Is this the End of Micro-Credit and Small Loans?

chillibreeze writer — Gobinda Chandra Biswas

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Micro credit in India

Mondal of Bengal, Rangappa of Karnataka, Ilamkar of Maharashtra, or Cherian of Kerala—none are lucky enough to have a secure job. Each is destined for self-employment. They are scattered over different locations in India. Their trades are varied too. But they are tied by a common need—the need for credit, or rather micro credit, as it is popularly called today. ‘If only I had some more capital…’ is a common refrain that echoes through the small ventures of India.

Micro credit means loans to artisans, tiny and small industries, grocers, vegetable vendors, rickshaw pullers, roadside retailers and the like. Other activities include farming, poultry, cattle rearing, piggery, fishery etc.

Micro credit has its origins in the early eras of civilization. It was out of necessity that man became aware of the benefits of lending and borrowing. Much before the advent of money and banking, the practice of lending was prevalent in kind. For example, a farmer gave some seeds to another on the condition that the recipient would return the seeds with some extra quantity. This little extra—today known as interest—was the cost of micro borrowing.

The world witnessed the first organized system of lending with the establishment of the Bank of Venice in Italy, way back in 1157. Born in 1694, the Bank of England brought about an improvement. Much later, India joined the league in 1786 when the General Bank of India came into existence.

Before this, the indigenous bankers better known as private moneylenders controlled the entire unorganized banking sector. Obviously, the borrowers were always exploited. Exorbitant rates of interest and unscrupulous practices often drove borrowers to the point of destitution. Particularly, the takers of micro credit – the poor farmers and small traders— were the worst sufferers.

In India, the gap between the haves and the have-nots is always alarmingly high. Vices like superstition, illiteracy, caste system and the greed of the rich and powerful do not allow the principle of equality to set in. Consequently, India is unable to get rid of poverty and unemployment.

It was with the objective of alleviating poverty and generating employment that the role of small finance came into the limelight. Even the great visionary like poet Rabindranath Tagore utilized his Nobel Prize money to start a rural bank to extend financial assistance to small farmers and traders. Unfortunately, the bank did not last long.

With more than 220 million starving people, India must continue to exploit the great potential of micro credit. The posh shopping malls, the multiplexes and the capital- intensive big industries can provide livelihood only to a few educated urbanites. The rest have to live on small ventures and agriculture. These segments can never survive without small loans.

Micro credit creates a huge purchasing power. This, in turn, gives impetus to industrial growth and finally leads to a higher GDP. The contribution of micro credit towards social reforms cannot be overlooked either. Antisocial persons, ex-prisoners or even prostitutes may find an easy route of rehabilitation with a small credit.

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Before the nationalization of banks in India in 1969, co-operative banks were the main dispensers of small loans in the organized sector. Commercial banks were not easily accessible to small borrowers. Those were the days of security-oriented approach.

None could think of a loan, big or small, without a guarantor or mortgage of immovable property. Nationalization changed the picture radically. Purpose became the basis for finance.

Profit not being the only motive, the nationalized banks opened branches in the remotest corners of the country. They were to implement various government schemes like the Twenty Point Program, Antodaya Program, subsidized Differentiated Rate of Interest (at 4%) loan and the like, which aimed at uplifting the poorest of the poor with the help of micro credit.

Added to this, India saw the establishment of Regional Rural Banks (RRBs), Deposit Insurance and Credit Guarantee Corporation (DICGC), National Bank for Rural and Agricultural Development (NABARD), Small Industrial Development Bank of India (SIDBI), Export Credit Guarantee Corporation (ECGC) and the latest Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE). The CGTMSE covers collateral-free credit up to Rs. 50 lakhs. These institutions play supportive roles to ensure uninterrupted flow of credit to small time borrowers.

Under the present directive of the RBI, the Indian central bank, the priority sectors must get a minimum of 40% share of a commercial banks’ total lending. This includes 16% for the agriculture sector.

Unfortunately, these laudable measures notwithstanding, the performance of micro finance in India has not been quite satisfactory, both quantitatively and qualitatively. The money disbursed has not been adequate, nor has it yielded the desired results. Instead of being recycled, the major portions of loans have been lost as bad debt.

The bad money has naturally prompted the institutionalized lenders to reduce micro credit. This has resulted in small borrowers remaining under the yoke of private moneylenders. No wonder, suicides by small and marginal farmers continue to make frequent headlines in Indian newspapers!

What has gone wrong in ensuring an optimum rate of repayment of micro credit?

Every loan, however small, involves scrutiny of application, appraisal, pre and post-sanction inspection, disbursement and follow-up. Poor borrowers are hardly left with surplus time to pay frequent visits to their banks. This demands that the banks’ credit officials meet the borrowers at their residences or places of business to collect the installments of repayment.

As a result, given the high salary and allowances of bank officials, the cost of servicing small loans shoots up. Because of low income from micro credit, banks seldom deploy such numbers of staff as are considered adequate for the efficient working of small loans. Then, the inevitable happens— most of these loans turn bad.

A waiver of small loans, particularly agriculture loans, has impacted the recovery scenario. The government of India first resorted to waiver in 1990. Some state
governments also followed suit.

Now, in 2008, the Indian finance minister has again declared another largess costing the public exchequer a whopping sum of Rs. 60000 crore. This is simply suicidal. Instead, the farmers should have been assured of steps like fixing reasonable support prices for agricultural produce, supplying inputs at optimum rates, establishing cold storages and arranging marketing facilities.

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This waiver is nothing short of a blow to the banking sector. This will certainly spawn willful defaulters, because even the good borrowers will await another waiver. The backlash is that with government ownership of the nationalized banks gradually diluting, the bankers will feel discouraged to venture into micro credit. In future, perhaps they will not even hesitate to disobey the government directives.

Bank managers in India do not have statutory powers of recovery. So, legal recourse is unavoidable. But recovery suits run for years causing huge legal expenses and notional loss of interest on unrealized debt. This poorly conducted state of affairs only tend to further banks from further lending to micro enterprises.

Micro credit is most wanted in rural and semi-urban areas in India. These places are more susceptible to the influence of corrupt politicians, who themselves are willful defaulters to one or more local banks. In addition, they tend to direct the banks to grant small loans, preferably under government sponsored schemes. Simultaneously, they ask gullible borrowers not to repay. Given this scenario, how can one expect micro credit to flourish?

The remedy lies in engaging NGOs. Banks can provide funds to NGOs, who will in turn lend to the needy. The government will arrange for infrastructural facilities and also provide support in the form of subsidy and training. Even the World Bank has agreed to lend towards this purpose. This was revealed in a world meet of the Micro Finance Institutes held in Delhi in October 2007.

The financing NGOs will have retirees for office work. Youngsters with not-so-high education will be appointed for fieldwork. They will no doubt feel motivated to work at lower remuneration.

The approach to lending will be just the reverse of what happening presently. The creditor will go to the debtor. The venue for documentation, disbursal of funds and collection of repaid sums will be the borrower’s place.

In sanctioning loans, preference will be given to self-help groups with an eye on cluster approach. Women entrepreneurs should be encouraged with special incentives. They are more reliable than men in respect of diligence and repayment. The proof is the Nobel Prize won by the Bangladesh Grameen Bank, which is charged by nothing other than woman power.

Finance for a day or two should also be explored. Group guarantee will be the main insurance against default. Each group of borrowers will be headed by a leader, who will also be responsible for safety and repayment of the advance. He may wield the weapon of social boycott in case a group member shows any signs of default.

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Gobinda writes for chillibreeze.

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