Abstract
Microfinance, a civil society led innovation of 1980s for financial inclusion, has grown into a massive movement reaching out to over 125 million households in the country. The rapid growth has brought in its wake not only diverse interest groups but also several intractable policy challenges and contradictions. An epitome of such contradictions being the large-scale transformation of charitable non-governmental organizations (NGOs) into for-profit microfinance institutions (MFIs) with flagrant commercial orientation. The transformation though apparently helped scale-up microfinance but inherently compromised on the original social dimension of the movement. Simultaneously, with the group-based approach being co-opted by the state, India uniquely also saw emergence of another model of microfinance called SHG-Bank Linkage Programme (SBLP) focused on savings and credit. With the overarching neoliberalism guiding the policies, the reluctant banks were forced to adopt the model as a human face of the unfolding reforms. Both the models though had a common goal but worked at cross-purposes in several ways. Poaching, multiple loans and coercive practices became common features in dealing with the women and poor. With commercial funds and interests driving bulk of the MFIs, financial sustainability assumed overwhelming priority resulting in a mission drift and fostering an interest rate regime which even resembled usury. The contradiction with the goal of poverty alleviation became so acute that a crisis was almost imminent which did unfold in Andhra Pradesh (AP) in 2010 with a heavy clamp down on the MFIs by the state government. In a cascading effect, the crisis hampered the working and progress of MFIs all over the country. The downturn brought to fore several questions about the credibility of the movement which needed some clear answers.
The book under review is an attempt to address some of the more recent challenges that have confronted the microfinance including those that emanated post-2010 crisis. It is primarily an edited volume of papers presented at an international conference on e-governance held at IIM, Bangalore during April 2010 though it carries a couple of relevant papers presented elsewhere. The book comprises 13 chapters besides the introduction which presents a brief overview and summary of all the papers. The papers in the book cover broadly four themes: growth and crisis in microfinance; role of ICT; role of NGOs and federations; and the impact of microfinance and related services on poverty and empowerment.
The first three papers in the volume pertain to growth and the crisis of microfinance. The papers depict that the sector not only has grown fast but has assumed diverse forms, such as the SBLP model, NGO model and MFI model which go with their own unique features and challenges. The AP crisis and the resultant regulatory challenges have been dealt at length in these three chapters. The paper of Anand Sinha, even as it draws a parallel with the sub-prime crisis in the USA, in a way attributes the AP crisis to the failure of the Reserve Bank of India (RBI) to anticipate it by misreading the underlying trend. The paper by Graham A.N. Wright et al. hints that the portends of the crisis were already present, though were ignored. The crisis has been attributed to factors, such as excessive commercialization, investor overdrive, mission drift of MFIs and governance failure as reflected by way of poor transparency and accountability. While RBI came up with its own kind of a response by creating a new form of a non-banking financial company (NBFC)-MFI with prescription of interest cap and customer protection, the papers in this volume have diverse suggestions. Improving the regulation and governance apart, there is a strong argument to bring in a balance between social and financial goals of microfinance by following what is called a responsible finance approach. Some of the other solutions offered include effective use of technology, tapping information from credit bureaus, diversification of services, giving role for self-regulatory organizations (SROs), conversion of MFIs into BCs and strengthening a self-help group (SHG) model of microfinance. While there is some consensus on issues like adoption of technology and improved governance, there are divergent views on the contentious interest rate issue. The RBI approach of imposing the cap on the interest rates of MFIs is countered by the paper of Graham A.N. Wright et al. as that would compromise on the viability affecting ultimately the outreach. In the absence of any comprehensive theoretical framework in the book to guide more fundamentally the diagnosis of the problem of financial exclusion and the contradictions of microfinance, the solutions offered appear more instrumental. There is in a way an uncritical acceptance of the mainstream neo-classical approach advocated by agencies like the Consultative Group to Assist the Poor (CGAP) as can be seen in conceptual and other arguments highlighted in these papers. Basing solutions on an approach which even contributed to the crisis can only deepen the contradictions further.
Use of technology as a solution to diverse problems of microfinance is the second major theme in the book. There are five papers relating to technology including the one by the ex-RBI governor (R. Rajan). The spread of information and communication technology (ICT) along with mobile phones has raised several possibilities in the sector. Proponents see ICT playing a major role in widening and deepening financial inclusion by enabling hassle-free and cost-effective services for the poor. Innovative use of technology, it is hoped, can even help diversify services that are accessed by the customers. There is a spurt in technology-based initiatives globally, especially for transfers and payments including in India and Pakistan (U. Rafi). Varied models have emerged depending upon the country situation. Based on the available evidence, there are arguments to suggest some positive impact of the services enabled by ICT on the economic returns (S. Goswami). The emergence of Financial Inclusion Network and Operations Ltd (FINO) in India and M-Pesa in Kenya are identified as the noteworthy innovations in using ICT for financial services. Transactions and analytics are the two areas where technology can play useful role. Computerization of SHGs using locally trained animators called munshis is an example highlighted with potential to bridge the information gap between SHGs and banks (Lavneet Singh et al.).
The ICT spread is even being enabled by broader networks and platforms created by government agencies (Malini; Rajan). However, there are several challenges that are being encountered in the widespread use of ICT. As there are variety of models like Business Correspondent (BC) model and mobile-based services, the commercial viability is yet to be convincingly proved. Cost consideration is also a major issue for full-fledged adoption of technology by MFIs. Many mobile applications are not interoperable and have issues with data safety. Illiteracy, barrier to internet use, and lack of suitable regulatory provisions are other challenges identified by the papers in scaling up ICT. The papers make several suggestions in this regard. The prominent ones include innovation in products, financial literacy for effective use, partnership between ICT industry and financial institutions, phased and flexible adoption of ICT, appropriate regulation and oversight, easy user interfaces and proper network management, and exploring viable models of delivery. Despite the adoption of technology, several basic challenges of financial inclusion would still remain which the papers in this volume have not adequately addressed. Apart from enabling better MIS, the role of ICT so far is mainly confined to payments and transfers. There is no way at least in the near future ICT per se can help in diversification of services. It is mere transaction-driven empowerment especially for those who are able to access technology than one enabling wider and deeper access to financial services for a cross-section of the society. Until viable models of delivery emerge, given the involvement of private sector, the basic gaps and exclusion would continue. Lack of adequate evidence and analysis of such issues is one of the major lacunae of the papers under the theme in this volume.
The NGOs continue to play a prominent role in microfinance in several capacities. At the same time, the sector has seen emergence of new kinds of grassroot structures like federations of SHGs. There are three papers in this volume which deal with the role of NGOs and federations. A key requirement for the SHG linkage model is the formation and nurturing of quality SHGs which requires committed SHG-promoting institutions (SHPIs). Though diverse SHPIs have emerged in the country, such as NGOs, banks, cooperatives and government agencies, the paper on role of SHPIs (Veerashekharappa) argues that SHGs promoted by NGOs in particular seem to be displaying better qualities owing to critical minimum monitoring by those NGOs. The paper argues for promoting good SHPIs to take forward the SHG-bank linkage model. Another paper by Teruvath and Muralidharan depicts the potential role of women SHGs and their federated structures promoted by a local NGO in the rehabilitation of tsunami affected communities. The paper advocates further strengthening of microfinance especially by encouraging SHGs and NGOs. However, in both the papers, there is inadequate analysis to assess more critically the role played by the NGOs. The emergence and the role of SHG federations are captured in another paper by Sunil Kumar. The federations of SHGs whose role is contested in the discourse are seen in the paper as agencies capable of contributing to expansion of SHGs and their sustainability. The study based on a sample survey of SHG federations argues that SHG federations have indeed made some positive impact on the working of SHGs in terms of financial operations besides displaying potential to emerge as alternative financial institutions. As federations are facing challenges of sustainability, the paper suggests support for them in the nascent stages.
The role of microfinance is a major contested area. Despite over three decades of existence, the sector is plagued by inadequate evidence to have better clarity on the perceived role of microfinance for poverty alleviation. This volume has three papers relating to the impact of microfinance. The paper by Lavneet Singh et al. depicts the contribution of SHGs promoted under a land rehabilitation scheme for income and employment generation in the Etah district of Uttar Pradesh. The paper concludes that SHGs have been able to generate positive impact on income and employment opportunities of the participants. The second paper by M Kshetrimayum which studied the role of microfinance in poverty alleviation in Manipur reveals that microfinance through NGO promoted SHGs has resulted in some significant increase in income, building of assets and enhancement of skills, thereby reducing poverty among the participants. The paper also identified the key role of training and capacity building in contributing to the changes in socio-economic conditions along with microfinance. Similarly, the third paper by Naveen Kumar focused on the role of microfinance-plus services in Karnataka and concluded that microfinance when combined with other useful services can make positive impact on self-employment, income, consumption, living qualities and social conditions of the participating households. Though all the three impact studies reveal positive outcomes of microfinance, they suffer from serious conceptual and analytical lacunae. For example, the paper of Naveen Kumar fails to explicate conceptually and analytically how exactly credit-plus services play a role along with microfinance. The isolation and attribution of microfinance impact thus remains a challenge. Hence, one has to take the magnitude of impact reported in these papers with a pinch of salt. If the impact can be so overwhelming, as reported, the sector would not have faced many of the contradictions highlighted earlier.
Given the intense debate that rages over the role and working of microfinance, the book with its focus on capturing and clarifying some of the current challenges of microfinance is a timely addition. However, given some of the limitations like lack of a comprehensive theoretical framework to explain and tie up the diverse issues dealt with and weak empirical attempts in dissecting specific challenges, the book falls short of the expectations to depict well the changing contours of microfinance.