Micro-Financing: A Tool for Grassroot Development

As a majority of the Indian population lives in its 650,000-odd villages, there has been a consistent attempt by successive governments since Independence to develop rural India. Despite these attempts, the sad truth is that due to ineffectiveness in government or public delivery systems the policy benefits hardly trickled down to the targeted beneficiaries.

As the nation works towards building a physical infrastructure, there is an urgent need to review the manner in which we are building our infrastructure in the rural areas, which hold around 715 million people.

The importance of specially building a robust financial infrastructure is apparent when about 290 million of these people survive on less than Rs.20 a day and more than half of them do not have any access to either banking or formal funding infrastructure.

It is this lack of access that creates opportunity for local moneylenders to thrive by charging exorbitant lending rates to their clientele. A majority of them are rural poor and sometimes their inability to repay leads to either selling of their assets or taking of extreme steps like committing suicides.

The restricted access to capital and the high cost of servicing create a major social problem; in the absence of inadequate rural enterprises vis-à-vis job opportunities, the young generation has been migrating from rural to urban areas for a better living.

Not only does this create an opportunity for exploitation of these young men and women, it also leads to an incredible pressure on the urban infrastructure in the cities and metros. Establishment of sustainable rural enterprises is no doubt the best way to address this problem. In doing so, it is imperative to create requisite access to financial infrastructure at the grassroots.

The rural funding landscape has been traditionally dominated by local moneylenders where gradually more accessible, clientele-friendly, self-sustaining funding systems are needed to be in place. Looking at the recent success of the micro-financing system especially in the developing countries, it could be a viable funding model for growth of sustainable rural enterprises in India.

While the micro financing policy has several merits, it has inherent challenges too! Small transactions may entail high administrative costs. Lending terms may be inappropriate for a particular group of clientele who are conversant with traditional practices of borrowing as well as inadequate knowledge of cash flow and investment opportunities.

The borrowers often need the services of adequately trained micro-finance managers and sometimes their unavailability does affect growth. There are also legal or cultural biases against women, barring them from taking advantage of such services even when available.

Client illiteracy and lack of financial experience are further obstacles. Such shortcomings have been the major bottlenecks in propagating micro-financing.

However, with the increasing growth of investment opportunities, efforts are being made to circumvent the above problems.

As reported, the micro-financing system, in the recent past, has developed into a business model that, other than providing credits and fund monitoring, advises in all other aspects of business.

According to a study on the global growth of micro-financing, conducted by CGAP and the World Bank in July 2004, there have been around 665 million client accounts in over 3,000 institutions that are serving the poor.

Regionally, the highest concentration is in India, amounting to 18 percent of global accounts.

Jacques Attali, founder president of the London-based European Bank of Reconstruction and Development, in one of his recent articles mentioned that as 65 percent of Indian people do not have access to formal banking there is a great potential for the growth of micro-finance in India.

According to reports of some successful institutions, micro-financing, if properly implemented, can generate even 50 percent returns on investment; the borrowers can also afford to pay more than 20 percent interest.

Besides, the recovery rate in the micro-financing can be as high as 97 percent. It is interesting to note that all successful micro-financing institutions are led by the visionary leaders, supported with equally motivated and committed colleagues, with a missionary zeal in fostering their respective charters.

Of course, the benefits of rural enterprise is nothing new, the well-known 'Anand Cooperative Model' has demonstrated that the consumers' price benefits can effectively be passed on to the small holders and this model could be used as a tool for the socio-economic developments.

With its initial success, the Anand model was attempted outside the state where it originated but on replication similar results could not be achieved.

This has been due to consistent political-cum-bureaucratic tampering besides eroding functional autonomy that is essentially required for the successful replication of the model.

Recently the Indian government exhibited an unprecedented generosity by handing out a whopping Rs.72-billion largesse as a farmers' debt-relief scheme.

One can only imagine the level of impact had this been provided for as part of creating an enabling financial infrastructure in the hinterland rather than a largesse as a post-remedial measure.

The proposal when announced was bitterly criticized by experts and intelligentsia.

The reasons were perhaps the usual concern about the ability of the government to effectively reach the real needy in a cost effective manner. As already reported by the media, a recently conducted Maharashtra government-supported study has revealed the inappropriateness in the distribution of funds to the beneficiaries under the debt-relief scheme.

One can only wonder on the impact it would have, had a fraction of this fund been spent as a pre-policy funding measure to intensify the growth of self- generating funding like micro-financing at the grassroots.

There are multiple instances where pre-policy measures have proved to be a better alternative than the post policy remedial measure like the present debt-relief scheme.

Instead of any direct funding, the government should provide a suitable incentive-oriented scheme to foster the growth of micro-financing vis-à-vis micro enterprises at our grassroots.

On the nation's 62nd Independence Day, it is perhaps time to recall the nation's demand for 'Purna Swaraj' or 'Total Independence'. And the demand for 'Purna Swaraj' or 'Total Independence' can only be achieved when economic independence reaches our grassroots in totality - then India would really be shining!

(Animesh Banerjee is a former president of the Indian Dairy Association who works for rural empowerment. He can be reached at anerjeeanimesh@rediffmail.com)


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