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

Friday, December 18, 2009

According to the 2009 Microfinance India State of the Sector (MISS) Report, the microfinance industry’s client outreach has grown by 30% over the last year to 76.6 million and the total outstanding loan portfolio has grown by a staggering 56% to INR 359 Billion over the same period. The growing integration of the sector with the capital markets has led to an influx of funds from various channels and has accelerated the transition of the Indian Microfinance Institutions (MFIs) into mainstream companies. While such a period of heady growth especially amidst an overall slowdown in the economy is laudable, one must question whether the industry is fulfilling its core charter of integrating millions of underserved Indians into our financial system in a socially responsible way. Critics have pointed out that even today financial inclusion remains as elusive as ever to the people at the absolute bottom of the pyramid (BOP). There is also a real danger that some borrowers are falling behind by taking on excessive debt and then using debt rollover to meet their obligations. MFIs are also expanding the scope of their services by using their delivery platforms to bring more goods and services within the reach of rural India; but the same trend could also lead to financial profligacy amongst consumers. We delve into the intricacies of the microfinance debate and look ahead to see how Indian MFIs can manage the next phase of their growth in a way that benefits all stakeholders.

GAUTAM AGGARWAL: Microcredit – Need for reformulation

By definition, microcredit, or microfinance, is banking the unbankables, bringing credit, savings and other essential financial services within the reach of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. In general, banks are for people with money, not for people without (Gert van Maanen, Oikocredit 2004).

However, this definition doesn’t seem to hold true in today’s microfinance (MFI) space as we find the lower strata of the poor still struggling to get any financial traction with the MFIs. There are distinct income classes among the poor population which are classified differently by different people. To avoid ambiguities, this article segments this population into poor (income less than $1 per day) and non-poor (income more than $1 per day). As per the MISS 2008 Report, poverty audits carried out reveal that in five out of eight MFIs, the proportion of non-poor clients was more than the poor, with coverage of non-poor ranging from 42 to 88 per cent of the clientele. As a matter of fact, MFIs are substantiating the general notion that money attracts money by excluding the poor segment and focusing only on the non-poor one.