A conversation on Microfinance

Couple of months ago we had the privilege to host Mr. N. Srinivasan in Boston. Mr. Srinivasan is the author of the ‘Microfinance in India: State of the Sector Report 2008’. He also capped off his 25 year career at National Bank for Agriculture and Rural Development (NABARD) as Chief General Manager for his last 6 years.

Over an informal dinner with a number of interested locals, Mr. Srinivasan spoke extensively about the issues facing the current crop of Microfinance institutions (MFIs) in India. The recent focus on MFIs after Prof. Yunus got his Nobel Prize has increased the visibility for these institutions and has also accelerated the flow of funds to this sector creating almost another bubble.  From Boston, Mr. Srinivasan went to the San Francisco/Silicon Valley area where he met with Bhalchander (Bala) Vishwanath, who is himself a budding online micro lending entrepreneur.

Bala has documented his conversation and interview with Mr. Srinivasan on his blog “Everything you wanted to know about microfinance in India but did not know whom to ask – Interview with Mr. N Srinivasan” and it is worth a read. Some nuggets from that interview:

  • Studies show that SHG model where it has been in existence for a long time (five years or more) has an impact on poverty. …But given the present small size of [MFI] loans in both the models, it is difficult to envisage a rapid decline in poverty.  The loans are not sufficient to cover investment in livelihood assets that can produce a poverty mitigating income. In fact the loan sizes need to be about ten times the present average to provide a base for poverty alleviating income for a family.  Credit, we are reminded is not a solution to poverty.
  • Small loans leave the customer open to poaching by other lenders. While widening is necessary for inclusion, deepening of services would lead to greater customer loyalty, higher revenues per client and lower transaction and risk costs.  Consolidation of business in each location before moving to new locations would better serve the interests of MFIs.
  • First of all the notion that an MFI needs to be very large to be effective has to be dispelled.  The paradigm relevant in banks that have multi-location, multi-business clients is not relevant to MFIs where clients are small and ticket sizes are also small.

As a closing question Bala asked Mr. Srinivasan to list five policy measures that the Indian Government should consider to improve MFIs impact on the poor. In addition to addressing this question, Mr. Srinivasan has also, on his return to India, composed an open letter to the incoming Finance Minister of India listing key structural and policy changes that picked up several of the suggestions he outlined in Bala’s interview. The key proposals are summarized below.

  • Create a new microfinance law that should focus on functional regulation of those in microfinance – not form of institution based regulation as was attempted earlier. Customer protection is a critical issue that should be addressed in the law.
  • Allowing MFIs to mobilize savings on their own account or as correspondents of banks would improve availability of savings services to the remote and poor populations.
  • A deposit insurance facility could secure savings of people in MFIs
  • The refinance facility available to banks from the Reserve Bank of India (RBI) and other sources should also be available to MFIs.
  • End intrusive and at times abrasive interference of local state officials in microfinance which is not healthy for the sector.
  • MFIs should also be eligible to participate in government subsidies currently passed on to borrowers from banks
  • Should consider giving financial incentives to banks to work with low income clients so that the goals of shareholders, officers and employees of banks are aligned to making low income clients a significant source of revenue.
  • Strengthen and incentivize financial inclusion measures to include MFIs and Primary financial cooperatives thereby helping the excluded population

You can read the complete text of the letter in another of Bala’s postings “Microfinance agenda for the new government: Open letter to the new Finance Minister of India – guest post by Mr. N Srinivasan”.

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