Book Review: Jayadev M. and D. K. Sunder,eds,Changing Contours of Microfinance in India

Introduction

The book, Changing Contours of Microfinance in India, is a collection of selected papers on the theme of microfinance, which were presented at the Seventh International Conference of E-Governance (ICEG, 2010) held at the Indian Institute of Management (IIM), Bangalore. It examines varied topics related to microfinance and con-tributes to the literature by providing an extensive overview of the microfinance industry of India, the opportunities ahead of the Andhra Pradesh crisis, the role of technology in microfinance and the contribution of microfinance to poverty alleviation. The organizer and the editors have done a commendable job by discussing the importance of technology and governance to achieve better e-governance. The editor has maintained the continuity in the current context.

The microfinance industry experienced an unfortunate and one of the deepest crises, the Andhra Pradesh crisis, in October 2010. This book has captured this event as a precursor to assess the need of technology and governance to make the microfinance industry more reachable and sustainable. After the crisis, the growth of the industry subsided for a few years. However, the financial year 2015–2016 was a watershed year for microfinance in India. As per the Sa-Dhan report, the Indian microfinance industry grew by more than 60 per cent, that is, to `638.53 billion, in FY16. The client base increased by 2.8 million, taking the total number of customers to 39.9 million in FY16 (Sa-Dhan, 2016). As per ICRA’s estimates, the potential size of the microfinance market is at `2.8–3.4 trillion (ICRA, 2016). Thus, there is a tremendous potential for growth. Given the growth potential, ICRA has estimated that the microfinance industry can grow at an annualized rate of 30–35 per cent over the next three years.

In recent years, the microfinance industry has got some regulations boost from the Reserve Bank of India (RBI) and the Government of India; for example: continuation of priority sector status for on-lending to microfinance institutions (MFIs); the increment of overall permissible debt levels per borrower from `50,000 to `100,000; the setting up of MUDRA bank; refinancing for MFIs at lower than market rates; approval, in principle, by the RBI for 10 entities to set up small finance banks and focus on financial inclusion through Pradhan Mantri Jan Dhan Yojana.

This book covers the role of technology in microfinance extensively. As microfinance is a politically sensitive issue, scholars have predicted that interest rate cap is one of the likely scenarios in the long run. In the case of interest rate cap, MFIs have to reduce their cost of operation, and hence the use of technology in microfinance has become indispensable. In recent years, the information and communication technology (ICT) has emerged as a powerful solution to address the outreach and financial sustainability of MFIs. Raghuram G. Rajan also stressed the importance of technology in financial inclusion and suggested that the potential for mobile banking, with over 900 million cell phones as a delivery channel for financial services, is a significant opportunity.

Overview of the Book

The book is organized into 13 chapters. In this review, for the sake of better arrangement, these 13 chapters are thematically grouped into four parts. These are: Part-I: overview, crises, opportunities and governance; Part-II: technology in microfinance; Part-III: impact of self-help group (SHG) federations and the SHG–bank linkage programme (SBLP) on SHGs; and Part-IV: role of microfinance in poverty alleviations.

Part-I comprises Chapters 1 through 3 and presents a brief review of recent developments in microfinance, opportunities ahead of Andhra Pradesh microfinance crisis and governance in MFIs. Chapter 1 by M. Jayadev presents a comprehensive synopsis of microfinance in India, the SHG–bank linkage model and the MFI–NBFC (non-banking financial company) model. The author deliberates on the recent developments in microfinance industry and examines the key issues that can take microfinance activities forward. Chapter 2 outlines the Andhra Pradesh microfinance crisis. It highlights the three essential events that happened before the crisis: first, the closure of 50 MFIs in Krishna District; second, defaulting on a loan by Nirman Bharti, a local MFI, and third, the repayment strike prompted by the Anjuman Committee, a local Muslim group in Karnataka. The authors also discuss the obstacles and opportunities that may arise in the aftermath of this crisis. As a result of the crisis, large MFIs will not be able to raise funds from the capital market because they will not be getting a decent valuation. It is also predicted that interest rate cap is one of the likely scenarios that may arise in the long run. However, this likely scenario will induce more incentives for the use of technology to reduce cost. The authors also recommend the response from MFIs and governments on the crisis, such as bringing transparency in interest rates as well as in operations and governance, improved analysis and dissemination of social performance and establishment of a credit bureau. Chapter 3 presents the speech delivered by Anand Sinha, former Deputy Governor of RBI, who emphasizes the need for strengthening governance in MFIs with a proper regulatory framework to balance the dual objectives of social utility and financial sustainability.

Part-II comprises Chapters 4 through 7 and Chapter 13, and presents the role of technology in microfinance. Chapter 4 by Shubham Goswami presents the overview of global initiatives in mobile technology, such as M-PESA, WIZZIT, Celpay, SMART Money, G-CASH, True Money, WU mobile money transfer, WING, ZAP, Easypaisa and MMU programme. The author also presents the overview of some mobile initiatives in India. He briefs the challenges in scaling up the operation through mobile technology and examines the impacts of mobile technology on microfinance. Chapter 5 discusses ICT in microfinance through two case studies from Pakistan: first, on transactional systems (Khushhali Bank) and second, on mobile banking (Tameer Bank). Chapter 6 highlights the role of ICT and SHGs in empowerment through self-employment in rural areas. It estimates the contribution of SHGs in capital assets formation of beneficiaries and the resultant effect on their income and employment. The authors find that SHGs have created an atmosphere of economic assistance, which directly helps in creating more assets in rural areas. Chapter 7 outlines the role of ICT in economic growth through a case study from Andhra Pradesh. It outlines the ICT as a tool for e-governance, the advantages it offers and the challenges it poses. It also outlines the role of women in the growth of the ICT industry. Chapter 13 presents a speech given by Raghuram Rajan. It highlights that technology, with its capacity to reduce transaction costs, is the key to enabling the large volume of low-ticket transactions that are at the centre of financial inclusion.

Part-III comprises Chapters 8 and 9 and presents the impact of SHG federations and the SBLP on SHGs. The objective of the federation is to serve the purpose of undertaking the roles that cannot be performed well by an individual SHG on its own, such as the expansion of the SHG, imparting sustainability, community actions and collective bargaining power. Chapter 8, through an empirical study, traces the impact of SHG federations on the functioning of SHGs. The author concludes that SHG federations serves as an alternative source of credit to SHGs. He finds that the quality of federation SHGs is better than the non-federation SHGs. He also finds evidence that the financial operations of federation SHGs are better than that of non-federation SHGs. Chapter 9 examines the impact of SBLP on the performance of SHGs. The findings reveal that SBLP not only provides access and adequate credit to the members but also facilitates credit-plus services such as awareness training, exposure to income-generating activities and health insurance.

Part-IV comprises Chapters 10 through 12 which investigate the role of MFIs in poverty alleviation. The tsunami that occurred in the Indian Ocean on 26 December 2004 brought in the wrath of nature on the coastal areas. Chapter 10 finds evidence of microfinancial efforts by NGOs, SHGs and international financing agencies towards the reconstruction of tsunami-hit Karaikal, Puducherry. On the basis of their study, the authors recommend that the growth of SHGs and NGOs is encouraged. Chapter 11 tries to understand poverty from clients’ perspective and relates their perspective to the services provided by microfinance. The financial services of microfinance also include credit for investment purpose, skill upgradation and entrepreneurial development that would enable the poor to overcome poverty. The chapter examines the role of microfinance in poverty alleviation through the analysis of customers’ views and changes in their lives in the state of Manipur. The findings reveal that microfinance alleviates poverty when it addresses people’s needs and priorities, which indeed differ from one region to another. Microfinance programmes target both economic and social poverty by delivering various ‘credit-plus services’, such as savings, insurance, health services, training and entrepreneurial development. Chapter 12 examines, from the data of 10 villages in Karnataka, the impact of an extension of credit-plus services by MFIs on welfare changes in the member households. The findings show that on the economic front, credit-plus services enable the households to improve their income, assets, expenditure, employment and housing conditions. The study concludes that microfinance programmes also include numerous skill enhancement training and awareness programmes. These non-financial services not only uplift the poor from ‘income poverty’ but also from ‘knowledge poverty’.

Critique

While other books related to microfinance are more focused on a single theme, this book highlights the role of technology and governance and covers a few more topics such as opportunities ahead of Andhra Pradesh crisis and the role of federation and SBLP on the performance of SHGs. Hence, the coverage of this book is broader compared to other books written on microfinance.

This book is certainly a worthy attempt to provide fresh perspectives on microfinance, especially the role of technology and governance in achieving e-governance. Overall, the chapters of the book are well written and easy to understand. Arguments put forward by the authors are cogent, credible and convincing. The editor has clearly seen the agenda of the future, which is substantiated by some recent developments such as in-principle licences offered by RBI to open small finance banks to 10 entities, and also the in-principle banking licence issued by RBI to Bandhan, the country’s largest MFI based in Kolkata. Moreover, the demonetization drive is also likely to help the technology-driven MFIs thrive better. This book will push MFIs to adopt better technology.