Readers may recollect, the previous interview with Mr. N.Srinivasan on microfinance in India. In the interview he had also suggested policy measures for the new government..
I am delighted to share with you, Mr. N Srinivasan’s ‘ Microfinance agenda for the new government: Open letter to the new Finance Minister of India’.
Mr. Srinivasan will be participating in the discussion on this blog so please feel free to comment, critique and add your suggestions. Also please tell your friends and people involved in Microfinance in India and other parts of the world.
Thank you very much.
Microfinance agenda for the new government: Open letter to the new Finance Minister of India
Dear Honourable Finance Minister,
The Indian electorate has returned a stable government to power which should facilitate the smooth passage of important policies and legislation. As one of the most versatile and experienced ministers in India, you have in front of you an enormous opportunity to empower more than 75 million microfinance clients(1) who also voted during the elections. With suitable policies you can enable banks, Microfinance
Institutions (MFIs), Non Government Organizations, Self Help Groups and thousands of people who have dedicated their lives to the betterment of our people to meet the aspirations of livelihood development and viable financial services of the served and yet to be served microfinance clients.
The microfinance sector seeks the continued support from the new government. With the growth of microcredit and the increasing aspirations of the people it is now time to look deeply into certain aspects which have now acquired an even greater importance.
1) First on the microfinance agenda is the microfinance law. With great hope the microfinance sector approached the previous government which suitably responded with a microfinance bill after consulting the sector at different levels. But the bill lapsed with the dissolution of parliament after its term was over. Now a new microfinance bill has to be brought in to ensure vibrant growth and effective regulation of the sector. You have the opportunity of doing the exercise de novo as the earlier bill had scope for several refinments. The new law 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.
2. A clearer articulation of the stance towards Microfinance Institutions (MFIs) mobilising savings would be timely. You would be aware that the banks are still not in a position to provide savings services despite a few million “no frills accounts” (2). Allowing MFIs to mobilise savings on their own account or as correspondents of banks would improve availability of savings services to the remote and poor populations. Some of the limitations in the existing guidelines on banking correspondents need a review to accelerate availability of savings services.
3. A deposit insurance facility could secure savings of people in MFIs (e.g. Vietnam has a facility for this). This would increase regulatory comfort in allowing MFIs to mobilise savings. The Deposit Insurance Corporation could extend its existing cover to MFIs as well.
4. The refinance facility(3) available to banks from the Reserve Bank of India (RBI) and other sources should also be available to MFIs. The MFIs’ needs are smaller, but are dire and funding them satisfies a critical segment of vulnerable population. The facility could be set up in the public sector and made merit based without discretionary allocations. This would go a long way in ensuring funds flow to the sector even during periods of recession and financial meltdown.
5. The Centre should have an urgent dialogue with the States on issues relating to legitimacy and relevance of MFIs. Currently State governments also run their own independent microfinance programs. State governments could multiply the impact of the resources they deploy towards microfinance if they partner with microfinance institutions. Hence they should be actively encouraged to support microfinance operations by partnering with MFIs and the current microfinance infrastructure. This measure will not only put an end to intrusive and at times abrasive interference of local state officials in microfinance which is not healthy for the sector. The current state run programs can be gradually transitioned to MFIs so that the poor clients are not impacted.
6. The governments (centre and states) have several schemes that offer capital and interest subsidies to borrowers from banks(4). Such selective application of subsidies through select banks distorts the market, influences borrowers in their choice of banks and increases transactions costs of the customers. If the government has to pass on subsidies or transfer other benefits to people, the MFIs should also be eligible to participate in such schemes. This would ensure that the government is not a party to setting an uneven playing field.
7. The financial inclusion drive should undergo a qualitative change. The focus on numbers should give way to real access to financial services and including clients. The present efforts by and large start and end with opening of an account to meet mandates set by the RBI and as a result most banks end up doing the bare minimum. Doing business with included clients should become a valid objective in the drive towards total financial inclusion. This needs to become the corporate philosophy of banks engaged in inclusion. Perhaps, you may want to 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.
8. Lastly, financial inclusion measures have ignored MFIs and Primary financial cooperatives. These are the institutions that have the network and human capacity in the hinterland to provide financial services. Measures to strengthen and incentivise these structures to play a major role in financial inclusion would help the excluded population more than the other efforts targeting commercial banks.
Most of these require policy responses. Given the right policy environment, I am confident that the microfinance sector will perform and surpass your expectations. The perceived complexity and high costs (of designing financial sector policies that improve livelihoods of poor) should not deter the government nor make it defer the policy response to a future date. A large sector with more than 75 million poor but eager clients awaits your response; please help the clients empower themselves towards a better future.
Author – State of the Sector report – Microfinance India 2008
(1)Revised estimates for 2009 made on the basis of the data provided in the State of Sector Report on Indian Microfinance 2008, Access Development Services
(2)Simple savings accounts introduced that required no minimum balance and no service charges to facilitate poor open and operate bank accounts – introduced by Reserve Bank of India
(3)RBI offers a lender of the last resort facility; NABARD, SIDBI, National Housing Bank also offer refinance facilities to banks; some limited facilities are also available to MFIs
(4)Mostly public sector banks handle such schemes