WHAT IS WRONG WITH THE MICRO-FINANCE DELIVERY SERVICES IN INDIA? (An Analysis on the Dark Side of the Programme) Dr. Ayekpam Ibemcha Chanu

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1 WHAT IS WRONG WITH THE MICRO-FINANCE DELIVERY SERVICES IN INDIA? (An Analysis on the Dark Side of the Programme) Name of the Author: Designation: Organisation: Dr. Ayekpam Ibemcha Chanu Assistant Professor Assam University, Diphu Campus Address: Department of Commerce, Assam University, Diphu Campus, Diphu, Karbi Anglong, Assam, India ID: Introduction: In recent years, microfinance programme has been recognised as one of the important tools of poverty alleviation. So far as microfinance is concerned, it is a small financial service of small quantity provided by financial institutions to the poor in rural, semi urban and urban areas for enabling to raise their income levels and improving their standard of livings. These financial services include savings, credit, money transfers, insurance in small volumes to the poor and low income groups and their micro enterprises. It has been practicing in varying forms in different countries of the world. In South Asia, the modern microfinance programme was first initiated in Bangladesh in 1976 with a promise of giving credit to the poor without collateral, alleviating poverty, developing human creativity and endeavor of the poor people. In India, it was initiated by NABARD in 1992 with the formation of 500 SHGs. However, the performance of banks of banks in linking SHGs to the banking system in India under microfinance programme grew only from April1, 1999 onwards when the IRDP was subsumed to SGSY and the formation of SHGs became one of the principal strategy of poverty alleviation and development of microfinance. One of the big limitations of the today s analysis on the microfinance programme is that the ongoing programme, seen as poverty alleviation strategy and women empowerment tool only tries to focus the positive sides not the negatives. Various studies also show the positive role of microfinance in poverty reduction ( Khandekar, 2005; CGAP,2003, ADB, 2004, Das,2004). It may be mentioned that for, years, the microfinance industry has swept the issue of debt under its carpet. Since, its introduction in India, the microfinance programme deals only with borrowing money from the financial institutions after maintaining a regular savings record of around six months. There are a number of cases that after joining the microfinance programme, the income of the microfinance clients has been decreased. There is also another report that more than 70 borrowers within 2010 have committed suicide in India in order to escape the 1

2 increasing difficulties. Few studies have started arguing that the microfinance programme is out of reach of the poorest group of the society. The purpose of the study is not to establish that the microfinance programme of India cannot give positive impacts in Indian society. There are also negative impacts of these programmes, however, may be overcome by introducing innovative changes. In this background, few research questions may be raised What are the limitations of the microfinance delivery services in India? 2. Is it true that microfinance programme damages the prospects of poor? 3. What is the future of microfinance in India? Objectives: 1. To analyse the complex situation of microfinance delivery services in India. 2. To look at the contradictory symbolism behind the concept of debt 3. To see the future of microfinance programme in India. Methodology: Nature of study: The study is descriptive as well as exploratory in nature; Data used: It is mainly based on secondary data. Data Collection Design: Secondary data was collected from the books, journal, and newspapers, various reports published by Government, semi government and private agencies. However, the primary data have been collected from the microfinance clients to find out the changes in their life after joining microfinance programme. Significance of the Study: A number of studies deal with the success of microfinance programme in India but there is hardly any study focusing the negative side of the microfinance delivery services in India. However, it is highly required to study seriously in this regard as to overcome the demerits of the microfinance programme in India. Research Limitations: Though, the analysis is aimed for all India perspective, it is mainly based on North -East India. Review of Literature: According to Hulme (2007) the MFIs virtually never work with the poorest-the mentally and physically disabled, the elderly, street children, the destitute and refugees; and many MFIs have high proportions of clients who are non-poor, if one takes national lines as the criteria. He further opines that the common assumption that microfinance is automatically about working with the poor and poorest needs to be dropped unless MFIs can provide clear evidence. Study conducted on the income impact of microcredit on the clients drawn from poverty line by Bhalotra & Johnson, (2001) found that most households are better off with microcredit, but 2

3 income impacts vary in magnitudes and durability and sizable proportions of clients incomes become stagnant or fall after getting microcredit. According to Weis and Montgomery (2004), high recovery rate in microfinance programme may be due to intense group pressure and do not reflect capacity to repay. Khandewal (2007) observes that the microfinance development strategy for Indian commercial banks need not just encompass financial capital or services, but also focus on people s basic needs: a home, a good health, education for their children, etc. A study conducted by SpeeD ( Medhi, 2011), a specialized agency on microfinance based in Guwahati found that the interest rate of the RGVN-NEML, the first microfinance institution to take part in the employment generation mission (EGM) initiated by the government of Assam is 24 percent per annum. Scholars like Ramachandran and Swaminathan(2002) argue that microcredit is out of reach of the poorest, as the ability to repay the first installments depends on the initial resources based on the borrowers. Dhurjety, Sirish (2010), observes that the recent microfinance crisis in Andhra Pradesh is highly related with the political controversies. Sarkar (2008) opines that the urgent need of the hour is to bring about some institutional reforms in the microfinance development strategy of Indian Banks as the Gramin Bank did with the introduction of Gramin Bank II in Bangladesh. Borman and Chanu ( 2011) in their study also suggest for reformulation and redefining the policies of Government of India regarding microfinance programme in India. Analysis and Findings The analysis and findings of are reported under the following paragraphs. The Microfinance Services are not yielding Positive Results in India all the time: Majority of today are in the opinion that microfinance can create considerable opportunities for people, especially for poor section of the society by providing financial needs so that they can improve incomes and reduce vulnerability. However, if we consider the poor people working in low- return activities in saturated market, such services give less benefit to them. It is very common that because of the circumstances that are beyond the control like natural calamities*, sickness, theft, bandh and blockades by anti social elements** sickness and so on, lack of skills and knowledge of taking right decision, a sizable number of poor borrowers face great difficulties in repaying loans. The macroeconomic factors, the market crises because of the free market policy also give an adverse impact on the microfinance clients. There are several reports on arresting of MFI debtors by police in several parts of the world including India. A study conducted during April to August, 2010 by the author in Karbi Anglong, district of Assam also found that more than 12 percent SHG members can not improve after joining microfinance programme. 3

4 Microfinance programme in India: maintaining poor refinance and loan disbursement rate but high interest rate The reports of NBARD show that during , banks have financed lakh SHGs in India including repeat loans to the existing SHGs with bank loan of Rupees crore as against SHGs with bank loan of rupees 12, crore during registering a decline of 1.4 percent of SHGs. Though the bank loan disbursed during registered a growth rate of 38.5 percent, during , it has registered only 17.9 percent growth rate during (Microfinance Report: ) The another report of NABARD also shows that during , new SHGs were credit linked with mainstream banks and out of the remaining 29,24,973 SHGs already financed in earlier years, a repeat loan was given to only old SHGs. It means only 6.39 percent of SHGs were provided with repeat loan in However, all the reports show a very encouraging picture of recovery rate. (see notes for more details). The Rastriya Gramin Vikas Nidhi-North East Micro finance Limited (RGVN-NEML) which was earlier known as the Rastriya Gramin Vikash Nidhi-Credit and Saving Programme (RGVN-CSP), the only organization in India which offers both training and financial support to the entrepreneurs of Assam and Meghalaya has also a track record of maintaining 98 percent repayment from their clients (also considered as entrepreneurs) but, charges a very high interest rate of 24 percent per annum. The study conducted in 2010 by the author also found that in some areas, the microfinance clients (SHG members) have to pay interest 6-8 percent per month. Here, it can be assumed that in every year, a huge number of old SHGs that is more that 80 percent which have financed by financial institutions do not have further access to credit from the same source although the loans are repaid in time. Then, why such a huge number of old credit linked SHGs which have financed in earlier years are not receiving further loan from the same source even they make repayment in time? Is it the fact that the economic condition of such huge number of SHGs has improved so much after receiving primary loan that they need no further credit? If not, why do the refinance rate is very low in India? There is also a long gestation period between the loans as reported by the microfinance clients (Chanu, 2010). What are the reasons behind this? Who is benefited from this? There are number of answers to be found out. Microfinance Programme: Delivering Credits to Help Poor but Loss of Certain Values: Making a relationship with debt and morality, a well known author, Thomas Ditcher (2007) opines that almost everywhere, debt has been seen as bad, bad for society, bad for religion, bad for family. Now, we may relate it with the microfinance/micro-credit programmes. Though, the microfinance programmes start with the savings of groups, giving loans to the members is an important activity of the programme. In a common sense, borrowing money means being in debt. To be in debt means a loss of respectability, to be seen by others as less independent, less self-reliant or in the control of others. Debt is always in trouble and trouble is associated very often with alcohol, gambling, armed militant, theft etc, thus, further deepening the stigma if the if the proper clients who have the ability to make repayment are not selected, thus may lead to social crisis. Here, few issues may be raised that whether the microfinance programme will make the condition of poor worse than earlier? Will the poor have the cent 4

5 percent ability to make repayment? From the field visit, it is found that one of the main reasons behind the wide spread consumption of alcohol and gambling by the middle age group of Manipuri society is because of unbearable debt of the private financial institutions. It is also reported that because of the inability of repayment, the private financial institutions cease the belongings even utensils of poor clients. According to the report of survey conducted after the crisis of MFIs in Andhra Pradesh in 2006 showed that a sizable number of borrowers were compelled to take loans from moneylenders to repay the MFI installments. The Future of Microfinance Programme in India: It has already mentioned that the microfinance programme of India through SHGs is the largest in the world; and there are more than 69 lakhs bank saving linked SHGs as on 31 st March Out of these, there are more than 53 lakhs women SHGs. Though there is a high speed of expansion in this sector, the recent crises in south India bring a cloudy picture of microfinance services in India. It is assumed that Andhra Pradesh, alone accounts for around 30% of the MFI loans in the country but, the state has witnessed an alarming number of suicides of microfinance clients due to harassment from MFI agents over repayment. If such crises are allowed continue and do not check properly and immediately, there may be many microfinance related crises in all the states of India. Here, it may be noted that the basic problem is the nature of business of MFIs. If such abuse continues to persist, the future for microfinance will be bleak. For a peaceful, progressive future, MFI s must strictly enforce their lending policies, making sure to eliminate agent threats in collecting the loan amount. Hence, in India, so far as microfinance is concerned, it is the time to stop recycling myths, to stop the initial breakthrough products, to focus on the real objectives and to develop institutions that can provide the broad range of microfinance services that will support poor people in the true sense of the term. From the Andhra crises, it can be learnt that restrictions are not necessary at all, but a restructuring of the microfinance industry is highly required in India. Conclusion and Policy Implication: It is known to the nation that the policy of liberalization, privatization and globalization have already affected many formal sectors. Aggressive brand selling and marketing, with the strong financial background of the multinational corporations, pro-multinational policies of the government places the small producers especially rural and women entrepreneurs of the country nowhere in the market place. Till today, there is no proper mechanism to check the microfinance delivering services in India; as a result, in all the parts of the country, the MFIs enjoy the freedom to impose high interest rates in the name of microfinance in India, In such situation, Microfinance, at best, may lead to micro solution. There is a need for proper regulatory system and supervisory framework in order to ensure that all those who involved in microfinance programme come under close public scrutiny; otherwise, in future, the 5

6 microfinance like programmes simply lead to greater financial power to an exploitative form of organized money lending. Hence, there is need for innovative design in microfinance programme in India; or the poverty alleviation through microfinance programme will remain a distant dream..there is also wide scope for further research in this field. Some of the areas for further study are: comparative studies on the performance of microfinance among the regions/ states of India, the microfinance delivery system of MFIs, impact study on microfinance programme in India, etc. Notes: In March 2006, the Andhra Pradesh Government raided and temporarily closed down nearly all branches of MFIs functioning in Krishna District; about 300 cases filed by the state government in the name of violating a number of laws by MFIs. While many of the MFIs were soon reopened, there was a negative impact that the repayment rate was reduced to about percent for some months. See, Prabhu Ghate, 2007 As on , of the 290 reporting banks, 73 percent banks reported recovery of more than 80 percent in respect of their portfolio. Agency wise, 26 commercial banks (out of 36), 55 RRBs(out of 73) and 131 Co-operative Banks (out of 181) reported recovery above 80 percent See Annual Report, NABARD, As on , the number of participating Banks has increase to 446, see the Status of Microfinance in India , NABARD,2010 *Flood is very common in most of the parts of Assam. Sometimes, because of flood, the districts like Dhemaji, Lakhimpur, etc are cut off from mainland Assam for more than two months. See Dhemaji Flood Scene Still Grim Assam Tribune August 23, 2011 and Dhemaji Still Remains Cut Off: Assam Tribune September 26, 2011 ** It is very common to have economic Blockades and Bandhs in NH 39 and 53 that link state capital of Manipur with mainland India. The year 2011 is witnessed by more than 100 days economic blockades on National Highways by several organization demanding separate political identity. see Local newspapers published in Manipur in the month of July, August, and September,

7 References: Assam Tribune: Dhemaji Flood Scene Still Grim August 23, 2011 Assam Tribune: Dhemaji Still Remains Cut Off : September 26, 2011 ADB (2004) ADB Annual Report 2004, Special Theme: The Changing face of the Microfinance Industry, Manila Borman, Ratan & Chanu, A. Ibemcha (2011) Microfinance in India: Some Issues in Sudhansu Kumar Das & Sanjay Kanti Das (eds) Microfinance and India s Rural Economy New century Publication: New Delhi pp28-39 CGAP (2003), Focus Note No.24, Washington Copestake,J, Bhalotra & Johnson,, S ( 2001) Assessing the Impact of Microcredit: A Zambian Case Study Journal of Development Studies 37(4), pp Dass, R.M. (2004) Microfinance Through SHGs : A Boon for the Rural Poor Kurukhetra, A Journal of Rural Development 52(4) pp Dhurjety, Sirish (2010) Future of Microfinance in Andhra Pradesh and India posted on Dec16, 2010 Hulme, David(2007) Is Microdebt good for poor people? A Note on the dark side of Microfinance in Thomas Dichter and Malcolm Harper What s Wrong With Microfinance Intermediate Technonoly Publication: UK p20 Kabeer, N(2001) Conflicts Over Credit : Re-evaluating the Empowerment Potential of Loans to Women in Rural Bangladesh World development 29(1) pp Khandelwal, A.K.(2007) Microfinance Development Strategy for India Economic and Political Weekly 42(13) March Khandekar, S.R. (2005) Microfinance and Poverty: Evidence Using Panel Data from Bangladesh The World Bank Economic Review 19(2): Medhi, Dhanjit RGVN offers a ray of Hope for Entrepreneurs and State Economy Assam Tribune September 26, 2011 NABARD (2010) Status of Microfinance in India NABARD (2009) Status of Microfinance in India NABARD (2008) Annual Report Ramachandran, V.K.,Swaminathan Rural Banking and Landless Labour Households: Institutional Reforms and Rural Credit in India Journal of Agarian Change 2 (4) Sarkar, Devnarayan (2008) Indian Microfinance: Lessons from Bangladesh Economic and Political Weekly 43 (1) January pp Weiss, J., & Montgomery, H. (2004) Great Expectations : Microfinance and Poverty reduction in Asia and Latin America, ADB Institute Discussion paper No.15 Microfinance in India: Suicide, Interest Rates, and the Future of Microfinance 7