Micro Financing At Crossroad

MICRO FINANCING AT CROSSROAD In recent years some authoritative studies have revealed that the institution of micro financing is growing at a high rate particularly in India but leaning more towards commercial objective instead of its avowed social objective of poverty alleviation. No wonder greed and self interest are dominant traits of both individuals and institutions but these institutions have been conceived and promoted with the distinct objective to alleviate poverty and generate income earning capabilities of poor people. In fact promoters of these institutions have always been hailed and rewarded for their noble and benevolent objective to provide succor to the neglected and disadvantaged section of the society. In fact most of these institutions were successful of course only to the limited extent in transforming lives of poor people and empowering the women folks to generate subsidiary income for the family and thus releasing themselves from the trap of poverty. SOME VISIBLE CHANGES However in recent years some visible change is happening particularly due to its fast rate of growth in lending, 72% in the year ending March 31, 2008. This obviously has enhanced its total outstanding to an astronomical figure $ 1.24 billion in India only. It is true such a growth is commendable and these institutions should be proud of such laudable achievements but such judgmental conclusion is plausible only when one evaluates it without comprehending the impact of such fast growth. It is true that such impact study is not only difficult to undertake as human contentment is difficult to measure but also require much fund and time and both these are scarce particularly for such research work. However those who are closely observing and or managing these institutions would not miss the hovering clouds that are overshadowing some of the well known strength of these institutions. INSTITUTION TO FUND THE POOR It is universally acknowledged fact that micro financing institutions are pioneering institutions that developed a facile model to fund the poor and ultimately release them from poverty trap by generating employment opportunity and helping them to become employable. In fact these institutions have been helping the poor to engage themselves in economic activities that would generate sustainable income to enable them to live at least without undergoing the pangs of poverty if not living comfortably. It also helped them easy credit without collateral though somewhat costly as compared to bank loans. Another distinctive feature that made them most attractive to funding institutions and donors all over the world but fast growth of these institutions has taken out much of their sheen from their laudable objectives as’ too much money has been chasing too few good institutions’ and consequently crowding them without adequate management strength but unable to shed the lure of greed to avail all such money and deploy the same without adequate groundwork and managerial preparation.

NEED MANGEMENT AND RISK ASSESSMENT SUPPORT It would be obvious that all such deployment without the support of suitable management support and risk assessment would ultimately be fatal and lead to either overdoes and or multiple borrowings. A close look would reveal that this has already started happening but not surfacing as multiple borrowing for some time put a lid on the growing volume of non performing assets of these institutions. It has now become one of the most worrisome phenomena though still hidden from public glare due to multiple borrowing and securitization that are encouraged by commercial banks particularly foreign banks as that helps them to fulfill the state imposed target of priority sector lending. Further securitization has been encouraged by the oft repeated state policy of loan waiver. RECENT SHADOWS AND THE IMPACTS The impact of all these could be summed up as follows: 1. shadows of black clouds have overtaken the crystal clear blue sky of micro financing institutions as these are leaning more towards their commercial objective and showing lip sympathy towards their social objectives; 2. developing more of money transfer business for short period and thus helping remittance and short period transactions of vendors and small traders; 3. Enhancing risk exposure by spreading out without proper preparation to create management and technology support. NEED TO REVISIT THE MODEL It is therefore high time to take cognizance of the looming dark clouds hovering around clear blue sky over the space created with passion and endeavors of pioneers of these institutions. To obviate the growing pangs it would be necessary to revisit the growing and also the models developed by the pioneers of this movement. To be fair to our pioneers the model they structured was most appropriate for those days as in those days unemployment was not so severe but adequacy of income in a family was the main problem to be resolved and hence source of supplemental income by funding and empowering the women folk in villages and towns was aimed at. However the present scenario is fast changing and unemployment is growing at a very high rate almost all over the world despite increasing space now available and could be further augmented in the field of infrastructure, communication, environment, irrigation both for augmenting and maintenance and for upgrading farming and small scale industries. These are suffering not only due to lack of funds but also due to dearth of appropriately trained employable personnel. PARADIGM SHIFT IN MODEL No doubt these have made it imperative to revisit the present model pursued by them and where these are facing the problem of multiple borrowing and unhealthy

competition with each other. It is true some knee-jerk changes are visible of late in these institutions to highlight their social objectives like providing health insurance and education as well as training but such changes only touch the surface of the vicious surroundings and sufferings of these people. In fact these are challenges that could be very successfully obviated by micro financing institutions if these institutions give more emphasis to their social objectives and ensure sustainability by serving the society with transparent charges for their products and services. NEED FOR INITIATION OF BOLD STEPS In fact micro financing institutions today stand at a crossroad. Beside the recent efforts to bring it under the purview of regulators it would be necessary to initiate some bold steps to enable it to spread out in villages and towns to fill the neglected and growing space of sustainable economic activities. Some of these have been brought out very vividly by Yesuvendra and Quishon in their recent paper (2009). These could be summed up as follows: 1. to initiate steps to resolve systemic risks that are increasingly faced by these institutions due to their rapid growth without building adequate management and technology to absorb the spark of such growth; 2. to enlarge the perimeter of regulation to develop oversight that would not only ensure economic stability but also help to fulfill their much avowed social obligation; 3. to develop standards and procedures that would enable these institutions to withstand economic, political, environmental and social upheavals; 4. to create standardized operational procedures that are not only transparent but also could be comprehended by common people; 5. to enable to outreach larger number of people and to cover more space and social as well as economic activities; and 6. To enable sourcing of fund from diverse sources at competitive rates and also at concession rates from state agencies and state schemes under special purpose vehicle. OPPORTUNITY TO BECOME SUBSIDIARY OF BANKS .Indeed it is perhaps a great opportunity for commercial banks through the support of micro financing institutions instead of engaging individual intermediaries as correspondents. No doubt Indian banking direly needs to spread out in villages and small towns and promote, support and even manage viable and sustainable enterprises over there where such felt need already exist but due to lack of organized institutional support could not yet be developed. It has created considerable migration and disintegration of families in rural and semi urban areas and consequent overcrowding of cities and straining the limited resources of these areas.

No doubt infrastructure big or small is the backbone of economic development and there exist ample scope for development of appropriate infrastructure even in villages. In this regard it would be interesting to note that despite heavy investment in irrigation projects by the state the irrigation facilities are decreasing instead of increasing. This is happening as maintenance infrastructure is highly inadequate in villages and hence this it provides opportunities for developing sustainable economic activities over there. In fact many other such economic activities like solar energy facilities, transport and supply chain facilities, sanitation and water conservation supply facilities etc could be developed through micro financing institutions with support both by funding and even by participating under public private partnership model.