NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, April 6, 2012

Among many Bills stuck in the legislative process is the Micro Finance Institutions (Development and Regulation) Bill. This is a 2011 Bill. An earlier 2007 Bill was introduced in the Lok Sabha, but lapsed with the lower House’s dissolution in 2009. Financial inclusion shouldn’t mean only credit.

But de facto, financial inclusion has meant credit for an estimated 450 million unbanked people. These numbers don’t necessarily have sanctity. For example, one also hears of 145 million unbanked households (not individuals), and there is a difference between unbanked and underbanked. Just because there is an account doesn’t mean it is being used.

Since 2005-06, financial inclusion has been on RBI’s agenda. One element of the strategy is through no-frills accounts, diluted know-your-customer (KYC) norms, banking correspondents (BCs) and use of IT. For example, Puducherry, Himachal Pradesh and Kerala have announced 100% financial inclusion in all districts and pan-India, all villages with population of more than 2,000 will be served through bank branches or BCs.

But there are several villages with population less than 2,000 and this kind of financial inclusion for 6,00,000 villages isn’t going to happen fast. Indeed, there is a patronising angle to microfinance. We don’t talk ofmicrofinance when we approach our banks for financial products. But for that, we need to wait for 2020, or later still.

For the moment, there is an unorganised market (euphemism for moneylenders), where there are no collateral or procedural problems, nor repayment issues. Credit is available 24×7. But exploitation apart, interest rates are high. There are reports of rates as high as 150%, though an average is probably in the 30-40% range.

So, we have microfinance to an estimated 4.5 million self-help groups (SHGs), to cut collateral and procedural problems and ensure repayment. A limited Nabard-sponsored channel lets banks lend directly to SHGs. Banks and financial institutions also lend to microfinance institutions (MFIs), which then lend to SHGs, which then lend to individuals.