in governmental schemes like the SGSY or the Urban Self \-Employment Schemes, subsidies were linked to the ability of the SHGs to get loans from banks. The design of many of these schemes was such that applicants had to get their loans sanctioned before they could avail of even the inadequate and reduced subsidy (which in most cases did not exceed 35 per cent of the entire project). This was accompanied by inadequate infrastructural, training and marketing support for such employment opportunities. Thus, even though many of these schemes were targeted at the poorest of the poor (those below the poverty line), the rural and urban poor were not able to avail of these schemes adequately. For example, the government of Delhi was able to make only about 500 SHGs and train 3000 women in one decade of its Shahri Swarozgar Yojana. Thus, along with other macro economic factors, the failure to provide work to the rural and urban poor also made them more and more vulnerable to the MFIs as well as informal sources of credit to meet their daily needs.

NEED TO RESIST

THE CURRENT TREND

The pressure being applied by the MFIs to resist the regulation should be seen in this context. Their political influence is reflected in the fact that the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act (passed in December 2010) has no caps on interest rates. This once again shows that the government is willing to let the micro finance institutions do business as usual and manipulate the urban and rural poor for maximising their profits. Needless to say, this trend needs to be countered and linked to the larger fight against neo-liberal policies and the increased social security for the urban and rural poor.

The democratic movement has been raising demands based on their experience with women’s SHGs and the government programmes of the Left ruled states. It recognises that the MFIs can only be countered if the government supports the SHGs through increased subsidies and low interest credits. The direct links of public sector banks with rural and urban poor and their SHGs need to be strengthened by expansion of the banking infrastructure and provisioning of low interest rate credit at a repayment rate of 4 per cent. In such cases, the government may require to provide interest subsidies to these groups. But along with this, political mobilisation for the regulation of the MFIs needs to be strengthened. For-profit NGOs and MFIs need to be stopped from expanding their operations in this sector on an urgent basis. It is no surprise that the finance minister has already stated that the government does not want to ‘strangulate’ the micro finance sector. The intention of the government is thus clear and large scale political mobilisation is urgently required to stop its devious and anti-people design.