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

Wednesday, March 25, 2015

Q. You started BOP, or the micro-credit revolution. How has it evolved over the years?

A. I must clarify. We do not use the term ’bottom of the pyramid,’ or BOP, as it is being used by certain groups that see it as a market opportunity. This gives a wrong impression about micro-credit. We, on the other hand, see it as an opportunity to get people out of poverty. Our effort has been to fight loan sharks in the village, bring financial services to the poor, especially women, so that they can start generating income. Today, the initiative through Grameen Bank has spread across Bangladesh. It lends to 8.5 million borrowers (of which, 97 per cent are women) and the Bank is owned by these borrowers. It has lent over $1.5 billion and the money comes from within its own system. It does not take money from the government.

The idea of micro-credit has spread across many countries. But, there have been certain pain points. People are misusing the concept of micro-credit. They are using it to make money for themselves, rather than using it as an opportunity to help people to come out of poverty. That is not micro-credit. Some of it happened in India about four years ago, mostly in Andhra Pradesh, where people wanted to make money for themselves by floating IPOs. Of course, the RBI stepped in and the problem is now resolved. But a legislation is still pending in India on micro-credit. I feel it is a good thing that it has not been passed, as it is not a good legislation to begin with. For instance, the legislation should allow micro-credit banks to be created. It would allow them to take deposits and lend, and will not remain dependent on donors. Commercial banks will not take up micro-credit in a big way. They will always do it in a small way, as a token (activity).

Q. But don’t you see encouraging signals here? The government is encouraging banks to operate in the micro-credit segment. Bandhan has got a banking licence. Many micro-credit players, such as SKS and Vikram Akula, are also applying for licence?

A. No, this is not in the right direction. Akula’s initiative was wrong to begin with. And Bandhan, too, is taking a conventional banking licence. This would require a lot of investments and requirements, such as hiring experts to run a bank. When you do that, you are hiring the wrong kind of people for micro-credit. It’s a wrong start. In my view, one should start a micro-credit bank with a mandate that it would appoint a CEO who has at least a decade’s experience in micro-credit. Experience in commercial banking is useless. In fact, it will be counter-productive. There should be a separate law to create micro-credit banks. Existing laws allow the creation of banks for the rich. You need a banking law to create a bank for the poor. These are two different things.

Once there is a micro-credit bank, it will need an independent regulatory authority. Existing banking authorities cannot do the job. They look after banking for the rich and know how they need to behave. How will they know about how banks for the poor should behave.